UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


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




For
      the quarterly period ended:
            June
      30, 2008




o
            OR




TRANSITION
      REPORT PURSUANT SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT




For
      the transition period from:
            
            to





Commission
      file number:
            000-30375





Las
      Vegas Gaming, Inc.(Exact
      name of small business issuer as specified in its
  charter)Nevada
            
            88-0392994(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)4000
      West Ali Baba Lane, Suite D, Las Vegas, Nevada 89118(Address
      of principal executive offices)(702)
      871-7111(Issuer’s
      telephone number)(Former
      name, former address and former fiscal year, if changed since last
      report)Check
      whether the issuer (1) has filed all reports required to be filed by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 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 x  No 
      oIndicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company.  See the definitions of “large accelerated filer,”
      “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
      Exchange Act.
              
              Large
      Accelerated Filer  o                                                                                                             
      Accelerated Filer   o
              Non-accelerated
      filer  o    (do
      not check if smaller reporting
      company)                                 
      Smaller reporting company  xIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act). Yes  o  No 
      xAPPLICABLE
      ONLY TO CORPORATE ISSUERSIndicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latestpracticable
      date:
            13,579,340
      shares of Common Stock Series A, $.001 par value, as of June 30,
      2008





Table of Contents








LAS
      VEGAS GAMING, INC.
              
              FORM
      10-Q
              
              TABLE OF CONTENTS
            PagePART
      I – FINANCIAL INFORMATION
            3Item
      1.
            Financial Statements
            3Consolidated Balance Sheets
            3Consolidated Statements of Operations
            4Consolidated Statements of Operations
            5Consolidated Statements of Stockholders’
    Equity
            6Consolidated Statements of Cash Flow
            7Notes to Unaudited Consolidated Financial
      Statements
            9Item
      2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            20Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            29Item
      4T.
            Controls and Procedures
            29PART II – OTHER
      INFORMATION
            31Item
      1.
            Legal Proceedings
            31Item
      1A.
            Risk Factors
            31Item
      2.
            Unregistered Sales of Equity Securities
            31Item
      3.
            Defaults Upon Senior Securities
            31Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            31Item
      5.
            Other Information
            32Item
      6.
            Exhibits
            32


____________________________________





PlayerVision,
RoutePromo, NumberVision, WagerVision, AdVision, Nevada Numbers, The Million
Dollar Ticket, and Nevada Keno are our trademarks.  This report may
contain trademarks and trade names of other parties, corporations, and
organizations.












- 2
-
 Table of Contents


PART
I – FINANCIAL INFORMATION




Item 1.  Financial Statements.




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS




December
      31, 2007
            
            
            June
      30, 2008ASSETS
            
            
            
            
            (unaudited)Current
      assetsCash
            
            $
            489,262
            
            
            $
            -Investment
      in marketable securities
            
            
            87,881
            
            
            
            51,880Accounts
      receivable, net of allowance of $708 and $2,085
            
            
            567,186
            
            
            
            420,059Inventories
            
            
            1,161,707
            
            
            
            1,160,148Prepaid
      expenses, deposits and other
            
            
            149,596
            
            
            
            848,144Jackpot
      reserve deposits
            
            
            276,012
            
            
            
            1,277,0842,731,644
            
            
            
            3,757,315Equipment
      and software, net of accumulated depreciation of $1,565,560 and
      $1,448,414
            
            
            1,033,349
            
            
            
            814,387Other
      assetsGoodwill
            
            
            955,277
            
            
            
            955,295Trademarks,
      copyrights, patents and other identifiable intangibles, net of accumulated
      amortization of $1,098,867 and $1,340,218
            
            
            1,317,369
            
            
            
            1,076,018Other
      long term assets
            
            
            884,350
            
            
            
            175,544$
            6,921,989
            
            
            $
            6,778,559LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            1,453,525
            
            
            $
            2,049,432Current
      portion of long-term debt
            
            
            787,550
            
            
            
            648,428Progressive
      jackpot liability
            
            
            375,508
            
            
            
            846,1392,616,583
            
            
            
            3,543,999Long-term
      debt
            
            
            5,940,925
            
            
            
            7,061,067Conditionally
      redeemable equitySeries
      B convertible preferred stock, $.001 par, 130,350 and 76,750
              shares
      issued  and outstanding
            
            
            651,750
            
            
            
            383,750Stockholders'
      equityConvertible
      preferred stock, $.001 par, 10,000,000 shares authorized:Series
      A: 0 shares issued and outstanding
            
            
            -
            
            
            
            -Series
      C: 35,000 shares issued and outstanding
            
            
            35
            
            
            
            35Series
      D: 125,000 shares issued and outstanding
            
            
            125
            
            
            
            125Series
      E:  743,800 and 810,800 shares issued and
      outstanding
            
            
            744
            
            
            
            811Series
      F: 200,000 shares issued and outstanding
            
            
            -
            
            
            
            200Series
      G: 150,000 shares issued and outstanding
            
            
            -
            
            
            
            150Series
      H: 98,500 shares issued and outstanding
            
            
            -
            
            
            
            99Common
      stock (including Series A): $.001 par, 90,000,000 shares
              authorized,
      12,562,653 and 13,579,340 shares issued and outstanding
            
            
            12,563
            
            
            
            13,580Additional
      paid-in capital
            
            
            26,497,097
            
            
            
            30,138,102Less
      due from officers and stockholders
            
            
            (235,414
            )
            
            
            (185,826
            )Deficit
            
            
            (28,562,419
            )
            
            
            (34,177,533
            )(2,287,269
            )
            
            
            (4,210,257
            )$
            6,921,989
            
            
            $
            6,778,559The
      accompanying notes are an integral part of these financial
      statements.





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 Table of Contents


LAS VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


THREE
MONTHS ENDED JUNE 30, 2007 AND 2008 (UNAUDITED)





2007
            
            
            2008(restated)RevenuesCasino
      games
            
            $
            432,467
            
            
            $
            616,412Product
      sales
            
            
            332,425
            
            
            
            349,356Other
            
            
            322,229
            
            
            
            205,8701,087,121
            
            
            
            1,171,638Costs
      and expensesCasino
      games
            
            
            264,940
            
            
            
            551,810Product
      costs
            
            
            206,757
            
            
            
            165,577Other
            
            
            328,041
            
            
            
            241,518799,738
            
            
            
            958,905Gross
      operating income
            
            
            287,383
            
            
            
            212,733Other
      operating expensesSelling,
      general, and administrative
            
            
            1,477,640
            
            
            
            1,767,938Research
      and development
            
            
            260,623
            
            
            
            397,321Depreciation
      and amortization
            
            
            215,886
            
            
            
            211,3131,954,149
            
            
            
            2,376,572Operating
      loss
            
            
            (1,666,766
            )
            
            
            (2,163,839
            )Other
      income (expense)Finance
      costs
            
            
            (389,005
            )
            
            
            (580,391
            )Interest
      income and other
            
            
            36,269
            
            
            
            (71,318
            )Net
      loss
            
            $
            (2,019,502
            )
            
            $
            (2,815,548
            )Net
      loss per share
            
            $
            (0.19
            )
            
            $
            (0.21
            )Weighted
      average shares outstanding
            
            
            11,432,153
            
            
            
            13,363,193The
      accompanying notes are an integral part of these financial
      statements.


- 4
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LAS VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


SIX
MONTHS ENDED JUNE 30, 2007 AND 2008 (UNAUDITED)





2007
            
            
            2008(restated)RevenuesCasino
      games
            
            $
            863,175
            
            
            $
            1,159,507Product
      sales
            
            
            744,450
            
            
            
            673,369Other
            
            
            735,548
            
            
            
            477,8902,343,173
            
            
            
            2,310,766Costs
      and expensesCasino
      games
            
            
            587,550
            
            
            
            1,320,829Product
      costs
            
            
            494,581
            
            
            
            318,198Other
            
            
            668,477
            
            
            
            583,7261,750,608
            
            
            
            2,222,753Gross
      operating income
            
            
            592,565
            
            
            
            88,013Other
      operating expensesSelling,
      general, and administrative
            
            
            3,072,676
            
            
            
            3,362,027Research
      and development
            
            
            584,670
            
            
            
            698,540Depreciation
      and amortization
            
            
            432,045
            
            
            
            428,7094,089,391
            
            
            
            4,489,276Operating
      loss
            
            
            (3,496,826
            )
            
            
            (4,401,263
            )Other
      income (expense)Finance
      costs
            
            
            (874,754
            )
            
            
            (1,122,462
            )Interest
      income and other
            
            
            98,728
            
            
            
            (91,389
            )Net
      loss
            
            $
            (4,272,852
            )
            
            $
            (5,615,114
            )Net
      loss per share
            
            $
            (0.40
            )
            
            $
            (0.43
            )Weighted
      average shares outstanding
            
            
            10,814,085
            
            
            
            13,045,825The
      accompanying notes are an integral part of these financial
      statements.





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LAS VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


SIX
MONTHS ENDED JUNE 30, 2008 (UNAUDITED)








Series
      A Convertible
              Preferred
              Stock
            
            
            Series
      C Convertible
              Preferred
              Stock
            
            
            Series
      D Convertible
              Preferred
              Stock
            
            
            Series
      E Convertible
              Preferred
              Stock
            
            
            Series
      F Convertible
              Preferred
              Stock
            
            
            Series
      G Convertible
              Preferred
              Stock
            
            
            Series
      H Convertible
              Preferred
              Stock
            
            
            Common
              Stock
              (Including
      Series A)
            
            
            Additional
              Paid-In
              Capital
            
            
            Less
      Due From
              Officers
      and
              Stockholders
            
            
            DeficitBalances,
      December 31, 2007
            
            $
            -
            
            
            $
            35
            
            
            $
            125
            
            
            $
            744
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            12,563
            
            
            $
            26,497,097
            
            
            $
            (235,414
            )
            
            $
            (28,562,419
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,615,114
            )Exercise
      of warrants and options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            93
            
            
            
            108,706
            
            
            
            (8,412
            )Issuance
      of warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            238,682Other
      Stock based compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            238
            
            
            
            476,096
            
            
            
            52,000Cash
      received from employees and stockholders
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,000Conversion
      of Series B Convertible Preferred Stock to Common Stock Series
      A
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            131
            
            
            
            130,370Sale
      of Series E Convertible Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            67
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            334,933Sale
      of Series F Convertible Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            639,872Sale
      of Series G Convertible Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            150
            
            
            
            
            
            
            
            
            
            
            
            479,904Sale
      of Series H Convertible Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            99
            
            
            
            
            
            
            
            492,402Sale
      of Common Stock Series A to Employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            55
            
            
            
            110,666Sale
      of Common Stock Series A
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            500
            
            
            
            629,374Balances,
      June 30, 2008
            
            $
            -
            
            
            $
            35
            
            
            $
            125
            
            
            $
            811
            
            
            $
            200
            
            
            $
            150
            
            
            $
            99
            
            
            $
            13,580
            
            
            $
            30,138,102
            
            
            $
            (185,826
            )
            
            $
            (34,177,533
            )




The
accompanying notes are an integral part of these financial
statements.





