DIAMONDHEAD CASINO CORPORATION

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB


þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2006

COMMISSION FILE NO: 0-17529

DIAMONDHEAD CASINO CORPORATION

(Name of small business issuer in its charter)


Delaware		59-2935476
(State of Incorporation)		(I.R.S. Employer Identification Number)

1301 Seminole Boulevard, Suite 142, Largo, Florida 33770
(Address of principal executive offices)


Issuer’s telephone number, including area code:		727/674-0055
Securities registered pursuant to Section 12 (b) of the Act:		None
Securities registered pursuant to Section 12 (g) of the Act:		Common Stock, par value $.001

Check whether issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act o

Check whether the issuer (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. YES þ NO o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

State issuer’s revenues for its most recent fiscal year: None.

The aggregate market value of the voting stock held by non-affiliates of the Company is $66,640,662 based on the last reported sales price of $2.23 per share on February 27, 2007 multiplied by 29,883,705 shares of Common Stock outstanding and held by non-affiliates of the Company on February 27, 2007. As of the close of business on February 27, 2007, there were 36,266,707 shares of the Registrant’s Common Stock outstanding (which includes 4,899,850 shares in the Europa Cruises Corporation Employee Stock Ownership Plan).

PART I

FORWARD-LOOKING STATEMENTS

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding events, conditions, and financial trends that may effect the Company’s future plans of operation, business strategy, operating results, and financial position. Diamondhead Casino Corporation is referred to herein as, “the Company,” “we,” or “our.” Except for historical information contained herein, the matters discussed in this document, in particular, statements that use forward-looking terminology such as “believes,” “intends,” “anticipates,” “may,” “will,” “should,” or “expects,” or the negative or other variation of these or similar words, are intended to identify forward-looking statements that are subject to risks and uncertainties including, but not limited to, increased competition, financing, governmental action, environmental opposition, legal actions, and other unforeseen factors. The development of the Diamondhead, Mississippi project, in particular, is subject to additional risks and uncertainties, including, but not limited to, risks relating to permitting, financing, the availability of capital resources, licensing, construction and development, litigation, the activities of environmental groups, delays, and the actions of federal, state, or local governments and agencies. Although the Company believes the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations are reasonable or that they will be correct. Moreover, the financial results reported herein are not necessarily an indication of future prospects of the Company. Future results may differ materially.

All subsequent written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements included in this document. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur.


ITEM 1.		BUSINESS

The Company is a Delaware corporation incorporated on November 15, 1988 under the name “Europa Cruises Corporation.” The Company became a publicly-held company in 1989. On or about November 22, 2002, the Company changed its name to “Diamondhead Casino Corporation.” Since November 6, 1998, the Company’s stock has traded on the Over the Counter Bulletin Board (OTCBB). The Company’s stock currently trades under the symbol “DHCC.” Prior to the corporate name change, the Company’s stock traded under the symbol “KRUZ.” Prior to trading on the Over the Counter Bulletin Board, the Company’s stock traded on the NASDAQ Small Cap Market.

The Company currently has three subsidiaries with no current operations. As of December 31, 2006, the Company had four employees. The Company considers its relationship with its employees to be satisfactory.

I. FLORIDA

From inception through approximately August of 2000, the Company operated gaming vessels in international waters. The vessels sailed from state ports into international waters where gaming operations were conducted. From approximately 1994 through August of 2000, operations were conducted primarily out of ports located in Miami Beach, Florida, Ft. Myers Beach, Florida, and Madeira Beach, Florida. The Company eventually divested itself of its gaming operations to satisfy financial obligations to its vendors, lenders and taxing authorities and to focus its resources on the development of a casino resort on its 404.5 acres of waterfront property located in Diamondhead, Mississippi. The Company has no current operations in Florida. The Company does, however, lease office space in Largo, Florida, where it maintains its corporate headquarters.

II. MISSISSIPPI

The Company owns, through its wholly-owned subsidiary, Mississippi Gaming Corporation (hereafter “MGC”), a 404.5 acre tract of unimproved land in Diamondhead, Mississippi. The property is located at 7051 Interstate 10. The property fronts Interstate 10 for approximately two miles and fronts the Bay of St. Louis for approximately two miles. The property is owned in fee simple and there are no liens or debt on the property. The Company intends, in conjunction with unrelated third parties, to fully develop the site in phases beginning with a casino resort. The casino resort is expected to include a casino, a hotel and spa, a sports and entertainment center, a conference center and a state-of-the-art recreational vehicle park.

The Company has had the site appraised on three occasions, subject to certain material assumptions, by J. Daniel Schroeder Appraisal Company. The appraisals were predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site under Mississippi law prior to October 17, 2005, which required that casinos be water-based. The property was appraised in 1996, assuming full permitting for a water-based casino, at approximately $8 million. The property was reappraised in 1999, again assuming full permitting for a water-based casino, at approximately $42 million. The property was last appraised in 2003, again assuming full permitting for a water-based casino, at approximately $109 million. The property has not been appraised since a new law was passed in Mississippi which permits casinos to be built on land.

The Company maintains an office in Diamondhead, Mississippi and has one employee there. The Company has no current operations in Mississippi.

NEW LEGISLATION PERMITTING LAND-BASED CASINOS IN MISSISSIPPI

All references in this section to Mississippi law are qualified in their entirety by reference to the actual text of the law.

On August 29, 2005, Hurricane Katrina struck the Gulf coast of the United States causing extensive damage to Louisiana and Mississippi, including Biloxi, Gulfport, and Bay St. Louis, Mississippi, where approximately twelve of Mississippi’s casinos were then located. Hurricane Katrina destroyed most of the

casinos on the Gulf coast. Prior to Hurricane Katrina, Mississippi law required that casinos on the Gulf coast be built in, on, or above the water and be located a minimum of fifty percent below mean high tide. Hurricane Katrina destroyed most of these water-based casinos and carried some casino barges from their water-based moorings onto land. In a single day, Hurricane Katrina destroyed the Gulf coast casino industry and left thousands of casino-related workers without jobs. The State of Mississippi suffered an immediate and substantial loss of tax revenue due to the loss of a substantial portion of its casino industry.

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 St. Louis Bay. Under Mississippi’s new legislation, the part of the structure in which licensed gaming activities are conducted must be located entirely in an area which is located no more than eight hundred (800) feet from the mean high-water line (as defined in Section 29-15-1 of the Mississippi Code) of the waters within the State of Mississippi, which lie adjacent to the State of Mississippi south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay, or, with regard to Harrison County only, no farther north than the southern boundary of the right-of-way for U.S. Highway 90, whichever is greater. In the case of a structure that is located in whole or part on shore, the part of the structure in which licensed gaming activities are conducted must lie adjacent to state waters south of the three (3) most southern counties in the State of Mississippi, including the Mississippi Sound, St. Louis Bay, Biloxi Bay and Pascagoula Bay. When the site upon which the structure is located consists of a parcel of real property, easements and rights-of-way for public streets and highways are not construed to interrupt the contiguous nature of the parcel, nor is the footage contained within the easements and rights-of-way counted in the calculation of the distances specified above.

The Company believes that its property, which fronts Interstate 10 for approximately two miles and St. Louis Bay for approximately two miles, is strategically located to take advantage of the new law. The Company believes that the advent of land-based gaming in Mississippi will have a positive effect on the entire industry in Mississippi and change the perception of the gaming industry in Mississippi from that of a riverboat, dockside, or barge-based industry, to that of a Las Vegas style or Atlantic City style industry. With respect to the Company’s property, management believes the impact of the new law will also be beneficial. Management believes that the new law will allow the Company to avoid certain architectural constraints imposed by the design and construction of a water-based casino located in, on, or above water and a minimum of fifty percent below mean high tide. The new law will also allow the Company to avoid any permits, authorizations, or tidelands leases that water-based construction of a casino would have required, but that construction on land may not require.

Permits/Approvals

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. The regulatory environment relating to these permits and approvals is uncertain and subject to constant change. There can be no assurance that all permits and approvals can be obtained, or that if obtained, they will be renewed. Since Mississippi’s new law was passed, the Company has applied for and received the requisite zoning required from Hancock County, but has not applied for any other permits or approvals.

Inasmuch as the Company intends to take advantage of Mississippi’s new law and construct a casino on land, some of the permits, authorizations, and/or leases previously required may no longer be required. For example, since the Company intends to build a casino on land, a tidelands lease from the Mississippi Secretary of State, which was previously required to lease State water-bottoms in, on, or over which the casino would be placed, is no longer required. The extent to which previously-required permits, approvals, authorizations, or an environmental impact statement, will be required for a casino constructed on land on the Company’s property, is not yet known.

A. Hancock County

The Company’s Diamondhead, Mississippi property is located in Hancock County, Mississippi. On January 16, 1997, the Hancock County Board of Supervisors adopted a Hancock County Zoning Ordinance. Under the Hancock County Zoning Ordinance, the Company’s 404-acre site was zoned as a Special Use District-Waterfront District. The Company has obtained an extension of this Special Use designation each year since that time. Most recently, by letter dated November 13, 2006, the Company forwarded a request to the Hancock County Planning Commission for an extension of the Special Use designation. On November 16, 2006, the Hancock County Planning Commission passed a resolution extending the designation through December 31, 2007. On November 20, 2006, the Hancock County Board of Supervisors ratified the resolution.

B. Mississippi Gaming Commission

On June 15, 1995, the Mississippi Gaming Commission granted gaming site approval for the original, water-based, Diamondhead casino site. Inasmuch as the Company intends to construct its casino resort on land, the Company believes it will be required to obtain gaming site approval for a land-based casino site (See Mississippi Regulation-Gaming Site Approval/Approval of Site Development Plans/Approval to Proceed with Development). There can be no assurance that the Company will obtain the approvals required from the Mississippi Gaming Commission.

C. Annual In-Lieu Tidelands Assessment

The Company intends to take advantage of Mississippi’s new law and construct its casino on land, therefore, the Company will no longer require a tidelands lease from the Secretary of State. Under Mississippi’s prior law, which required that the Company’s casino be in, or, or above water and a minimum of fifty percent at or below mean high tide, the Company would have required a tidelands lease to lease water-bottoms owned by the State.

On October 17, 2005, when Mississippi passed new legislation permitting casinos to be built on land in certain locations, Mississippi also passed a companion law that requires any person possessing a license under the Mississippi Gaming Control Act, who operates a gaming establishment in any of the three most southern counties of the State (including the county in which the Company’s property is located), and who does not lease public trust tidelands from the State, to pay an annual in-lieu tidelands assessment to the Public Trust Tidelands Assessments Fund. For calendar year 2006, the annual in-lieu tidelands assessment will be between $400,000 and $750,000, based on an escalating scale which is based on the capital investment in the part of the structure in which the licensed gaming activities are conducted. For each calendar year thereafter, the Secretary of State shall review and adjust the value of the capital investment and the annual in-lieu tidelands assessment due. Such review and adjustment shall be tied to

the Consumer Price Index. This annual in-lieu tidelands assessment will apply to any casino constructed on land on the Company’s property.

D. Other Required Permits

In addition to the foregoing, the Company will, at a minimum, be required to obtain various permits, authorizations, or approvals from the following:

1)		Mississippi Commission on Marine Resources

2)		Mississippi Commission on Environmental Quality

3)		U.S. Army Corps of Engineers

There can be no assurance that the Company will be successful in obtaining these permits.

Uncertain Regulatory and Political Environment/Modifications

Any modification of the Company’s originally-approved site plan or any newly-approved site plan may require resubmission to, amendment to, and/or re-approval by the Mississippi Gaming Commission, the Mississippi Department of Marine Resources, the Mississippi Department of Environmental Quality, the U.S. Army Corps of Engineers, Hancock County, and/or other federal, state or local agencies. The foregoing federal, state and local agencies regularly pass new rules and regulations which may affect permits and authorizations required. While there is no pending environmental litigation, the foregoing permits and approvals remain subject to future litigation and the actions of environmental groups and various federal, state and local governments and agencies, including, but not limited to, the foregoing. The regulatory environment relating to these permits, approvals and leases is uncertain and subject to constant change.

The political environment in which the Company and/or its subsidiaries intend to operate is also uncertain, dynamic and subject to rapid change. Existing operators often propose and support legislation and/or litigation designed to make it difficult or impossible for competition to enter a market. This political and regulatory environment makes it impossible to predict the effects that the adoption of and changes in gaming laws, rules and regulations and/or competition will have on proposed gaming operations or development of a gaming resort. Moreover, legislatures in states in which gaming is legal often consider wide-ranging legislation and regulations which could adversely affect operations and expected revenues. Likewise, the federal government often considers legislation which could adversely affect operations and expected revenues. For example, in 1999, the National Gambling Impact Study Commission, which conducted a two-year study of legal gaming in the United States, reported its findings and recommendations to Congress. Some of the recommendations made in its report, if implemented, might result in additional regulation of the gaming industry and could have an adverse effect on the industry and the Company’s proposed development.

