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, 2009




OR




o
            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 registrant as specified in its charter)Nevada
              
              88-0392994(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)3980
      Howard Hughes Pkwy., Suite 450, Las Vegas, Nevada 89169(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 has submitted electronically and
      posted on its corporate Web site, if any, every Interactive Data File
      required to be submitted and posted pursuant to Rule 405 of Regulation S-T
      (§232.405 of this chapter) during the preceding 12 months (or for such
      shorter period that the registrant was required to submit and post such
      files). Yes oNo  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:
              15,081,846
      shares of Common Stock Series A, $.001 par value, as of June 30,
      2009


Table of Contents


LAS
VEGAS GAMING, INC.
 
 FORM
10-Q
 TABLE OF CONTENTS
 
 PagePART I – FINANCIAL INFORMATIONItem
      1.
                        Financial Statements
                        2Consolidated Balance Sheets
                        2Consolidated Statements of Operations
                        3Consolidated Statements of  Stockholders’
      Equity
                        5Consolidated Statements of Cash Flows
                        7Notes to Unaudited Consolidated Financial
      Statements
                        8Item
      2.
                        Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                        19Item
      3.
                        Quantitative and Qualitative Disclosures About Market
      Risk
                        25Item
      4T.
                        Controls and Procedures
                        25PART II – OTHER INFORMATIONItem
      1.
                        Legal Proceedings
                        26Item
      1A.
                        Risk Factors
                        26Item
      2.
                        Unregistered Sales of Equity Securities
                        26Item
      3.
                        Defaults Upon Senior Securities
                        26Item
      4.
                        Submission of Matters to a Vote of Security
      Holders
                        26Item
      5.
                        Other Information
                        27Item
      6.
                        Exhibits
                        27
 ______________
  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.


- i
-
 Table of Contents


PART
I – FINANCIAL INFORMATION


Item
1.Financial
Statements.


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


December
      31, 2008
                  
                  
                  June
      30, 2009ASSETS
                  
                  
                  
                  
                  (unaudited)Current
      assetsCash
                  
                  $
                  497,529Investment
      in marketable securities
                  
                  
                  5,068Accounts
      receivable, net of allowance of $578 and $31,560
                  
                  
                  576,847
                  
                  
                  $
                  273,173Inventories
                  
                  
                  454,026
                  
                  
                  
                  493,571Prepaid
      expenses, deposits and other
                  
                  
                  79,881
                  
                  
                  
                  159,765Jackpot
      reserve deposits
                  
                  
                  1,230,761
                  
                  
                  
                  201,5412,844,112
                  
                  
                  
                  1,128,050Equipment,
      net of accumulated depreciation of $1,238,739 and
    $1,336,364
                  
                  
                  924,256
                  
                  
                  
                  756,732Other
      assetsGoodwill
                  
                  
                  2,371,178
                  
                  
                  
                  2,371,178Trademarks,
      copyrights, patents, software, and other identifiable intangibles, net of
      accumulated amortization of $1,165,742 and $1,296,843
                  
                  
                  278,330
                  
                  
                  
                  781,067Other
      long term assets
                  
                  
                  56,451
                  
                  
                  
                  70,151$
                  6,474,327
                  
                  
                  $
                  5,107,178LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      liabilitiesAdvances
      from stockholders
                  
                  $
                  600,000
                  
                  
                  $
                  1,710,000Accounts
      payable and accrued expenses
                  
                  
                  1,624,740
                  
                  
                  
                  2,524,024Current
      portion of long-term debt
                  
                  
                  11,957
                  
                  
                  
                  10,914Current
      portion of progressive jackpot liability
                  
                  
                  1,555,360
                  
                  
                  
                  1,495,6653,792,057
                  
                  
                  
                  5,740,603Long-term
      debt
                  
                  
                  23,119
                  
                  
                  
                  18,795Conditionally
      redeemable equitySeries
      B convertible preferred stock, $.001 par, 50,000 shares issued and
      outstanding
                  
                  
                  250,000
                  
                  
                  
                  250,000Stockholders'
      equity (deficiency)Convertible
      preferred stock, $.001 par, 10,000,000 shares authorized:Series
      E:  810,800 shares authorized, 810,800 shares issued and
      outstanding
                  
                  
                  811
                  
                  
                  
                  811Series
      F: 200,000 shares authorized, 200,000  and 0 shares issued and
      outstanding, respectively
                  
                  
                  200
                  
                  
                  
                  -Series
      G: 150,000 shares authorized, 150,000 shares issued and
      outstanding
                  
                  
                  150
                  
                  
                  
                  150Series
      H: 98,500 shares authorized, 98,500 shares issued and
      outstanding
                  
                  
                  99
                  
                  
                  
                  99Series
      I:  4,693,878 shares authorized, 4,693,878 shares issued and
      outstanding
                  
                  
                  4,694
                  
                  
                  
                  4,694Common
      stock (including Series A): $.001 par, 90,000,000 shares authorized,
      14,849,690 and 15,081,846 shares issued and outstanding
                  
                  
                  14,850
                  
                  
                  
                  15,082Additional
      paid-in capital
                  
                  
                  44,160,702
                  
                  
                  
                  44,119,795Less
      stock subscriptions due from officers and principal
      stockholders
                  
                  
                  (188,245
                  )
                  
                  
                  (182,245
                  )Deficit
                  
                  
                  (41,584,110
                  )
                  
                  
                  (44,860,606
                  )2,409,151
                  
                  
                  
                  (902,220
                  )$
                  6,474,327
                  
                  
                  $
                  5,107,178The
      accompanying notes are an integral part of these consolidated financial
      statements.


- 2
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


THREE
MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)





2008
                      
                      
                      2009RevenuesCasino
      games
                      
                      $
                      616,412
                      
                      
                      $
                      426,658Product
      sales
                      
                      
                      349,356
                      
                      
                      
                      251,475Other
                      
                      
                      205,870
                      
                      
                      
                      301,5181,171,638
                      
                      
                      
                      979,651Costs
      and expensesCasino
      games
                      
                      
                      551,810
                      
                      
                      
                      404,184Product
      costs
                      
                      
                      165,577
                      
                      
                      
                      133,885Other
                      
                      
                      241,518
                      
                      
                      
                      211,990958,905
                      
                      
                      
                      750,059Gross
      operating income
                      
                      
                      212,733
                      
                      
                      
                      229,592Other
      operating expensesSelling,
      general, and administrative
                      
                      
                      1,767,938
                      
                      
                      
                      1,282,587Research
      and development
                      
                      
                      397,321
                      
                      
                      
                      162,725Depreciation
      and amortization
                      
                      
                      211,313
                      
                      
                      
                      134,3872,376,572
                      
                      
                      
                      1,579,699Operating
      loss
                      
                      
                      (2,163,839
                      )
                      
                      
                      (1,350,107
                      )Other
      income (expense)Finance
      costs
                      
                      
                      (580,391
                      )
                      
                      
                      (2,794
                      )Interest
      income and other
                      
                      
                      (71,318
                      )
                      
                      
                      (25,287
                      )Net
      loss
                      
                      
                      (2,815,548
                      )
                      
                      
                      (1,378,188
                      )Preferred
      stock dividends
                      
                      
                      -
                      
                      
                      
                      (214,062
                      )Net
      loss attributed to common stockholders
                      
                      $
                      (2,815,548
                      )
                      
                      $
                      (1,592,250
                      )Net
      loss per share attributed to common stockholders
                      
                      $
                      (0.21
                      )
                      
                      $
                      (0.11
                      )Weighted
      average shares outstanding
                      
                      
                      13,363,193
                      
                      
                      
                      15,095,057The
      accompanying notes are an integral part of these consolidated financial
      statements.