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 Table of Contents


LAS VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOW


FOR
THE SIX MONTHS ENDED JUNE 31, 2007 AND 2008 (UNAUDITED)





2007
            
            
            2008(restated)Operating
      activitiesNet
      loss
            
            $
            (4,272,852
            )
            
            $
            (5,615,114
            )Marketable
      security received for licensing fee
            
            
            16,545
            
            
            
            36,001Depreciation
      and amortization of equipment and software
            
            
            190,698
            
            
            
            187,359Loss
      on disposal of assets
            
            
            -
            
            
            
            70,947Amortization
      of debt issuance cost and intangibles
            
            
            788,366
            
            
            
            1,178,205Fair
      market value adjustment of debt derivative liability
            
            
            (59,244
            )
            
            
            (83,995
            )Stock-based
      compensation to employees and consultants
            
            
            331,665
            
            
            
            557,319Other
            
            
            40,973
            
            
            
            (1,318
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (11,850
            )
            
            
            147,127Inventories
            
            
            (723,505
            )
            
            
            18,960Prepaid
      expenses, deposits and other
            
            
            325,819
            
            
            
            10,240Accounts
      payable and accrued expenses
            
            
            (139,324
            )
            
            
            944,610Progressive
      jackpot liability
            
            
            (135,895
            )
            
            
            470,631Net
      cash (used in) operating activities
            
            
            (3,648,604
            )
            
            
            (2,079,028
            )Investing
      activitiesPurchase
      of property and equipment
            
            
            (216,900
            )
            
            
            (77,970
            )Proceeds
      from sale of equipment
            
            
            -
            
            
            
            55,250Jackpot
      reserve deposits
            
            
            2,543,611
            
            
            
            (1,001,072
            )Net
      cash provided by (used in) investing activities
            
            
            2,326,711
            
            
            
            (1,023,792
            )Financing
      activitiesProceeds
      from litigation settlements
            
            
            28,754
            
            
            
            -Repayment
      of debt
            
            
            (3,721
            )
            
            
            (43,552
            )Sale
      of Series E Convertible Preferred Stock
            
            
            1,372,000
            
            
            
            335,000Sale
      of Series F Convertible Preferred Stock
            
            
            -
            
            
            
            640,072Sale
      of Series G Convertible Preferred Stock
            
            
            -
            
            
            
            480,054Sale
      of Series H Convertible Preferred Stock
            
            
            -
            
            
            
            492,501Redemption
      of Series B Convertible Preferred Stock
            
            
            (179,500
            )
            
            
            (137,500
            )Exercise
      of warrants and options for common stock
            
            
            203,123
            
            
            
            100,387Collection
      of stock subscription receivables
            
            
            -
            
            
            
            6,000Sale
      of Common Stock
            
            
            -
            
            
            
            740,596Net
      cash provided by financing activities
            
            
            1,420,656
            
            
            
            2,613,558Net
      increase (decrease) in cash and cash equivalents
            
            
            98,763
            
            
            
            (489,262
            )Cash
      and cash equivalents, beginning of period
            
            
            1,675,588
            
            
            
            489,262Cash
      and cash equivalents, end of period
            
            $
            1,774,351
            
            
            $
            0Non-cash
      investing and financing activitiesConversion
      of Series B Convertible Preferred Stock to
              Common
      Stock Series A
            
            $
            852,450
            
            
            $
            130,500Exercise
      of stock warrants and options increasing
              subscriptions
      receivable
            
            
            129,000
            
            
            
            8,412Conversion
      of Series C Convertible Preferred Stock to
              Common
      Stock Series A
            
            
            15Exercise
      of warrants in settlement of accounts payable
            
            
            257,750Cost
      of warrants for debt
            
            
            255,273Equipment
      acquired directly with proceeds new borrowing
            
            
            
            
            
            
            34,025Debt
      retired through issuance of Common Stock Series A
            
            
            
            
            
            
            107,500Prepayment
      of lease costs through issuance of Common
              Stock
      Series A
            
            
            
            
            
            
            106,000Accrued
      and prepaid interest added to face amount of note
              due
      to debt modification
            
            
            
            
            
            
            801,250The
      accompanying notes are an integral part of these financial
      statements.





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 Table of Contents




LAS VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.  Nature
of operations:




Our current principal business is the
delivery of new, linked-progressive, mega jackpot games to the worldwide gaming
industry.  Our current offering of these types of games includes
Nevada Numbers, Super Bonanza Bingo, and the Million Dollar
Ticket.  During the second quarter of 2008, we launched Gamblers Bonus
Million Dollar Ticket in cooperation with the largest slot route operation in
Nevada.  Although we have recently focused our business on the
development of our proprietary multimedia delivery system, known as
PlayerVision, PlayerVision has not had a significant revenue effect on our
financial statements to date.




2.  Basis
of Presentation




The
accompanying consolidated financial statements have been prepared by us pursuant
to the rules and regulations of the Securities and Exchange Commission, or the
SEC, relating to interim financial statements. Accordingly, certain information
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. For
further information, please refer to our annual financial statements and the
related notes included within our Annual Report on Form 10-KSB for the year
ended December 31, 2007, previously filed with the SEC, from which the
information as of that date is derived.




The
consolidated financial statements include the accounts of Las Vegas Gaming,
Inc., Imagineering Gaming, Inc. (Imagineering), our wholly-owned subsidiary, and
Las Vegas Keno Incorporated, an inactive 85%-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in
consolidation.




The
unaudited interim consolidated financial statements included herein reflect all
adjustments that are, in the opinion of management, necessary to present fairly
the financial position and results of operations for the interim periods
presented.  Information presented in the notes that is as of June 30,
2008 and 2007, or relates to the interim periods is likewise unaudited. The
results of operations for the six months ended June 30, 2008, are not
necessarily indicative of results to be expected for the year ending December
31, 2008.




3.  Restatement
of 2007 financial statements:




In
connection with the preparation of our 2007 Annual Report on Form 10-KSB,
corrections were determined to be necessary to our previously issued 2007
financial statements for the quarters ended in that year for errors in
accounting for the Company’s debt modifications at March 22, 2007 and September
28, 2007, and for the value of stock-based compensation.  Details of
these error corrections are contained in our 2007 Annual Report on Form
10-KSB.




4.  Jackpot
Reserve Deposits




At December 31, 2007 and June 30, 2008,
as required by gaming regulators, we held aside on deposit cash amounts of
$276,012 and $1,277,084 respectively that are restricted for funding our various
jackpot-oriented games.  We had a funding reserve deficiency of
$281,000 (including outstanding checks) for our jackpot reserve deposits at June
30, 2008 (Note 9).




- 8
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 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




5.  Equipment
and Software




Equipment
and software consist of the following:




December
      31, 2007
            
            
            June
      30, 2008
              UnauditedSoftware
            
            $
            422,560
            
            
            $
            422,560Production
      equipment
            
            
            1,669,461
            
            
            
            1,267,931Equipment,
      furniture, and fixtures
            
            
            463,261
            
            
            
            528,682Leasehold
      improvements
            
            
            43,627
            
            
            
            43,6272,598,909
            
            
            
            2,262,800Less
      accumulated depreciation and   amortization
            
            
            1,565,560
            
            
            
            1,448,413$
            1,033,349
            
            
            $
            814,387





6.  Other
intangible assets:





Trademarks, copyrights, patents and
technology rights, and other intangible assets consist of the following:





December
      31, 2007
            
            
            June
      30, 2008
              UnauditedPlayerVision
      technology patents
            
            $
            1,016,236
            
            
            $
            1,016,236PlayerVision
      technology rights for “at home” wagering
            
            
            1,400,000
            
            
            
            1,400,0002,416,236
            
            
            
            2,416,236Less
      accumulated amortization
            
            
            1,098,867
            
            
            
            1,340,218$
            1,317,369
            
            
            $
            1,076,018




The
intangible assets are amortized over their useful lives, which are currently 5
years.  Implementing “at home” wagering is scheduled for 2009, subject
to regulatory and third-party approval, following the product roll out of
PlayerVision.  Total amortization for other intangible assets amounted
to $241,351 for the three months ended June 30, 2007 and 2008.  The
estimated aggregate amortization for the next five calendar years is as
follows:




2008
            
            $
            241,3512009
            
            
            482,7022010
            
            
            303,3072011
            
            
            48,6582012
            
            
            -0-$
            1,076,018





7.  Debt




On May 1,
2008, we amended our financing with CAMOFI and entered into an Amended and
Restated Senior Secured Convertible Note due January 1, 2010, or Note, and an
Amended and Restated Registration Rights Agreement, or Registration Rights
Agreement, with CAMOFI.  The commitment fees due under the original
CAMOFI note on April 1, 2008, July 1, 2008, October 1, 2008, and January 1, 2009
of $131,250 and prior accrued commitment fees were added to the face amount of
the Note which increased from $5,250,000 to $6,051,250.  We must also
pay commitment fees of $403,417 on January 1,




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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




2009, and
$302,563 on July 1, 2009 and January 1, 2010.  The Registration Rights
Agreement requires us to file a registration statement with the Securities and
Exchange Commission on the earlier of the closing of a Qualified Financing, as
defined in the Registration Rights Agreement or April 30, 2009 with the
effectiveness date remaining 120 calendar days after the filing
date.  The maturity date of the Note was changed from January 1, 2009
to January 1, 2010. We were in compliance with all loan covenants at June 30,
2008.  With respect to the issuance and sale of Series F, Series G and
Series H Convertible Preferred Stock (see Note 8), CAMOFI verbally waived
non-compliance of any provisions in its loan documents restricting us from
effecting such transactions, including with respect to (a) the issuance of any
securities (i) convertible into shares of common stock based upon trading prices
at any time after the issuance of such securities, or (ii) that grant to an
investor the right to receive additional shares based upon future transactions
on terms more favorable than those granted to such investor in such offering;
and (b) the granting of a security interest in assets pledge to
CAMOFI.  Although the agreement with CAMOFI provides that waivers must
be in writing, the Company believes that, notwithstanding any issue as to
whether such waiver is legally binding, the verbal waiver represents CAMOFI’s
intent to allow the sales of the Series F, Series G and Series H Convertible
Preferred Stock and not to take the position that the sales resulted in an Event
of Default under the CAMOFI loan documents.




Long –
term debt consists of:




December
      31, 2007
            
            
            June
      30, 2008Debt
      derivative liability
            
            $
            1,592,263
            
            
            $
            1,508,269Bridge
      financing
            
            
            4,342,345
            
            
            
            5,524,387Settlement
      due third parties
            
            
            614,027
            
            
            
            614,027Other
      notes payable
            
            
            179,840
            
            
            
            62,812$
            6,728,475
            
            
            $
            7,709,495Less
      amounts due within one year
            
            
            787,550
            
            
            
            648,428$
            5,940,925
            
            
            $
            7,061,067




Aggregate
scheduled debt maturities are $648,428 in 2009, $7,042,896 in 2010, $7,055 in
2011, $7,797 in 2012 and $3,319 in 2013.