Anti-Gaming Referenda

On three separate occasions since 1998, certain anti-gaming groups have proposed referenda that, if adopted, would have banned gaming in Mississippi and required that gaming entities cease operations within two years after the ban. All three of the proposed referenda were ruled illegal by Mississippi State

trial courts. If such a referendum were to be approved by the voters, it would have a material adverse effect on the Company.

MISSISSIPPI REGULATION

The Company has no current operations in Mississippi and does not operate any gaming facility in Mississippi. The Company intends to develop its Diamondhead property as a destination casino resort and to eventually operate its casino resort, through its subsidiaries, MGC and Casino World, Inc. (hereafter “CWI”). Assuming it is successful in developing its resort, the Company and its subsidiaries will be subject to federal, state and local, laws, rules, ordinances and regulations with respect to the operation of any gaming facility. The following is intended to serve as a partial description of the Mississippi regulatory environment in which the Company and its subsidiaries or joint venture partner(s) would seek approvals to construct and operate a gaming facility and is not intended to be a complete, precise, or up-to-date recitation of all applicable laws, rules, regulations or ordinances that might affect the Company’s operations or with which the Company would be required to comply. Additional or more restrictive laws, rules and regulations could be adopted at any time or gambling could be completely banned.

The location of, ownership of, and operation of gaming facilities in Mississippi are subject to extensive state and local regulation, primarily through the licensing and control of the Mississippi Gaming Commission and the Mississippi State Tax Commission. The Company and/or its subsidiaries, must register and be licensed under the Mississippi Gaming Control Act and its gaming operations will be subject to the regulatory control of the Mississippi Gaming Commission, the Mississippi State Tax Commission and various local and county regulatory agencies.

The Mississippi Gaming Control Act gives the Mississippi Gaming Commission (the “Commission”) extensive power to enforce the Act and adopt regulations in furtherance of the Act (the “Mississippi Regulations”). The laws, regulations and supervisory procedures of Mississippi and the Mississippi Gaming Commission seek to: (1) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (2) establish and maintain responsible accounting practices and procedures; (3) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Gaming Commission; (4) prevent cheating and fraudulent practices; (5) provide a source of state and local revenues through taxation and licensing fees; and (6) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Commission. Changes in Mississippi law or the regulations or the Commission’s interpretation thereof may limit or otherwise materially affect the types of gaming that may be conducted and could have a material adverse effect on Mississippi gaming operations.

The Commission has divided the preliminary approval process into three separate phases: (1) gaming site approval; (2) approval of the applicant’s site development plans; and (3) approval to proceed with development.

Gaming Site Approval

With respect to gaming site approval, preliminary approval constitutes only the Commission’s finding that the location complies with applicable gaming laws and regulations. Preliminary gaming site approval does not entitle the person receiving preliminary approval to approval of site development plans, nor does it

constitute a license to engage in gaming or a right to a gaming license. Preliminary gaming site approval is a revocable privilege, and no holder acquires any vested right therein. Preliminary site approval is not subject to sale, assignment, or transfer. Nothing prevents the Commission from denying a gaming license or preliminary site approval based on the unsuitability of a particular site. An application for site approval must include evidence satisfactory to the Commission including: (1) a survey indicating the specific location of the property; (2) the current use of any adjacent property as well as the location of the nearest residential area, church and school; (3) evidence that all applicable zoning ordinances allow gaming at the proposed site; and (4) a survey, performed by a qualified surveyor of tidal surveys, establishing the mean high water line at the time site approval is granted.

Gaming establishments in the three most southern counties in the State of Mississippi, including Hancock County, are permitted to be permanent inland structures. No point in the gaming area may be more than eight hundred (800) feet from the nineteen (19) year mean high water line. Harrison County establishments south of Highway 90 may exceed the eight hundred (800) foot measurement up to the southern boundary of Highway 90. All public easements and rights-of-way for public streets and highways are excluded from the 800 foot measurement. Any point of reference used to determine the 800 foot distance from the mean high water line must be located on the applicant or licensee’s premises. The applicant or licensee must own and/or lease the land that is contiguous both to the parcel used to conduct gaming and the point of reference used to determine the mean high water line, and this land must be shown to be an integral part of the project. The Commission has final authority in reviewing and approving each site as it pertains to meeting the requirements of this regulation. Preliminary gaming site approval may be granted for a period not to exceed two years; however, such approval will automatically expire six months from the date granted if site development plans have not been approved by the Commission within that time.

Site Development Plan Approval

With respect to gaming site development plans, the Commission’s approval constitutes only the approval of the plan in concept. The applicant may not proceed with actual development until it receives approval to proceed with development from the Commission. The applicant’s site development plans submitted for approval must include architectural plans or renderings showing details of all proposed construction and renovation for the project, together with a footprint of the project and a description of the construction and type of parking facilities, as well as parking lot capacity, together with documentation to support this information.

Commission approval of site development plans requires that the facility include a 500 car, or larger parking facility in close proximity to the casino complex and infrastructure facilities which will amount to at least 100% of the higher of the appraised value or construction cost of the casino. Such infrastructure shall include any of the following: 250 room, or larger hotel of at least a two star rating as defined by the current edition of the Mobil Travel Guide, a theme park, golf course, marinas, tennis complex, entertainment facilities, or any other such facility as approved by the Commission as infrastructure. Infrastructure facilities are not such items as parking facilities, roads, sewage and water systems, or civic facilities normally provided by cities and/or counties. The Commission may, in its discretion, reduce the number of rooms required, where it is shown to the Commission’s satisfaction that sufficient rooms are available to accommodate the anticipated visitor load. Parking spaces may also be reduced as needed for small casinos, provided that the 100% infrastructure requirement is otherwise met. In cases where casinos

that are not in operation are purchased which do not meet the parking and infrastructure requirements subsequent to February 20, 1999, the infrastructure requirement will be calculated on the higher of the appraised value of the casino barge or acquisition cost of the casino barge. For the purpose of determining compliance with this regulation, the Commission will, in its discretion, determine a fair and equitable method for calculating the construction cost of new casinos and acquisition costs for existing casinos. This regulation applies to any new applicant for a gaming license for a new gaming facility and to the acquisition or purchase of a licensee for which gaming operations have ceased prior to the time of acquisition or purchase. This regulation does not apply to any licensee which has been licensed by the Commission, or received a finding of site suitability from the Commission, prior to February 20, 1999 (or to any such licensee upon any licensing renewal after such date). For purposes of complying with this regulation, the appraised value of any casino will be determined by an appraisal completed by an appraiser approved by the Executive Director of the Commission prior to the appraisal. The Commission may require more than one appraisal and may obtain its own appraisal with the reasonable cost of same to be paid by the applicant.

Any change to the site development plan, or placement or design of the establishment, cruise vessel or vessel, shall be submitted in advance to the Executive Director for a determination of whether such change constitutes a material change. If the Executive Director determines that a material change has occurred, Commission approval is required for same.

Approval to Proceed with Development

With respect to obtaining the Commission’s approval to proceed with development, the Commission requires the applicant to submit the following information, together with documentation to support this information: (1) Statements reflecting the total estimated cost of construction or renovation of the establishment, vessel, or cruise vessel and shore and dock facilities, distinguishing between known costs and projections, and separately identifying: facility design expense; land acquisition costs; site preparation costs; construction costs or renovation costs; equipment acquisition costs; costs of interim financing; organization, administrative and legal expenses; projected permanent financing costs; qualified infrastructure costs; and non-qualifying infrastructure costs. (2) A construction schedule for completion of the project, including an estimated date of project completion, indicating whether a performance bond will be required by the applicant to be furnished by the contractor. (3) Current financial statements, including, at a minimum, a balance sheet and profit and loss statement for the proposed licensee. (4) A detailed statement of the sources of funds for all construction and renovation proposed by the site development plans. Any funding, whether equity or debt, to be obtained must be supported by firm written commitments satisfactory to the Commission. (5) Evidence that the following agencies (if applicable) do not oppose the site development: U.S. Corps of Engineers, U.S. Coast Guard, Mississippi Department of Transportation, Mississippi Department of Environmental Quality, Department of Marine Resources, Port and Harbor Commission, Levee Board, City and County government, and such other agencies as the Executive Director deems appropriate.

The application for a Gaming Operator’s License must be filed no later than ninety (90) days after the Commission grants approval to proceed with development.

Opening of a Casino

Before any gaming facility may open to the public, all infrastructure requirements must be fully operational. Site development must be completed in accordance with the approved site development plan

and be ready for operation within the preliminary gaming site approval time period. Gaming site approval may be extended within the discretion of the Commission.

The Commission requires, as a condition of licensure, that gaming establishments meet strict hurricane, fire-safety, and construction-related standards and regulations.

Application Information Required

In addition to other information required by law and Commission regulations, an applicant must provide complete information regarding the proposed operation, including but not limited to, a certification that any establishment to be used by the proposed operation has been inspected and approved by all appropriate authorities; fingerprints for each individual applicant; the nature, source, and amount of any financing; the proposed uses of all available funds; the amount of funds available after opening for the actual operation of the establishment; and economic projections for the first three (3) years of operation of the establishment. Each applicant must provide complete information regarding his or her background for the ten-year period preceding submission of the application. Every application must include any feasibility studies done on the type of gaming in the particular locale where the applicant intends to conduct gaming; the actual establishment blueprints, including a layout of each floor stating the projected use of each area; a description of the casino size and configuration of slot machines, video games of chance and table games; a description of the arrangements for food and drink concessions, the names and addresses of the concessionaires and the terms of the concession contracts; the type of slot machines and video games of chance to be used and the proposed distributors and manufacturers of this equipment; a description of the proposed management of the facility, management personnel by function, and tip distribution policies; and a description of procurement policies that emphasize the utilization of Mississippi employees, resources, and goods and services in the operation of the gaming establishment. In cases where the premises used for gaming are not wholly owned by the applicant, information pertaining to the interest held by any other person is required. Applicants must also submit a timetable for financing arrangements and commencement and completion of construction activities, setting forth the date upon which gaming activities will commence. The timetable will be subject to approval by the Commission and monitored for compliance by the Executive Director.

Gaming Licenses

Neither the Company nor any of its subsidiaries has a license to operate a casino in Mississippi or in any other jurisdiction. Gaming licenses require the periodic payment of fees and taxes and are not transferable. Gaming licenses in Mississippi are issued for a maximum term of three years and must be renewed periodically thereafter. There can be no assurance that the Company or any of its subsidiaries will be licensed. There can be no assurance that if licensed, new licenses can be obtained at the end of each three-year licensure period. Moreover, the Commission may, at any time, and for any cause it deems reasonable, revoke, suspend, condition, limit or restrict a license or approval to own shares of stock in a company that operates in Mississippi. The Mississippi Act also requires that a publicly traded company register under the Act. The Company and/or its subsidiaries will be required to periodically submit detailed financial, operating and other reports to the Commission and Mississippi State Tax Commission. Substantial fines for each violation of Mississippi’s gaming laws or regulations may be levied against a company or its subsidiaries and the persons involved. A violation under a gaming license held by a

subsidiary of a Company operating in Mississippi could be deemed a violation of all other licenses, if any, then held by the Company. Numerous transactions, including substantially all loans, leases, sales of securities and similar financing transactions entered into by any subsidiary of the Company operating a casino in Mississippi must be reported to or approved by the Commission. In addition, the Commission may, at its discretion, require additional information about the operations of the Company. The Company’s gaming operations outside of Mississippi, if any, would also be subject to approval of the Commission.

Key Employee Licenses

Any executive, employee, or agent of a gaming licensee having the power to exercise a significant influence over decisions concerning any part of the operation of a gaming licensee or who is listed or should be listed in the annual employee report may be required to hold a Key Employee License. A Key Employee License relates only to the specified involvement for which it was made. If the nature of the involvement changes from that for which the applicant is granted a Key Employee License, he may be required to submit himself to a new determination of suitability to hold a Key Employee License. A Key Employee may be required to submit to a finding of suitability at any time after issuance of a Key Employee License. A Key Employee license is granted for a period of no longer than nine years from the date of issue. A Key Employee License may be granted for a period of less than nine years within the discretion of the Commission. A holder of a Key Employee License must file with the Investigations Division of the Commission by June 30^th of each year, the “Investigations Division Annual Report”, providing all information requested on forms provided by the Commission and any other information requested by the Executive Director. Commission approval is required for certain acts of licensees or transactions directly or indirectly involving licenses. A holder of a Key Employee License must immediately inform the Commission of any arrest or conviction.

Deborah Vitale, President and Chairman of the Board of Diamondhead Casino Corporation and President and a Director of CWI and MGC, was issued a key person license by the Colorado Gaming Commission during 1994. A Colorado license is ineffective in Mississippi. During 1996, Ms. Vitale’s key person license in Colorado expired and was not renewed.