- 3
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


SIX
MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)





2008
                      
                      
                      2009RevenuesCasino
      games
                      
                      $
                      1,159,507
                      
                      
                      $
                      984,565Product
      sales
                      
                      
                      673,369
                      
                      
                      
                      531,349Other
                      
                      
                      477,890
                      
                      
                      
                      588,0502,310,766
                      
                      
                      
                      2,103,964Costs
      and expensesCasino
      games
                      
                      
                      1,320,829
                      
                      
                      
                      911,901Product
      costs
                      
                      
                      318,198
                      
                      
                      
                      271,050Other
                      
                      
                      583,726
                      
                      
                      
                      492,0402,222,753
                      
                      
                      
                      1,674,991Gross
      operating income
                      
                      
                      88,013
                      
                      
                      
                      428,973Other
      operating expensesSelling,
      general, and administrative
                      
                      
                      3,362,027
                      
                      
                      
                      2,771,726Research
      and development
                      
                      
                      698,540
                      
                      
                      
                      183,183Depreciation
      and amortization
                      
                      
                      428,709
                      
                      
                      
                      270,3304,489,276
                      
                      
                      
                      3,225,239Operating
      loss
                      
                      
                      (4,401,263
                      )
                      
                      
                      (2,796,266
                      )Other
      income (expense)Finance
      costs
                      
                      
                      (1,122,462
                      )
                      
                      
                      (14,335
                      )Interest
      income and other
                      
                      
                      (91,389
                      )
                      
                      
                      (27,902
                      )Net
      loss
                      
                      
                      (5,615,114
                      )
                      
                      
                      (2,838,503
                      )Preferred
      stock dividends
                      
                      
                      -
                      
                      
                      
                      (437,993
                      )Net
      loss attributed to common stockholders
                      
                      $
                      (5,615,114
                      )
                      
                      $
                      (3,276,496
                      )Net
      loss per share attributed to common stockholders
                      
                      $
                      (0.43
                      )
                      
                      $
                      (0.22
                      )Weighted
      average shares outstanding
                      
                      
                      13,045,254
                      
                      
                      
                      15,054,185The
      accompanying notes are an integral part of these consolidated financial
      statements.


- 4
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIENCY)


SIX
MONTHS ENDED JUNE 30, 2008 AND 2009 (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
                  
                  
                  Series
      I Convertible Preferred Stock
                  
                  
                  Common
                    Stock
                    (Including
      Series A)
                  
                  
                  Additional
                    Paid-In
                    Capital
                  
                  
                  Less
      Due From
                    Officers
      and
                    Stockholders
                  
                  
                  DeficitBalances,
      January 1, 2008
                  
                  $
                  -
                  
                  
                  $
                  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
                  
                  
                  
                  110,667Sale
      of Common Stock Series A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  500
                  
                  
                  
                  629,374Balances,
      June 30, 2008
                  
                  $
                  -
                  
                  
                  $
                  35
                  
                  
                  $
                  125
                  
                  
                  $
                  811
                  
                  
                  $
                  200
                  
                  
                  $
                  150
                  
                  
                  $
                  99
                  
                  
                  $
                  -
                  
                  
                  $
                  13,580
                  
                  
                  $
                  30,138,101
                  
                  
                  $
                  (185,826
                  )
                  
                  $
                  (34,177,533
                  )




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














- 5
-
 Table of Contents











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
                  
                  
                  Series
      I Convertible Preferred Stock
                  
                  
                  Common
                    Stock
                    (Including
      Series A)
                  
                  
                  Additional
                    Paid-In
                    Capital
                  
                  
                  Less
      Due From
                    Officers
      and
                    Stockholders
                  
                  
                  DeficitBalances,
      January 1, 2009
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  811
                  
                  
                  $
                  200
                  
                  
                  $
                  150
                  
                  
                  $
                  99
                  
                  
                  
                  4,694
                  
                  
                  $
                  14,850
                  
                  
                  $
                  44,160,702
                  
                  
                  $
                  (188,245
                  )
                  
                  $
                  (41,584,110
                  )Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,838,503
                  )Dividends
      payable Preferred Stock Series F, G and I
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (437,993
                  )Issuance
      of warrants for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  378,735Issuance
      of common stock to reimburse legal expenses
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  27
                  
                  
                  
                  17,863Cancellation
      of common stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (20
                  )
                  
                  
                  20Cancellation
      of Series F Preferred Stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (400
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,999,600
                  )Re-issuance
      of Series F Preferred Stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  200
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  999,800Cash
      received from employees and stockholders
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,000Sale
      of Common Stock Series A
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  225
                  
                  
                  
                  562,275Balances,
      June 30, 2009
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  811
                  
                  
                  $
                  -
                  
                  
                  $
                  150
                  
                  
                  $
                  99
                  
                  
                  $
                  4,694
                  
                  
                  $
                  15,082
                  
                  
                  $
                  44,119,795
                  
                  
                  $
                  (182,245
                  )
                  
                  $
                  (44,860,606
                  )






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





- 6
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOW


SIX
MONTHS ENDED JUNE 30, 2008 AND 2009 (UNAUDITED)





2008
                    
                    
                    2009Operating
      activitiesNet
      loss
                    
                    $
                    (5,615,114
                    )
                    
                    $
                    (2,838,503
                    )Marketable
      security received for licensing fee
                    
                    
                    36,001
                    
                    
                    
                    5,068Depreciation
      and amortization of equipment
                    
                    
                    257,946
                    
                    
                    
                    164,675Amortization
      of debt issuance costs and intangibles
                    
                    
                    1,178,205
                    
                    
                    
                    131,100Fair
      market value adjustment of debt derivative liability
                    
                    
                    (83,995
                    )
                    
                    
                    -Stock-based
      compensation to employees and consultants
                    
                    
                    557,319
                    
                    
                    
                    386,625Bad
      debts
                    
                    
                    1,377
                    
                    
                    
                    30,982Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    145,750
                    
                    
                    
                    272,692Inventories
                    
                    
                    18,960
                    
                    
                    
                    40,455Prepaid
      expenses, deposits and other
                    
                    
                    10,240
                    
                    
                    
                    (79,885
                    )Other
                    
                    
                    (958
                    )
                    
                    
                    (13,701
                    )Accounts
      payable and accrued expenses
                    
                    
                    944,610
                    
                    
                    
                    504,170Progressive
      jackpot liability
                    
                    
                    470,631
                    
                    
                    
                    (59,695
                    )Net
      cash (used in) operating activities
                    
                    
                    (2,079,028
                    )
                    
                    
                    (1,456,017
                    )Investing
      activitiesPurchase
      of property, equipment, and software
                    
                    
                    (77,970
                    )
                    
                    
                    (85,239
                    )Proceeds
      from sale of equipment
                    
                    
                    55,250
                    
                    
                    
                    6,150Capitalize
      PlayerVision 3 engineering costs
                    
                    
                    -
                    
                    
                    
                    (631,899
                    )Jackpot
      reserve deposits
                    
                    
                    (1,001,072
                    )
                    
                    
                    1,029,220Net
      cash provided by (used in) investing activities
                    
                    
                    (1,023,792
                    )
                    
                    
                    318,232Financing
      activitiesDividend
      payments on Series F Preferred Stock
                    
                    
                    -
                    
                    
                    
                    (32,877
                    )Redemption
      of Series F Preferred Stock
                    
                    
                    -
                    
                    
                    
                    (2,000,000
                    )Re-issuance
      of Series F Preferred Stock
                    
                    
                    -
                    
                    
                    
                    1,000,000Redemption
      of Series B Preferred Stock
                    
                    
                    (137,500
                    )Repayment
      of debt
                    
                    
                    (43,552
                    )
                    
                    
                    (5,367
                    )Sale
      of Series E Convertible Preferred Stock
                    
                    
                    335,000
                    
                    
                    
                    -Sale
      of Series F Convertible Preferred Stock
                    
                    
                    640,072Sale
      of Series G Convertible Preferred Stock
                    
                    
                    480,054Sale
      of Series H Convertible Preferred Stock
                    
                    
                    492,501Advances
      from principal stockholders
                    
                    
                    -
                    
                    
                    
                    1,720,000Repayment
      of advances from principal stockholders
                    
                    
                    -
                    
                    
                    
                    (610,000
                    )Exercise
      of warrants and options for common stock
                    
                    
                    100,387
                    
                    
                    
                    -Collection
      of stock subscription receivables
                    
                    
                    6,000
                    
                    
                    
                    6,000Sale
      of common stock
                    
                    
                    740,596
                    
                    
                    
                    562,500Net
      cash provided by financing activities
                    
                    
                    2,613,558
                    
                    
                    
                    640,256Net
      decrease in cash
                    
                    
                    (489,262
                    )
                    
                    
                    (497,529
                    )Cash,
      beginning of period
                    
                    
                    489,262
                    
                    
                    
                    497,529Cash,
      end of period
                    
                    $
                    -
                    
                    
                    $
                    -Non-cash
      investing and financing activitiesConversion
      of Series B Convertible Preferred Stock to Common Stock Series
      A
                    
                    $
                    130,500
                    
                    
                    $
                    -Exercise
      of stock warrants and options increasing subscriptions
      receivable
                    
                    
                    8,412
                    
                    
                    
                    -Equipment
      acquired directly with proceeds of new borrowing
                    
                    
                    34,025
                    
                    
                    
                    -Debt
      retired through issuance of Common Stock Series A
                    
                    
                    107,500
                    
                    
                    
                    -Prepayment
      of lease costs through issuance of Common Stock Series A
                    
                    
                    106,000
                    
                    
                    
                    -Interest
      added to face amount of note due to debt modification
                    
                    
                    801,250
                    
                    
                    
                    -Dividends
      declared, but unpaid on Series F, G and I Preferred Stock
                    
                    
                    -
                    
                    
                    
                    437,993Dividend
      paid in Common Stock Series A on Series F Preferred Stock
                    
                    
                    
                    
                    
                    
                    (10,000
                    )The
      accompanying notes are an integral part of these consolidated financial
      statements.