We have received all monies due from a
settlement with a customer, and will distribute all monies due except for
$107,500 which is due to the prior owners of Imagineering who converted their
debt into Common Stock Series A at $2.00 per share or 53,750 shares in March
2008.




8.  Stockholders'
Equity




From  time
to time, we issue shares of common stock and preferred stock through
transactions that are exempt from registration under the Securities Act of 1933
(Securities Act), or pursuant to Section 4(2) of the Securities Act and Rule 506
of Regulation D.  In March 2007, an officer and a board member
were each awarded 50,000 shares of Common Stock Series A for their respective
promotions.  For the six months ended June 30, 2008, we issued 92,659
shares of Common Stock Series A as a result of the exercise of options and
warrants.  Additionally, we issued 130,500 shares of Common Stock
Series A pursuant to the conversion of 26,100 shares of Series B Convertible
Preferred Stock.  During the six months ended June 30, 2008, we also
issued 293,528 shares of Common Stock Series A for salaries, bonuses, services,
and board of director fees and 500,000 shares of Common Stock Series A as part
of our sale of Series F and Series G Convertible Preferred Stock.




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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




In
February 2008, we received an advance from a shareholder of $250,000. This same
shareholder purchased 200,000 shares of Series F Convertible Preferred Stock for
$5 per share and 150,000 shares of Series G Convertible Preferred Stock for $5
per share on May 9, 2008 for an aggregate purchase price of
$1,750,000.  Both Series F and Series G Convertible Preferred Stock
are convertible into Common Stock Series A at the lower of $3.50 or 30% off the
IPO price, where “IPO price” means the per share price to the public of any
common shares offered by us that in the aggregate results in capital in excess
of $10.0 million being raised and the shares of a class of our common stock
being listed and traded on a national stock exchange.  The proceeds of
the Series F Convertible Preferred Stock were used to fund the $1,000,000
jackpot bankroll for our Gamblers Bonus Million Dollar Ticket game which
launched on April 14, 2008. The proceeds of Series G Convertible Preferred Stock
were used for general operating purposes, and the advance of $250,000 was offset
against the Series G purchase price. As an incentive to do these transactions,
the same shareholder was issued 500,000 shares of Common Stock Series
A.  Additionally, if our Common Stock Series A, as a result of a
qualified financing, commences trading at less than $5 per share, the
shareholder will receive additional shares of Common Stock Series A prorated for
the percentage shortfall from $5 per share measured against the 500,000 shares,
where a “qualified financing” is a capital raise of $10 million or more or a
transaction at less than $5 per share resulting in a change in control of the
Company.  In addition, the Series F Convertible Preferred Stock
shareholder was granted a security interest and other additional rights in
connection with our separate account (and related insurance policy), and $1
million is set aside solely to satisfy our jackpot security requirements
relating to the Gamblers Bonus Million Dollar Ticket game.




In May
2008, we began a private placement offering of 1,000,000 shares of Series H
Convertible Preferred Stock.  We issued 98,500 shares and raised
$492,500 when we closed the offering in June 2008.  The shares are
convertible into Common Stock Series A at the lower of $2.50 or 30% off the IPO
price, where “IPO price” means the per share price to the public of any common
shares offered by us that in the aggregate results in capital in excess of $10.0
million being raised and the shares of a class of our common stock being listed
and traded on a national stock exchange.




Series A
Convertible Preferred Stock.  On March 15, 2007, pursuant to the terms
and conditions of our Series A Convertible Preferred Stock, we exercised our
right to convert all shares of Series A Convertible Preferred Stock into shares
of Common Stock Series A on a one-for-one basis.  Accordingly, all
536,400 remaining shares of Series A Convertible Preferred Stock were converted
into 536,400 shares of Common Stock Series A.




Series B
Convertible Preferred Stock.  Each share of Series B Convertible
Preferred Stock is convertible at any time into Common Stock Series A at the
election of the holders of the Series B Convertible Preferred Stock on a
one-to-five basis.




A certain
portion of the proceeds derived from the sale of Series B Convertible Preferred
Stock provides jackpot security for two of our game products, Nevada Numbers and
The Million Dollar Ticket. The terms of Series B Convertible Preferred Stock
provide that if at any time we determine that these proceeds are no longer used
by us to provide jackpot security for either our Nevada Numbers or Million
Dollar Ticket game then, in each case, each holder of Series B Convertible
Preferred Stock will have the option, for 90 calendar days from the date the
holders of Series B Convertible Preferred Stock are noticed that such funds are
no longer being so used, to put to us up to 50% of such holder's Series B
Convertible Preferred Stock for $5.00 per share or convert on a one-to-five
basis for Common Stock Series A.




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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




On
January 18, 2008, because Treasure Island had begun maintaining the required
base jackpot bankroll for our Million Dollar Ticket game, the holders of Series
B Convertible Preferred Stock were notified pursuant to the terms and conditions
of our Series B Convertible Preferred Stock of their ability to exercise the
above options. The holders of Series B Convertible Preferred Stock had until
April 17, 2008, to make their decision.  During the six months ended
June 30, 2008, holders of 27,500 shares of Series B Convertible Preferred Stock
had redeemed their shares at $5 per share for a total redemption of
$137,500, and holders of 26,100 shares of Series B Convertible Preferred
Stock had converted their shares on a one-to-five basis for 130,500 shares of
Common Stock Series A.  As of June 30, 2008, there were 76,750 shares
of Series B Convertible Preferred Stock still outstanding.




Series C
Convertible Preferred Stock.  In January 2007, holders of our Series C
Convertible Preferred Stock converted 3,000 shares of Series C Convertible
Preferred Stock on a one-to-five basis for 15,000 shares of Common Stock Series
A.  Holders of Series C Convertible Preferred Stock are entitled to
receive $5 per share as a liquidation preference, after payment of all existing
and future indebtedness and the liquidation preference of Series B and Series F
Convertible Preferred Stock, over Series D, Series E, Series G and Series H
Convertible Preferred Stock.  In August 2008, the remaining holders of
35,000 shares of Series C Convertible Preferred Stock converted their shares
into 175,000 shares of Common Stock Series A.




Series D
Convertible Preferred Stock.  In November 2005, we issued 125,000
shares of Series D Convertible Preferred Stock at $2 per share which, after
payment of all existing and future indebtedness and the liquidation preference
of Series B and Series F Convertible Preferred Stock, have a liquidation
preference over Series E, Series G and Series H Convertible Preferred
Stock.  In August 2008, the holder of 125,000 shares of Series D
Convertible Preferred Stock converted his shares into 125,000 shares of Common
Stock Series A.




Series E
Convertible Preferred Stock.  Holders of Series E Convertible
Preferred Stock are entitled to receive $5 per share as a liquidation preference
after payment of all existing and future indebtedness and the liquidation
preference of Series B, Series C, Series D, and Series F Convertible Preferred
Stock. Series E and Series G Convertible Preferred Stock are pari passu in
liquidation preference. During the six months ended June 30, 2008, we issued
67,000 shares of our Series E Convertible Preferred Stock raising
$335,000.  In February 2008, we closed our Series E Convertible
Preferred Stock offering with a total of 810,800 shares issued and $4,054,000
raised.




Series F
Convertible Preferred Stock.   The holder of Series F Convertible
Preferred Stock is entitled to receive $5 per share as a liquidation preference
after payment of all existing and future indebtedness and before Series B,
Series C, Series D, Series E, and Series G Convertible Preferred Stock as to the
$1,000,000 jackpot bankroll reserve for our Gamblers Bonus Million Dollar Ticket
game.  On May 9, 2008, we issued 200,000 shares of Series F
Convertible Preferred Stock which carries a 12% dividend rate which is
cumulative and payable fifteen days after the CAMOFI note is paid
off.  Series F Convertible Preferred Stock is convertible into Common
Stock Series A at the lower of $3.50 or 30% off of the IPO price, where “IPO
price” means the per share price to the public of any common shares offered by
us that in the aggregate results in capital in excess of $10.0 million being
raised and the shares of a class of our common stock being listed and traded on
a national stock exchange.




Series G
Convertible Preferred Stock.   The holder of Series G Convertible
Preferred Stock is entitled to receive $5 per share as a liquidation preference
pari passu with the liquidation preference of Series E Convertible Preferred
Stock and after payment of all existing and future indebtedness and the
liquidation preference of Series B, Series C, Series D and Series F Convertible
Preferred Stock.  On May 9, 2008, we issued 150,000 shares of Series G
Convertible Preferred Stock which carries a 12% dividend rate




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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




which is
cumulative and payable fifteen days after the CAMOFI note is paid
off.  Series G Convertible Preferred stock is convertible into Common
Stock Series A at the lower of $3.50 or 30% off of the IPO price, where “IPO
price” means the per share price to the public of any common shares offered by
us that in the aggregate results in capital in excess of $10.0 million being
raised and the shares of a class of our common stock being listed and traded on
a national stock exchange.




Series H
Convertible Preferred Stock.   The holders of Series H
Convertible Preferred Stock are entitled to receive $5 per share as a
liquidation preference after payment of all existing and future indebtedness and
the liquidation preference of Series B, Series C, Series D, Series E, Series F
and Series G Convertible Preferred Stock. During the second quarter of 2008, we
issued 98,500 shares of Series H Convertible Preferred Stock at a price of $5
per share for a total capital raise of $492,500.  The Series H
Convertible Preferred offering closed June 21, 2008.  Series H
Convertible Preferred stock is convertible into Common Stock Series A at the
lower of $2.50 or 30% off of the IPO price, where “IPO price” means the per
share price to the public of any common shares offered by us that in the
aggregate results in capital in excess of $10.0 million being raised and the
shares of a class of our common stock being listed and traded on a national
stock exchange.




Stock
Warrants and Options.  We have both a qualified and a non-qualified
stock option plan. The Compensation and Stock Option Committee of our Board
of Directors administers the plans.  As of June 30, 2008, there were
1,533,900 qualified and 425,000 non-qualified options outstanding. The exercise
price of options issued pursuant to either plan cannot be less than the fair
market value at the time of the grant and vesting is at the discretion of the
Compensation and Stock Option Committee, though limited to ten years. Only
employees and board members are qualified to receive options.  The
stock subject to the qualified plan is limited to 2,500,000 shares of Common
Stock Series A.




We
have, from time to time, granted common stock, warrants and options to employees
and others as employment incentives, or as an inducement to invest in our common
or preferred securities, in return for other services, and in conjunction with
the initial capitalization of our company and business
acquisitions.  Options to purchase 310,000 shares of Common Stock
Series A were issued to officers and directors during the six months ended June
30, 2008. Total compensation cost recognized in operations amounted to
$755,076 and $557,319 for the six months ended June 30, 2007 and June 30, 2008
respectively.  Unrecognized costs related to employee stock options
and warrants outstanding at June 30, 2008 totaled $279,191 and are expected to
be amortized over a weighted average period of three years.




