UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark
One)


X
                ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended
                December
      31, 2008TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from
                
                toCommission
      file number
                000-30375Las
      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.)4000
      West Ali Baba Lane, Suite D, Las Vegas, Nevada
                
                89118(Address
      of principal executive offices)
                
                (Zip
      Code)Registrant’s
      telephone number, including area code:
                (702)
      871-7111Securities
      registered under Section 12(b) of the Act:Title
      of each class
                
                Name
      of each exchange on which registeredSecurities
      registered under Section 12(g) of the Act:Common
      Stock Series A, $.001 par value(Title
      of each class)(Title
      of each class)Indicate
      by check mark if the registrant is a well-known seasoned issuer, as
      defined in Rule 405 of the Securities Act. Yes  o  No 
      xIndicate
      by check mark if the registrant is not required to file reports pursuant
      to Section 13 or Section 15(d) of the Act. Yes o  No 
      xIndicate
      by check mark whether the registrant (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 if the disclosure of delinquent filers pursuant to Item 405
      of Regulation S-K (§229.405 of this chapter) is not contained in herein,
      and will not be contained, to the best of the registrant’s knowledge, in
      definitive proxy or information statements incorporated by reference in
      Part III of this Form 10-K or any amendment to this Form 10-K.  
      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     (do not check if
      smaller reporting company)  o                       Smaller
      reporting company   xIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act).  Yes  o  No 
      x





Table of Contents





State
      the aggregate market value of the voting and non-voting common equity held
      by non-affiliates computed by reference to the price at which the common
      equity was last sold, or the average bid and asked price of such common
      equity, as of the last business day of the registrant’s most recently
      completed second fiscal quarter.  $24,458,146.Indicate
      the number of shares outstanding of each of the registrant’s classes of
      common stock, as of the latest practicable date.Common
      Stock Series A, $.001 par value
            
            14,849,690
      shares as of December 31, 2008Documents
      Incorporated By Reference:
              
              Portions
      of our Proxy Statement relating to the 2009 annual stockholders meeting
      are incorporated herein by reference in Part III.  Such Proxy
      Statement will be filed with the Securities and Exchange Commission not
      later than 120 days after the conclusion of the registrant’s fiscal year
      ended December 31, 2008.


Table of Contents


TABLE OF CONTENTS


ITEM
      1.
                                        BUSINESS
                                        1ITEM
      1A.
                                        RISK FACTORS
                                        17ITEM
      1B.
                                        UNRESOLVED STAFF COMMENTS
                                        17ITEM
      2.
                                        PROPERTIES
                                        17ITEM
      3.
                                        LEGAL PROCEEDINGS
                                        17ITEM
      4.
                                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                                        18ITEM
      5.
                                        MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASERS OF EQUITY
      SECURITIES
                                        19ITEM
      6.
                                        SELECTED FINANCIAL DATA
                                        24ITEM
      7.
                                        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
                                        24ITEM
      7A.
                                        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                                        31ITEM
      8.
                                        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                                        32ITEM
      9.
                                        CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                        56ITEM
      9A(T).
                                        CONTROLS AND PROCEDURES
                                        56ITEM
      9B.
                                        OTHER
      INFORMATION
                                        56ITEM
      10.
                                        DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
                                        57ITEM
      11.
                                        EXECUTIVE COMPENSATION
                                        57ITEM
      12.
                                        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
                                        57ITEM
      13.
                                        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                                        57ITEM
      14.
                                        PRINCIPAL ACCOUNTING FEES AND SERVICES
                                        57ITEM
      15.
                                        EXHIBITS, FINANCIAL STATEMENT SCHEDULES
                                        57





PlayerVision,
RoutePromo, NumberVision, WagerVision, AdVision, Nevada Numbers, The Million
Dollar Ticket, and Nevada Keno are some of our trademarks.  This
Annual Report on Form 10-K contains trademarks and trade names of other parties,
corporations and organizations.





Table of Contents







PART
I




ITEM 1. BUSINESS.




Overview




During
2008 we continued to focus our development efforts on our proprietary
application delivery system, known as PlayerVision.  Through our
PlayerVision system, we offer gaming operators the ability to increase the
productivity of their existing gaming machines by delivering additional wagering
opportunities, customer service enhancements, entertainment applications, games,
and other content to their existing gaming machines, such as slot machines,
poker machines, and video lottery terminals.  Our PlayerVision system
is flexible and compatible with virtually all gaming machines currently produced
by all major manufacturers. As a result, we view every gaming machine as a
revenue opportunity for our PlayerVision system. Since we plan to offer an
option to acquire PlayerVision at little or no up front capital cost to casino
operators in exchange for a recurring licensing fee, we expect to provide
operators with an ability to increase significantly the earning power and
functionality of their gaming machines with little or no financial
risk.  In addition, we are currently a leading supplier of keno and
bingo games, systems, and supplies.