Findings of Suitability

The Commission can require that certain persons directly and actively involved in the administration or supervision of the gaming activities of gaming licensees be found suitable to hold a gaming license so long as that involvement continues and its regulations require that the following persons shall apply for a finding of suitability and must be found suitable by the Commission in order to be involved with a licensee: each person who serves as Chairman of the Board of Directors of any corporation, public or private, licensed or registered by the Commission; and each person who has a vote on any issue before the Board of Directors of any corporation, public or private, licensed or registered by the Commission and who is also an employee of the corporation or any of its subsidiaries. In addition, each person who serves as Chairman of the audit or compliance committees of any corporation, public or private, licensed or registered by the Commission, must apply for a finding of suitability. If the nature of the job changes from that for which the applicant is found suitable, he may be required to submit himself to a new determination of his suitability.

A finding of suitability is granted for a period of no longer than ten years from the date of issue. A finding of suitability may be granted for a period of less than ten years within the discretion of the Commission. A holder of a finding of suitability must file with the Investigations Division of the Commission by June 30^th of each year, the “Investigations Division Annual Report”, providing all information requested on forms provided by the Commission and any other information requested by the Executive Director. A holder of a finding of suitability must immediately inform the Commission of any arrest or conviction.

The Commission has full and absolute power and authority, at any time, to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered, found suitable or approved, for any cause deemed reasonable by the commission. The Commission has the power, at any time, to investigate and require the finding of suitability of any record or beneficial stockholder of the Company. The Act requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 5% of any class of voting securities of a publicly traded corporation registered with the Mississippi Gaming Commission, must notify the Mississippi Gaming Commission of this acquisition. The Act also requires that each person who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 10% of any class of voting securities of a publicly traded corporation registered with the Commission must be found suitable by the Mississippi Gaming Commission and pay the costs and fees that the Commission incurs in conducting the investigation. The Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a registered publicly traded holding company’s stock. However, the Commission has adopted a policy that generally permits certain institutional investors to own beneficially up to 15% of a registered public company’s stock without a finding of suitability. If a stockholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information, including a list of beneficial owners. The Commission may, at any time, dissolve, suspend, condition, limit or restrict a finding of suitability to own a registered public company’s equity interests for any cause it deems reasonable.

Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the Company’s securities beyond such time as the Commission prescribes, may be guilty of a misdemeanor. The Company could be subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or its subsidiaries operating casinos in Mississippi, the Company pays the unsuitable person any dividend, interest or other distribution whatsoever; recognizes the exercise, directly or indirectly, of any voting rights conferred through such securities held by the unsuitable person; pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in limited and specific circumstances; makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction; or fails to pursue all lawful efforts to require the unsuitable person to divest himself or herself of the securities, including, if necessary, the immediate purchase of the securities for cash at fair market value.

The Company may be required to disclose to the Commission upon request, the identities of holders of any debt or other securities. Under the Act, the Commission may, in its discretion, (1) require holders of

debt securities of registered corporations to file applications; (2) investigate such holders; and (3) require the holders to be found suitable to own such securities. Although the Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Commission retains the discretion to do so for any reason, including but not limited to a default, or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Commission in connection with such an investigation.

The finding of suitability is comparable to licensing and both require submission of detailed personal financial information followed by a thorough investigation. In addition, the Mississippi Gaming Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources.

The Mississippi regulations provide that a change in control of a Company may not occur without the prior approval of the Commission. Mississippi law prohibits the Company from making a public offering of its securities without the approval of the Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. The Commission has the authority to grant a continuous approval of securities offerings subject to renewal every two years. Regulations of the Commission prohibit certain repurchases of securities of publicly traded corporations registered with the Commission, including holding companies, without prior approval of the Commission. Transactions covered by these regulations are generally aimed at discouraging repurchases of securities at a premium over market price from certain holders of greater than 3% of the outstanding securities of the registered publicly traded corporation. The regulations of the Commission also require prior approval for a “plan of recapitalization” as defined in such regulations.

The Company, once registered, will have to maintain current stock ledgers in the State of Mississippi, which may be examined by the Mississippi Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is required to render maximum assistance in determining the identity of the beneficial owner. Mississippi law requires that certificates representing shares of a registered company’s common stock bear a legend to the general effect that the securities are subject to the Mississippi Gaming Control Act and regulations of the Mississippi Gaming Commission. The Commission has the authority to grant a waiver from the legend requirement. (Isle of Capri obtained such a waiver.) The Commission, through the power to regulate licenses, has the power to impose additional restrictions on holders of the Company’s securities at any time.

Employees associated with gaming in Mississippi must obtain work permits that are subject to immediate suspension under certain circumstances. The Commission will refuse to issue a work permit to a person who has been convicted of a felony, committed certain misdemeanors or knowingly violated the Mississippi Gaming Control Act, and it may refuse to issue a work permit to a gaming employee for any other reasonable cause.

License Fees and Taxes

License fees and taxes are payable to the State of Mississippi and to the counties and cities in which the Mississippi Gaming Subsidiary’s respective operations will be conducted. The license fee payable to the State of Mississippi is based upon “gaming receipts”, generally defined as gross receipts less payouts to customers as winnings, and equals 4% of gross revenue of $50,000 or less per calendar month, plus 6% of gross revenue over $50,000 and less than $134,000 per calendar month, plus 8% of gross revenue over $134,000 per calendar month. License fees paid in any taxable year are allowed as a credit against the Mississippi State income tax liability of a licensee for that taxable year. In addition, a licensee must pay a $5,000 annual license fee and an annual fee based upon the number of games it operates. In addition to state gaming license fees or taxes, a municipality or county may impose a gross revenue fee upon a licensee based on all gaming receipts derived from the establishment equal to approximately 4%. Certain local and private laws of the State of Mississippi may impose fees or taxes in addition to the fees described above.

Beer, Wine and Liquor Licensing

The sale of food or alcoholic beverages, including beer and wine, is subject to licensing, and regulation and control by the applicable state and local authorities. The Miscellaneous Tax Division of the Mississippi State Tax Commission regulates the sale of beer and light wine. The Alcoholic Beverage Control Division of the Mississippi State Tax Commission (the “ABC”), regulates the sale of alcoholic beverages containing more than 5% alcohol. The ABC requires that all equity owners and managers file personal record forms and fingerprint cards for licensing. In addition, owners of more than 5% of a company’s equity, as well as officers and managers, must submit detailed financial information to the ABC for licensing. All such licenses are revocable and non-transferable. The Mississippi State Tax Commission has full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could, and revocation would, have a material adverse impact upon the operations of an affected casino.

Extensive Non-Gaming Laws and Regulations

In addition to the foregoing, the Company and/or its subsidiaries will be subject to additional federal, state and local safety, health, employment, and other laws, regulations and ordinances that apply to non-gaming businesses generally. For example, Regulations adopted by the Financial Crimes Enforcement Network of the U.S. Treasury Department require currency transactions in excess of $10,000 occurring within a gaming day to be reported, including identification of the patron by name and social security number. Substantial penalties can be imposed for failure to comply with these regulations. The foregoing is just one example of the pervasiveness of the non-gaming laws, rules, regulations and ordinances that would apply to a casino operator.

COMPETITION

There is intense competition in the Mississippi market in which the Company intends to operate and in surrounding markets. The Company will compete directly with other existing gaming facilities located in Mississippi and in bordering states, including Louisiana. The Company will also be competing directly and indirectly, with gaming facilities throughout the United States and throughout the world as well as with Native American gaming operations which enjoy certain tax advantages. The Company expects this competition to increase as new gaming operators enter these markets, existing competitors expand their operations, gaming activities expand in existing jurisdictions, and gaming is legalized in new jurisdictions

and/or on the internet. Assuming it is successful in developing a destination casino resort, the Company will also be competing with other forms of gaming and entertainment, including but not limited to, bingo, online computer gambling, pull tab games, card parlors, sports-book operations, pari-mutuel betting, dog racing, lotteries, jai-alai, video lottery terminals, and video poker terminals.

MANAGEMENT AGREEMENT

On June 19, 1993, CWI and MGC entered into a Management Agreement with Casinos Austria Maritime Corporation (CAMC). Subject to certain conditions, under the Management Agreement, CAMC would operate, on an exclusive basis, all of the Company’s proposed dockside gaming casinos in the State of Mississippi. If the Company enters into a joint venture arrangement pursuant to which the joint venture partner acquires a controlling interest, the agreement with CAMC will terminate. Unless earlier terminated pursuant to the provisions of the Agreement, the Agreement terminates five years from the first day of actual Mississippi gaming operations and provides for the payment of an annual operational term management fee of 1.2% of all gross gaming revenues between zero and one hundred million dollars ($100,000,000); plus 0.75% of gross gaming revenue between $100,000,000 and $140,000,000; plus 0.5% of gross gaming revenue above $140,000,000; plus two percent of the net gaming revenue between zero and twenty-five million dollars ($25,000,000); plus three percent of the net gaming revenue above twenty-five million dollars ($25,000,000).

ITEM 2. PROPERTIES

DIAMONDHEAD, MISSISSIPPI PROPERTY

On June 19, 1993, the Company, through MGC, exercised an option to purchase 404.5 acres of land in Diamondhead, Mississippi for $4,000,000. MGC obtained a $2,000,000 loan from Casinos Austria Maritime Corporation (“CAMC”) to complete the purchase of the property. The loan was secured by a first mortgage on the property. The first mortgage loan was payable interest only at 8% per annum for fifteen months. The full principal balance on the first mortgage loan was due and payable on June 30, 1995. Prior to its due date, the first mortgage was paid in full from the proceeds of a loan obtained by the Company in May of 1995 from First Union National Bank of Florida. The loan due First Union National Bank of Florida was subsequently paid in full and the property is now debt-free and lien-free.

On June 19, 1993, MGC also entered into an Option Agreement to purchase approximately 80 acres of land included within the 404 acre site for a purchase price of ten dollars ($10.00). The option was originally purchased so as to avoid certain limitations that attached to the underlying parcels. It was in the interest of the Company and its Diamondhead project that certain litigation instituted by the seller of the property be completed before MGC exercised this option. The litigation was finalized in 2002 and MGC exercised its option in December of 2002. The property was transferred to MGC by Warranty Deed on December 18, 2002. The exercise of this option gave MGC full title to the entire 404 acre tract.

MGC now owns the entire 404 acre tract in fee simple. There is no debt and there are no liens on the property. The Company believes the property is adequately insured.

OFFICES


Location		Lease Terms

Florida
1301 Seminole Blvd., Suite 142 Largo, Florida 33770		One year commencing August 1, 2006 with an option to renew for one additional year.

Mississippi
5403 Indian Hill Blvd. Diamondhead, Mississippi 39525		Two years commencing June 1, 1998 and continuing month-to-month thereafter

STORAGE FACILITIES

The Company leased storage facilities at the following location in 2006:


Florida		Lease Terms
4319 Duhme Rd. Madeira Beach, Florida 33708.		Month-to-month leases on various storage units.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since November 22, 2002, shares of the Company’s Common Stock, $.001 par value (the “Common Stock”) have traded on the over-the-counter market under the symbol “DHCC.” The following table sets forth the high and low closing price quotations of the Common Stock in each full quarter during the periods set forth. The over-the-counter quotations reflect inter-dealer prices without retail markup, markdown, or commission and may not represent actual transactions.


	2006 Quarters				2005 Quarters
	High		Low		High		Low

First Quarter	$	2.76	$	1.55	$	.90	$	.62
Second Quarter		3.12		2.57		.80		.54
Third Quarter		3.13		2.50		.90		.56
Fourth Quarter		3.38		2.55		2.09		.85

On February 23, 2007, there were 929 registered holders of record of the Common Stock of the Company.

The Company has never paid a cash dividend on its Common Stock. Reference is made to Part III, Item 10 of this report which describes in full all compensation involving equity securities related to Directors and Officers of the Company.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINACIAL CONDITION AND PLAN OF OPERATION

Plan of Operation

The Company’s current priority is the development of a destination casino resort in Diamondhead, Mississippi. In the opinion of management, this project holds the greatest potential for increasing shareholder value. The Company’s management, financial resources and assets will be devoted towards the development of this goal. There can be no assurance that the casino resort can be developed and, if developed, that the Diamondhead casino resort would be successful.

The Company has had no operations since it ended its cruise ship gambling operations in 2000. The Company incurred a net loss applicable to common shareholders of $1,757,192 in 2006 and $749,308 in 2005. Costs and expenses for the year ended December 31, 2006 were $2,893,821 as compared to $786,841 for 2005. The increase of $2,106,980 was primarily attributable to the expense associated with the issuance of stock option awards valued at $1,238,348 and required to be expensed under FASB 123(R), additional compensation and increased base compensation awarded to the Company President amounting to $617,000 over the prior year, and an increase in non-cash ESOP expense of approximately $147,000. These cost increases were partially offset by the reversal of a sales tax settlement liability in the amount of $1,125,752, the circumstances of which are more fully described in Part 1, Item 3 of this report.