During
the first half of 2008, the Company issued 49,755 shares of Common Stock Series
A to directors in lieu of board of director fees.




The
weighted average exercise price of our outstanding options and warrants at June
30, 2008, was $2.44. The following table summarizes our stock option and warrant
activity followed by the applicable weighted average prices during the quarter
ended June 30, 2008:




Balance,
      December 31, 2007
            
            
            6,174,862$
            2.33Granted
            
            
            900,000$
            3.36Exercised
            
            
            (92,659
            )$
            1.17Forfeited
            
            
            (395,494
            )$
            3.09Balance,
      June 30, 2008
            
            
            6,586,709$
            2.44







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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




As of
June 30, 2008, 1,001,343 options and warrants are outstanding, but have not
vested. The aggregate intrinsic value of options and warrants at June 30, 2008,
is $251,155.




WeightedNon-vested
            
            
            AverageOptions
            
            
            PriceBalance,
      December 31, 2007
            
            
            515,610
            
            
            $
            5.00Granted
            
            
            564,000
            
            
            $
            3.44Vested
            
            
            (139,150
            )
            
            $
            (5.00
            )Forfeited
            
            
            (5,950
            )
            
            $
            (5.00
            )Balance,
      June 30, 2008
            
            
            934,510
            
            
            $
            4.07







WeightedNon-vested
            
            
            AverageWarrants
            
            
            PriceBalance,
      December 31, 2007
            
            
            270,333
            
            
            $
            2.85Granted
            
            
            0
            
            
            $
            0.00Vested
            
            
            (195,000
            )
            
            $
            (2.91
            )Forfeited
            
            
            (8,500
            )
            
            $
            (5.00
            )Balance,
      June 30, 2008
            
            
            66,833
            
            
            $
            2.40





The
following table summarizes stock options and warrants outstanding at June 30,
2008, as to number exercisable and average remaining life in years:




Weighted
      Average
            
            
            
            
            
            Weighted
      AverageExercise
            
            
            Number
            
            
            Remaining
            
            
            Number
            
            
            RemainingPrice
            
            
            Outstanding
            
            
            Life
      in years
            
            
            Exercisable
            
            
            Life
      in yearsOptions
            
            $
            1.00
            
            
            
            270,000
            
            
            
            1.5
            
            
            
            270,000
            
            
            
            1.5$
            2.00
            
            
            
            460,000
            
            
            
            5.0
            
            
            
            158,500
            
            
            
            5.0$
            3.00
            
            
            
            100,900
            
            
            
            1.7
            
            
            
            100,900
            
            
            
            1.6$
            4.55
            
            
            
            30,000
            
            
            
            1.2
            
            
            
            30,000
            
            
            
            1.2$
            5.00
            
            
            
            1,123,000
            
            
            
            4.2
            
            
            
            489,990
            
            
            
            4.1Warrants
            
            $
            1.00
            
            
            
            535,000
            
            
            
            1.3
            
            
            
            491,500
            
            
            
            1.2$
            1.48
            
            
            
            2,675,000
            
            
            
            2.8
            
            
            
            2,675,000
            
            
            
            2.8$
            1.50
            
            
            
            30,000
            
            
            
            4.8
            
            
            
            30,000
            
            
            
            4.8$
            2.00
            
            
            
            195,000
            
            
            
            2.1
            
            
            
            195,000
            
            
            
            2.5$
            2.10
            
            
            
            23,809
            
            
            
            2.4
            
            
            
            23,809
            
            
            
            2.4$
            3.00
            
            
            
            854,000
            
            
            
            2.6
            
            
            
            854,000
            
            
            
            2.4$
            4.00
            
            
            
            100,000
            
            
            
            1.6
            
            
            
            100,000
            
            
            
            1.6$
            4.55
            
            
            
            40,000
            
            
            
            0.4
            
            
            
            40,000
            
            
            
            0.4$
            5.00
            
            
            
            150,000
            
            
            
            2.7
            
            
            
            126,667
            
            
            
            2.56,586,709
            
            
            
            2.9
            
            
            
            5,585,366
            
            
            
            2.3







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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




There are
1,001,343 options and warrants that have been issued but have not
vested.  Of these options and warrants 111,466 will vest in 2008,
419,557 in 2009, 378,570 in 2010 and 91,750 in 2011.




9.  Concentration,
commitments and contingencies:




Concentration.  Historically,
we have depended on relatively few suppliers for components and programming for
certain of our games.  However, this dependence has been substantially
mitigated as a result of acquisitions, mostly in 2003, and we believe that such
other suppliers are sufficiently available so that any disruption of service
would be brief and not have a material adverse effect on our business financial
condition, or results of operations.  From time to time, we have cash
on deposit that is in excess of federally-insured limits, and the risk of losses
related to such concentrations may be increasing as a result of recent economic
developments.




Employment
Agreements.  Effective June 4, 2007, we entered into an
employment agreement with Jon D. Berkley to serve as our President and Chief
Executive Officer.  Pursuant to the Agreement, Mr. Berkley is paid an
annual salary of $270,000.  Mr. Berkley was also granted options to
purchase 400,000 shares of Common Stock Series A that are exercisable at $5.00
and vest annually at a rate of 25% beginning on June 4, 2007.  In
addition, Mr. Berkley is also eligible to receive grants of options to purchase
another potential 600,000 shares of Common Stock Series A subject to achieving
specific performance based milestones.  All of Mr. Berkley’s unvested
options will immediately vest upon a change in control of the
Company.




In 2004,
we entered into an employment agreement with John English to serve as our Senior
Vice President in charge of strategic business development through August 14,
2009, subject to early termination under certain conditions.  Pursuant
to the agreement, Mr. English is paid a base salary of $200,000, with automatic
annual raises and possible bonus payments.  In addition, as part of
his compensation, Mr. English was granted warrants to purchase 250,000 shares of
Common Stock Series A that are exercisable at $1.00 per share and vest annually
at a rate of 20% per year beginning on August 10, 2004.  Under the
agreement Mr. English is prohibited from competing with us during the term of
the agreement and for one year following termination of the
agreement.  From November 2005 through June 2006, Mr. English also
served as our Chief Strategic Officer.  Although Mr. English resigned
as an executive officer in June 2006, he remained as our Senior Vice President
in charge of gaming development.




We have
agreed to severance arrangements with all executive officers that provide for
the payment of six months of base salary following termination of employment for
other than cause which amounts to $507,000 of financial commitment.




Technology
License Fees.We
are obligated to pay AdLine Network, LLC, in cash, a 5% royalty or license fee
based on net revenue (defined as gross revenue less the theoretical cost of any
pay-outs) derived from the purchased rights for “at home” wagering as long as
the agreement remains in effect.




Gaming Regulations and
Licensing. We are licensed with the state of Nevada as an operator of
inter-casino-linked systems, supplier and distributor of keno and bingo
products, parts, and service, and as a keno route operator.  From time
to time, we seek licensure in other gaming jurisdictions so that we may
similarly participate in the gaming revenue produced by customers for
our products in those jurisdictions.  Failure to retain our
Nevada licenses or to obtain and retain the necessary licenses in other
jurisdictions would have a material adverse effect on us.




- 15
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VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




We
purchase insurance to fund the base progressive jackpots for Nevada Numbers,
Super Games Bingo (in some circumstances), and The Million Dollar Ticket. We
fund any uninsured portion plus increases to the progressive jackpot through
operations. We are ultimately liable for the entire jackpot. The following
tables illustrate our liability for progressive jackpots at December 31, 2007
and June 30, 2008, and related assumptions:




December
      31, 2007Present
      value of Nevada Numbers $5.0 million
              base progressive jackpot, payable in 20 equal
              annual installments using a 7.25% discount rate,
              the prevailing prime rate
            
            $
            2,786,153Present
      value at 7.25% of the progressive jackpot
              meter for Nevada Numbers
            
            
            13,446Less
      portion insured through conventional insurers
            
            
            (2,900,000
            )Other
      games
            
            
            475,909$
            375,508







June
      30, 2008Present
      value of Nevada Numbers $5.0 million
              base
      progressive jackpot, payable in 20 equal
              annual
      installments using a 5% discount rate, the
              prevailing
      prime rate
            
            $
            3,271,330Present
      value at 5% of the Nevada Numbers
              increase
      to the progressive jackpot meter
            
            
            43,967Less
      portion insured through conventional insurers
            
            
            (2,900,000
            )Other
      games
            
            
            430,842$
            846,139







Leases.We lease
office and warehouse space under various non-cancelable operating leases
expiring through 2013.  The lease agreements require us to pay monthly
base rent plus common area maintenance charges.  Future minimum lease
payments under the leases by calendar year are:




2008
            
            $
            224,2542009
            
            
            183,9212010
            
            
            179,1152011
            
            
            158,0682012
            
            
            141,9862013
            
            
            47,745$
            935,089







Legal Matter.  On
September 12, 2007, International Game Technology (IGT) filed a lawsuit against
us alleging copyright infringement, trademark infringement, trade dress
infringement and false designation of origin relating to the operation of our
PlayerVision system on IGT’s Game King® gaming machines.  IGT is
seeking injunctive and monetary relief in the case, including treble damages and
profits,




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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




claiming
that IGT would be irreparably harmed by LVGI if LVGI’s PlayerVision were
deployed in the marketplace.  On November 16, 2007, the Court denied
IGT’s motion for preliminary injunction, finding that IGT had not shown a
likelihood of success or raised serious questions as to its derivative works
claim or other infringement claims. Discovery continued on this lawsuit through
May 2008.  Management does not believe the IGT Complaint to be
meritorious, and is defending the lawsuit vigorously.   On June
12, 2008, IGT and LVGI jointly filed a “stay” of the lawsuit and began
settlement negotiations.  Nevertheless, management has made no
provision for this matter as it is unable to estimate the minimum loss, if any,
to be incurred by the Company as a result of its ultimate outcome.




On July
17, 2008, we executed an agreement (the “Agreement”) with IGT whereby IGT
advanced $1,500,000 to us to fund working capital needs; provided, that we will
not use such funds in any manner to advance the pending litigation with
IGT.  Pursuant to the Agreement as subsequently amended, if we do not
execute definitive agreements with IGT concerning the potential settlement of
the litigation (the “Potential Settlement”) by August 19, 2008, then on October
30, 2008, we will issue to IGT 750,000 shares of common stock and IGT will have
a first right of refusal to take an exclusive license from us to any and all
patents owned or controlled by us which have one or more claims covering our
PlayerVision related hardware and firm ware.  The first right of
refusal will be automatically effective on October 30, 2008 and continue
thereafter, with the terms of the exclusive license to be
negotiated.  Until it is determined whether IGT will have the first
right of refusal, we may not license our PlayerVision technology and patents to
any third party, other than end users and operators.  If IGT receives
the first right of refusal, we may not abrogate IGT’s right by licensing to
third parties prior to IGT exercising its first right of refusal.  In
lieu of issuing the common stock and granting the first right of refusal, we
will have the option of paying IGT $1,525,000 in immediately available funds on
or before October 29, 2008.




