Diamondhead Casino 10QSB 2006 Q2 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No: 0-17529

DIAMONDHEAD CASINO CORPORATION

(Exact name of registrant as specified in charter)


Delaware		59-2935476
(State of Incorporation)		(I.R.S. EIN)

150 153rd Avenue, Suite 201, Madeira Beach, Florida 33708
(Address of principal executive offices)

Registrant’s telephone number, including area code: 727/393-2885

Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the Issuer’s classes of common equity as of the latest practicable date: Number of shares outstanding as of August 7, 2006: 32,641,847.

TABLE OF CONTENTS


PART I:	FINANCIAL INFORMATION

ITEM 1:	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Loss for the Three Months Ended June 30, 2006 and June 30, 2005	2

	Condensed Consolidated Statements of Loss for the Six Months Ended June 30, 2006 and June 30, 2005	3

	Condensed Consolidated Balance Sheet as of June 30, 2006	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and June 30, 2005	5

	Notes to Condensed Consolidated Financial Statements	6-10

ITEM 2:	Management’s Discussion and Analysis or Plan of Operation	10-14

ITEM 3:	Controls and Procedures	14-15

PART II:	OTHER INFORMATION

ITEM 1:	Legal Proceedings	15

ITEM 4:	Submission of Matters to a Vote of Security Holders	15

ITEM 5:	Other Information	15

ITEM 6:	Exhibits	15
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification
Ex-32.1 Section 906 Certification
Ex-32.2 Section 906 Certification

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form-10QSB, accounting principles generally accepted in the United States of America for reporting interim financial information and by the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form-10KSB for the year ended December 31, 2005.

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of Management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal reoccurring nature. The Company has presented the financial statements contained in this report as if the Company were to be able to continue as a going concern. However, as described in Note 1 to the condensed consolidated financial statements, certain conditions indicate that the Company may not be able to continue as a going concern.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)


	Three Months Ended
	June 30
	2006			2005
Costs and Expenses:
General and Administrative	$	275,739		$	155,878
Stock-based Compensation		1,238,348			—
Depreciation and Amortization		420			3,100
Other		65,992			23,635

		1,580,499			182,613


Other Income (Expense):
Dock Lease Income		—			39,252
Interest Earned On Invested Cash		5,606			603
Interest Expense		—			(14,478	)
Reversal of Sales Tax Settlement Liability		1,125,752			—
Other		—			69

		1,131,358			25,446


Net Loss		(449,141	)		(157,167	)
Preferred Stock Dividends		(26,840	)		(26,840	)

Net Loss Applicable to Common Stockholders	$	(475,981	)	$	(184,007	)


Net Loss Per Common Share Applicable to Common Stockholders Basic and Diluted	$	(.015	)	$	(.006	)


Weighted Average Number of Common Shares Outstanding, Basic and Diluted		32,124,952			29,776,320

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(Unaudited)


	Six Months Ended
	June 30
	2006			2005
Costs and Expenses:
General and Administrative	$	938,918		$	313,982
Stock-based Compensation		1,238,348			—
Depreciation and Amortization		840			6,200
Other		130,098			48,915

		2,308,204			369,097


Other Income (Expense):
Dock Lease Income		—			78,504
Interest Earned On Invested Cash		9,733			1,313
Interest Expense		—			(36,257	)
Reversal of Sales Tax Settlement Liability		1,125,752			—
Other		—			52,638

		1,135,485			96,198


Net Loss		(1,172,719	)		(272,899	)
Preferred Stock Dividends		(53,680	)		(53,680	)

Net Loss Applicable to Common Stockholders	$	(1,226,399	)	$	(326,579	)


Net Loss Per Common Share Applicable to Common Stockholders Basic and Diluted	$	(.039	)	$	(.011	)


Weighted Average Number of Common Shares Outstanding, Basic and Diluted		31,426,557			29,758,688

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

JUNE 30, 2006

(Unaudited)


ASSETS

Current Assets:
Cash	$	858,163
Other Current Assets		10,490

Total Current Assets		868,653

Equipment and Fixtures, Less Accumulated Depreciation		2,021
Land Held for Development -Dockside Gaming		5,403,378
Long Term Receivables and Other		26,514

	$	6,300,566


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts Payable and Accrued Liabilities	$	192,472

Total Current Liabilities		192,472

Contingencies		—

Stockholders’ Equity:
Preferred Stock, $.01 par value;
Shares Authorized: 5,000,000
Shares Outstanding: 2,122,000
Aggregate Liquidation Preference ($2,591,080)		21,220