The
PlayerVision system consists of proprietary software that runs on our own
hardware as well as other vendors’ server based application delivery systems
such as IGT’s sbX. Our ability to deliver applications through our own delivery
system as well as that of other server based gaming systems provides our
customers with the ability to achieve 100% gaming floor coverage without the
need to replace their existing machines.  Our system gives our
customers a transition path from legacy machines to server based
gaming.




There are
four delivery channels related to PlayerVision
functionality:  service, marketing, entertainment and
gaming.  Each application group addresses a specific cost reduction,
revenue enhancing application set, player experience or operator control
feature, including “Beverage-on-Demand”, NumberVision and WagerVision - turning
each gaming machine into a multi-tasking touch-point for the customer who will
see more, do more and - as a result - play more.




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In
addition to the PlayerVision applications identified above, it is our mission to
develop new applications that will position PlayerVision as a platform for a
variety of new multimedia and gaming functions.




We have
received final regulatory approval from Nevada and Gaming Laboratories
International (GLI), an independent accredited testing laboratory, for two
applications on our PlayerVision 2 platform; AdVision and Live TV, on several
different gaming machine platforms.  We have also received GLI
approval for NumberVision on our PlayerVision 2
platform.  PlayerVision 3 is the next generation of our PlayerVision
system.  It is more robust and scalable than our PlayerVision 2
platform and has become our go-to-market product.  The following
applications will be submitted for regulatory review and approval to Nevada and
GLI in April 2009 in regards to our PlayerVision 3 platform:  Beverage
on Demand, ServiceVision, ValetVision, AdVision, Live TV, Casino Tunes, You
Tube, and VoyeurVision.  Because these eight software applications do
not interface with the slot accounting system and the regulators
are




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familiar
with the earlier PlayerVision 2 platform, we expect a shorter approval time
period from the regulators.  We expect to submit WagerVision and
NumberVision for regulatory approval from Nevada and GLI on the PlayerVision 3
platform sometime between June and August 2009.  Because the regulatory
approval of new gaming applications is a complex process, we may experience
delays in developing and introducing the PlayerVision 3
applications.  Because of the substantial ongoing costs of the
PlayerVision system, we will continue to require substantial third-party
financing, in addition to any funds from operations, to pursue our business
plan.  During 2008 we raised over $14 million in private placements,
and we estimate that we will need to raise at least another $10 million in
2009 in order to accomplish our 2009 plan.  We expect to raise the
additional funds through one or more private placements and master lease
equipment financings (see “Item 7.  Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources”).  No assurance can be given that we will be able to raise
such additional funds or complete such private placements or equipment
financings on terms acceptable to us, or at all.




Industry
Overview




The
domestic and global gaming markets have grown rapidly and consistently over most
of the last decade despite some slowdown in the past year due to the
macroeconomic recession. This growth has generally brought increased social and
political acceptance of legalized gaming throughout many diverse societies. As a
result, there is a rising public sector / municipal dependency on gaming
revenues for funding of programs and projects that would not otherwise
exist.  In the United States, the gaming industry is a $60.3 billion
business consisting of 860 casinos spread throughout 48 states. In addition,
many jurisdictions are currently pushing for liberalization of existing gaming
legislation and introduction of new regulations designed to augment sources of
gaming tax revenue.  Twelve states now allow commercial (non-tribal)
gaming, compared to only two in 1980.




The
conventional wisdom that the gaming industry is recession-proof has been
challenged over the last 12 months. However, recent economic pressures have
prompted new efforts to legalize casino gaming and to liberalize gaming laws to
fill fiscal gaps.  Furthermore, in the current environment, operators
are pressured to extract the most out of existing operations by enhancing the
competitiveness of their slot machine floor at minimal investment rather than
deploying cash into new or expanded equipment or facilities. While historical
U.S. trends suggest a resilient recovery will eventually be at hand, through our
PlayerVision product we expect to offer the casino operator a product that
will enhance the gaming machine’s productivity while simultaneously enhancing
the customer’s playing experience – all with little or no money up
front.




PlayerVision
can also be deployed outside the United States.  Casinos in
jurisdictions such as Macau, Western and Central Europe, South Korea, Singapore,
Australia, Japan, Vietnam, Taiwan, and the Philippines should be attracted to
our product.  However, we will need to get approval from the relevant
regulatory bodies prior to a roll out of PlayerVision in these
jurisdictions.