The
Agreement was entered into pursuant to a non-binding term sheet (the “Term
Sheet”), which we executed with IGT on July 17, 2008 concerning the Potential
Settlement.  The Potential Settlement involves potential licenses of
intellectual property and products, software development and access to
intellectual property, and a potential investment by IGT in us.  The
Term Sheet was executed as a negotiation aid, and its terms are not binding on
either us or IGT.  There is no assurance that we will negotiate,
execute and deliver binding agreements with IGT with respect to the Potential
Settlement.




Noncompliance with Gaming
Regulation.  Adopted amendments to Regulation 5.115 of the
Nevada Gaming Commission, as amended on November 18, 1999, allow licensees to
use the “reserve method” to fund periodic payments of any game, including a race
book or sports pool, tournament, contest, or promotional activity provided that
the licensee complies with certain financial monitoring and reporting
requirements as follows: 1) current ratio of 2:1 and 2) interest coverage ratio
of 3:1.  We have frequently found it impossible, primarily due to the
absence of earnings, to be in compliance with these ratios and in the past have
been successful in presenting an alternative plan acceptable to the Nevada
Gaming Commission to satisfactorily meet the objectives of the Regulation if not
cure the situation prospectively through expected future raises of
capital.  In our ten-year history, all of our jackpot liabilities have
been paid by us or through insurance coverage, and we have no reason to believe
that it will not continue to be the case in the future.  The Nevada
Gaming Commission has the right to demand that a one-year letter of credit be
posted when a company is not in compliance with the foregoing financial ratios
but has not made any such demand to date.




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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




In July,
2008, we received two “Orders to Show Cause” from the Nevada Gaming Control
Board.  One order dealt with deficiencies in financial requirements as
to 1) resources in restricted accounts; 2) current ratio or working capital; 3)
interest coverage ratios or debt to EBITDA ratio; and 4)
bankroll.  The second order dealt with deficiencies in filing timely
reports with the Nevada Gaming Control Board as to new hires and termination of
personnel.  We have filed responses to these orders as to how these
matters have been or will be cured.  We do not know and we are unable
to estimate at the present time whether there will be any adverse consequences
as a result of these “Orders to Show Cause.”




10.
Income taxes:





As of
June 30, 2008, net operating loss carryovers for federal income tax reporting
purposes total approximately $35.0 million and expire between 2013 and 2025.
However, because we have not achieved a satisfactory level of operations,
realization of any future income tax benefit of the net operating loss
carryovers accumulated to date is not yet viewed by management at this time as
more likely than not.  Therefore, the related deferred tax asset of
$12.25 million has been effectively reduced by a 100% valuation
allowance.  In addition, we may be limited in our ability to fully
utilize our net operating loss carryforwards and realize any benefit therefrom
in the event of any of certain ownership changes described in Internal Revenue
Code Section 382.




In 2007,
the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes – An Interpretation of FASB No. 109, (FIN 48).  The
adoption of FIN 48 did not have a material impact on the Company’s financial
statements, its net operating loss carryovers or related deferred tax assets or
valuation allowances.




11.
Segment Information:




We conduct our operations in three
primary business segments: “Casino Games,” “Products” and “Other.” The “Casino
Games” segment generates income from three games in 25 casinos in Nevada and
another 14 outside Nevada and from a fourth one launched on April 14, 2008,
Gamblers Bonus Million Dollar Ticket, which is in approximately 110 bars and
convenience stores in Nevada.






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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(Continued)




Operating
results, certain unallocated expenditures, and identifiable assets for these
segments are set forth below.


Six
      months ended June 30,2007
            
            
            2008RevenueCasino
      Games
            
            $
            863,175
            
            
            $
            1,159,507Product
      Sales
            
            
            744,450
            
            
            
            673,369Other
            
            
            735,548
            
            
            
            477,890$
            2,343,173
            
            
            $
            2,310,766Operating
      income (loss)Casino
      Games
            
            $
            275,625
            
            
            $
            (161,322
            )Product
      Sales
            
            
            249,869
            
            
            
            355,171Other
            
            
            67,071
            
            
            
            (105,836
            )Unallocated
            
            
            (4,089,392
            )
            
            
            (4,489,276
            )$
            (3,496,827
            )
            
            $
            (4,401,263
            )Identifiable
      assets
            
            
            
            
            
            June
      30,2008Casino
      Games
            
            
            
            
            
            $
            3,802,910Product
      Sales
            
            
            
            
            
            
            332,849Other
            
            
            
            
            
            
            366,874Unallocated
            
            
            
            
            
            
            2,275,926$
            6,778,559







Identifiable
assets of $6,778,559 at June 30, 2008, included recorded goodwill of $955,277
that relates to the Project Sales segment from prior acquisitions.




Six
      months ended June 30,Capital
      expenditures
            
            2007
            
            
            2008Casino
      Games
            
            $
            139,496
            
            
            $
            31,177Product
      Sales
            
            
            1,508
            
            
            
            0Other
            
            
            30,538
            
            
            
            56,726Unallocated
            
            
            45,358
            
            
            
            24,093$
            216,900
            
            
            $
            111,996







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Item 2.Management’s Discussion and Analysis of Financial
Condition and Results of Operations.




You
should read the following discussion and analysis together with our unaudited
consolidated financial statements and the accompanying notes.  This
discussion contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933, as amended, Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities Litigation Reform
Act of 1995, including statements regarding our expected realization of revenue
from PlayerVision during the first quarter of 2009 and our expected financial
position, business and financing plans. Some of the forward-looking statements
can be identified by the use of forward-looking terms such as “believes,”
“expects,” “may,” “will,” “should,” “could,” “seek,” “intends,” “plans,”
“estimates,” “anticipates,” or other comparable terms. Forward-looking
statements involve inherent risks and uncertainties which could cause actual
results to differ materially from those in the forward looking statements,
including any adverse judgment, ruling or order in our current litigation with
IGT or a failure to obtain a settlement of such litigation with IGT and those
additional risks discussed herein and elsewhere in our Form 10-KSB for the year
ended December 31, 2007.  We caution readers not to place undue
reliance upon any such forward-looking statements, which speak only as of the
date made.  These historical financial statements may not be
indicative of our future performance.




Overview




Historically,
we have been one of the leading suppliers of keno and bingo games, systems, and
supplies, a relatively small market associated with nominal growth and smaller
companies.  Our current principal business is the delivery of new,
linked-progressive, mega jackpot games to the worldwide gaming
industry.  However, to date, we have devoted a significant portion of
our resources toward the development, regulatory approval, and marketing of our
PlayerVision system.  In comparison to the keno and bingo market, the
potential market for our PlayerVision system, i.e., the gaming machine market,
is much larger and more dynamic.  PlayerVision has not had a
significant revenue effect on our financial statements to date.  Due
to our focus on the development of our PlayerVision system, we have incurred
expenses in excess of our revenue and have generated losses to
date.




By the
third quarter of 2007, we substantially completed the development of our
PlayerVision system, including the first four modules to be offered through our
PlayerVision system:  AdVision, PlayerVision TV, NumberVision and
WagerVision.  In terms of the sales and marketing of our PlayerVision
system, we introduced our PlayerVision system to the gaming industry at the
Global Gaming Expo in Las Vegas, Nevada initially during the fourth quarter of
2006 and again in 2007.  We displayed our PlayerVision system at the
International Casino Exhibition in London, England in January 2007 and 2008, the
National Indian Gaming Association Convention in Phoenix, Arizona during the
first quarter of 2007 and in April, 2008, and the Southern Gaming Show in
Biloxi, Mississippi in May 2007 and 2008.  We have received gaming
regulatory approval from Nevada with respect to AdVision and PlayerVision TV,
and we have received approval from Gaming Laboratories International, or GLI,
with respect to AdVision, PlayerVision TV and NumberVision.  We hope
to receive approval from the Nevada gaming regulators for WagerVision and
NumberVision by the end of the third quarter of 2008.  Following the
Nevada approval of WagerVision and NumberVision, we expect to beta test these
applications for 30 days at Treasure Island in Las Vegas. With GLI approval, we
expect to launch NumberVision applications in various casinos in Oregon and
Arizona in the fourth quarter of 2008.




On June
27, 2006, we entered into a binding memorandum of understanding with
Computerized Bookmaking Systems, Inc. (CBS), a subsidiary of American Wagering,
Inc., whereby both parties agreed that mutually beneficial synergies existed in
utilizing our PlayerVision platform (then known as PortalVision) to expand the
approved electronic devices upon which a customer having a CBS wagering account
might use to (i) watch a live televised sports or horse race event, (ii) view
live odds for such an event posted by a customer of CBS, and (iii) place a wager
on such an event.  Pursuant to such binding




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memorandum,
CBS developed, at no charge to us, a race and sports book interface for
WagerVision on our PlayerVision system.  CBS owns all of the rights to this
CBS race and sports book interface protocol including the software, source code
and documentation. We own the WagerVision trademark and the platform on which
the source code was written.   It was the intent of both companies to share
equally in the net revenues generated from wagers on televised sports and horse
race events and other CBS wagering opportunities offered through this
WagerVision module.  Although the binding memorandum has expired, we are
negotiating the terms of a definitive agreement with CBS.  We
anticipate that the definitive agreement will clearly define the CBS
protocol and protocol interface as the portion of the total system owned by and
licensed from CBS and our PlayerVision code and modules running on our platform
that are owned and maintained by us.  This will significantly enhance our
ability to produce, deploy, and maintain this module and allow LVGI and CBS to
quickly adapt to technological, regulatory and social changes. If these
negotiations are unsuccessful, it would prevent or significantly delay
regulatory approval and market introduction of the WagerVision
module.




Based on
the foregoing, and other than the insignificant revenue realized from our early
adoption agreements, we anticipate beginning to realize revenue from our
PlayerVision system during the first quarter of 2009 that would mark a
significant shift in the type of revenue recognized by us.  The
anticipated revenue would be from the installation of AdVision, PlayerVision TV,
WagerVision, and NumberVision at various casino locations in the United States
and elsewhere.  We expect that any revenue derived from CBS wagering
opportunities offered through the WagerVision/CBS module will be shared with
CBS.




We expect
to continue for the calendar year 2008 to incur expenses related to the
development and regulatory approval for the remaining PlayerVision modules and
additional modules presently in development, and we expect to face competition
from larger, more formidable competitors as we enter the gaming machine
market.  Due to continuing expenses related to our PlayerVision system
and in negotiating a settlement with and defending the lawsuit from IGT, we
expect to continue to rely on funds from third party financing sources, the $1.5
million advance from IGT, in addition to funds from operations, to sustain our
operations in 2008.  See discussion in “Liquidity and Capital
Resources – Outlook” below.