Common Stock, $.001 par value;
Shares Authorized: 50,000,000
Shares Issued: 36,032,695		36,033
Shares Outstanding: 32,641,847
Additional Paid-In-Capital:		29,714,159
Unearned ESOP Shares		(4,566,192	)
Accumulated Deficit		(19,047,176	)
Treasury Stock, at Cost, 328,346 Shares		(49,950	)

Total Stockholders’ Equity		6,108,094

	$	6,300,566

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended
	June 30,
	2006			2005
Operating Activities:
Net Loss	$	(1,172,719	)	$	(272,899	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and Amortization		840			6,200
Release of ESOP Shares		105,398			24,460
Issuance of common shares for services		32,400			—
Issuance of stock-based compensation		1,238,348			—
Decrease in:
Other Current Assets		26,227			3,202
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities		(42,145	)		81,826
Sales Tax Settlement Liability		(1,125,752	)		31,424


Net cash used in Operating Activities:		(937,403	)		(125,787	)


Investing Activities:
Land Development		(798	)		(14,802	)


Net cash used in Investing Activities		(798	)		(14,802	)


Financing Activities:
Proceeds from sale of common shares held in treasury		522,850			—
Proceeds from exercise of options to purchase common stock		787,505			—
Payment of Preferred Stock Dividends		(15,000	)		(15,000	)


Net cash provide by (used in) Financing Activities:		1,295,355			(15,000	)


Net increase (decrease) in cash		357,154			(155,589	)

Cash, beginning of period		501,009			449,723


Cash, end of period	$	858,163		$	294,134

See accompanying notes to condensed consolidated financial statements.

DIAMONDHEAD CASINO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Liquidity and Going Concern

The accompanying condensed consolidated financial statements have been prepared on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses over the past several years, and as of June 30, 2006, has an accumulated deficit of $19,047,176. The Company has no operations, generates no revenues, and, as reflected in the accompanying condensed consolidated financial statements, incurred a loss applicable to common shareholders of $1,226,399 for the six months ended June 30, 2006. Continued losses are expected for the foreseeable future. These conditions raise significant doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon its ability to raise the necessary capital with which to satisfy liabilities, fund future operations and develop the Diamondhead, Mississippi property. Our auditors have referred to the substantial doubt about the Company’s ability to continue as a going concern in the audit report of our consolidated financial statements included with the Annual Report on Form 10-KSB for the year ended December 31, 2005. Management’s plans in regard to these matters are described below. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

One June 12, 2006, the Company issued a joint press release with Trump Entertainment Resorts, Inc., (NASDAQ: TRMP) to announce that the parties had signed a letter of intent pursuant to which the parties intend to form a joint venture partnership to develop, build and operate a destination casino resort on the Company’s property in Diamondhead, Mississippi. The project would cover a minimum of forty acres within the 404-acre tract of land owned by the Company. At the date of this report, the parties continue to proceed with their due diligence regarding the project.

The Company has been able to sustain its cash position and continue to satisfy its ongoing expenses through sales of its equity securities. During the six month period ended June 30, 2006, the Company received $522,850 in exchange for the sale of 421,654 shares of common stock formerly held in treasury, and, an additional $787,505 arising from the exercise of options to purchase 1,438,500 shares of common stock by various directors, former directors, officers, and a key employee of the Company. Management believes it can continue to raise sufficient capital via the above described means over the short term. However, the Company continues to consider various asset-backed and securities-backed financing alternatives for the longer term.

The Company’s priority is the development of a destination casino resort at its 404-acre property located on the Bay of St. Louis in Diamondhead, Mississippi. As of June 30, 2006, the Company does not have the financial resources to develop the property and there can be no assurance that the Company can successfully develop the property. In the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, it would have a significant adverse impact on the Company’s ability to ultimately develop the Diamondhead property. The accompanying condensed consolidated financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if the Company is unsuccessful.

Note 2. Net Loss per Common Share

Net loss per common share applicable to common stockholders is based on the net loss applicable to common stockholders divided by the weighted average number of common shares outstanding during each period. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury.

Basic net loss per share applicable to common stockholders is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is calculated by using the weighted average number of common shares outstanding plus other potentially dilutive securities. As of June 30, 2006, dilutive securities included 3,752,000 potential additional common shares consisting of stock purchase options, warrants and convertible preferred stock. The foregoing potentially dilutive securities are excluded from diluted net loss per share applicable to common stockholders as their effect would be antidilutive.