The Company has been able to sustain its cash position and continue to satisfy its ongoing expenses through the sale of common stock and the receipt of cash from the exercise of options to purchase common stock. During 2006, the Company received a total of $1,217,850 from the sale of 699,654 shares of common stock formerly held in treasury; $843,755 from the exercise of options to purchase 1,513,500 shares of common stock by various directors, former directors and a key employee of the Company; and $200,000 from the exercise of warrants granted to Wachovia Bank (formerly First Union National Bank of Florida). Subsequent to December 31, 2006, the Company received an additional $200,000 from the exercise of the remaining warrants outstanding which were formerly granted to Wachovia Bank. Management of the Company has examined the historical and planned future spending patterns of the Company in relation to its cash currently on hand, and believes that it has sufficient cash to operate for the next twelve months. In addition, the Company believes it can continue to raise sufficient capital via the above- [hyphen here]described means over the short term. However, the Company continues to consider various asset-backed and securities-backed financing alternatives for the longer term, as well as any potential capital which may be derived from an agreement with an outside party to sell portions of the Diamondhead, Mississippi property or develop all or parts of the property.

There can be no assurance that the Company will be able to reach an agreement with any party regarding the development of the Diamondhead property. The ultimate development of this project is subject to risks and uncertainties which include, but are not limited to, those relating to permitting, financing, and the actions of federal, state, or local governments and agencies. The Company may be affected by some or all of these factors and other risks and uncertainties, many of which are beyond the Company’s control.

Off Balance Sheet Arrangements

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 Policy

Valuation of Impairment

In accordance with generally accepted accounting principles, the Company currently carries the value of the Diamondhead, Mississippi property on its balance sheet at cost in the amount of $5,409,913 and has tested the valuation for impairment. In the opinion of management, the carrying value is not in excess of the estimated market value of the property or the anticipated cash flows to be generated from the property. However, there can be no assurance that the necessary regulatory approvals for the Diamondhead project can be obtained or that financing will be available to develop the property.

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 year ended December 31, 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 year ended December 31, 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 7. FINANCIAL STATEMENTS

The consolidated financial statements and notes thereto are included herein beginning at page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 8A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e), promulgated pursuant to 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 December 31, 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 annual report.

Section 404 Compliance

Beginning with the year ending December 31, 2007, 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 our 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) subject to a future measurement of the Company’s market cap, 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 under which management has adopted a project work plan 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 fourth quarter of fiscal year 2006, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our 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.

ITEM 8B. OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

A. Directors and Officers:

The current executive officers of the Company and their titles are as follows:


Name	Age		Title
Deborah A. Vitale		56	Chairman of the Board, President, Chief Executive Officer, Treasurer
Gregory A. Harrison		62	Director, Vice President, Secretary
Frank E. Williams, Jr.		72	Director
Benjamin J. Harrell		53	Director
H. Steven Norton		73	Director
Carl D. Stevens		60	Director
Robert Zimmerman		57	Chief Financial Officer

Directors elected to office have terms which extend to the next annual meeting.

DEBORAH A. VITALE has served as President, Chief Executive Officer and Treasurer of the Company since February 1998 and has served as Chairman of the Board of the Company since March 1995. As President and CEO, Ms. Vitale was responsible for all phases of the day-to-day operations of

four casino ships sailing out of three Florida ports into international waters and for the management and supervision of hundereds of both ship-based and land-based employees. Ms. Vitale served as Secretary of the Company from November 1994 until July 2002. She has been a Director of the Company since December 1992. On February 14, 1997, Ms. Vitale was appointed Chairman of the Board of Directors of Casino World, Inc. and Chairman of the Board of Directors of Mississippi Gaming Corporation, each a subsidiary of the Company. On September 2, 1997, Ms. Vitale was appointed President of Casino World, Inc. and Mississippi Gaming Corporation. Ms. Vitale is a trial attorney with over twenty years of experience handling complex civil litigation. Ms. Vitale is licensed to practice law in Maryland, Virginia and Washington, D.C.

GREGORY A. HARRISON, Ph.D., P.E., was elected a Director of the Company on February 20, 1998. Dr. Harrison was appointed Vice-President of the Company on July 18, 2002 and was appointed Secretary of the Company on July 25, 2002. Dr. Harrison is a consulting forensic engineer with forty years of diversified fire protection/safety/project engineering experience with NASA, DOD, NBS, NRC, ARAMCO, and Tenera, L.P. Effective August 27, 2004, Dr. Harrison became a Professional Engineer licensed to practice in the state of Mississippi. Dr. Harrison has qualified as an expert witness in various courts in ten states. Dr. Harrison is a partner of Master Jin Kim of Champion Martial Arts, Inc., in the development of an internet martial arts school. Dr. Harrison received a B.S. degree in Fire Protection Engineering from the University of Maryland in 1966, an M.S. degree in Civil Engineering from the University of Maryland in 1970, an M.S. degree in Engineering Administration from George Washington University in 1979 and a Ph.D. in Safety Engineering from Kennedy-Western University in 1994. Dr. Harrison has held a top secret security clearance with the U.S. Department of Energy, the U.S. Nuclear Regulatory Commission, and the Department of Defense. Dr. Harrison has served on the Board of Directors of Data Measurement Corporation and was an Advisory Board member of United Bank and First Patriot National Bank.

FRANK E. WILLIAMS, JR. was elected a Director of the Company on July 3, 2002. Since 1969, Mr. Williams has served as Chairman of the Board of Williams Enterprises of Georgia, Inc., a holding company controlling six subsidiaries active in various facets of the steel industry. Since 1995, Mr. Williams has also served as Chairman, CEO, and a fifty percent owner of Bosworth Steel Erectors, Inc. of Dallas, Texas, an erector of steel products in the southwestern United States and as Chairman and a major shareholder of Wilfab, Inc., a structural steel fabricator located in Cherokee County, Georgia. Mr. Williams is the Managing Partner and principal owner of Structural Concrete Products, LLC of Richmond, Virginia, a manufacturer of pre-stressed concrete building systems for customers in the mid-Atlantic region and of Industrial Alloy Fabricators, LLC of Richmond, Virginia, a fabricator of alloy plate products for the energy and chemical industries. Mr. Williams continues to serve on the Board of Williams Industries, Inc., a public company (NASDAQ), which owns five subsidiaries active in the steel industry including Williams Bridge Company, one of the largest fabricators of steel plate for bridge structures in the mid-Atlantic region. The company was founded by Mr. Williams, who serves as its President and CEO and who served as its Chairman through 1994. Mr. Williams is currently Chairman of the Board of Directors of Kaiser Group Holdings, Inc., a public company (NYSE: KGH). Mr. Williams is a former Chairman and a current Director of Capital Bank, N.A. Mr. Williams has been appointed by bankruptcy courts as an official representative serving in a pro bono capacity on behalf of investors and debt holders in public companies in bankruptcy. Mr. Williams holds a Bachelor of Civil Engineering degree from the Georgia Institute of Technology.

BENJAMIN J. HARRELL was elected a Director of the Company on July 18, 2002. Mr. Harrell was the founder and served as President and CEO of Pete Fountain Productions, Inc. from 1979 until it was acquired in 1999 by Production Group International, Inc. (“PGI”), a global event communications company, and subsequently acquired from “PGI” by TBA Global Events, LLC in 2005. Mr. Harrell currently manages the acquiring company’s business in the New Orleans area. Mr. Harrell also currently serves as Vice President of Pete Fountain Entertainment, LLC, which until March 2003, operated one of the largest jazz clubs in New Orleans. Since 1975, Mr. Harrell has served as personal manager for the internationally noted jazz artist, Pete Fountain. Mr. Harrell handles all aspects of Mr. Fountain’s career, including promotion, concerts, personal appearances and commercial endorsements. From 1985 through 2003, Mr. Harrell served as President of Cresent Sound & Light, Inc, a professional sound, lighting, video and staging company for the convention and entertainment industry. Mr. Harrell served as a Director of the New Orleans Metropolitan Convention and Visitors Bureau from 1997 through 1999. On January 15, 2004, Mr. Harrell was elected to the Board of Directors of Mississippi Gaming Corporation, a wholly owned subsidiary of the Company.

H. STEVEN NORTON was elected a Director of the Company on August 6, 2002. Since 1998, Mr. Norton has served as President and CEO of Norton Management, Inc., a consulting company in Alton, Illinois and Las Vegas, Nevada. Mr. Norton also currently serves as a Director of Centaur, Inc., a privately held company which owns a casino in Central City, Colorado and owns Hossier Park, an Indiana race track, located in Anderson, Indiana. Mr. Norton is also a Director of Colorado Casino Resorts, Inc., in Cripple Creek, Colorado and North East Resorts, Inc., a privately held company pursuing gaming in the state of Massachusetts. Mr. Norton is also a major creditor and has provided consulting services to Onnam Entertainment, Inc., a privately held Las Vegas based company, with contracts to develop and operate Native American casinos in various U.S. locations. Prior to Hurricane Katrina, Onnam received permission from the Mississippi Gaming Commission to develop a casino site in Biloxi, Mississippi. The casino, if constructed, would compete with any casino resort subsequently developed by the Company.

From 1993 to 1998, Mr. Norton served as President and Chief Operating Officer of Argosy Gaming Corporation, a public company and operator of riverboat casinos. Mr. Norton also previously served as President and Chief Operating Officer of the Sands Hotel & Casino in Las Vegas, Nevada; as President and Chief Executive Officer of the Gold River Gambling Hall & Resort in Laughlin, Nevada; as Executive Vice-President of Resorts International, Inc. and Resorts International Casino Hotel in Atlantic City, New Jersey; and as Vice-President, Treasurer and Comptroller of Paradise Island, Ltd/Paradise Island Casino.

Mr. Norton has also previously served as a founder and a Director of the American Gaming Association; as a founder, a Director and Vice-Chairman of the New Jersey Casino Association; as Chairman of the Indiana Gaming Association; as a Director and Vice-President of the Missouri Gaming Association; as a Director of the Illinois River Boat Association and as Chairman of the Casino Commission of the American Hotel Association. Mr. Norton has also served on the Board of Directors and Executive Committee of the American Hotel Association; as Chairman of the Board and President of the New Jersey Hotel Motel Association; as Director and Vice-President of the Bahamas Hotel Association; as Chairman of the Bahamas Hotel Employers Association; as Director and Treasurer of the Bahamas Employers Confederation; as a Board Member of the Nevada Hotel Motel Association; as Chairman of the Atlantic City Convention & Visitors Bureau; as Chairman of the Nassau Paradise Island Promotion

Board; and as a member of the Advisory Board of the Governors Office of Travel and Tourism in New Jersey.

CARL D. STEVENS was elected a Director of the Company on January 10, 2006. Mr. Stevens spent 26 years with the IBM Corporation in various sales and management positions, including Branch Manager, Atlanta, Georgia. Mr. Stevens was responsible for the southeast United States and served as Program Director for Public Sector Sales for the United States. In 1997, Mr. Stevens became President and CEO of ITC Corporation which was headquartered in Herndon, Virginia. ITC, a NASDAQ listed company, was a publisher and distributor of multimedia training materials with worldwide sales. In 1999, Mr. Stevens was named Division President of InfoCast Corporation Inc., which was headquartered in Toronto, Canada. Mr. Stevens headed the Company’s efforts in the e-Learning and Virtual Contact Center divisions. In June of 2001, Mr. Stevens was named CEO and President of Cogient Corporation, a medical software development and services provider headquartered in Toronto, Canada. Mr. Stevens resigned as CEO of Cogient Corporation in January of 2005 to return to the U.S. to actively manage his investments. Mr. Stevens attended Indiana University where he majored in business administration. Mr. Stevens is a veteran of the United States Air Force.

ROBERT ZIMMERMAN was appointed Chief Financial Officer of the Company on July 27, 1998. From May of 1994 until joining the Company, Mr. Zimmerman served as Controller for the North and Central American operations of Casinos Austria International, Ltd. From 1980 through 1993, Mr. Zimmerman served as Vice President of Finance for the Industrial Controls subsidiary of Emerson Electric Company (NYSE: EMR). Prior to 1980, Mr. Zimmerman was employed with the public accounting firm of Fiddler and Co. for seven years.

B. Audit Committee

The Audit Committee of the Board of Directors is comprised of Frank E. Williams, Jr. (Audit Committee Chairman), Benjamin J. Harrell, and Gregory A. Harrison (ex-officio member). The Board of Directors has determined that both Mr. Williams and Mr. Harrell are independent members, as that term is defined under the enhanced independence standards for audit committee members in the Securities and Exchange Act of 1934. Mr. Harrison does not meet the independence standards. The Board of Directors has also determined that Frank E. Williams, Jr. is an Audit Committee Financial Expert as that term is defined in rules issued pursuant to the Sarbanes-Oxley Act of 2002.