- 7
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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 offering of these
types of games has included Nevada Numbers, Super Bonanza Bingo, Million Dollar
Ticket and Gamblers Bonus Million Dollar Ticket.  During the second
quarter of 2008, we launched Gamblers Bonus Million Dollar Ticket in cooperation
with one of the larger slot route operators in Nevada.  We
subsequently shut this game down on January 31, 2009.  On March
31, 2009, the Company shut down Nevada Numbers and Million Dollar
Ticket.




Although we have 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.  We
continue to provide equipment, supplies and casino games for use by our
customers in the keno and bingo segments of the gaming industry. (See Note
8a).




2.  Basis
of Presentation and Accounting:




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-K for the year ended
December 31, 2008, previously filed with the SEC, from which the information as
of that date is derived.




The consolidated financial statements include the accounts of our wholly-owned
subsidiaries and an inactive and immaterial 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.  Events through the date the consolidated financial
statements were issued, August 19, 2009, were evaluated by management to
determine if adjustments to or disclosure in these interim consolidated
financial statements were necessary.  The results of operations for
the three and six months ended June 30, 2009, are not necessarily indicative of
results to be expected for the year.




3.  Jackpot
ReserveDeposits:




At December 31, 2008 and June 30, 2009, as required by gaming regulators, we had
deposit cash amounts of $1,230,761 and $201,604, respectively, which are
restricted for funding our various jackpot-oriented games.




- 8
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 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


4.
Equipment:




Equipment (Note
8a) consists of the following:




December
      31, 2008
                
                
                June
      30, 2009
                  (Unaudited)Production
      equipment
                
                $
                1,561,513
                
                
                $
                1,478,147Equipment,
      furniture, and fixtures
                
                
                557,855
                
                
                
                571,322Leasehold
      improvements
                
                
                43,627
                
                
                
                43,6272,162,995
                
                
                
                2,093,096Less
      accumulated depreciation and   amortization
                
                
                1,238,739
                
                
                
                1,336,364$
                924,256
                
                
                $
                756,732




5.  Other
Intangible Assets:




Other intangible assets
(Note 8a) consist of the following:




December
      31, 2008
                
                
                June
      30, 2009
                  (Unaudited)Capitalized
      PlayerVision engineering costs
                
                
                
                
                
                $
                651,899PlayerVision
      technology patents
                
                $
                1,016,236
                
                
                
                996,236Software
                
                
                427,836
                
                
                
                429,7751,444,072
                
                
                
                2,077,910Less
      accumulated amortization
                
                
                1,165,742
                
                
                
                1,296,843$
                278,330
                
                
                $
                781,067




The intangible assets are
amortized over their estimated useful lives, which are currently 5 years with
the exception of software which is amortized over three years.  We
have not begun amortizing PlayerVision costs as yet and will begin when we get
our product to market. Total amortization for other intangible assets amounted
to $266,944 and $131,100, respectively, for the six months ended June 30, 2008
and 2009.  The estimated aggregate amortization for the remaining six
months of calendar 2009 and the next five years is as follows (if we begin
deployment of PlayerVision 3 as planned in November
2009):




2009
                $             153,9412010
                236,9252011
                214,5122012
                175,6892013
                -2014
                -$            781,067





- 9
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 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


6.  Debt:




Long term
debt is as follows:




December
      31, 2008
                
                
                June
      30, 2009Other
      notes
      payable
                
                $
                35,076
                
                
                $
                29,709Less
      amounts due within one year
                
                
                11,957
                
                
                
                10,914$
                23,119
                
                
                $
                18,795




The $600,000 advance from
a stockholder at December 31, 2008 was paid back in January 2009.  An
additional $1,720,000 was advanced from three stockholders including $1.5
million from IGT (see below).  Of this amount, $10,000 was paid back
in June 2009.




On February 13, 2009, we
signed a binding term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5
million (“the Advance”) to the Company.  We are presently in
negotiations with IGT to extend the term of the $1.5 million advance beyond
August 15, 2009 and make it a longer term, interest only note payable with a 10%
interest rate.  Although the term has expired, negotiations are
continuing.  We expect the note to be extended to at least January 31,
2010.  We granted a security interest in all of our present and future
assets as security for such obligation.




The Company and IGT
also agreed to amend the License and Application Support Agreement dated
September 30, 2008 between the Company and IGT (the “LASA”), and the
Intellectual Property Access Agreement dated September 30, 2008 between the
Company and IGT (the “IPAA”). The amendments to the LASA include: (i) a
requirement that the Company use its best efforts to utilize IGT’s sb (server
based) Media Manager as the default infrastructure for the delivery of the
Company’s PlayerVision® applications, where feasible, (ii) a requirement that
the Company provide development support for IGT sb (server based) applications
requested by IGT, (iii) an amendment to the amount of distribution fees, (iv) a
granting to IGT of a “most favored distributor” status so that IGT is granted
the most favorable terms on the Company’s software distributor rates for its
server-based applications,  and (v) a requirement that the Company
escrow the source code for the applications that connect to IGT systems. IGT
will have the right to access the source code only if the Company becomes
insolvent, and IGT’s rights to utilize such software (if released) will be
unlimited. The amendments to the IPAA include the Company’s agreement that IGT
will have the right to initiate, coordinate, finance and assist in the
prosecution, defense and enforcement of all Company owned intellectual property
to which the Company has granted a right of first refusal to
IGT.




7.  Stockholders'
Equity:




From  time to
time, the Company issues shares of common stock and preferred stock through
transactions that are exempt from registration under the Securities Act of 1933
(Securities Act), either pursuant to Section 4(2) of the Securities Act and/or
Rule 506 of Regulation D.  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 295,528 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.




During the six months
ended June 30, 2009, we issued 229,000 shares of Common Stock Series A to an
investor in return for cash used for working capital (this is the same investor
who invested $1,000,000 in Series E Convertible Preferred Stock, $1,000,000 in
Series F Convertible Preferred Stock, and $750,000 in Series G Convertible
Preferred Stock).




- 10
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 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


In February 2008, we
received an advance from a stockholder of $250,000. In May 2008, this same
stockholder 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.  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 stockholder 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 stockholder 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 stockholder was granted a security interest and
other additional rights in connection with our separate account (and related
insurance policy), and $1 million was set aside  solely to satisfy our
jackpot security requirements relating to the Gamblers Bonus Million Dollar
Ticket game.




In the first quarter of
2009, we closed the Gamblers Bonus Million Dollar game due to a lack of ticket
sales.  Accordingly, we redeemed the $1,000,000 of Series F Preferred
Stock from our investor. We closed our Million Dollar Ticket Game as well for
the same reason.  We also temporarily suspended our Nevada Numbers
game to change the draw to hourly rather than daily.  We restarted the
Nevada Numbers game on March 1, 2009 but again suspended it on March 31,
2009 due to a lack of funds to meet our Nevada Gaming bankroll
requirements.  This suspension resulted from the change in ownership
at Treasure Island and the new ownership’s decision to not continue bankrolling
our game.  The game will remain suspended until we can find
approximately $4 million for the bankroll.  When we restarted Nevada
Numbers on March 1, 2009, we restored Series F Convertible Preferred Stock for
$1,000,000 to be used as additional bankroll needed for Nevada Numbers. Due to
the March 31 shutdown, the Nevada Numbers bankroll funds associated with Series
F Convertible Preferred Stock were no longer needed.  Therefore, in
April 2009 we again redeemed the Series F Convertible Preferred Stock and the
$1,000,000 was returned to the investor.  In addition, in April 2009,
he received another 7,156 shares of Common Stock Series A.  These
shares were awarded in lieu of cash dividends and as a reimbursement of legal
fees for the restoration of Series F Convertible Preferred Stock for
$1,000,000 to support the restarting of Nevada
Numbers.