Common Shares outstanding at June 30, 2006 includes:
Issued Shares	36,032,695
Less: Treasury Shares	(328,346	)
Unallocated, uncommitted ESOP Shares	(3,062,502	)

Outstanding Shares	32,641,847

Note 3. New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect that the adoption of SFAS No. 155 will have a material impact on our consolidated financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. We do not expect that the adoption of SFAS No. 156 will have a material impact on our consolidated financial condition or results of operations.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing this new standard to determine its effects, if any, on our results of operations or financial position.

Note 4. Share-Based Compensation

On January 1, 2006, the Company adopted SFAS 123(R), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based upon estimated fair values. As a result of adopting SFAS 123(R), net loss applicable to common stockholders for the six months ended June 30, 2006, was $1,238,348 higher than if the Company had continued to account for stock-based compensation under APB No. 25. The impact on basic and diluted earnings per share for the six months ended June 30, 2006 was a reduction of $.039 per share. There was no stock-based compensation expense recognized for the six months ended June 30, 2005.

In determining the fair value of each option, the Black-Scholes option-pricing model consistent with the provisions of SFAS 123(R) and SAB No. 107 was used with the following weighted-average assumptions: dividend yield of zero, expected volatility of 86.45%, an average expected option life of 5 years, and average risk-free interest rates of 4.86%. All awards were fully vested at June 30, 2006. The weighted average estimated value of employee stock options granted during the six months ended June 30, 2006 was $1.91 per share.

Prior to January 1, 2006, the Company accounted for stock compensation plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123 (SFAS 123), “Accounting for Stock-Based Compensation.” No stock-based employee compensation cost was recognized for stock option awards the periods prior to January 1, 2006 as all options granted under those plans had an exercise price equal to or less than the market value of the underlying common stock on the date of grant.

Consistent with the disclosure provisions of SFAS 148, the Company’s net income and basic and diluted net income per share for the six months ended June 30, 2005, would have been adjusted to the pro forma amounts indicated below:


Net loss applicable to common shareholders	$	(326,579	)
Deduct: Total stock-based compensation expense determined under fair value based method		336,624

Pro forma net loss applicable to common Shareholders	$	(663,203	)


Per share, as reported	$	(.011	)
Per share, pro forma	$	(.022	)

In determining the fair value of each option, the Black-Scholes option-pricing model, as prescribed by SFAS No. 123, was used with the following weighted-average assumptions: dividend yield of zero, expected volatility of 87.49%, an average expected option life of 5 years, and average risk-free interest rates of 3.65%.

The Company uses the Black-Scholes option-pricing model for estimating the fair value of options granted. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company uses projected volatility rates, which are based upon historical volatility rates, trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.

Non-plan stock options

A summary of the status of the Company’s non-plan options as of June 30, 2006 and 2005, and changes during the period ended on those dates, is presented below:


	June 30, 2006					June 30, 2005
				Weighted				Weighted
				Average				Average
				Exercise				Exercise
	Options			Price		Options		Price
Options outstanding January 1		4,044,500		$	.69		3,794,500	$	.52
Granted		650,000			2.70		600,000		.80
Exercised		(1,438,500	)		.55		—		—
Forfeited/cancelled		—			—		—		—

Options outstanding June 30		3,256,000		$	1.15		4,394,500	$	.56


Exercisable at June 30		3,256,000			—		4,394,500		—

The following table summarizes information about stock options outstanding at June 30, 2006:

Options Outstanding

Options Exercisable

Weighted-

Number

Average

Weighted

Number

Weighted-

Range of

Outstanding

Remaining

Average

Exercisable

Average

Exercise

Contractual

Exercise

Prices

6/30/06

Life

Price

6/30/06

Price

$.30- $2.70

3,256,000

3.24

1.15

3,256,000

1.15

Stock Option Plan

On December 19, 1988, the Company adopted a stock option plan (the “Plan”) for its officers and management personnel under which options could be granted to purchase up to 1,000,000 shares of the Company’s common stock. Accordingly, the Company reserved 1,000,000 shares for issuance under the Plan. The option price may not be less than 100% of the market value of the shares on the date of the grant. The options expire within ten years from the date of grant. At June 30, 2006, no options from this plan were issued or exercised.

Employee Stock Ownership Plan

The Company’s employee stock ownership plan (ESOP) is intended to be a qualified retirement plan and an employee stock ownership plan. All employees having one year of service are eligible to participate in the ESOP. The ESOP is funded by two 8% promissory notes issued by the Company. The shares of common stock are pledged to the Company as security for the loans. The promissory notes are payable from the proceeds of annual contributions made by the Company to the ESOP. In January 2001, the plan and accompanying promissory notes were amended to conform to the Company’s current employment structure, by extending the note repayment terms through 2044.