Critical
Accounting Policies and Estimates




The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue, and expenses and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. These estimates and assumptions provide a basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, and these differences may
be material.




We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.




Revenue
Recognition




PlayerVision.
The revenue from Player Vision will result from installation fees, activation
fees, fees for services, and revenue sharing arrangements. We will recognize
installation and activation fees for PlayerVision upon installation and
recognize the costs associated with the installation (labor and supplies) at
that time. We will recognize revenue from the revenue sharing arrangements as
earned and recognize maintenance expenses as incurred against the corresponding
revenue.  Manufacturing costs will be capitalized and depreciated over
the life of the asset.




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Casino
Games. As wagers are made within our inter-linked systems, we recognize our
share of each wager made as revenue. Based on the revenue proceeds, we purchase
insurance to fund the base jackpot. We also estimate the cost for any uninsured
base jackpot and the expense for any progressive jackpot and, accordingly,
establish a liability on our balance sheet as a progressive jackpot liability.
For our other casino games, we recognize our share of revenue upon the sale of
each ticket. We have the discretion to purchase insurance to fund jackpots. We
recognize costs associated with uninsured jackpots as each ticket is sold based
on mathematical probabilities dictated by the odds of the game.




Products.
We generally recognize sales of bingo and keno equipment when installed and
sales of supplies when the products are shipped. Warranty costs and related
liabilities associated with product sales have not been material. We recognize
fees from equipment maintenance contracts sold separately (with no bundled
deliverables) evenly over the term of the contract. Prior to shipment, we
include equipment and supplies in inventories and stated at the lower of cost,
as determined on a “first-in first-out’’ basis, or market.




Other. We
include keno revenue from the operation of a keno route subject to multiple
participation agreements in other revenue in an amount equal to the net win from
such gaming activities, which is the difference between gaming handle and
amounts paid to customers. We reflect amounts due to the owners of the
facilities in which the keno games are conducted (effectively contingent rent)
as an expense.




Goodwill
and other Intangible Assets





We review
goodwill and other intangible assets for impairment annually, and whenever
events or circumstances indicate the carrying value may not be recoverable or
warrant a revision to the estimated remaining useful life, in accordance with
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and
SFAS 142, Goodwill and Other Intangible Assets.




Our
forecasted future cash flows used to test the recoverability or determine the
fair value of intangibles are based on assumptions that are consistent with
plans used to manage the underlying business.  Factors used in our
evaluations of potential impairment and fair value require significant judgments
about respective estimated useful lives, risk rates, forecasted growth rates,
brand history, expected market growth, competitive environment, market share,
future business prospects and success of our products.  Changes in
these estimates and assumptions could materially affect the determination of
recoverability or fair value. While we believe that our estimates of future
revenues and cash flows are reasonable, different assumptions could materially
affect our assessment of useful lives, recoverability and fair
values.  Application of the goodwill impairment test requires
judgment, including the identification of reporting units, allocation of related
goodwill, assignment of corporate shared assets and liabilities to reporting
units, and determination of the fair value of each reporting unit.  We
determine the fair value of our reporting units using the discounted cash flow
method, and compare the implied valuation multiples to a group of guideline
public companies under the Market approach to test the reasonableness of the
discounted cash flow results.




Our
intangible assets consist of key patents and technology rights with a five year
life related to PlayerVision which went to market for the first time during the
fourth quarter of 2007.  We recorded no goodwill impairment charges
during the six months ended June 30, 2008 and 2007.




Income
Taxes




We have
provided a full valuation allowance for the tax effects of our net operating
losses at June 30, 2008 and 2007.  We have effectively recorded a 100%
valuation allowance to offset the deferred tax asset that might otherwise have
been recognized as a result of operating losses in the current period and prior
periods since, because of our history of operating losses, management is unable
to conclude at this




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time that
realization of such benefit is currently more likely than
not.  Although Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109, became effective for 2007, based on
its evaluation, management determined that FIN 48 did not have a material effect
on our financial statements or either our net operating loss carryovers or the
related deferred tax assets or valuation allowance.




Equipment
and Software and Depreciation




Equipment
and software are stated at cost.  Expenditures for maintenance and
repairs are expensed as incurred.  When equipment and software is
sold, the cost and the related accumulated depreciation are removed from the
respective accounts and the resulting gains or losses are reflected in
income.  Depreciation is provided using the straight-line method over
the useful lives of the assets (three to ten years).




Recent
Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.  In February 2007, the FASB
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of SFAS No. 115, which will permit the option
of choosing to measure certain eligible items at fair value at specified
election dates and report unrealized gains and losses in
earnings.  SFAS No. 157 is effective now for financial asset and
liabilities, if any, carried at fair value, and SFAS No. 159 now provides an
option to carry other assets and liabilities at fair value for us beginning with
financial statements issued for 2008.  SFAS No. 157 becomes effective
for us for nonfinancial assets and liabilities carried at fair value if any,
beginning in 2009.  However, since we do not have, nor do we plan for
the foreseeable future, to carry any assets or liabilities at fair value, we do
not currently expect any effects of adopting SFAS Nos. 157 and 159 on our future
financial position, results of operations and operating cash flows.




In
December 2007, the FASB issued SFAS 141R, Business Combinations, which will
significantly change the accounting for business combinations and certain other
transactions.  SFAS 141R will apply prospectively to business combinations
and certain other transactions for which the acquisition date is on or after the
start of the first annual reporting period beginning on or after
December 15, 2008, and early adoption is prohibited.  Because we are
not now contemplating any covered transactions after its effective date, we
currently expect that SFAS 141R will not have an impact on our future financial
position, results of operations, and operating cash flows.




In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51, which
establishes new accounting for the noncontrolling interest in a subsidiary,
including a consolidated variable interest entity, and requires that a parent
recognize a gain or loss when a subsidiary is deconsolidated and measured using
the fair value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 will be effective for 2009, and earlier adoption is
prohibited. Since we do not now have and do not contemplate acquiring any
interests in subsidiaries with noncontrolling interests (other than one inactive
and immaterial subsidiary), we currently expect that SFAS 160 will not have
an effect on our future financial position, results of operations and operating
cash flows.




In
March 2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities -- an Amendment of SFAS 133. SFAS 161, which
will require enhanced disclosures regarding the impact on financial position,
financial performance, and cash flows, will be effective for us
beginning on January 1, 2009, and the effect on our financial
statements will be limited to requiring certain additional limited disclosures,
if any.




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Results
of Operations




Three
Months Ended June 30, 2008 Compared with Three Months Ended June 30,
2007




Revenue.  Casino
games revenue for the three months ended June 30, 2008, increased $184,000 or
42.6%, to $616,000 from $432,000 for the three months ended June 30, 2007. The
higher casino games revenue principally resulted from higher revenue from Super
Coverall Bingo of $66,000.  In addition we launched our Gamblers Bonus
Million Dollar Ticket in April 2008 which generated $121,000 of new
revenue.




Product
sales for the three months ended June 30, 2008, increased by $17,000 to $349,000
or 5.1% from $332,000 for the three months ended June 30, 2007. Keno equipment
sales amounted to $86,000 for the three months ended June 30, 2008 compared to
$15,000 during the three months ended June 30, 2007, an increase of $71,000.
This increase in Keno equipment sales was offset by a $69,000 decrease in bingo
equipment and supplies during the three months ended June 30, 2008, compared to
the same period in the prior year due to the loss of several customers once we
stopped distributing bingo electronics.  PlayerVision sales of $11,000
for the three months ended June 30, 2008 compared to $0 in the prior
year.




Other
revenue for the three months ended June 30, 2008, declined by $116,000 or 36.2%,
to $206,000 from $322,000 for three months ended June 30,
2007.  Revenue from Keno route and participation agreements decreased
from $166,000 for the three months ended June 30, 2007 to $54,000 for the three
months ended June 30, 2008, as we closed our Keno route business on February 29,
2008 due to renovation at one of our key customer locations. We will restart the
Keno route operations in August at two to three locations where we previously
had two locations.




Costs and
Expenses.  Cost and expenses of casino games for the three months
ended June 30, 2008, increased by $287,000 or 108.3%, to $552,000 from $265,000
for the three months ended June 30, 2007. The increase resulted primarily from
the decline in the prime rate of interest which increased our bankroll
requirement by $172,000.  In addition, games salaries increased by
$35,000 for the three months ended June 30, 2008 compared to June 30, 2007 as we
hired a business unit leader for bingo in February, 2008.  Our jackpot
expense for Super Coverall Bingo increased by $48,000 for the three months ended
June 30, 2008 compared to the same period in 2007 consistent with our increase
in this game’s revenue.




Product
costs and expenses for the three months ended June 30, 2008, decreased $41,000
or 20.0% to $166,000 from $207,000 for the three months ended June 30,
2007.  Gross margin increased to 51.8% for the three months ended June
30, 2008 compared to 37.8% for the three months ended June 30, 2007 as we had
higher margin Keno Optima system sales than normal.




Other
cost and expenses for the three months ended June 30, 2008, decreased $87,000 to
$242,000 from $328,000 for the three months ended June 30, 2007. Gross margin
also decreased to (17.0%) for the three months ended June 30, 2008 versus (1.8%)
for the three months ended June 30, 2007.




Other
Operating Expenses. Selling, general and administrative expenses for the three
months ended June 30, 2008 increased $290,000 or 19.6% to $1,768,000 from
$1,478,000 for the three months ended June 30, 2007. We have decreased our
administrative infrastructure through salary reductions of $106,000 during the
three months ended June 30, 2008 compared to June 30,
2007.  Consulting and professional fees have increased by $514,000,
during the three months ended June 30, 2008 compared to the same period in 2007.
The increase in consulting and professional fees is primarily related to
consulting costs for money raising and legal fees incurred in defending the IGT
lawsuit. Advertising and promotion has decreased by $50,000 as we reduced
advertising costs to promote PlayerVision during the three months ended June 30,
2008 compared to the same period in the prior year.




Research
and development costs for the three months ended June 30, 2008 have increased by
$137,000 or 52.5% to $397,000 from $261,000 for the three months ended June 30,
2007 due to the addition of three engineers to our staff.




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Depreciation
and amortization for the three months ended June 30, 2008, decreased $5,000 or
2.2%, to $211,000 from $216,000 for the three months ended June 30, 2007, as a
result of only $55,000 of capital expenditures during the three months ended
June 30, 2008.




Finance
Costs. Finance costs for the three months ended June 30, 2008, increased
$191,000 or 49.1% to $580,000 from $389,000 for the three months ended June 30,
2007. The increased finance costs related to the recording of the fair value of
the derivative liability and the increased finance cost from the debt
modifications to the CAMOFI note in 2007 and May 2008.