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 provided
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.




On January 18, 2008, because Treasure Island began maintaining the required base
jackpot bankroll for The Million Dollar Ticket, the holders of Series B
Convertible Preferred Stock were notified pursuant to the terms and conditions
of our Series B Convertible Preferred Stock of the ability to exercise the above
options.  The holders of Series B Convertible Preferred Stock had
until April 17, 2008 to make their decision.  At March 31, 2008
holders of






- 11
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 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


183,690
shares of Series B Convertible Preferred Stock had converted their shares on a
one-to-five basis for 918,450 shares of Common Stock Series A.  We
also redeemed 35,900 shares of Series B Convertible Preferred Stock at $5 per
share for a total redemption of $179,500 through March 31, 2008.  In
the second quarter of 2008, we redeemed 27,900 shares of Series B Convertible
Preferred Stock, and holders of 98,650 shares of Series B Convertible Preferred
Stock elected to convert on a one-to-five basis into 493,250 shares of Common
Stock Series A.  As of June 30, 2009, there were 50,000 outstanding
shares of Series B Convertible Preferred Stock.




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 I and B Convertible Preferred Stock.
Series E and Series G Convertible Preferred Stock are pari passu in liquidation
preference. Series E Convertible Preferred Stock has a liquidation preference
over Series H Convertible Preferred Stock.  During the year ended
December 31, 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
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 I and B Convertible Preferred
Stock.  Series G Convertible Preferred Stock has a liquidation
preference over Series H Convertible Preferred Stock.  On May 9, 2008,
we issued 150,000 shares of Series G Convertible Preferred Stock which carries a
cumulative 12% dividend rate payable on January 1, 2010 immediately after paying
IGT their 6.5% dividend on Series I Preferred Stock.  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
HConvertible
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 I, Series B, Series E, and Series G Convertible Preferred
Stock.  During the year ended December 31, 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.




Series
I Preferred
Stock.  On October 1, 2008, IGT signed an investment agreement
as of September 30, 2008, with us for 4,693,878 shares of our Series I Preferred
Stock at $2.45 per share, or a total investment of $11.5 million.  The
Series I Preferred Stock is convertible into shares of Common Stock Series A on
a one-for-one basis. The transaction closed on October 24, 2008.  IGT
had previously advanced $1.5 million of this total investment pursuant to an
agreement dated July 17, 2008, as amended, so the net proceeds received by the
Company on October 24, 2008 was $10 million.  IGT also received a
warrant to purchase 1.5 million shares of Common Stock Series A at an exercise
price of $2.45 per share.  The warrant has a three-year term and is
fully vested.  The shares of Series I Preferred Stock carry a
dividend rate of 6.5% payable initially on January 1, 2010 and vote on an as
converted basis, on all matters submitted to the Company’s
stockholders.  Based on the fully diluted outstanding shares of the
Company, IGT is entitled to two seats on the Company’s Board of Directors,
which to date they have not chosen to fill.  In addition, IGT forgave
a receivable from the Company from a prior legal settlement for
$614,027.  Also on October 1, 2008, we signed three
agreements with IGT which became part of the legal settlement with IGT: 1)
the Retrofit License Agreement, 2) the License and Application Support Agreement
and 3) the Intellectual Property Access Agreement.  On October 14,
2008, the legal case with IGT was dismissed by the Court with
prejudice.






- 12
-
 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)
  With the additional $10
million of funding from IGT, we paid in full the CAMOFI note for $6,051,250,
together with accrued interest and a payment penalty amounting to
$1,567,272.  We were released from any and all liens and claims that
CAMOFI may have against us and the Registration Rights Agreement was
terminated.  CAMOFI has 2,675,000 warrants, with “piggy back”
registration rights for its 300,000 shares of our common stock and underlying
shares of common stock underlying its warrants, which registration rights are
junior to the registration rights granted to IGT as part of the Series I
Preferred Stock transaction.




In connection with the IGT
transaction, we filed Amended and Restated Certificates of Designation with the
Nevada Secretary of State with respect to our Series B, Series E, Series F,
Series G and Series H Convertible Preferred Stock on October 22,
2008.  We also filed Certificates of Withdrawal of Certificate of
Designation with the Nevada Secretary of State with respect to our Series
A, Series C, and Series D Convertible Preferred Stock on October 3, 2008, as no
shares of such series were then issued or
outstanding.




Stock Warrants and Options. Our 2009 Stock Option Plan (2009 Plan),
adopted by our Board of Directors and approved by our stockholders, allows for
the issuance of both qualified and non-qualified options. The Stock Option
Committee of our Board of Directors administers the 2009 Plan. The 2009 Plan
succeeds the 2000 Stock Option Plan (2000 Plan) that will expire later this year
except as to options outstanding under the 2000 Plan. As of June 30, 2009, there
were 885,387 qualified and 24,000 non-qualified options outstanding under the
2009 Plan.  As of June 30, 2008 and 2009, respectively, there were
1,978,900 and 2,645,900 options outstanding under the 2000 Plan.  As
of June 30, 2008 and 2009, respectively, there were 425,000 and 650,000
non-qualified options outstanding that were issued outside of the
plans.  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 Stock Option Committee, though limited to ten years.
Only employees, directors and consultants are qualified to receive
options.  The stock subject to the 2000 Plan is limited to 2,500,000
shares of Common Stock Series A. The stock subject to the 2009 Plan is limited
to 20% of the sum of the currently outstanding shares of Common Stock Series A
and the outstanding shares of our preferred stock convertible into Common Stock
Series A as of beginning of the period under
consideration.




We have, from time to time, granted common stock, warrants and options to
employees and others as employment incentives, in return for successful
capital-raising efforts 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.  Warrants and
options to purchase 870,000 and 931,387 shares of Common Stock Series A were
issued to officers, directors and employees during the six months ended June 30,
2008 and 2009, respectively. Total compensation cost recognized in operations
from grants of options and warrants amounted to $557,319 and $378,735 for the
six months ended June 30, 2008 and June 30, 2009,
respectively.  Unrecognized costs related to employee stock options
and warrants outstanding at June 30, 2009 totaled $879,536 and are expected to
be amortized over a weighted average period of three years.






- 13
-
 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


The weighted average
exercise price of our outstanding options and warrants at June 30, 2009, was
$2.48. The following table summarizes our stock option and warrant activity
followed by the applicable weighted average prices during the quarter ended June
30, 2009:




Options/Warrants
                  
                  
                  Weighted
                    Average
      PriceBalance,
      January 1, 2009
                  
                  
                  8,656,209
                  
                  
                  $
                  2.46Granted
                  
                  
                  931,387
                  
                  
                  
                  2.50Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (100,000
                  )
                  
                  
                  1.00Balance,
      June 30, 2009
                  
                  
                  9,487,596
                  
                  
                  $
                  2.48




As of June 30, 2009,
1,697,790 options and warrants are outstanding, but have not vested. The
aggregate intrinsic value of options and warrants at June 30, 2009 is
$879,536.