Shares are allocated to the participants’ accounts in relation to repayments of the loans from the Company. At June 30, 2006, 1,937,498 shares were released, of which 39,773 were released in 2006. At June 30, 2006, 3,062,502 shares, having a fair market value of $8,268,755, are unearned.

The Company recognized net compensation expense equal to the shares allocated, multiplied by the current market value of each share, less any dividends received by the ESOP on unallocated shares. Compensation expense related to the ESOP for the six months ended June 30, 2006 and 2005 was $105,398 and $24,460, respectively. The unearned ESOP shares in stockholders’ equity represented deferred compensation expense to be recognized by the Company in future years as additional shares are allocated to participants.

Note 5. Contingency

On November 28, 1994, the Florida Department of Revenue issued a Notice of Intent to make Sales and Use Tax Audit Changes to five subsidiaries of the Company for the period February 1, 1989 through June 30, 1994. The total proposed assessments, including estimated penalties and interest, through June 15, 1997, totaled approximately $7.4 million. In May 1997, the five subsidiaries settled this liability by entering into fifteen separate Closing Agreements with the Florida Department of Revenue. The settlements, which included all audits for the covered period, totaled approximately $1.76 million. The settlements included a payment schedule of approximately $21,000 per month, which, in March 1998, was reduced, by agreement of the parties, to $10,476 per month. The settlements provided for no interest for the first 3 years and interest accruing at a rate of 6% per year for the last 4 years. A balloon payment in the amount of $964,093 was due under the agreements after the final installment was to be made on May 5, 2005. The total amount, including accrued interest, due the Florida Department of Revenue amounted to $1,125,752.

The five subsidiaries which entered into the fifteen Closing Agreements are no longer operating, have no assets, and are unable to make further payments pursuant to their respective Closing Agreements. The parent corporation did not guarantee the payments under these settlement agreements. On May 18, 2006, the Company received correspondence from the Florida Department of Revenue stating that the Department had filed tax warrants with respect to the amounts owed by the subsidiaries in question and had placed these warrants as uncollectible and no further collection efforts would be pursued by the Florida Department of Revenue.

Therefore, as of June 30, 2006, the Company has ceased to recognize the liability due the Department of Revenue in the amount of $1,125,752 and has recorded income in the same amount for the six month period then-ended.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Plan of Operation

The Company’s current priority is the development of a destination casino resort on its 404-acre property located on the Bay of St. Louis in Diamondhead, Mississippi. The Company’s management, financial resources and assets will be devoted towards the development of this property. There can be no assurance that the property can be developed or, that if developed, the project will be successful.

The Company has had no operations since it ended its gambling cruise ship operations in 2000. The

Company incurred a net loss applicable to common shareholders of $1,226,399 and $326,579 for the six months ending June 30, 2006 and 2005 respectively. Costs and expenses for the six months ended June 30, 2006 totaled $2,308,204 versus $369,097 for the same period one year ago. The increase of $1,939,107 was primarily attributable to expense associated with the issuance of stock option awards valued at $1,238,348, additional compensation in the amount of $450,000 awarded to the Company President, and an increase in non-cash ESOP expense of approximately $81,000. These cost increases were partially offset by the reversal of the sales tax settlement liability in the amount of $1,125,752, the circumstances of which are more fully described in Note 5 of the accompanying condensed consolidated financial statements.

Management of the Company has determined that there may not be sufficient cash on hand to sustain the Company through the future twelve month period. The cash required to satisfy current accounts payable and accrued expenses which totals $192,472 at June 30, 2006, coupled with requirements to fund expected on-going costs and expenses over the next twelve months, exceeds the cash on hand of $858,163 at June 30, 2006.

On October 17, 2005, in response to the devastation caused by Hurricane Katrina, Mississippi passed new legislation that allows casinos located in certain statutorily-described areas to be constructed on land no more than 800 feet from the mean high-water line of certain bodies of water, including Bay St. Louis. The new law applies to the Company’s property on Bay St. Louis. The new law differs significantly from the law previously in effect, which required that a casino at the Company’s site be constructed in, on, or above water and be located a minimum of 50% below mean high tide. The development of the Diamondhead, Mississippi property requires the Company to obtain permits and approvals from various federal, state, and local agencies, boards and commissions. There can be no assurance that all permits and approvals can be obtained, or that if obtained, they will be renewed

In the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, it would have a significant adverse impact on the Company’s ability to ultimately develop the property. Due to the uncertainty of the outcome, the accompanying condensed consolidated financial statements do not reflect any adjustments which may occur as a result of the above-discussed conditions.