Interest
and Other Income. Interest and other income for the three months ended June 30,
2008 decreased by $108,000 or 300%, to $(71,000) from $36,000 for the three
months ended June 30, 2007. The decrease was a result of lower cash balances
outstanding and loss in fair value incurred on our marketable
securities.




Six Months Ended June 30, 2008
Compared with Six Months Ended June 30, 2007




Revenue.  Casino
games revenue for the six months ended June 30, 2008, increased $296,000 or
34.3%, to $1,160,000 from $863,000 for the six months ended June 30, 2007. The
higher casino games revenue principally resulted from higher revenue from Super
Coverall Bingo of $195,000 offset by a decline in Nevada Numbers of $10,000 and
a decline in Million Dollar Ticket revenue of $13,000.  In addition we
launched our Gamblers Bonus Million Dollar Ticket in April 2008 which generated
$121,000 of new revenue.




Product
sales for the six months ended June 30, 2008, decreased by $71,000 to $673,000
or 9.6% from $744,000 for the six months ended June 30, 2007. Keno equipment
sales amounted to $182,000 for the six months ended June 30, 2008, compared to
$94,000 during the six months ended June 30, 2007, an increase of $88,000. This
increase in Keno equipment sales was offset by a $155,000 decrease in bingo
equipment and supplies during the six months ended June 30, 2008 compared to the
same period in the prior year due to the loss of several customers once we
stopped distributing bingo electronics.




Other
revenue for the six months ended June 30, 2008, declined by $258,000 or 35.1%,
to $478,000 from $736,000 for the six months ended June 30, 2007. Bingo
electronics revenue decreased from $70,000 for the six months ended June 30,
2007 to $0 for the six months ended June 30, 2008, as we lost our bingo
electronics distributor agreement early in 2007. Revenue from Keno route and
participation agreements decreased from $325,000 for the six months ended June
30, 2007 to $164,000 for the six months ended June 30, 2008, as we closed our
Keno route business on February 29, 2008 due to renovation at one of our key
customer locations. We will restart the Keno route operations in August 2008 at
two to three locations where we previously had two locations.




Costs and
Expenses.  Cost and expenses of casino games for the six months ended
June 30, 2008, increased by $733,000 or 124%, to $1,321,000 from $588,000 for
the six months ended June 30, 2007. The increase resulted primarily from the
decline in the prime rate of interest which increased our bankroll requirement
by $501,000.  In addition, games salaries increased by $71,000 for the
six months ended June 30, 2008 compared to June 30, 2007 as we hired a business
unit leader for bingo in February 2008.  Our jackpot expense for Super
Coverall Bingo increased by $96,000 for the six months ended June 30, 2008
compared to the same period in 2007 consistent with our increase in this game’s
revenue.




Product
costs and expenses for the six months ended June 30, 2008, decreased $177,000 or
35.6% to $318,000 from $495,000 for the six months ended June 30,
2007.  Gross margin increased to 52.7% for the six months ended June
30, 2008 compared to 33.6% for the six months ended June 30, 2007 as we had
higher margin Keno Optima system sales than normal.




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Other
cost and expenses for the six months ended June 30, 2008, decreased $84,000 to
$584,000 from $668,000 for the six months ended June 30, 2007. Gross margin also
decreased to (22.2%) for the six months ended June 30, 2008 versus 9.1% for the
six months ended June 30, 2007 due to lost profits from the bingo electronics
distribution agreement being canceled, and additional salaries of
$15,000.




Other
Operating Expenses. Selling, general and administrative expenses for the six
months ended June 30, 2008 increased $232,000 or 7.4% to $3,362,000 from
$3,130,000 for the six months ended June 30, 2007. We have decreased our
administrative infrastructure through salary reductions of $191,000 during the
six months ended June 30, 2008 compared to June 30, 2007.  Board
compensation was reduced by $102,000 during the six months ended June 30, 2008
compared to the same period in the prior year due to a board promotion that cost
$100,000 in the prior year. In addition, consulting and professional fees have
increased by $739,000, during the six months ended June 30, 2008 compared to the
same period in 2007. The increase in consulting and professional fees is
primarily related to consulting costs for money raising and legal fees incurred
in defending the IGT lawsuit. Advertising and promotion has decreased by
$118,000 as we reduced advertising costs to promote PlayerVision during the six
months ended June 30, 2008 compared to the same period in the prior
year.




Research
and development costs for the six months ended June 30, 2008 have increased by
$114,000 or 19.5% to $699,000 from $585,000 for the six months ended June 30,
2007 due to the addition of three engineers to our staff.




Depreciation
and amortization for the six months ended June 30, 2008, decreased $3,000 or
..7%, to $429,000 from $432,000 for the six months ended June 30, 2007, as a
result of only $112,000 of capital expenditures during the six months ended June
30, 2008.




Finance
Costs. Finance costs for the six months ended June 30, 2008, increased $248,000
or 28.4% to $1,122,000 from $875,000 for the six months ended June 30, 2007. The
increased finance costs related to the recording of the fair value of the
derivative liability and the increased finance cost from the debt modifications
to the CAMOFI note in 2007 and May 2008.




Interest
and Other Income. Interest and other income for the six months ended June 30,
2008 decreased by $190,000 or 191.9%, to $(91,000) from $99,000 for the six
months ended June 30, 2007. The decrease was a result of lower cash balances
outstanding and loss in fair value incurred on our marketable
securities.




Liquidity
and Capital Resources




Cash




As of
June 30, 2008, we had no cash, reflecting a $489,000 decrease from December 31,
2007 resulting primarily from the net cash outflows discussed
below.




Cash
Flows




Cash used
in operating activities amounted to $2,079,000 for the six months ended June 30,
2008 primarily because of the foregoing revenue decreases and expense
increases.  Investing activities consisted principally of cash
outflows in connection with $112,000 of capital expenditures for reasons
discussed below.  Our cash flows from financing activities in the six
months ended June 30, 2008 consisted principally of inflows of $335,000 of new
capital from the sale of Series E Convertible Preferred Stock, $100,000 for
exercise of options and warrants to purchase shares of Common Stock Series A,
$110,000 for the sale of Common Stock Series A to employees, $1,750,000 from the
sale of Series F and G Convertible Preferred Stock, and 492, 500 from the sale
of Series H Convertible Preferred Stock.


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Capital
Expenditures




Capital
expenditures decreased by $105,000 for the six months ended June 30, 2008
compared to the same period in the prior year due to our present cost reduction
program.  For 2008, other than our obligation to pay any jackpots that
may be won, we anticipate that our most significant capital resource requirement
will relate to the purchase of approximately $15 million of PlayerVision Control
Units for the rollout of our PlayerVision System.




We
believe that we will be able to pay for these capital expenditures from our
existing cash balances, from funds generated from future operations, third party
financing and/or the establishment of a master equipment lease agreement with
financing sources that we have used in the past.




Sources
of Capital




We have
traditionally relied on various forms of third-party financing in order to
sustain our operations.  In 2008, we have raised $335,000 from the
private placement of Series E Convertible Preferred Stock which closed in late
February, 2008. We have raised $210,000 through the sale of Common Stock Series
A to employees and through the exercise of options and warrants. In February
2008 we received a noninterest bearing advance from a shareholder of
$250,000.  On May 7, 2008, we entered into a subscription agreement
with this same shareholder pursuant to which the shareholder purchased 200,000
shares of Series F Convertible Preferred Stock for $5 per share and 150,000
shares of Series G Convertible Preferred Stock for $5 per share for an aggregate
purchase price of $1,750,000.  The proceeds of the Series F
Convertible Preferred Stock were used to fund the $1,000,000 jackpot bankroll
for the Gamblers Bonus Million Dollar Ticket which launched on April 14,
2008.  The proceeds of the Series G Convertible Preferred Stock were
used for general operating purposes, and the advance of $250,000 was offset
against the Series G purchase price.  As an incentive to enter into
these transactions, the Company issued the shareholder 500,000 shares of Common
Stock Series A with the right to receive additional shares if the Company’s
common stock, as a result of a qualified financing, commences trading at less
than $5 per share, in which case the shareholder will receive additional shares
of Common Stock Series A prorated for the percentage shortfall from $5 per share
measured against the 500,000 shares, where a “qualified financing” is a capital
raise of $10 million or more or a transaction at less than $5 per share
resulting in a change in control of the Company.  In addition, the
shareholder was granted a security interest and other additional rights in
connection with our separate account (and related insurance policy) in which $1
million is reserved solely to satisfy our jackpot security requirements relating
to the Gamblers Bonus Million Dollar Ticket game.




In May
and June 2008, we raised $492,500 from the private placement of 98,500 shares of
Series H Convertible Preferred Stock for $5 per share.  The offering
was closed in late June 2008.




On May 1,
2008, we further amended our financing with CAMOFI Master LDC, or CAMOFI,
whereby we entered into an Amended and Restated Senior Secured Convertible Note
due January 1, 2010, or Note, and an Amended and Restated Registration Rights
Agreement, or Registration Rights Agreement, with CAMOFI.  The
commitment fees due under the original CAMOFI note on April 1, 2008, July 1,
2008, October 1, 2008, and January 1, 2009 of $131,250 and prior accrued
commitment fees were added to the face amount of the Note which increased from
$5,250,000 to $6,051,250.  We must also pay commitment fees of
$403,417 on January 1, 2009 and $302,563 on July 1, 2009 and January 1,
2010.  The Registration Rights Agreement requires us to file a
registration statement with the Securities and Exchange Commission on the
earlier of the closing of a Qualified Financing, as defined in the Registration
Rights Agreement, or April 30, 2009, with the effectiveness date remaining 120
calendar days after the filing date.  The maturity date of the Note
was changed from January 1, 2009 to January 1, 2010.




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The Note
is convertible into shares of Common Stock Series A at $1.345 per share, subject
to certain limitations, including the limitation that the total number of shares
of Common Stock Series A to be issued cannot cause CAMOFI’s ownership of Common
Stock Series A to exceed 4.99% of our issued and outstanding shares of Common
Stock Series A after the issuance.




We were
in compliance with all loan covenants at June 30, 2008.  With respect
to the issuance and sale of Series F, Series G, and Series H Convertible
Preferred Stock (see Note 8 “Stockholders’ Equity” to Financial Statements),
CAMOFI verbally waived non-compliance of any provisions in its loan documents
restricting us from effecting such transactions, including with respect to (a)
the issuance of any securities (i) convertible into shares of common stock based
upon trading prices at any time after the issuance of such securities, or (ii)
that grant to an investor the right to receive additional shares based upon
future transactions on terms more favorable than those granted to such investor
in such offering; and (b) the granting of a security interest in assets pledged
to CAMOFI.  Although the agreement with CAMOFI provides that waivers
must be in writing, the Company believes that, notwithstanding any issue as to
whether such waiver is legally binding, the verbal waiver represents CAMOFI’s
intent to allow the sales of the Series F, Series G, and Series H Convertible
Preferred Stock and not to take the position that the sales resulted in an Event
of Default under the CAMOFI loan documents.