Non-vested
      Options
                  
                  
                  Weighted
                    Average
      PriceBalance,
      January 1, 2009
                  
                  
                  1,393,210
                  
                  
                  $
                  3.45Granted
                  
                  
                  580,790
                  
                  
                  
                  2.50Vested
                  
                  
                  (378,960
                  )
                  
                  
                  (3.79
                  )Forfeited
                  
                  
                  -
                  
                  
                  
                  -Balance,
      June 30, 2009
                  
                  
                  1,595,040
                  
                  
                  $
                  3.02






Non-vested
      Warrants
                  
                  
                  Weighted
                    Average
      PriceBalance,
      January 1, 2009
                  
                  
                  110,417
                  
                  
                  $
                  2.52Granted
                  
                  
                  9,000
                  
                  
                  
                  2.50Vested
                  
                  
                  (16,667
                  )
                  
                  
                  (2.63
                  )Forfeited
                  
                  
                  -
                  
                  
                  
                  -Balance,
      June 30, 2009
                  
                  
                  102,750
                  
                  
                  $
                  2.50




- 14
-
 Table of Contents




LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


The
following table summarizes stock options and warrants outstanding at June 30,
2009, 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
                
                
                
                0.50
                
                
                
                270,000
                
                
                
                0.50$
                2.00
                
                
                
                460,000
                
                
                
                3.79
                
                
                
                310,000
                
                
                
                3.79$
                2.50
                
                
                
                1,576,387
                
                
                
                4.51
                
                
                
                495,347
                
                
                
                4.54$
                3.00
                
                
                
                100,900
                
                
                
                0.67
                
                
                
                100,900
                
                
                
                0.67$
                4.55
                
                
                
                25,000
                
                
                
                0.50
                
                
                
                25,000
                
                
                
                0.50$
                5.00
                
                
                
                1,123,000
                
                
                
                3.22
                
                
                
                759,000
                
                
                
                3.16Warrants
                
                $
                1.00
                
                
                
                267,500
                
                
                
                1.31
                
                
                
                267,500
                
                
                
                1.31$
                1.48
                
                
                
                2,675,000
                
                
                
                1.82
                
                
                
                2,675,000
                
                
                
                1.82$
                1.50
                
                
                
                30,000
                
                
                
                3.85
                
                
                
                30,000
                
                
                
                3.85$
                2.00
                
                
                
                185,000
                
                
                
                1.15
                
                
                
                185,000
                
                
                
                1.15$
                2.10
                
                
                
                23,809
                
                
                
                1.38
                
                
                
                23,809
                
                
                
                1.38$
                2.45
                
                
                
                1,500,000
                
                
                
                2.31
                
                
                
                1,500,000
                
                
                
                2.31$
                2.50
                
                
                
                147,000
                
                
                
                4.21
                
                
                
                44,250
                
                
                
                4.29$
                3.00
                
                
                
                854,000
                
                
                
                1.56
                
                
                
                854,000
                
                
                
                1.56$
                4.00
                
                
                
                100,000
                
                
                
                0.62
                
                
                
                100,000
                
                
                
                0.62$
                5.00
                
                
                
                150,000
                
                
                
                1.78
                
                
                
                150,000
                
                
                
                1.789,487,596
                
                
                
                2.53
                
                
                
                7,789,806
                
                
                
                2.17




There are
1,697,790 options and warrants that have been issued but not
vested.  Of these options and warrants 247,800 will vest during the
remainder of 2009, 778,496 in 2010, 478,497 in 2011 and 192,997 in
2012.




8.  Contingencies:




a.     Economic conditions and related risks and
uncertainties. The United States is currently experiencing a widespread
recession accompanied by, among other things, weakness in the commercial and
investment banking systems resulting in reduced credit and capital financing
availability, and highly curtailed gaming, other recreational activities and
general discretionary consumer spending, and is also engaged in war, all of
which are likely to continue to have far-reaching effects on economic conditions
in the country for an indeterminate period.  The effects and duration
of these developments and related risks and uncertainties on our future
operations and cash flows, including our access to capital or credit financing,
cannot be estimated at this time but have been and may continue to be
significant.  We are presently unable to satisfy our obligations as
they come due and do not have enough cash to sustain our expected working
capital requirements for the remainder of 2009.  Accordingly, unless
we obtain third-party debt or equity financing or otherwise raise capital, for
example, through the possible sale of assets, in the near future, we will
not be able to continue as a going
concern.




Based on circumstances described inthe foregoing paragraph,
and the related uncertainties as to the success of management’s plans to
continue as a going concern, we are unable to make cash flow forecasts based on
reasonably objective assumptions. Accordingly, as of June 30, 2009, impairment
evaluations relative to these assets were based on our expectation of
recoverability of at least their carrying values through a possible sale thereof
using fair value estimates that are based on Level 3 inputs, as defined in
Statement of Financial Accounting Standards No. 157, Fair Value Measurements.
However, except as discussed in Note 12 to our consolidated financial
statements, no such asset sales are presently expected and, therefore, no assets
are currently classified as held for sale. It is possible based on future
developments, even in the near term, that asset impairment writedowns may become
necessary and that they may be significant.
 
 To address the
going concern uncertainty, we are in discussions to engage an investment banking
firm to assist us in raising capital and are presently in due diligence with
possible strategic partners in the gaming industry for an equity
investment.  We are also creating a sales deployment pipeline which
should provide momentum to our capital raising efforts.  We have also
engaged in some cost cutting and are in the process of negotiating for the sale
of our bingo and keno business. (See Note 12.)




- 15
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 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


We often carry cash and
cash equivalents, including jackpot reserves, on deposit with financial
institutions substantially 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 and uncertainties discussed in the foregoing
paragraph.  The extent of a future loss as a result of uninsured
deposits in the event of a future failure of a bank or other financial
institution, if any, is not subject to estimation at this
time.




Though the two progressive
jackpot games are currently shut down, we may still become liable for the unpaid
progressive portion of each game.  That possible liability is
currently $218,604 and is provided for with a deposit in one of our brokerage
accounts.




b.    Legal Matter. A lawsuit is pending against LVGI and
certain other defendants concerning their provisional patent for “Slot
Lottery.”  Management is unable to estimate minimum costs, if any, to
be incurred by the Company upon the ultimate disposition of this matter and,
accordingly, no provision has been made, but management believes the case is
without merit and will vigorously defend the Company.  No assurance
can be given that the Company will be successful with respect to this
matter.




c.    Gaming Regulation 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 from our products in those
jurisdictions.  Failure to comply with applicable gaming regulations,
retain our Nevada licenses, or obtain and retain the necessary licenses in other
jurisdictions, would likely have a material adverse effect on our future
operations and cash flows.




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.  The Nevada Gaming Commission has the right to demand that a
one-year letter of credit be posted when a licensee is not in compliance with
the foregoing financial ratios but has not made any such demand on the Company
to date.




The foregoing notwithstanding, in July, 2008, we received two “Orders to Show
Cause” from the Nevada Gaming Control Board (NGCB).  One order dealt
with deficiencies in meeting the financial requirements of Regulation 5.115 as
to 1) resources in restricted accounts; 2) current ratio or working capital; 3)
interest coverage ratio or debt to EBITDA ratio; and 4) bankroll.  We
have paid a fine of $10,000 in full settlement and satisfaction of the
allegations in this matter.  The second order dealt with deficiencies
in filing timely reports with the NGCB as to new hires and termination of
personnel.  Our response set forth some remedial action taken by us,
which was deemed adequate during the three months ended March 31, 2009, and to
date, no further disciplinary action has been taken.




9.  Income
Taxes:




As of June 30, 2009, net operating loss carryforwards for federal income tax
reporting purposes total approximately $40.0 million and expire between 2013 and
2028. However, because we have not as yet achieved profitable operations,
realization of any future income tax benefit of the net operating loss
carryforwards accumulated to date is not yet viewed by management at this time
as more likely than not.  Therefore, the related deferred tax asset of
$14.2 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, if any, described in Internal
Revenue Code Section 382.






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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)


10.  Financial
Instruments:




The
Company’s financial instruments consist of cash, jackpot reserve deposits,
progressive jackpot liability, and debt.  The estimated fair values of
these financial instruments are approximately equal to book value because of
their short-term nature and/or interest rates approximating current market
interest rates based on Level 2 inputs, as defined in Statement of
Financial Accounting Standards No. 157, Fair
Value Measurements, as amended.




11.  Segment
Information:




We conduct our operations
in three primary business segments: “Casino Games”, “Products” and
“Other.”  The “Casino Games” segment generates income from four games
which have been played in 25 casinos and 100 bars and convenience stores in
Nevada and another 14 casinos outside Nevada.




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






Six
      months ended June 30,2008
                
                
                2009RevenueCasino
      Games
                
                $
                1,159,507
                
                
                $
                984,565Product
      Sales
                
                
                673,369
                
                
                
                531,349Other
                
                
                477,890
                
                
                
                588,050$
                2,310,766
                
                
                $
                2,103,964Operating
      income (loss)Casino
      Games
                
                $
                (161,322
                )
                
                $
                72,664Product
      Sales
                
                
                355,171
                
                
                
                260,299Other
                
                
                (105,836
                )
                
                
                96,010Unallocated
                
                
                (4,489,276
                )
                
                
                (3,225,239
                )$
                (4,401,263
                )
                
                $
                (2,796,266
                )Identifiable
      assetsCasino
      Games
                
                $
                3,802,910
                
                
                $
                1,591,825Product
      Sales
                
                
                332,849
                
                
                
                240,765Other
                
                
                366,874
                
                
                
                428,487Unallocated
                
                
                2,275,926
                
                
                
                2,846,1016,778,559
                
                
                $
                5,107,178




Identifiable
assets of $5,107,178 at June 30, 2009, included recorded goodwill of $2,371,178
that relates to the Product Sales segment from prior acquisitions.