C. Code of Ethics

The Company adopted a Code of Ethics in 2004 that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code was attached as an exhibit in a prior year’s annual report. A copy of the Code of Ethics will be made available to any shareholder, free of charge, upon written request to the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon its review of Forms 3, 4 and 5 and any amendments thereto furnished to the Company pursuant to Section 16 of the Securities Exchange Act of 1934, as amended, all purchases and sales of stock and all required forms were filed timely by reporting persons during 2006 except as follows:

Carl D. Stevens was elected as a Director of the Company on January 10, 2006 and should have filed a Form 3 by January 20, 2006, but did not file that form until January 27, 2006.

On April 25, 2006, Frank E. Williams, Jr. reported one transaction reflecting the Company’s award of an option to purchase 100,000 shares of common stock on April 13, 2006, which should have been reported by April 17, 2006. On May 25, 2006, Mr. Williams reported one transaction for the sale of 4,000 shares of common stock on May 22, 2006, which should have been reported by May 24, 2006. On June 12, 2006, Mr. Williams reported one transaction for the sale of 1,500 shares of common stock on June 7, 2006, which should have been reported by June 9, 2006. On October 3, 2006, Mr. Williams reported one transaction for the sale of 7,625 shares of common stock on September 28, 2006, which should have been reported by October 2, 2006.

ITEM 10. EXECUTIVE COMPENSATION

The following table provides information concerning the compensation of named executive officers of the Company and its wholly-owned subsidiaries. No other person serving as an executive officer of the Company on December 31, 2006, received cash compensation in excess of $100,000 during any of the last two fiscal years.

SUMMARY COMPENSATION TABLE

Nonqualified

Non Equity

Deferred

All

Incentive

Compensa-

Other

Name and

Stock

Option

Plan

tion

Compen-

Occupation

Year

Salary

Bonus

Awards

Awards (2)

Compensation

Earnings

sation

Total

Deborah A. Vitale

2006

300,000

450,000

None

190,515

None

)

940,515

President

2005

133,654

(1)

None

437,171

None

)

570,825


(1)		In 2005, Ms. Vitale received $125,000 of her annual salary and the remainder was paid to her in 2006.

(2)		On February 10, 2005, Ms. Vitale was awarded an option to purchase 75,000 shares of common stock, exercisable at $.80 per share. On October 24, 2005, an option to purchase 450,000 shares of common stock, exercisable at $.50 per share, expired. On October 27, 2005, Ms. Vitale was awarded an option to purchase 450,000 shares of common stock, exercisable at $1.25 per share. On April 13, 2006, Ms. Vitale was awarded an option to purchase 100,000 shares of common stock, exercisable at $2.70 per share. Reference is hereby made to Note 3, “Summary of


		Significant Accounting Policies — Stock Based Compensation” in the attached 2006 financial statements, for a determination of the variables used in computing the value of option awards.

(3)		The Europa Cruises Corporation Employee Stock Ownership Plan (“the Plan”) is a defined contribution pension plan funded with common stock of the Company of which Ms. Vitale is a participant. As of December 31, 2005, Ms. Vitale was fully vested in 278,327 shares of common stock allocated to her account in the Plan. As of December 31, 2006, Ms. Vitale was fully vested in 314,700 shares of common stock allocated to her account in the Plan.

The following table provides a summary of the outstanding equity awards at December 31, 2006 for the named executive officer.

SUMMARY OF OUTSANDING EQUITY AWARDS AT FISCAL YEAR END

Option Awards

Equity

Incentive

Plan

Awards

Number of

Securities

Underlying

Unexercised

Unexpired

Option

Options

Unexercised

Exercise

Expiration

Name

Exercisable

Unexercisable

Options

Price

Date

Deborah A. Vitale

750,000

None

.30

3/11/08

75,000

None

.75

7/23/08

75,000

None

.80

2/10/10

450,000

None

1.25

10/27/10

100,000

None

2.70

4/13/11

Stock Awards


				Equity
			Equity	Incentive
			Incentive	Plan Awards
			Plan Awards	Market or
			Number of	Payout Value
	Number of	Market Value of	Unearned	of Unearned
	Shares or Units	Shares or Units	Shares, Units or	Shares, Units or
	Of Stock That	Of Stock That	Other Rights That	Other Rights That
	Have Not	Have Not	Have Not	Have Not
Name	Vested	Vested	Vested	Vested

Deborah A. Vitale	None	None	None	None

Directors’ Compensation

The current members of the Board of Directors are not paid fees for their services as a Director. Directors are reimbursed for certain approved expenses incurred in connection with Company business and for certain approved expenses incurred in connection with attendance at non-telephonic Board meetings and non-telephonic committee meetings. Directors are, from time to time, awarded non-qualified options to purchase common stock of the Company. The table below summarizes compensation of Directors for 2006, exclusive of the named executive officer, whose compensation has been summarized in the tables above.

Nonqualified

Fees Earned

(1) (2)

Non-Equity

Deferred

Or Paid in

Stock

Option

Incentive Plan

Compensation

All Other

Name

Cash

Awards

Compensation

Earnings

Compensation

Total

Gregory A. Harrison

None

190,515

None

190,515

Frank E. Williams, Jr.

None

190,515

None

190,515

Benjamin J. Harrell

2,500

None

190,515

None

193,015

H. Steven Norton

None

190,515

None

190,515

Carl D. Stevens

None

190,515

None

190,515


(1)		On April 13, 2006, each Director was awarded an option to purchase 100,000 shares of common stock at an exercise price of $2.70 per share. The option is immediately exercisable and expires five years from the date of grant.

(2)		Reference is hereby made to Note 3, “Summary of Significant Accounting Policies — Stock Based Compensation” in the attached 2006 financial statements, for a determination of the variables used in computing the value of option awards.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AS OF FEBRUARY 23, 2007.

The following table sets forth, to the Company’s knowledge, as of February 23, 2007, based on filings with the Securities and Exchange Commission by certain beneficial owners, the beneficial ownership of the outstanding Voting Stock held by (i) each person or entity beneficially owning more than 5% of the shares of any class of Voting Stock, (ii) each director, nominee, and certain executive officers, individually, and (iii) all directors and executive officers as a group.

Amount &

Nature of

Name and Address

Beneficial

Title of

Beneficial Owner

Ownership

Class

of Class

Voting (1)

Europa Cruises Corporation

3,102,275

Common

7.81

7.46

Employee Stock Ownership Plan Trust (2)


	Amount &
	Nature of
Name and Address	Beneficial		Title of	%			%
Beneficial Owner	Ownership		Class	of Class			Voting (1)
1301 Seminole Boulevard., Suite 142 Largo, Florida 33770

Deborah A. Vitale (2) (3) Chairman, President, CEO, and Treasurer Chairman, President, and Treasurer of Casino World, Inc. and Mississippi Gaming Corp. 1013 Princess Street Alexandria, Virginia 22314		5,633,975	Common		14.18	%		13.55	%

Gregory Harrison (4) Director, Secretary, and Vice President 16209 Kimberly Grove Gaithersburg, Maryland 20878		1,424,553	Common		3.58	%		3.43	%

Benjamin J. Harrell (5) Director 237 N. Peters Street, Fourth Floor New Orleans, Louisiana 70130		650,000	Common		1.64	%		1.56	%

Frank E. Williams, Jr. (6) Director 2789b Hartland Road Falls Church, Virginia 22043		472,150	Common		1.19	%		1.14	%

Carl D. Stevens (7) Director 1753 Highway 42 South Forsyth, Georgia 31029		602,324	Common		1.52	%		1.45	%

H. Steven Norton (8) Director 700 Rozier Street Alton, Illinois 62002		250,000	Common		.63	%		.60	%

Serco International Limited (9)		1,251,833	Common		3.15	%		7.40	%
P.O. Box 15, A-9010		900,000	S-NR Preferred		100.00	%
Klagenfurt, Austria		926,000	S-Preferred		100.00	%

Austroinvest International Limited (9)		1,251,833	Common		3.15	%		7.40	%
P.O. Box 15, A-9010		900,000	S-NR Preferred		100.00	%
Klagenfurt, Austria		926,000	S- Preferred		100.00	%

Ernst G. Walter (9)		1,251,833	Common		3.15	%		7.40	%
14700 Gulf Blvd., Apt.401		900,000	S-NR Preferred		100.00	%
Madeira Beach, Florida 33708		926,000	S-Preferred		100.00	%

Amount &

Nature of

Name and Address

Beneficial

Title of

Beneficial Owner

Ownership

Class

of Class

Voting (1)

All Directors and Executive Officers

9,033,002

22.73

21.73

as a Group
(6 persons)


(1)		Common Stock, Series S-NR Preferred Stock and Series S Preferred Stock have been combined for the purpose of calculating voting percentages.

(2)		The Europa Cruises Corporation Employee Stock Ownership Plan (“ESOP”) was established on August 18, 1994. The Trustee of the ESOP is Deborah A. Vitale, President, CEO, and Chairman of the Board. As of December 31, 2006, 1,977,270 ESOP shares had been released and 1,897,725 ESOP shares had been allocated to participants in the ESOP. The participants in the ESOP are entitled to direct the Trustee as to the manner in which the Company’s allocated shares are voted. The remaining 3,102,275 unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.

(3)		Includes 3,102,275 unallocated common shares of the ESOP Trust; 767,000 shares of Common Stock owned directly by Ms. Vitale; options to purchase 1,450,000 shares of Common Stock; and 314,700 shares of Common Stock, which represent shares of stock held in Ms. Vitale’s fully vested ESOP participant account.

(4)		Includes 807,951 shares of Common Stock owned directly by Mr. Harrison; 70,000 shares owned by the Harry and Marie Harrison Trust of which Mr. Harrison is a Co-Trustee; options to purchase 425,000 shares of Common Stock; and 121,602 shares of Common Stock held in Mr. Harrison’s partially vested ESOP participant account

(5)		Includes 400,000 shares of Common Stock owned directly by Mr. Harrell and options to purchase 250,000 shares of Common Stock.

(6)		Includes 168,500 shares of Common Stock owned directly by Mr. Williams; 53,650 shares of Common Stock owned by the Williams Family Limited Partnership of which Mr. Williams is President of the General Partner, the Williams Family Corporation; and options to purchase 250,000 shares of Common Stock.

(7)		Includes 502,324 shares of Common Stock owned directly by Mr. Stevens and options to purchase 100,000 shares of Common Stock.

(8)		Includes 75,000 shares of Common Stock owned directly by Mr. Norton and options to purchase 175,000 shares of Common Stock.

(9)		Serco International Limited (f/k/a Serco International Financial Advisory Services, Ltd.) and Austroinvest International Limited are affiliated entities. The Company understands that Dr. Ernst Walter is the sole director of each company. The total beneficial ownership of securities of the Company held by the foregoing and Dr. Walter includes: 1,251,831 shares of Common Stock owned by Serco International Limited; 900,000 shares of Series S-NR Preferred Stock owned by Serco International Limited; and 926,000 shares of Series S Preferred Stock owned by Austroinvest International Limited.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On August 18, 1994, the Company established the Europa Cruises Corporation Employee Stock Ownership Plan (the “ESOP”). The ESOP, which is a qualified retirement plan under the provisions of Section 401(a) of the Internal Revenue Code and an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Internal Revenue Code, was established primarily to invest in stock of the Company. All employees as of December 31, 1994, and subsequent new employees having completed 1,000 hours of service, are eligible to participate in the ESOP. The Company also established a trust called the Europa Cruises Corporation Employee Stock Ownership Plan Trust Agreement, to serve as the funding vehicle for the ESOP. Deborah A. Vitale, CEO, President and Treasurer of the registrant, is the sole Trustee of the Trust. As of December 31, 2006, 1,977,270 shares of Common Stock had been released and 1,897,725 shares of Common Stock had been allocated to participants in the ESOP. Unallocated shares are voted by the Trustee. The Trustee is required to vote the unallocated ESOP shares in the best interests of the ESOP beneficiaries.

On August 21, 1994, the Company loaned $4,275,000 to the ESOP in exchange for a ten-year promissory note bearing interest at eight percent per annum. On August 24, 1994, the ESOP purchased 2,880,000 shares of the Company’s Common Stock with the proceeds of the loan. On August 25, 1994 the Company loaned an additional $3,180,000 to the ESOP in exchange for a ten year promissory note bearing interest at eight percent per annum. On August 26, 1994, the ESOP purchased an additional 2,120,000 shares of the Company’s Common Stock with the proceeds of the loan. The shares of Common Stock were pledged to the Company as security for the loans. The promissory notes will be repaid with the proceeds of annual contributions made by the Company to the ESOP. In April of 1995, the Company agreed to extend the maturity of the loans to twenty years. Effective for the Plan year beginning January 1, 2001, the Company amended the plan and related loans for the purpose of limiting excise tax liability for plan contributions in excess of IRS Code 415 limitations. To accomplish this, the Company agreed to extend the maturity of the loans to fifty years.