Off Balance Sheet Arrangements

Letter of Intent

Permits

On October 17, 2005, Mississippi passed new legislation which allows casinos in certain statutorily-described-areas to be built on land up to 800 feet from the mean high water mark of certain bodies of water, including Bay St. Louis. Given the fact that the Company intends to take advantage of the new law and construct its casino resort on land rather than in, on, or above the water, the extent to which various permits, authorizations, and approvals, as well as studies and assessments in support thereof, will be required, is unknown at this point. The Company believes that permitting for the project and plans for ultimate development will require significant capital expenditures for engineering, architectural, accounting, and legal services. The amount ultimately required is unknown at this time, but the Company does not have sufficient funds required for this purpose.

Other Arrangements

The Company has agreements with various persons and entities that would be entitled to substantial commissions if the Company enters into an agreement relating to the development of its Diamondhead property as a result of their efforts.

Critical Accounting Policies

Valuation of Impairment

The Company currently carries the value of the Diamondhead, Mississippi property on its consolidated balance sheet at cost, in the amount of $5,403,378 and has examined that valuation for impairment. In the opinion of management, the carrying value is not in excess of the ultimate recovery value of the property. The Diamondhead, Mississippi property was last appraised on or about August 4, 2003, by J. Daniel Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material assumptions and was predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site.

The property is one that meets the Mississippi Gaming Commission’s requirements for a legal gaming

site. Accordingly, management believes that use of the property as a gaming site represents the highest and best use of the property and provides for the greatest potential for shareholder value. In the event the Company was unable to obtain all of the permits required to develop a casino resort, the property could be used for other commercial or residential purposes.

Stock-Based Compensation Expense

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. In accordance with the modified prospective transition method, the Company’s condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under FASB 123(R) for the six months ended June 30, 2006 was $1,238,348 which consisted of stock-based compensation expense related to non-qualified stock option awards. There was no stock-based compensation expense related to employee equity awards and employee stock purchases recognized during the six months ended June 30, 2005.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s condensed consolidated statement of loss. Prior to the adoption of SFAS 123(R), the Company accounted for employee equity awards and employee stock purchases using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Company’s condensed consolidated statement of loss because the exercise price of the Company’s stock options granted to employees and directors was equal to or less than the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during a period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

The fair value of share-based payment awards is estimated at the grant date using the Black-Scholes option valuation model. The Company’s determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise history.

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position

No. FAS 123(R)-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company has elected to adopt the modified prospective transition method provided in FAS 123(R)-3 for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and condensed consolidated statements of cash flows arising from the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Security Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Security Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of June 30, 2006, the Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Section 404 Compliance

Beginning with the year ending December 31, 2007, (or sooner should certain conditions as outlined in rule 12(b)-2 of the Exchange Act be met) Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to include management’s report on our internal control over financial reporting in the Annual Report on Form 10-KSB. The internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over our financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal control over financial reporting is effective, and (4) a statement that our registered independent public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting.

In order to achieve compliance with Section 404 within the prescribed period, management has commenced a Section 404 compliance project to assess the adequacy of the internal control over financial reporting, remediate any control deficiencies that may be identified, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. During the six month period ending June 30, 2006, there have been no changes in the internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

Inherent Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance, that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company, have been detected.

Changes in Internal Control Over Financial Reporting

There were no changes in the internal control over financial reporting during the period covered by this report that materially affected, or are reasonably expected to materially affect, the internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 4. Submission of Matters to a Vote of Securities Holders

None.

Item 5. Other Information

None

Item 6. Exhibits

A complete index of exhibits previously filed by the registrant can be accessed under Item 13 in the registrant’s Form 10-KSB for the year ending December 31, 2005 and is incorporated herein by reference.

Exhibits 31.1 and 31.2

Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company pursuant to Rule 13A – 14 of the Securities and Exchange Commission Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.

Exhibits 32.1 and 32.2

Attached to this report is the certification of both the Chief Executive Officer and the Chief Financial Officer of the Company as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.


	DIAMONDHEAD CASINO CORPORATION

DATE: August 11, 2006	/s/	Deborah A. Vitale

	By:	Deborah A. Vitale
		President

	/s/	Robert L. Zimmerman

	By:	Robert L. Zimmerman
		Chief Financial Officer

Diamondhead Casino (DHCC) 10QSB2006 Q2 Quarterly report (small business)

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