Six
      months ended June 30,Capital
      expenditures
                
                2008
                
                
                2009Casino
      Games
                
                $
                31,177
                
                
                $
                16,050Product
      Sales
                
                
                -
                
                
                
                -Other
                
                
                56,726
                
                
                
                36,604Unallocated
                
                
                24,093
                
                
                
                32,585$
                111,996
                
                
                $
                85,239




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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 (Continued)




12.  Subsequent
Event:




We began
a voluntary unpaid furlough of 15 PlayerVision division employees on August 1,
2009, which furlough is expected to continue until we raise additional capital
and/or begin deploying our product.




On August 6, 2009, we
signed a Technology Royalty Agreement with Perfect Storm Software, LLC, whose
members include five of our engineers, one of whom is our Chief Technology
Officer, who began employment in 2008 and brought preexisting technology with
them which was used in the development of PlayerVision 3.  The
Technology Royalty Agreement calls for (1) a  one-time royalty fee of
$1,000 due and payable on the date of execution, (2) an annual license reissue
fee in the amount of $20,000 due and payable on each anniversary of the
Effective Date beginning on the first anniversary, (3) a royalty bonus equal to
5% of net PV 3 sales for software licensed products, (4) a royalty bonus equal
to 5% of net sales for hardware utilized to operate software licensed products
where the markup percentage of the hardware is greater than 20%, and (5) a
royalty bonus of 750,000 shares of the our Common Stock Series A contingent upon
any change in control of us.




We have
been negotiating the sale of our bingo and keno businesses since June 2,
2009.  However, since approval by the board of directors of a formal
plan for the sale did not take place until July 2009, there has been no 
reclassification to discontinued operations.  Retroactive
reclassification will be reflected in our consolidated financial statements
beginning in the third quarter, 2009.  The sale would be an asset sale
for $1.2 million and an assumption of approximately $200,000 in
liabilities.  The sale of the bingo business for $1.1 million is
expected to close by the end of August 2009, and the sale of the keno business
for $100,000 is expected to close by the end of 2009, subject to the final
approval of the Nevada Gaming Control Board.  The buyer of the bingo
business has advanced $500,000 as a refundable deposit against the sale of the
bingo business.


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 Table of Contents





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




The following discussion and analysis
should be read 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 more significant revenue from PlayerVision during
the fourth 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.  Such risks and uncertainties
include any adverse judgment, ruling or order, lack of market acceptance of our
PlayerVision system, our inability to secure additional third-party financing,
the current economic recession, the lack of operating history of our
PlayerVision system, the ability of our competitors to introduce products having
advantages over our PlayerVision system, the failure to obtain regulatory
approval for our PlayerVision modules, restrictions on our ability to install
our PlayerVision system on existing gaming machines, our failure to protect our
intellectual property rights and additional risks discussed herein and elsewhere
in our Form 10-K for the year ended December 31, 2008.  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.  (See
“Liquidity and Capital Resources,” below.)





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, we
believe that the potential market for our PlayerVision system, i.e., the gaming machine
market is much larger and more dynamic.  While we continue to provide
equipment, supplies and games for use by our customers in the keno and bingo
segments of the gaming industry, subject to our ability to continue as a going
concern, addressed below, we expect these revenues will continue to decline
as we focus on the deployment of PlayerVision.  PlayerVision has not
had a significant revenue effect on our financial statements to
date.  Due primarily to our focus on the development of our
PlayerVision system and other factors, we have incurred expenses in excess of
our revenue and have generated losses to date.





In May 2009, we received approval for
nine software applications on our more robust and scalable PlayerVision 3
platform from the Nevada Gaming Control Board laboratory.  These
software applications include Beverage-on-Demand, ServiceVision, VoyeurVision,
Live TV, AdVision, YouTube, CasinoTunes, ValetVision, and
BurstVision.  We will submit these same applications for Gaming
Laboratories International (GLI) approval, an independent accredited testing
laboratory, in the second half of 2009.





Based on the foregoing, and other than
the insignificant revenue realized from our early adoption agreements, and
subject to economic uncertainties discussed herein, subject to our ability to
continue as a going concern, as discussed below, we expect to begin to realize
more significant revenue from our PlayerVision system during the fourth quarter
of 2009.  This would mark a significant shift in the type of revenue
recognized by us.  The anticipated revenue would be from the
installation of our nine software applications on the PlayerVision 3 platform in
the United States, primarily Nevada for now.  No assurance can be
given, however, that we will begin installing our PlayerVision 3 applications or
begin realizing revenue from our PlayerVision system during the fourth quarter
of 2009 or at all.






- 19
-
 Table of Contents





We expect to continue for the remainder
of 2009 to incur expenses related to the development and regulatory approval for
the remaining PlayerVision modules, and we expect to face competition from
larger, more formidable competitors as we attempt to enter the gaming machine
market.  Due to continuing expenses related to our PlayerVision
system, in addition to any funds from operations, we plan to continue to
rely on funds from third party financing sources, if available, in addition to
funds from operations to sustain our operations in 2009 and
2010.




We are presently unable to satisfy our
obligations as they come due and do not have enough cash to sustain our
anticipated working capital requirements for the remainder of 2009 and, unless
we obtain third-party financing or otherwise raise capital through the sale of
assets or otherwise in the near future, we will be unable to continue as a going
concern.  See discussion in “Liquidity – 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. Any revenue from
PlayerVision 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.





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.






- 20
-
 Table of Contents





Equipment,
Goodwill and other Intangible Assets





We review the carrying values of
equipment, goodwill and other intangible assets for impairment at least
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.




Based on circumstances described in “Liquidity
and Capital Resources,”below, and the related uncertainties as to the success of management’s
plans to continue as a going concern, we are unable to make cash flow forecasts
based on reasonably objective assumptions. Accordingly, as of June 30, 2009,
impairment evaluations relative to these assets were based on our expectation of
recoverability of at least their carrying values through a possible sale thereof
using fair value estimates that are based on Level 3 inputs, as defined in
Statement of Financial Accounting Standards No. 157, Fair Value Measurements.
However, except as discussed in Note 12 to our consolidated financial
statements, no such asset sales are presently expected and, therefore, no assets
are currently classified as held for sale. It is possible based on future
developments, even in the near term, that asset impairment writedowns may become
necessary and that they may be significant.
 
 Factors used in our evaluations of
potential impairment and estimated recoverable values 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, including with
respect to goodwill, 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.  Changes in these estimates and assumptions could materially
affect the determination of recoverability or fair value. While we believe that
our estimates of recoverable values are reasonable, different assumptions could
materially affect our assessment of useful lives, recoverability and fair
values.  Based on the foregoing analysis, we recorded no goodwill or
other impairment charges during the six months ended June 30, 2009.
 
 Our
intangible assets consist of key patents with a five-year life and software with
a three-year life.   PlayerVision 3 costs are being capitalized
as we have proven technological feasibility and, subject to our ability to
continue as a going concern, as discussed above and below, will be depreciated
once our product is brought to market.




Income
Taxes





We have effectively provided a full
100% valuation allowance for the deferred tax effects of our net operating
losses at June 30, 2008 and 2009. We have effectively recorded a 100% valuation
allowance to offset the deferred tax asset resulting from operating loss
carryforwards arising in the current and prior periods that might otherwise have
been recognized since, because of our history of operating losses, management is
unable to conclude at this time that realization of such benefit is currently
more likely than not.





Recent
Accounting Pronouncements




There have been no recent accounting
pronouncements or changes in accounting pronouncements issued, but not yet
effective or early adopted, that are of significance, or potential significance
to the Company.


Results
of Operations





Three
Months Ended June 30, 2009, Compared with Three Months Ended June 30,
2008.


Revenue.  Casino
games revenue for the three months ended June 30, 2009, decreased $190,000 or
30.8%, compared to the three months ended June 30, 2008.  The lower
casino games revenue principally resulted from a reduction of $121,000 of
revenue for Gamblers Bonus Million Dollar Ticket which was not in existence in
the second quarter of 2009 but was being played in the  second quarter
of 2008, and Nevada Numbers and Million Dollar Ticket declined by $104,000 due
to the discontinuance of the game on March 31, 2009 offset by higher revenue
from Super Coverall Bingo of $35,000.


