Summary of DIAMONDHEAD CASINO CORP

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND FINANCIAL RESULTS
Liquidity, Capital Resources, and Financial Results 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 gambling cruise ship operations in 2000. The Company incurred a net loss applicable to common shareholders of $3,227,614 for the year ended December 31, 2008, $1,262,847 for the year ended December 31, 2007, and $1,757,192 for the year ended December 31, 2006. Costs and expenses amounted to $3,122,488 for the year ended December 31, 2008, $1,182,092 for the year ended December 31, 2007 and $2,893,821 for the year ended December 31, 2006. Costs and expenses for the year ending December 31, 2008 included a charge in the amount of $2,072,927 for stock based compensation associated with the modification of option grants originally issued in 2003. Costs and expenses for the year ended December 31, 2006 were impacted by an award of additional compensation in the amount of $450,000 to the Company President in the first quarter and the award of stock-based compensation valued at $1,238,348 for stock options granted to directors, officers, and key personnel in April 2006.
During 2007 and 2006, the Company was able to sustain its cash position and continue to satisfy its ongoing expenses through the sale of common stock formerly held in treasury and receipt of cash from the exercise of options and warrants to purchase common stock. In 2008, the Company entered into two promissory notes with two Directors of the Company yielding proceeds of $205,000; received $75,000 from the exercise of options to purchase 100,000 shares of common stock; and obtained a Line of Credit from an unrelated third party in the total amount of $1,000,000, of which the Company has drawn $300,000 as of December 31, 2008.
On March 9, 2009, the Company requested a second draw on the Line of Credit in the amount of $300,000 and received the funds on or about March 17, 2009. Therefore, the total indebtedness under the Line of Credit is $600,000 with a remaining $400,000 available for future draws.
As of the date of this report, in lieu of any additional source of capital, management believes that the Company will essentially exhaust all cash resources currently available by December 31, 2009. In addition, our auditors have expressed substantial doubt about the Company's ability to continue as a going concern in their audit report on our 2008 consolidated financial statements. The Company is currently discussing possible development of all or part of the Diamondhead property with interested parties and is exploring opportunities for financing required to develop the property and meet the Company's current liquidity needs.
There can be no assurance that the Company will be able to reach an agreement with any party regarding the development or financing 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.

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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.
Related Parties
The Company has agreements with various current Officers and Directors which is providing or would give rise to payment of a fee under certain conditions as follows:
The Company has agreed to pay Director Gregory A. Harrison a fee of 6% of funds realized on borrowings from the unsecured line of credit obtained in October 2008. The fee is payable to Mr. Harrison as the Company receives proceeds from the Lender. In the event that this loan facility should require security in the future, the fee payable under the agreement is reduced to 3% of the proceeds received from the Lender. A total of $20,000 was paid to Mr. Harrison in 2008 pursuant to the terms of this agreement.
The Company has agreements with Directors Harrell, Harrison and Norton in the event they are successful in obtaining funding for the Company and/or its Diamondhead project. The Company has agreed to pay a commission equal to one percent (1%) of the amount of any debt financing obtained and a commission of between one and one-half percent (1.5%) and four percent (4%) of the amount of any equity investment obtained in connection with the development of the Diamondhead property as a result of their efforts. The Company has agreed to pay a commission equal to six percent (6%) of the gross sales price for property sold or for any loan or line of credit that does not require that the property be pledged as security for a loan. In the event a loan or line of credit requires that the property be pledged as security, the commission would be reduced to three percent (3%). Payment of any commission is contingent on the signing of a loan and/or equity agreement, sales agreement, and/or joint venture agreement acceptable to the Company and payment of the loan proceeds, sales proceeds, or equity financing by the entity or person brought to the deal. The commission due will be paid at Closing out of monies paid and upon receipt of good funds. If funds are received periodically, the commission due will be paid periodically upon receipt of said funds by the Company.

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Other
The Company has agreements with unrelated persons and entities who would be entitled to substantial commissions if the Company enters into a financial agreement relating to the development of its Diamondhead property as a result of their efforts.
Critical Accounting Policies
Impairment of Long-Lived Assets
In accordance with generally accepted accounting principles, the Company currently carries the Diamondhead, Mississippi property on its balance sheet at cost in the amount of $5,409,913 and has tested this carrying value for impairment. In the opinion of management, the carrying value is not in excess of the estimated fair value of the property.
The Diamondhead, Mississippi property was last appraised on or about August 4, 2003, by J. Daniel Schroeder Appraisal Company at $108,900,000. The appraisal was subject to certain material assumptions and was predicated on the site being fully permitted and zoned as a legally permissible, water-based casino site. In addition, the Company rejected an offer to purchase the entire 404 acre site for $100 million in July 2007.
The property is one that meets the Mississippi Gaming Commission's requirements for a legal gaming site. Accordingly, management believes that use of the property as a gaming site represents the highest and best use of the property and provides for the greatest potential for shareholder value. In the event the Company was unable to obtain all of the permits required to develop a casino resort, the property could be used for other commercial or residential purposes. Stock Based Compensation Expense
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted 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. Stock-based compensation expense recognized under FASB 123(R) for the year ended December 31, 2008 was $2,072,927, which consisted of a modification to all outstanding stock option awards originally granted in 2003. 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, 2007.

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SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant or modification 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. Forfeitures are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The fair value of share-based payment awards or modifications to prior awards, are estimated at the grant date using the Black-Scholes option valuation model. The Company's determination of fair value of share-based payment awards or modifications thereto, is measured on the date of grant using an option-pricing model and 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.