Meetings of the Board of Directors

The Board of Directors held twelve meetings during 2006 and all directors attended at least 75% of the meetings.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K


Exhibits

(a)	3(a)(i)	Certificate of Incorporation of the Company. (ii) Amendment to Certificate of Incorporation of the Company


Exhibits

(a)	3(b)	By-laws of the Company.

(g)	4.1	Subscription and Investment Agreement between Europa Cruises Corporation and Lagoon Cruise Line, Inc. dated August 26, 1994.

(g)	4.2	Warrant Agreement between Europa Cruises Corporation and FLC Holding Corp dated July 8, 1992.

(g)	4.2.1	Consent and Amendment of Credit Agreement Note and Warrant by and among FLC Holding Corp. (“FLC”), EuropaSky Corporation (“EuropaSky”), Europa Cruises Corporation and Casino World, Inc. (“Casino”), dated May 27, 1993 without Exhibits.

(g)	4.3	Warrant Agreement between Europa Cruises Corporation and The Stuart-James Company Incorporated dated June 29, 1989.

(g)	4.3.1	Warrant Certificates and Assignments for 125,520 shares and 17,000 shares registered in the name of Marc N. Geman dated June 22, 1994.

(g)	4.3.2	Motion to Approve Settlement Agreement Among Trustee, Marc N. Geman and Chatfield Dean & Co., Inc. dated October 8, 1993 with Settlement Agreement dated October 6, 1993 attached.

(g)	4.3.4	Order Approving Settlement Agreement Among Trustee, Marc N. Geman and Chatfield Dean & Co., Inc.

(g)	4.3.5	Agreement between Marc N. Geman and Europa Cruises Corporation dated June 15, 1993.

(g)	4.4	Convertible Promissory Note between Europa Cruises Corporation and Serco International Ltd. dated November 11, 1993: Transfer by Serco International Ltd. to Gaming Invest Corp. and election to convert Promissory Note by Gaming-Invest Corp.

	5.1	Qualified plan determination letter from the Internal Revenue Service dated April 4, 1996, issued to the Europa Cruises Corporation Employee Stock Ownership Plan.

(g)	10.1	Consulting Agreement between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated September 16, 1994.

(g)	10.1.1	Equipment Lease between Europa Cruises Corporation and Casinos Austria Maritime Corporation dated October 13, 1994.


Exhibits

(g)	10.1.2	Promissory Note payable to Casinos Austria Maritime Corporation dated December 30,1994, and Second Naval Mortgage on the M/V Stardancer.

(g)	10.1.3	Subordination Agreement between Lagoon Cruise Line, Inc., Europa Stardancer Incorporation and Casinos Austria Maritime Corporation.

(a)	10(d)	The Company’s 1988 Stock Option Plan.

(b)	10(e)	Standard Bareboat Charter Agreement, dated August, 1989, between Sea Lanes Bahamas Limited and Europa Cruise Lines, Ltd.

(c)	10(f)	Service Agreement, dated April 12, 1991, between Service America Corporation and Europa Cruise Lines.

(c)	10(g)	Lease Agreement, dated June 30, 1991, between Palm Grove Marina, Inc., and Europa Cruises of Florida 1, Inc.

(c)	10(h)	Memorandum of Agreement for lease, dated March 29, 1992, between Durwood Dunn and Mississippi Gaming Corporation.

(c)	10(i)	Lease Agreement, dated January 29, 1992, between Claiborne County, Mississippi Port Commission and Mississippi Gaming Corporation.

(c)	10(j)	Contract of Sale, dated February 21, 1992, between Ferry Binghamton, Inc., and Mississippi Gaming Corporation.

(b)	10(k)	Lease Agreement, dated November 30, 1990, between Europa Cruises of Florida 2, Inc., and Hubbard Enterprises, Inc.

(b)	10(l)	Reciprocal Relationship Agreement, dated December 28, 1990, amongst Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., the Company and Cordis, A.G.

(b)	10(m)	Promissory Note, dated December 31, 1990, and Addendum thereto, dated May 2, 1991, from the Company to Charles S. Liberis, P.A., Profit Sharing Plan.

(b)	10(n)	Promissory Note, dated December 31, 1990, and Addenda thereto, dated April 18 and May 2, 1991, from the Company to Harlan G. Allen, Jr.

(b)	10(o)	Stock Option and Agreement, dated December 31, 1990, between the Company and Charles S. Liberis, P.A., Profit Sharing Plan.

(b)	10(p)	Stock Option and Agreement, dated December 31, 1990, between the Company and Harlan G. Allen, Jr.


Exhibits

(b)	10(q)	Promissory Note, dated January 25, 1992, from Europa Cruises of Florida 1, Inc., and Europa Cruises of Florida 2, Inc., to Cordis, A.G.

(b)	10(r)	Release, dated January 25, 1991, by Europa Cruise Lines, Ltd. in favor of the St. Paul Fire & Marine Insurance Co. Lloyds and certain London companies, through Bain Clarkson, Ltd.

(b)	10(s)	Promissory Note, dated February 15, 1991, from Europa Cruises of Florida 1, Inc., to Midlantic.

(b)	10(t)	Assumption Modification and Security Agreement, dated February 15, 1992, amongst Europa Cruises of Florida 2, Inc., the Company and Midlantic.

(b)	10(u)	Mortgage Modification Agreement, dated February 15, 1992, between Europa Cruises of Florida 2, Inc., and Midlantic.

(b)	10(v)	Guarantee Agreement, dated February 15, 1991, between Europa Cruises of Florida 2, Inc., and Midlantic, Re:
		Europa Cruises of Florida 2, Inc.

(b)	10(w)	Coordination Agreement, dated February 20, 1991, between Midlantic and Cordis, A.G.

(b)	10(aa)	Assignment of Note Receivable, Account Receivable and Common Stock from Harlan G. Allen, Jr. to the Company.

(b)	10(bb)	Stock Purchase Agreement, dated March 31, 1991, between the Company and Freeport Cruise Line, Ltd.

(b)	10(cc)	Pledge Agreement and Addendum thereto, dated April 18, 1991, between the Company and Harlan G. Allen, Jr.

(b)	10(dd)	Franchise and Development Agreements between LoneStar Hospitality Corporation and Miami Subs U.S.A., Inc., dated July 1, 1992.

(d)	10(ee)	Vessel Purchase Agreement dated July 8, 1992 between the Company and FLC, Re: Purchase of the EuropaSky.

(d)	10(ff)	Contract of Sale dated July 21, 1992, between the Company and Ferry Binghamton, Inc. Re: the Purchase of Miss New York.

(d)	10(gg)	Agreement to Lease and Option to Purchase dated July 7, 1992, between the Company and A&M Developers, Inc. Re:
		Bossier City site.

(d)	10(hh)	Vessel Completion Contract by and between Eastern Shipyards, Inc., and FLC Holding Corporation Re: EuropaSky.


Exhibits

(e)	10(ii)	Stock Purchase Agreement dated December 21, 1992 between Europa Cruises Corporation and Jeffrey L. Beck, Trustee.

(e)	10(jj)	Copy of the Complaint filed by Charles S. Liberis vs. the Company and others.

	10(kk)	Settlement agreement between the Company and Sea Lane Bahamas, Ltd. dated February 4, 1994.

(f)	10(ll)	Gaming Concession Agreement between the Company and Casinos Austria Maritime Corporation dated February 18, 1993.

(f)	10(mm)	Management Agreement between the Company and Casinos Austria Maritime Corporation dated June 19, 1993.

(f)	10(nn)	Diamondhead, Mississippi Loan Agreement, Continuing Guaranty, Promissory Note, and extension of Promissory Note between the Company and Casinos Austria Maritime Corporation mortgage to September 17, 1994.

(f)	10(oo)	Convertible Promissory Note dated November 11, 1993 issued by the Company to Serco International Ltd.

(f)	10(pp)	Lease Agreement between the Company and Serco International Ltd dated November 15, 1993.

(f)	10(qq)	Casino World, Inc. 1993 Stock Option Plan dated March 25, 1993.

(f)	10(rr)	Form of Stock Option Agreement dated as of August 31, 1994 issued to Deborah A. Vitale, Stephen M. Turner, Ernst G. Walter and Lester E. Bullock.

(f)	10(ss)	Easement dated December 22, 1994 granted to Mississippi Gaming Corporation adjacent to proposed Diamondhead gaming site.

(f)	10(tt)	Miami Beach Marina Lease dated February 10, 1995 as amended between Europa Cruises of Florida, 2 and Tallahassee Building Corp.

(f)	10(uu)	Settlement Agreement dated May 9, 1994 between Europa Cruises Corporation and Harlan G. Allen, Jr.

(f)	10(vv)	First Union National Bank Credit and Security Agreement and Promissory Note dated May 23, 1995 between Europa Cruises Corporation, Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., EuropaSky Corporation and Europa Stardancer Corporation.


Exhibits

(f)	10(ww)	First Union National Bank Credit and Security Agreement and Promissory Note dated August 25, 1995 between Europa Cruises Corporation, Europa Cruises of Florida 1, Inc., Europa Cruises of Florida 2, Inc., EuropaSky Corporation and Europa Stardancer Corporation.

(f)	10(xx)	Snug Harbor Group, Inc. Lease dated September 20, 1996 between Snug Harbor Group, Inc. and Europa Cruises of Florida 1, Inc.

(f)	10(yy)	Tidelands Lease and Land Lease dated February 1, 1996, between Hancock County Port and Harbor Commission and Mississippi Gaming Corporation.

	10.2	Warrant Agreement Between First Union National Bank of Florida and Europa Cruises Corporation dated October 30, 1996 and February 4, 1997.

	10.2.1	Second Modification of Credit and Security Agreement and other Loan Documents and Renewal Promissory Note between First Union National Bank of Florida and Europa Cruises Corporation dated October 31, 1996.

	10.2.2	Promissory Note between Europa Cruises of Florida 2, Inc. and dEBIS Financial Services, Inc. dated October 30, 1996.

	10.2.3	Form of Stock Option Agreements for options granted April 18, 1996 to Lester Bullock, Deborah Vitale, Piers Hedley, Debra Gladstone, Andy Rufo, Michael Reeves, and Jim Monninger.

	10.2.4	Lease Agreement between Tierra Verde Marina Development Corporation and Europa Stardancer Corporation dated October 1, 1996.

	10.2.5	Agreement between the Company and McDonald & Company Securities, Inc. dated April 2, 1998.

(h)	10.3	Charter Agreement between Europa Stardancer Corporation and Seven Star Charters, Inc. dated December 28,1998.

(h)	10.3.1	Agreement for Purchase and Sale of a Vessel between Europa Stardancer Corporation and Seven Star Charters, Inc. dated October 30, 1999.

(h)	10.3.2	Agreement for Purchase and Sale of a Vessel and Business Assets between Europa Cruises of Florida 2, Inc. and Stardancer Casino, Inc. dated December 30, 1999.

(h)	10.3.3	Agreement for the Purchase and Sale of a Vessel and Certain Assets between Europasky Corporation and Stardancer Casino, Inc, dated August 2, 2000.

(h)	10.3.4	Agreement for the Purchase and Sale of a Vessel between Europa Cruises of Florida 1, Inc. and Stardancer Casino, Inc. dated August 2, 2000.


Exhibits

(i)	10.4	Code of Ethics applicable to the Chief Executive Officer, Chief Financial Officer and Vice President of the Company.

(f)	18	Letter from BDO Seidman, LLP regarding 1995 change in accounting principle.

Index to Exhibits


(a)		Previously filed as an exhibit to the Company’s Registration Statement No. 33-26256-A and incorporated by reference.

(b)		Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated by reference.

(c)		Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated by reference.

(d)		Previously filed as an exhibit to the Company’s Form S-2 Registration Statement dated August 26, 1992 and incorporated by reference.

(e)		Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1992 and incorporated by reference.

(f)		Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the years ended December 31, 1993 and 1994 and incorporated by reference.

(g)		Previously filed as an exhibit to the Company’s S-2 Registration Statement (No. 33-89014) filed January 31, 1995 and incorporated by reference.

(h)		Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the years ended December 31, 2000 and 1999 and incorporated by reference.

(i)		Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference.