- 21
-
 Table of Contents




Product sales for the three months
ended June 30, 2009, decreased by $98,000 or 28.0% compared to the three months
ended June 30, 2008. Keno equipment sales amounted to $17,000 for the three
months ended June 30, 2009 compared to $86,000 during the three months ended
June 30, 2008. This decrease in keno equipment sales was due to a delay by
customers to buy new keno systems due to the state of the
economy.  Bingo supplies sales also declined by $25,000 during the
three months ended June 30, 2009 versus the same period in the prior year due to
loss of market share.
  Other
revenue for the three months ended June 30, 2009, increased by $96,000 or 46.5%
compared to the three months ended June 30, 2008.  Revenue from Keno
route and participation agreements increased by $93,000 for the three months
ended June 30, 2009, compared to the three months ended June 30, 2008, due to
two new route locations being open in Las Vegas during the three months ended
June 30, 2009 versus none being open during the three months ended June 30,
2008.





Cost and Expenses. Cost and
expenses of casino games for the three months ended June 30, 2009, decreased by
$148,000 or 26.8% compared to the three months ended, June 30, 2008. The
decrease resulted primarily from the discontinuance of the Nevada Numbers and
Million Dollar Ticket games offset by the increase in Super Coverall Bingo as
discussed previously.





Product cost and expenses for the three
months ended June 30, 2009, decreased $32,000 or 19.1% compared to the three
months ended June 30, 2008, consistent with the decline in Keno equipment
sales.  Gross margin on product sales has declined from 52.6% to 46.8%
as we have had to do more discounting on Keno equipment sales.





Other cost and expenses for the three
months ended June 30, 2009, decreased $30,000 or 12.2% compared to the three
months ended June 30, 2008 as we reduced salary expenses by $48,000 through
headcount reductions in our Keno service staff.





Other Operating Expenses.
Selling, general and administrative expenses for the three months ended June 30,
2009, decreased by $485,000 or 27.5%, as legal and consulting fees decreased by
$488,000 during the three months ended June 30, 2009, compared to the same
period in 2008 primarily as a result of a reduction in legal fees resulting from
settlement of the IGT lawsuit in October 2008.





Research and development costs for the
three months ended June 30, 2009, have decreased by $235,000 or 59.0% compared
to the three months ended June 30, 2008, as we began capitalizing development
costs of our PlayerVision 3 platform.





Depreciation and amortization for the
three months ended June 30, 2009, decreased $77,000 or 36.4% compared to the
three months ended June 30, 2008, as our asset base is older and more assets are
becoming fully depreciated.





Finance Costs. Finance costs
for the three months ended June 30, 2009, decreased $578,000 or 99.5% compared
to the three months ended June 30, 2008, due to the payoff of our primary third
party lender, CAMOFI, in October 2008 with proceeds from equity capital
invested.





Interest and Other Income.
Interest and other income for the three months ended June 30, 2009, increased by
$46,000 or 64.5% compared to the three months ended June 30,
2008.  The increase was due to the decrease in the loss on the sale of
equipment of $46,000 in the three months ended June 30, 2009 versus the
comparable period in the prior year.





Results
of Operations





Six
Months Ended June 30, 2009, Compared with Six Months Ended June 30,
2008.




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Revenue.  Casino
games revenue for the six months ended June 30, 2009, decreased $175,000 or
15.1%, compared to the six months ended June 30, 2008.  The lower
casino games revenue principally resulted from a reduction of $104,000 of
revenue for Gamblers Bonus Million Dollar Ticket which was not in existence in
the second quarter of 2009 but was being played in the second quarter of 2008,
and Nevada Numbers and Million Dollar Ticket declined by $153,000 due to the
discontinuance of the game on March 31, 2009 offset by higher revenue from
Super Coverall Bingo of $84,000.


Product sales for the six months ended
June 30, 2009, decreased by $142,000 or 21.1% compared to the six months ended
June 30, 2008. Keno equipment sales amounted to $68,000 for the six months ended
June 30, 2009 compared to $182,000 during the six months ended June 30, 2008.
This decrease in Keno equipment sales was due to a delay by customers to buy new
keno systems due to the state of the economy.  Bingo supplies sales
also declined by $33,000 during the six months ended June 30, 2009 versus the
same period in the prior year due to loss of market share.





Other revenue for the six months ended
June 30, 2009, increased by $110,000 or 23.1% compared to the six months ended
June 30, 2008.  Revenue from Keno route and participation agreements
increased  $102,000 for the six months ended June 30, 2009, compared
to the six months ended June 30, 2008, due to two new route locations being open
in Las Vegas for the entire six months ended June 30, 2009 versus two being
opened for one month during the six months ended June 30, 2008.





Cost and
Expenses.  Cost and expenses of Casino Games for the six months
ended June 30, 2009, decreased by $409,000 or 30.9% compared to the six months
ended June 30, 2008.  The decrease resulted primarily from the
discontinuance of the Nevada Number and Million Dollar Ticket games offset by an
increase in Super Coverall Bingo as previously discussed.





Product cost and expenses for the six
months ended June 30, 2009, decreased $47,000 or 14.8% compared to the six
months ended June 30, 2008, consistent with the decline in Keno equipment
sales.   Gross margin on product sales has declined from 52.7% to
49.0% as we have had to do more discounting on Keno equipment
sales.





Other cost and expenses for the six
months ended June 30, 2009, decreased $92,000 or $15.7% compared to the six
months ended June 30, 2008 as we reduced salary expenses by $103,000 through
headcount reductions in our Keno service staff.





Other Operating
Expenses.  Selling, general and administrative expenses for the
six months ended June 30, 2009, decreased by $590,000 or 17.6%, as legal and
consulting fees, decreased by $610,000 during the six months ended June 30,
2009, compared to the same period in 2008 primarily as a result of a reduction
in legal fees resulting from settlement of the IGT lawsuit in October
2008.





Research and development costs for the
six months ended June 30, 2009, have decreased by $515,000 or 73.8% compared to
the six months ended June 30, 2008, as we began capitalizing development costs
of our PlayerVision 3 platform.





Depreciation and amortization for the
six months ended June 30, 2009, decreased $158,000 or 36.9% compared to the six
months ended June 30, 2008, as our asset base is older and more assets are
becoming fully depreciated.





Finance Costs.Finance costs
for the six months ended June 30, 2009, decreased $1,108,000 or 98.7% compared
to the six months ended June 30, 2008, due to the payoff of our primary third
party lender, CAMOFI, in October 2008 with proceeds from equity capital
invested.





Interest and Other Income.
Interest and other income for the six months ended June 30, 2009, increased by
$63,000 or 69.5% compared to the six months ended June 30, 2008.  The
increase was due to decrease in the loss on the sale of equipment of $46,000 in
the six months ended June 30, 2009 versus the comparable period in the prior
year and an additional loss in fair value incurred on or marketable securities
of $31,000.






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Liquidity
and Capital Resources




Cash
Flows





Cash used in operating activities
decreased by $623,000 for the six months ended June 30, 2009 primarily because
of accounts receivable and inventory decreases of $148,000 offset by increases
in accounts payable and accrued expenses of $971,000.  Investing
activities consisted principally of net cash inflows in connection with the
reduction in the jackpot reserve deposits of $1,029,000 because of the
discontinuance of the Gamblers Bonus Million Dollar Ticket game in January 2009
offset by cash outflows for capital expenditures of $617,000.  Our
cash inflows from financing activities of $640,000 in the six months ended June
30, 2009, consisted principally of $562,500 of new capital from the sale of
Common Stock Series A and net proceeds from advances from stockholders of
$1,110,000 offset by the redemption of Series F Convertible Preferred Stock
following the shutdown of the Nevada Numbers game.





Capital
Expenditures





Capital expenditures increased by
$605,000 for the six months ended June 30, 2009 compared to the same period in
the prior year as we began capitalizing our PlayerVision 3 engineering costs
prior to the projected rollout to the marketplace of nine new software
applications. For 2009, 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 $10 million of PlayerVision control
units for the rollout of our PlayerVision System.




No assurance can be given that we will be able purchase sufficient control units
or that such control units will be available at an acceptable price, or at
all.  No assurance can be given that we will be able to secure any
third-party financing or that such financing will be available to us on
acceptable terms.  As discussed further under the heading Outlook
below, it may be difficult for us to secure additional third-party financing at
this time.