Outlook




We expect
to continue for at least the calendar year 2008 to incur expenses related to the
development and regulatory approval for the remaining PlayerVision modules and
additional modules presently in development. We expect to
also have ongoing costs in defending the lawsuit from IGT or in
negotiating the potential settlement of such lawsuit.  Accordingly, we
expect to continue to rely on funds from third party financing sources, the $1.5
million advance from IGT, in addition to funds from operations, to sustain our
operations in 2008.  We believe that this cash will be sufficient to fund
our anticipated working capital requirements and our business expansion plans
for at least the next year.  However, we cannot provide assurance that
we will be successful in completing or obtaining any additional financing or be
able to settle the litigation with IGT by August 19, 2008, or at
all.  Failure to complete or obtain additional financing or a failure
to reach definitive agreements to settle the litigation with IGT will likely
have a material adverse effect on our financial conditions and business
operations.




Although
gaming revenues in Nevada for the first half of 2008 are down, we believe that
our PlayerVision system will provide casinos with an additional revenue source
without any upfront capital expenditure.  Other than the insignificant
revenue realized from our early adoption agreements, we do not expect to begin
to realize revenue from our PlayerVision system until the first quarter of
2009.  We cannot provide assurance that the market will accept our
PlayerVision system.  Any failure by us to obtain approval of NumberVision
and/or WagerVision, or to install our PlayerVision system within our expected
schedule or on terms acceptable to us will likely have a material adverse impact
on our cash position and financial condition.  In addition, we expect to
face competition from larger, more formidable competitors as we enter the gaming
machine market.  An unexpected lack of market acceptance of our
PlayerVision system, a failure to prevail in our trademark and copyright
litigation with IGT or negotiate a settlement agreement with IGT, failure to
obtain additional financing, or unforeseen adverse competitive, economic, or
other factors may adversely impact our cash position, and thereby materially
adversely affect our financial condition and business operations.




From time
to time, we may be required to raise additional funds through public or private
financing, strategic relationships, or other arrangements. We may be unable to
secure such funding, if needed and such financing may not be available on terms
acceptable to us, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise additional
funds, may require that we relinquish rights to certain of our technologies or
products or agree to other material obligations and covenants. Failure to
generate sufficient revenue or to raise capital when needed could likely have a
material adverse impact on our business, operating results, and financial
condition, as well as our ability to achieve intended business
objectives.




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Off
Balance Sheet Financing Arrangements




We have
operating leases totaling $935,089 that have the following payment schedule by
calendar year: $224,254 in 2008, $183,921 in 2009, $179,115 in 2010, $158,068 in
2011, $141,986 in 2012, and $47,745 in 2013.




Qualitative
and Quantitative Disclosures about Market Risk




We
presently do not use any derivative financial instruments to hedge our exposure
to adverse fluctuations in interest rates, foreign exchange rates, fluctuations
in commodity prices, or other market risks, nor do we invest in speculative
financial instruments.




Item 3.  Quantitative and Qualitative Disclosures
About Market Risk.




Not
required.





Item 4T.  Controls And Procedures.




Evaluation
of Disclosure Controls and Procedures




The Company’s management, including the
Chief Executive Officer and Chief Financial Officer, has conducted an evaluation
of the effectiveness of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e) as of June 30, 2008.  As a
part of its evaluation, management took into account the material weaknesses
(discussed below) in the Company’s disclosure controls and procedures identified
by management for the year ended December 31, 2007.  The Company’s
Chief Executive Officer and the Chief Financial Officer have concluded that, as
of June 30, 2008, the end of the period covered by this report, the Company’s
disclosure controls and procedures were still not effective due to the material
weaknesses discussed below,  a late Form 8-K filed on January 24,
2008, which should have been filed in December 2007, a late Form 10-KSB filed on
April 16, 2008, which should have been filed by April 15, 2008, a late Form 8-K
filed on May 13, 2008, which should have been filed by May 8, 2008, a late Form
8-K filed on May 14, 2008, which should have been filed by May 13, 2008, a late
Form 8-K filed on July 28, 2008 which should have been filed by July 23, 2008,
and our failure to timely file reports with Nevada Gaming Regulators as to new
hires and termination of personnel.




As
disclosed in the Company’s December 31, 2007 Form 10-KSB, the errors that
occurred in our financial reporting and in our accounting for certain complex
accounting transactions in 2005, 2006 and 2007 were the result of material
weaknesses in our accounting controls.  In the past, we have not
completed an SEC and GAAP disclosure checklist as part of our internal control
procedures, and we have had insufficient oversight of the chief financial
officer.  In addition, our equity shares in our financial records for
2007 were not reconciled with our transfer agent’s share ledger on a timely
basis.




Management
believes that we have addressed or are addressing these material weaknesses in
internal control over financial reporting with respect to the current and future
periods (1) by hiring Bruce Shepard, a former audit partner with
PricewaterhouseCoopers LLP, as our chief financial officer on August 1, 2006,
(2) by requiring the completion of a detailed SEC and GAAP disclosure checklist
in connection with our financial closing process at the end of each interim
quarter and at the end of the year, (3) by holding an audit committee meeting
prior to each annual and quarterly report being filed with the SEC, (4) by
having a detailed cold review of our financial statements and notes thereto
performed by another independent accounting firm prior to filing each annual and
quarterly report with the SEC and reporting the results of that cold review to
the audit committee, (5) by subscribing to an online accounting reference
service, and (6) by assigning responsibility for regular reconciliation of our
equity shares to the


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transfer
agent ledger to a full-time accounting staff person.  All of the above
procedures were implemented prior to the filing of this report, except that we
did not hold a separate audit committee meeting prior to the filing of this
report and we have not yet assigned the responsibility of reconciling our equity
shares with the transfer agent ledger to a full-time accounting staff person due
to limited accounting resources.  With respect to disclosure controls
and procedures relating to timely filing of Form 8-Ks, management plans to train
its compliance officer in, and assign him the responsibility of, identifying the
events requiring Form 8-K reports, and develop procedures for communications on
a timely basis between him and the person in management who has sufficient
knowledge of the information necessary to make these disclosure
determinations.





Changes
in Internal Control Over Financial Reporting





The Company is in the process of
implementing the remediation plans not yet implemented as described above to
address our material weaknesses.  Other than as described above, there
have not been any other changes in the Company’s internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
during the fiscal quarter ended June 30, 2008, that have materially affected, or
are reasonably likely to materially affect, the Company’s internal controls over
financial reporting.









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PART
II – OTHER INFORMATION




Item 1.    Legal
Proceedings.




For a
description of our legal proceedings, see “Legal Matter” in Note 9 contained in
our “Notes to Unaudited Consolidated Financial Statements” of this Quarterly
Report on Form 10-Q, which is incorporated by reference in response to this
item.




Item 1A. Risk Factors.




Not required.





Item 2.   Unregistered Sales of Equity
Securities.




During
the quarter ended June 30, 2008, we issued an aggregate of 530 shares of Common
Stock Series A as a result of the exercise of outstanding stock options and
warrants.  Additionally, we issued 111,500 shares of Common Stock
Series A pursuant to the conversion, on a one-to-five basis, by the holders of
22,300 shares of Series B Convertible Preferred Stock.  We also issued
61,500 shares of Common Stock Series A for salaries, bonuses, and board of
director fees.  These issuances were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act in that the issuances did not involve a public
offering.




In April
2008, we issued warrants to purchase 30,000 shares of Common Stock Series A with
a five-year life and an exercise price of $1.50 per share to consultants for
capital raising services.  We also issued options to purchase 10,000
shares of Common Stock Series A with a five-year life and an exercise price of
$2.00 per share for a short-term advance of $1,000,000 which was subsequently
paid back.  These warrants and options are fully vested.  We
also issued options to purchase a total of 450,000 shares of Common Stock Series
A to four employees, all with an exercise price of $2.00 per share, a three-year
vesting schedule and a five-year life.  These issuances were deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act in that the issuances did not involve a public
offering.





In June
2008, we issued 27,000 shares of Commons Stock Series A for human resource
consulting services.  We also issued 5,000 shares of Common Stock
Series A for a short-term advance of $200,000 which was subsequently paid
back.  These issuances were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act in
that the issuance did not involve a public offering.





In
addition to the sale of 65,000 shares of Series H Convertible Preferred Stock
disclosed in our Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 12, 2008, during the quarter ended June 30, 2008, we
sold 33,500 shares of Series H Convertible Preferred Stock for an aggregate
purchase price of $167,500.  The shares of Series H Convertible
Preferred Stock were issued pursuant to exemption from registration provided by
Rule 506 of the Securities Act and Section 4(2) of the Securities
Act.  The private placement of Series H Convertible Preferred Stock
was closed in June 2008 with a total of 98,500 shares sold for an aggregate
purchase price of $492,500.  We did not pay commission on the sale of
any shares of Series H Convertible Preferred Stock.




Item 3.    Defaults Upon Senior
Securities.




See Note
7 “Debt” to Financial Statements.




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




Not
applicable.




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Item 5.  Other Information.




On August
15, 2008, we entered into an amendment of the agreement dated July 17, 2008,
with IGT, extending the date by which we must enter definitive agreements with
IGT concerning the potential settlement of pending litigation from August 15,
2008 until August 19, 2008.  No other provisions of the Agreement were
amended.  The agreement and the amendment are attached hereto as
Exhibits 10.5 and 10.6, respectively.




Item 6.Exhibits




The
exhibits to this Form 10-Q are listed in the Exhibit Index to this Form 10-Q and
are incorporated by reference herein.









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SIGNATURE




In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.




Las
      Vegas Gaming, Inc.(Registrant)Date:
            August
      19, 2008
            By:
            /s/
      Jon D. BerkleyJon
      D. BerkleyIts:
            President
      and Chief Executive Officer(Principal
      Executive Officer)Date:
            August
      19, 2008
            By:
            /s/
      Bruce A. ShepardBruce
      A. ShepardIts:
            Chief
      Financial Officer(Principal
      Financial Officer)







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EXHIBIT
INDEX




Exhibit
            
            Document
      Description
            
            Page10.1
            
            Amended and Restated Senior Secured Convertible Note with
      Original Issue date of March 31, 2006 in favor of CAMOFI Master
      LDC10.2
            
            Amended and Restated Registration Rights Agreement dated
      April 30, 2008 between registrant and CAMOFI Master LDC10.3
            
            First Amendment to Security Agreement dated April 30,
      2008 between registrant and CAMOFI Master LDC10.4
            
            First Amendment to Subsidiary Guarantee dated April 30,
      2008 between registrant and CAMOFI Master LDC10.5
            
            Agreement dated July 17, 2008 between registrant and
      International Game Technology10.6
            
            First Amendment to Agreement dated August 15, 2008
      between registrant and International Game Technology31.1
            
            Certifications pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certifications pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            Certifications pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002







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