Subsidiaries of the Registrant:

Mississippi Gaming Corporation (Delaware)
Casino World, Inc. (Delaware)
Europasky Corporation (Delaware)

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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The Audit Committee approved all services provided by the Company’s independent registered public accounting firm, Friedman, LLP, for the years ended December 31, 2006 and 2005. The following fees were paid to Friedman, LLP for services in 2006 and 2005:


	2006		2005
Audit Fees	$	57,603	$	50,529
Audit-Related Fees		7,745		7,745
Tax Fees		0		0
All Other Fees		0		1,500


Total Fees Paid to Friedman, LLP	$	65,348	$	59,774

Audit fees are comprised of fees for professional services rendered in conjunction with the audit of the Company’s annual financial statements, review of the Company’s annual report filed with the Securities and Exchange Commission on Form 10KSB, and review of the information contained in the Company’s quarterly filings with the Securities and Exchange Commission on Form 10QSB.

Audit-related fees are comprised of the fees for professional services rendered in connection with the audit of the Company’s Employee Stock Ownership Plan.

All other fees are comprised of fees for professional services rendered in conjunction with the review of the Company’s answers to the Securities and Exchange Commission’s queries in their review of the Company’s filings.

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, thereunto duly authorized.


	DIAMONDHEAD CASINO CORPORATION
DATE: March 16, 2007	/s/ Deborah A. Vitale
	By: Deborah A. Vitale, President


	/s/ Robert Zimmerman
	By: Robert Zimmerman, Chief Financial Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signature and Title				Date

/s/ Deborah A. Vitale,				March 16, 2007

President and Chairman of the Board

/s/ Gregory A. Harrison				March 16, 2007

Corporate Secretary and Director

/s/ Frank E. Williams, Jr.				March 16, 2007

Director

/s/ Benjamin J. Harrell				March 16, 2007

Director

/s/ Carl D. Stevens				March 16, 2007

Director

/s/ H. Steve Norton				March 16, 2007

Director

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of:
Diamondhead Casino Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheet of Diamondhead Casino Corporation and Subsidiaries as of December 31, 2006, and the related consolidated statements of loss, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2006. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamondhead Casino Corporation and Subsidiaries as of December 31, 2006, and the consolidated loss and its cash flows for each of the years in the two-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 3 to the consolidated financial statements, effective January 1, 2006, the Company adopted the provisions of Financial Accounting Standard No. 123(R), Share-Based Payment.

Friedman LLP
New York, New York
February 28, 2007


		MEMBER OF DFK INTERNATIONAL WITH AFFILIATED OFFICES WORLDWIDE

F-2

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2006


ASSETS

Current assets
Cash	$	1,419,955
Prepaid insurance and other current assets		16,288

Total current assets		1,436,243

Property and equipment, less accumulated depreciation of $14,015		1,190
Land held for development (Note 3)		5,409,913
Other assets		26,514


	$	6,873,860


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	199,909


Total current liabilities		199,909

Commitments and contingencies (Notes 3 and 7)		—

Stockholders’ equity (Note 4)
Preferred stock, $.01 par value; shares authorized 5,000,000, outstanding 2,122,000 ($2,591,080 aggregate liquidation preference)		21,220
Common stock, $.001 par value; shares authorized 50,000,000, issued 36,217,053, outstanding 33,143,977		36,217
Additional paid-in capital		30,709,032
Unearned ESOP shares		(4,506,890	)
Accumulated Deficit		(19,577,969	)
Treasury stock, at cost, 50,346 shares		(7,659	)


Total stockholders’ equity		6,673,951


	$	6,873,860

See accompanying notes to consolidated financial statements.

F-3

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF LOSS

YEARS ENDED DECEMBER 31, 2006 AND 2005


	2006			2005
COSTS AND EXPENSES
Administrative and General	$	1,378,067		$	648,518
Stock-based Compensation		1,238,348			—
Depreciation and Amortization (Note 3)		1,671			12,365
Other		275,735			125,958


		2,893,821			786,841


OTHER INCOME (EXPENSE)
Dock Lease Income		—			130,841
Interest Earned on Invested Cash		21,742			2,670
Interest Expense		—			(41,347	)
Reversal of Sales Tax Liability		1,125,752			—
Other		96,495			52,729

		1,243,989			144,893


NET LOSS		(1,649,832	)		(641,948	)


PREFERRED STOCK DIVIDENDS		(107,360	)		(107,360	)


NET LOSS APPLICABLE TO COMMON SHAREHOLDERS	$	(1,757,192	)	$	(749,308	)


PER SHARE AMOUNTS
Net loss per common share, basic and diluted	$	(.055	)	$	(.025	)


Weighted average number of common shares outstanding, Basic and diluted		32,125,425			29,892,404

See accompanying notes to consolidated financial statements.

F-4

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(NOTE 4)
YEARS ENDED DECEMBER 31, 2006 AND 2005


					Additional
	Preferred		Common		Paid-In			Unearned
	Stock		Stock		Capital			ESOP Shares

Balance, January 1, 2005	$	21,220	$	34,166	$	26,474,833		$	(4,744,094	)
ESOP compensation		—		—		(41,842	)		118,602
Issuance of common stock for:
Exercise of stock options				350		174,650
Sale of shares held in treasury				—		473,938
Preferred stock dividends		—		58		47,302			—
Net loss for the year		—		—		—			—


Balance, December 31, 2005		21,220		34,574		27,128,881			(4,625,492	)

ESOP compensation				—		105,316			118,602
Issuance of common stock for:
Exercise of stock options				1,614		1,042,141
Sale of shares held in treasury				—		1,111,415
Services				13		35,587
Stock-based compensation awards				—		1,238,348
Preferred stock dividends		—		16		47,344			—
Net loss for the year		—		—		—			—


Balance, December 31, 2006	$	21,220	$	36,217	$	30,709,032		$	(4,506,890	)


	Accumulated			Treasury
	(Deficit)			Stock			Total

Balance, January 1, 2005	$	(17,071,469	)	$	(190,156	)	$	4,524,500
ESOP compensation		—			—			76,760
Issuance of common stock for:
Exercise of stock options		—			—			175,000
Sale of shares held in treasury		—			76,062			550,000
Preferred stock dividends		(107,360	)		—			(60,000	)
Net loss for the year		(641,948	)		—			(641,948	)

Balance, December 31, 2005		(17,820,777	)		(114,094	)		4,624,312

ESOP compensation		—			—			223,918
Issuance of common stock for:
Exercise of stock options								1,043,755
Sale of shares held in treasury								1,217,850
Services								35,600
Stock-based compensation awards					106,435			1,238,348
Preferred stock dividends		(107,360	)		—			(60,000	)
Net loss for the year		(1,649,832	)		—			(1,649,832	)


Balance, December 31, 2006	$	(19,577,969	)	$	(7,659	)	$	6,673,951

See accompanying notes to consolidated financial statements.

F-5

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)

YEARS ENDED DECEMBER 31, 2006 AND 2005


	2006			2005
OPERATING ACTIVITIES
Net loss	$	(1,649,832	)	$	(641,948	)
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization		1,671			12,365
ESOP provision		223,918			76,760
Issuance of common shares for services		35,600			—
Issuance of stock-based compensation		1,238,348			—
(Increase) decrease in:
Accounts receivable		16,956			(10,645	)
Prepaid insurance and other		3,473			13,884
(Decrease) increase in:
Accounts payable and accrued expenses		(19,708	)		(41,020	)
Sales tax settlement liability		(1,125,752	)		36,515
Deferred dock lease income		—			(28,000	)

Net cash used in operating activities		(1,275,326	)		(582,089	)


INVESTING ACTIVITIES
Land development		(7,333	)		(31,625	)

Net cash used in investing activities		(7,333	)		(31,625	)


FINANCING ACTIVITIES
Proceeds from sale of common shares held in treasury		1,217,850			550,000
Proceeds from exercise of options to purchase common stock		1,043,755			175,000
Payment of preferred stock dividends		(60,000	)		(60,000	)

Net cash provided by financing activities		2,201,605			665,000


Net increase in cash		918,946			51,286
Cash beginning of year		501,009			449,723

Cash end of year	$	1,419,955		$	501,009

See accompanying notes to consolidated financial statements.

F-6

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Business

Diamondhead Casino Corporation (the “Company”) owns a total of approximately 404.5 acres of unimproved land in Diamondhead, Mississippi which it plans to develop. The Company officially changed its name from Europa Cruises Corporation to Diamondhead Casino Corporation in November of 2002. The Company was originally formed to principally own, operate and promote gaming vessels offering day and evening cruises in international waters.

2. Liquidity

The Company has had no operations since it ended its gambling cruise ship operations in 2000. Since that time, the Company has concentrated its efforts on the development of its Diamondhead, Mississippi property. That development is dependent upon the Company obtaining the necessary capital, whether through equity and/or debt financing, to master plan, obtain permits for, and construct a casino resort.

The Company generates no revenues and incurred a net loss applicable to common shareholders of $1,757,192 and $749,308 for the years ended December 31, 2006 and 2005, respectively. The Company has been able to meet its on-going costs and expenses through the sale of its equity securities. During 2006, the Company raised $1,217,850 through the private placement sale of 699,654 common shares formerly held in treasury, and received an additional $1,043,755 from the exercise of options to purchase 1,613,500 shares of common stock. At December 31, 2006, the Company had cash on hand totaling $1,419,955 which management believes is sufficient to meet on-going costs and expenses through the next fiscal year.

On October 17, 2005, the Governor of Mississippi signed into law a measure that would allow casinos in Mississippi to be constructed on land. The new law will allow casinos located in certain areas to be constructed up to 800 feet from the mean high-water line of certain bodies of water. This new law applies to the company’s property on the Bay of St. Louis.

At December 31, 2006, the Company does not have the financial resources to develop its proposed casino resort. There can be no assurance that the Company can successfully develop its Diamondhead, Mississippi property, and in the event that the Company is unsuccessful in raising sufficient cash or finding alternative means to meet its future obligations, this would have a significant adverse impact on the Company’s ability to ultimately develop the property.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Diamondhead Casino Corporation and its subsidiaries. All material intercompany balances and transactions have been eliminated in the consolidation.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial

F-7

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Estimates (continued)

statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash

The Company’s cash balances are maintained primarily in two banks and are insured for up to $100,000 by the Federal Deposit Insurance Corporation for each bank.

Land Held for Development

Land held for development is carried at cost. Costs directly related to site development, such as licensing and permits, engineering, and other costs, are capitalized.

Expenditures which result in acquisition of assets which benefit future periods are deferred and amortized over the period of expected future benefit.

Land development costs which have been capitalized consist of the following:


	2006

Land under development	$	4,868,139
Licenses		77,000
Engineering and costs associated with permitting		464,774


	$	5,409,913

Fair Value of Financial Instruments

The carrying amounts of cash, accounts payable, and accrued expenses approximate fair value due to short term maturity of the instruments.

Long-Lived Assets

The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the assets to the estimated undiscounted future cash flows generated by the assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount the carrying value exceeds the fair value of such assets.

Property and Equipment

Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method.

F-8

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Employee Stock Ownership Plan

The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees with one or more years of service, financed by employer loans. Compensation expense is measured at the current market price of shares committed for release and such shares constitute outstanding shares for earnings per share computations. As the loans are repaid, shares are released from the ESOP and allocated to qualified employees based upon the proportion of payments made during the year to the remaining amount of payments due on the loans through maturity. Dividends, if any, are treated as follows:

(1) stock dividends on shares allocated to participant accounts shall be credited to the participant account when paid (2) cash dividends on shares allocated to participant accounts shall, at the discretion of the Administrator, be credited to the participants’ Other Investment Account, or, be used to reduce the indebtedness to the Company, in which case, shares bearing an equal value to the cash dividend would be allocated to participant accounts. The Company has not paid any dividends on its common stock.

Taxes on Income

Under the asset and liability method of SFAS No. 109, deferred tax liabilities and assets are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is recorded to reflect the uncertainty of realization of deferred tax assets.

Net Loss per Common Share

Basic earnings/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings/ (loss) per share is calculated by using the weighted average number of common shares outstanding, plus other potentially dilutive securities. Common shares outstanding consist of issued shares, including allocated and committed shares held by the ESOP trust, less shares held in treasury Dilutive securities included stock purchase options, warrants and convertible preferred stock which totaled 3,577,000 and 4,540,500 at December 31, 2006 and 2005 respectively. The foregoing is excluded from diluted net loss per share as their effect would be antidilutive.

Segment Information

Operating segments are components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company currently operates solely in one line of business, development of land, which relates to planned future operations.

F-9

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Stock 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 year ended December 31, 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 year ended December 31, 2006 was a reduction of $.039 per share. There was no stock-based compensation expense recognized for the year ended December 31, 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 December 31, 2006. The weighted average estimated value of employee stock options granted during the year ended December 31, 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 for 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 year ended December 31, 2005, would have been adjusted to the pro forma amounts indicated below:


Net loss applicable to common shareholders	$	(749,308	)
Deduct: Total stock-based compensation expense determined under fair value based method		951,213

Pro forma net loss applicable to common Shareholders	$	(1,700,521	)


Per share, as reported	$	(.025	)
Per share, pro forma	$	(.057	)

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%.