Sources
of Capital





We have
traditionally relied on various forms of third party financing in order to
sustain our operations.  On February 13, 2009, we signed a binding
term sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million (“the
Advance”) to the Company.  We are presently in negotiations with IGT
to extend the term of the $1.5 million advance beyond August 15, 2009 and make
it a longer term, interest only note payable with a 10% interest
rate.  Although the term has expired, negotiations are
continuing.  We expect the note to be extended to at least January 31,
2010.  We granted a security interest in all of our present and future
assets as security for such obligation.





Outlook





The United States has been experiencing
a severe economic recession that, among other things, has curtailed casino
gaming development, activity and profitability, both nationwide and particularly
in our local market, and has resulted in highly reduced availability of credit
and capital financing and heightened economic risks. The effects and duration of
these developments and related uncertainties on the Company’s future operations
and cash flows cannot be estimated at this time but likely will be
significant.





We presently are unable to satisfy
our obligations as they come due and do not have enough cash, inclusive of
the possible sale of our
bingo and keno business, to sustain our anticipated working capital requirements
and our business expansion plans for the remainder of
2009.  Subject to unforeseen effects of the economic risks and
uncertainties discussed in the foregoing paragraph and to our ability to raise
working capital, we expect to continue for at least the calendar year 2009 and
2010 to incur expenses related to the development and regulatory approval for
the remaining PlayerVision modules and additional modules presently in
development.  The further delay of the rollout of our PlayerVision system,
the failure to obtain additional third-party financing, and/or the failure to
sell our bingo and keno business will have material adverse effects on our cash
flow, results of operations and financial condition including significant
uncertainty as to our ability to continue as a going concern for the remainder
of 2009.  No assurance can be given that we will be able to secure any
third party financing or that such financing will be






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available
to us on acceptable terms. Given the current financial market disruptions,
credit crisis and economic recession, including the current downturn in the
gaming industry, it is difficult at this time to obtain any third-party
financing on acceptable terms, whether public or private equity or debt,
strategic relationships, capital leases or other arrangements.  In
addition, we have significant restrictive covenants under our recent financing
with IGT that may prohibit us, in certain circumstances, from obtaining third
party financing without IGT’s prior written consent.  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.





Although casino gaming development,
activity and profitability for 2008 and the first six months of 2009 were down
and are expected to remain down for the remainder of 2009, we believe that our
PlayerVision system will provide casinos with an additional revenue sources or
cost reductions attractive enough to appeal even in the current depressed gaming
environment.  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 fourth quarter of 2009,  though we
cannot provide assurance that the market will ever accept our PlayerVision
system.  Any failure by us 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 flow, results of operations 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, 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.





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.





Off
Balance Sheet Financing Arrangements




We have operating leases totaling
$1,271,075 that have the following payment schedule by calendar year: $248,176
in 2009, $500,948 in 2010, $324,253 in 2011, $147,804 in 2012, and $49,894 in
2013.




Item 3.         Quantitative and
Qualitative Disclosures About Market Risk.




Not required.





Item 4(T).  Controls and
Procedures.




We evaluated the effectiveness of our
disclosures controls and procedures as of the end of the period covered by this
report.  This evaluation was carried out under the supervision, and
with the participation, of Jon D. Berkley, our Chief Executive Officer, and
Bruce A. Shepard, our Chief Financial Officer. Based on this evaluation, Mr.
Berkley and Mr. Shepard concluded that our disclosure controls and procedures
are effective to ensure the information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934, or the
Exchange Act, is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms.





Mr. Berkley and Mr. Shepard also
concluded that there have been no significant changes in internal controls or in
other factors that have materially affected, or would be reasonably likely to
materially affected, our internal control over financial reporting during the
quarter most recently ended.





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PART
II – OTHER INFORMATION




Item 1.     Legal
Proceedings.




On
September 15, 2008, Steven Brandstetter and J & S Gaming filed a lawsuit
against us, among other defendants, in Department 11 of the Nevada Eighth
Judicial District Court captioned Brandstetter, et al. v. Bally Gaming, Inc., et
al., case no. 08-A-571641-C alleging against us claims of breach of contract,
misrepresentation, breach of fiduciary duty and unjust enrichment regarding a
non-disclosure agreement executed in May 2002 pertaining to the plaintiffs’
gaming concepts.  The plaintiffs are seeking monetary damages,
including attorney’s fees and costs.   We filed an answer to the
complaint on December 8, 2008 citing eighteen affirmative
defenses.  Depositions have been scheduled for some of the executives
of the larger company defendants.  No depositions have been requested
of any of our executives. We are unable to estimate minimum costs, if any, to be
incurred by us upon the ultimate disposition of this matter an accordingly, no
provision has been made.





Item 1A.   Risk Factors.




Not required.





Item 2.      Unregistered Sales of Equity
Securities.




During
the three months ended June 30, 2009, we issued 7,156 shares of Common Stock
Series A to our Series F Convertible Preferred Stock investor in lieu of legal
fees incurred by him for the restoration of Series F Convertible Preferred Stock
and for cash dividends on Series F Convertible Preferred Stock when it was
redeemed in April 2009.  This issuance was 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.




During
the three months ended June 30, 2009, we issued options and warrants to purchase
a total of 697,359 shares of Common Stock Series A to our employees and members
of our board of directors, all with an exercise price of $2.50 per share,
primarily with 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 issuance did not involve a public offering.




Item 3.   Defaults Upon Senior
Securities.




None.




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




Our 2009
annual meeting of the stockholders was held on May 26, 2009.  Items of
business set forth in our proxy statement dated April 24, 2009 that were voted
on and approved at the annual meeting are as follows:






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(1)
            Election
      of Directors to serve until our next annual meeting and until their
      successors are elected and
qualified:




VotesNominee
                
                For
                
                WithheldRussell
      R. Roth
                
                11,438,807
                
                1,511,021Jon
      D. Berkley
                
                11,214,632
                
                1,735,196Richard
      H. Irvine
                
                11,438,807
                
                1,511,021Kyleen
      E. Cane
                
                11,438,807
                
                1,511,021Terry
      L. Caudill
                
                11,438,807
                
                1,511,021Robert
      M. McMonigle
                
                6,744,929
                
                6,204,899Harlan
      D. Braaten
                
                11,438,807
                
                1,511,021




(2)
            Adoption
      of our 2009 Stock Option Plan:




For
                
                Withheld
                
                Abstain
                
                Broker
      Non-vote11,403,307
                
                1,594,921
                
                59,400
                
                -





(3)
            Ratification
      of Piercy Bowler Taylor & Kern as our Independent Registered Public
      Accounting Firm:





For
                
                Withheld
                
                Abstain
                
                Broker
      Non-vote12,936,628
                
                2,200
                
                -
                
                -




Item 5. Other Information.




On August
6, 2009, we signed a Technology Royalty Agreement with Perfect Storm Software,
LLC, whose members include five of our engineers, one of whom is our Chief
Technology Officer, who began employment in 2008 and brought preexisting
technology with them which was used in the development of PlayerVision
3.  The Technology Royalty Agreement calls for (1) a one-time royalty
fee of $1,000 due and payable on the date of execution, (2) an annual license
reissue fee in the amount of $20,000 due and payable on each anniversary of the
Effective Date beginning on the first anniversary, (3) a royalty bonus equal to
5% of net PV 3 sales for software licensed products, (4) a royalty bonus equal
to 5% of net sales for hardware utilized to operate software licensed products
where the markup percentage of the hardware is greater than 20%, and (5) a
royalty bonus of 750,000 shares of our Common Stock Series A contingent upon any
change in control of us.





Item 6.    Exhibits




10.1
                
                Technology Royalty Agreement dated August 6, 2009 between
      the Company and Perfect Storm Software, LLC31.1
                
                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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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, 2009
            By:
            /s/
      Jon D. BerkleyJon
      D. BerkleyIts:
            President
      and Chief Executive Officer(Principal
      Executive Officer)Date:
            August
      19, 2009
            By:
            /s/
      Bruce A. ShepardBruce
      A. ShepardIts:
            Chief
      Financial Officer(Principal
      Financial Officer)










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EXHIBIT
INDEX







Exhibit
                
                Document
      Description10.1
                
                Technology Royalty Agreement dated August 6, 2009 between
      the Company and Perfect Storm Software, LLC31.1
                
                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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