F-10

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Stock-based Compensation (continued)

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.

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. The Company does not expect that the adoption of SFAS No. 155 will have a material impact on its 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. The Company does not expect that the adoption of SFAS No. 156 will have a material impact on its 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. The Company does not expect that the adoption of FIN 48 will have a material impact on its consolidated financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value measurements, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Company will adopt the provisions of SFAS No. 157 effective January 1, 2008. The Company does not expect that the adoption of SFAS No. 157 will have a material impact on its consolidated financial condition or results of operations.

F-11

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies (continued)

Accounting Pronouncements (continued)

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB No. 108), “Qualifying Financial Statement Misstatements.” Due to diversity in practice among registrants, the SEC staff expressed its views regarding the process by which misstatements in financial statements are evaluated for the purpose of determining whether financial statement restatements are necessary. The Company will adopt the provisions of SAB No. 108 in 2007, but does not believe it will have an impact on its consolidated financial statements.

On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (SFAS No. 159). Under this Standard, the Company may elect to report financial instruments and certain other items at fair value on a contract-by-contract basis with changes in value reported in earnings. This election is irrevocable. SFAS No. 159 provides an opportunity to mitigate volatility in reported earnings that is caused by measuring hedged assets and liabilities that were previously required to use a different accounting method than the related hedging contracts when the complex provisions of SFAS No. 133 are not met. SFAS No. 159 is effective for years beginning after November 15, 2007. The Company does not believe it will have an impact on its consolidated financial statements.

4. Stockholders’ Equity

At December 31, 2006, the Company had a stock option plan and non-plan options, which are described below. The Company applies the intrinsic value method in accordance with APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for employee stock options for options awarded prior to January 1, 2006. Under APB Opinion 25, no compensation cost is recognized because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant. Subsequent to January 1, 2006, the Company applies the provisions of FASB 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.

Non-Plan Stock Options

On February 6, 2006, the President and Vice President of the Company each exercised options to purchase 100,000 shares of common stock at an exercise price of $.50 per share. On March 13, 2006, a former Director of the Company exercised options to purchase 150,000 shares of common stock at an average exercise price of $.775 per share. On March 21, 2006, another former Director of the Company exercised an option to purchase 150,000 shares of common stock at an exercise price of $.50 per share. On April 5, 2006, the President of the
Company exercised an option to purchase 800,000 shares of common stock at an exercise price of $.50 per share and the Vice President of the Company exercised an option to purchase 75,000 shares of common stock at an exercise price of $.75 per share. On June 6, 2006, a key employee of the Company exercised an option to purchase 63,500 shares of common stock at $.63 per share. On July 10, 2006, a Director of the Company exercised an option to purchase 75,000 shares of common stock at $.75 per share.

F-12

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Stockholders’ Equity (continued)

Non-Plan Stock Options (continued)

On April 13, 2006, the Company awarded options to purchase 100,000 shares of common stock at an exercise price of $2.70 per share to each of the six Directors of the Company. On the same date, the Board of Directors awarded an option to purchase 50,000 shares of common stock at an exercise price of $2.70 per share to a key employee of the Company and awarded an option to purchase 25,000 shares of common stock at an exercise price of $2.70 per share to an Officer of the Company. For the year ended December 31, 2006, the Company recorded stock-based compensation expense of $1,238,348.

On February 10, 2005, the Company awarded options to purchase 75,000 shares of common stock at an exercise price of $.80 per share to each of the six Directors of the Company. On the same date, the Board of Directors awarded an option to purchase 75,000 shares of common stock at an exercise price of $.80 per share to a key employee of the Company, awarded an option to purchase 50,000 shares of common stock at an exercise price of $.80 per share to an Officer of the Company and awarded an option to purchase 25,000 shares of common stock at an exercise price of $.80 per share to a Director of a subsidiary of the Company.

On October 17, 2005, a key employee of the Company exercised an option to purchase 50,000 shares of common stock at $.50 per share, and an Officer of the Company exercised an option to purchase 25,000 shares of common stock at $.50 per share. On October 18, 2005, a former Director of the Company exercised an option to purchase 250,000 shares of common stock at $.50 per share, and on October 19, 2005, a Director of a subsidiary of the Company exercised an option to purchase 25,000 shares of common stock at $.50 per share.On October 24, 2005, an option to purchase 450,000 shares of common stock issued to the President of the Company, and an option to purchase 250,000 shares of common stock issued to the Vice President of the Company, expired.

On October 27, 2005, the Board of Directors awarded an option to purchase 450,000 shares of common stock at an exercise price of $1.25 per share to the President of the Company, and an option to purchase 250,000 shares of common stock at an exercise price of $1.25 per share to the Vice President of the Company.

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 December 31, 2006, no options from this plan were issued or exercised.

Accounting for Stock Options

A summary of the status of the Company’s fixed Plan and non-plan options as of December 31, 2006 and 2005 and changes during the years ended on those dates is presented below:

F-13

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Stockholders’ Equity (continued)

Accounting for Stock Options (continued)


	December 31, 2006						December 31, 2005
				Weighted						Weighted
				Average						Average
				Exercise						Exercise
	Shares			Price			Shares			Price
Outstanding at beginning of year		4,044,500		$	.69			3,794,500		$	.52
Granted		650,000			2.70			1,300,000			1.04
Exercised		(1,513,500	)		(.56	)		(350,000	)		(.50	)
Expired		—			—			(700,000	)		.50

Outstanding at end of year		3,181,000		$	1.17			4,044,500		$	.69

Options exercisable at year-end		3,181,000			—			4,044,500			—
Weighted-average fair value of options granted during the year				$	2.70					$	1.04

The following table summarizes information about stock options outstanding at December 31, 2006:

Options Outstanding

Options Exercisable

Weighted-

Number

Average

Weighted

Number

Weighted-

Range of

Outstanding

Remaining

Average

Exercisable

Average

Exercise

Contractual

Exercise

Prices

12/31/06

Life

Price

12/31/06

Price

$.30 — $2.70

3,181,000

2.76

1.17

3,181,000

1.17

Preferred Stock

On June 14, 1993, the Company issued 926,000 shares of $.01 par value Series S Voting, Non-Convertible Preferred Stock to Austroinvest International, Inc. in exchange for proceeds of $1,000,080. The Company pays quarterly cumulative dividends of three percent per annum on these shares.

These shares may be redeemed at the option of the Company at $1.08 per share plus $.0108 per share for each quarter that such shares are outstanding. The shares also have a $1.08 per share preference in involuntary liquidation of the Company. At December 31, 2006, outstanding Series S preferred stock totaled 926,000 shares. No cumulative dividends were in arrears at December 31, 2006.

On September 13, 1993, the Company issued 900,000 shares of its $.01 par value Series S-NR Voting, Non-Convertible, Non-Redeemable, Preferred Stock to Serco International Limited (a wholly-owned subsidiary of Austroinvest International, Inc. and a stockholder of the Company), in exchange for proceeds of $999,000. The Company pays quarterly, non-cumulative dividends of three percent per annum on these shares. Upon involuntary liquidation of the Company, the liquidation preference of each share is $1.11. At December 31, 2006, outstanding Series S-NR preferred stock totaled 900,000 shares.

F-14

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Stockholders’ Equity (continued)

Preferred Stock (continued)

In March 1994, the Company offered, pursuant to Regulation S, one million units at $5.50 per unit, each unit consisting of one share of the Company’s $.001 par value common stock and two shares of the Company’s Series S-PIK Junior, cumulative, convertible, non-redeemable, non-voting $.01 par value preferred stock. Each share of Series S-PIK preferred stock is convertible into one share of the Company’s common voting stock at any time after February 15, 1995. No shares were converted during 2006 or 2005. The Series S-PIK preferred stock ranks junior to the Series S and Series S-NR preferred shares as to the distribution of assets upon liquidation, dissolution, or winding up of the Company. Upon liquidation of the Company, the S-PIK preferred stock will have a liquidation preference of $2.00 per share. A cumulative quarterly dividend of $0.04 per share is payable on Series S-PIK preferred stock. At December 31, 2006, outstanding Series S-PIK preferred stock totaled 296,000 shares.

During 2005, the Company paid $47,360 of the total preferred dividends of $107,360 with 57,560 shares of its common stock. During 2006, the Company paid $47,360 of the total preferred dividends of $107,360 with 16,746 shares of its common stock. No dividends were in arrears at December 31, 2006.

Other

In connection with a refinancing in 1996, the Company granted Wachovia Bank (formerly First Union National Bank of Florida) ten-year warrants, to purchase an aggregate of 200,000 shares of the Company’s common stock at $2.00 per share. In October 2006, a warrant to purchase 100,000 shares of common stock was exercised. A warrant to purchase an additional 100,000 shares of common stock was exercised in February 2007 after which no unexercised warrants remain outstanding under the refinancing agreement with Wachovia Bank.

5. Employee Stock Ownership

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 December 31, 2006, 1,977,270 shares were released, of which 79,545 were released in 2006. At December 31, 2006, 3,022,730 shares with a fair market value of $8,554,326 are unearned.

F-15

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Employee Stock Ownership (continued)

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 2006 and 2005 was $223,918 and $76,760, 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.

6. Income Taxes

At December 31, 2006, the Company had net operating loss carryforwards for income taxes of approximately $16.8 million, which expire during various periods through 2026. Changes in ownership in prior years of greater than fifty percent, which occurred as a result of the Company’s issuance of common and preferred stock, may result in an annual limitation of approximately $1.2 million being imposed upon the future utilization of approximately $7.9 million of the net operating losses for tax purposes.

Realization of deferred income taxes as of December 31, 2006 is not considered likely. Therefore, a valuation allowance of approximately $6 million has been established for the entire amount of deferred tax assets relative to the net operating loss.

7. Commitments and Contingencies

Leases

The Company leases office space in Largo, Florida pursuant to a lease with Wyndham Office Properties, Inc. which expires July 31, 2007. The Company also leases storage facilities in Madeira Beach, Florida and offices in Diamondhead, Mississippi on a month-to month basis. Rental expenses for these facilities totaled $24,680 and $17,012 in 2006 and 2005, respectively.

The Company is liable for future minimum lease payments of $4,449 through July 2007.

Management Agreement

On June 19, 1994, the Company entered into a Management Agreement with Casinos Austria Maritime Corporation (“CAMC”) to operate, on an exclusive basis, all of its proposed dockside gaming casinos in the State of Mississippi. If the Company enters into a joint venture arrangement pursuant to which the joint venture partner acquires a controlling interest, the agreement with CAMC will terminate. The Management Agreement is for a term of five years beginning when the casino resort becomes operational and provides for the payment of an operational term management fee based on a percentage of gross gaming revenues, as defined therein.

F-16

DIAMONDHEAD CASINO CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Commitments and Contingencies (continued)

Sales Tax Settlement

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 at that time 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 in for the year ended December 31, 2006.

9. Subsequent Events

On February 1, 2007, the Company received $200,000 from the exercise of an option to purchase 100,000 shares of common stock at $2.00 per share granted to Wachovia Bank (formerly First Union National Bank of Florida) in 1996 in connection with loans then-obtained by the Company.

On June 8, 2006, the Company and Trump Entertainment Resorts, Inc. signed a non-binding letter of intent pursuant to which the parties intended to form a joint venture partnership to develop, build and operate a destination casino resort on the Company’s property in Diamondhead, Mississippi. As of February 26, 2007, negotiations with Trump Entertainment Resorts, Inc. were concluded and the parties were no longer moving forward with a joint venture or other agreement with respect to the Diamondhead property.

F-17


	Part 1

Item 1.	Description of Business	1

Item 2.	Properties	14

Item 3.	Legal Proceedings	15

Item 4.	Submission of Matters to a Vote of Security Holders	15

	Part II

Item 5.	Market for Common Equity and Related Stockholder Matters	15

Item 6.	Management’s Discussion and Analysis of Financial Condition and Plan of Operation	15

Item 7.	Financial Statements	18

Item 8.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	18

Item 8A.	Controls and Procedures	18

Item 8B.	Other Information	19

	Part III

Item 9.	Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16 (A) of the Exchange Act	20

Item 10.	Executive Compensation	23

Item 11.	Security Ownership of Certain Beneficial Owners and Management	25

Item 12.	Certain Relationships and Related Transactions	28

Item 13.	Exhibits and Reports on Form 8-K	29

Item 14.	Principal Accountant Fees and Services	36
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


	2006		2005
Interest paid:
Cash paid for interest	$	—	$	1,892


	2006		2005
Preferred stock dividends paid with shares of common stock	$	47,360	$	47,360


		Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2006		F-3

CONSOLIDATED STATEMENTS OF LOSS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005		F-4

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005		F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005		F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-7 to F-18