1.7
million EGMs (Electronic Gaming Machines or slot machines as they are commonly
referred to) were installed worldwide as of the end of 2007, with approximately
50% in North America. These machines represent the gaming industry's most
resilient and predictable revenue stream and usually comprise well over 50% of
total gaming revenue for the typical casino operator. The historical EGM average
unit replacement cycle of 5-6 years will likely be stretched out over the next
few years as the recession works its way out of the world
economy.  However, new technology may disrupt the normal replacement
cycle.  The last such technology was the "Ticket-In-Ticket-Out"
revolution in 2000. We believe the next such revolution will be Server-Based
Gaming, which allows operators to manage casino floors more effectively and
efficiently.  It will also usher into the gaming industry the art of
multi-tasking as the EGM will now be able to provide the player several
experiences concurrently with gambling on the next pull of the handle (or more
typically, the next push of the button).




Increased
popularity and social acceptance of gaming as a leisure activity is also fueling
the growth of server-based gaming. According to the 2008 American Gaming
Association Survey of Casino Entertainment, 84% of Americans believe that casino
gaming is an acceptable activity for themselves or






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others,
an increase of 5% since 2006. The simplicity and instant appeal of EGMs versus
other gambling opportunities create familiarity and adoption across the board,
characterized by ease-of-use and informality. EGMs have demonstrated greater
appeal than any other gaming activity. Additionally, technology has become a
significant part of the gaming experience, allowing for more innovative content
and customer convenience. A new younger player demographic translates into a
multi-tasking "user interface" that creates new revenue
opportunities.




We
believe that the global casino and gaming industry, over time, will grow due to
the increasing acceptance of gaming as a form of entertainment and the
increasing need of various jurisdictions for increased revenue from
taxes.  EGM growth is expected to grow even faster than casino growth
as a result of the following:




·
            Simplicity and instant appeal
      of gaming machines versus other games.Characterized by simplicity
      and informality, gaming machines have greater appeal to all eligible
      demographic segments of the population than any other gaming
      activity.




·
            Continuing evolution of gaming
      machines.The launch of cashless technology (ticket-in/ticket-out
      versus coins or tokens) in 2000, the introduction of new and more
      sophisticated and interactive theme-based games and the increasing
      non-gaming functionality currently becoming available on the EGM
      platform.




As the
gaming machine base continues to grow we believe that our target market will
continue to expand.  We believe that a consistent need for improvement
in gaming activities and demand for greater entertainment value for players will
give us the ability to market PlayerVision aggressively and to provide gaming
operators with a single solution to introduce additional functionality without a
wholesale replacement of their existing gaming machines.




Our
Strategy




Our
strategy is to provide the premier enhancement system for the installed base of
gaming machines by delivering additional wagering opportunities, cost saving
opportunities, promotions, games, and other content on existing gaming machines
and delivering those same applications over the newer server based deliver
systems and gaming machines.  No assurance can be given, however, that
we will be successful.  In order to achieve this objective, we are
pursuing the following strategies:




·
            Increased Revenue Potential
      for Operators.Our sales effort stresses the ability of our
      PlayerVision system to provide gaming operators with the opportunity to
      increase significantly the earning power and functionality of their gaming
      machines. Since our PlayerVision system directly interfaces with the
      existing video, audio, and printing functions of the machine, we are able
      to use the machine’s existing video screen (or attached alternatives) to
      deliver additional games, promotions, additional wagering opportunities,
      and other forms of entertainment. If desired by our customers, we have a
      kiosk driven ticket redemption system featuring its own accounting system
      separate and apart from the main slot accounting system.  We can
      also provide alternative viewing options if the casino operator would
      prefer not to use the main screen.




·
            Compelling Patron Experience.We expect to offer PlayerVision as a single multimedia delivery
      system for a wide range of content directly on the existing screens of
      gaming machines. By adding PlayerVision, a gaming machine is transformed
      from a single use, single wager option into a multimedia experience that
      can deliver to the player extra wagering opportunities and targeted,
      promotional content in addition to traditional slot play. Through
      PlayerVision, the operator will be able to enhance the functionality
      of its existing EGMs and deliver targeted gaming opportunities and
      promotional content to players.  In exchange, the player will
      receive an enhanced playing experience, information about promotions,
      entertainment, and dining opportunities, and the opportunity to win
      jackpots and other prizes.




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·
            Reduce operating costs.Through our Beverage on Demand feature, an operator may be able to
      cut its drink delivery costs approximately in
  half.




·
            Low Operator Risk.As
      an alternative, we expect to offer the gaming operators the ability to
      substantially reduce operating cost, extend the replacement cycle and
      increase significantly the earning power and functionality of their
      existing gaming machines at little or no up front capital cost. This
      strategy involves installing PlayerVision at little or no up front capital
      cost to gaming operators in exchange for recurring software license
      fees.




·
            New Applications.We
      plan to continue the development of innovative applications to be
      delivered through our PlayerVision system. To date, we have designed our
      PlayerVision system to deliver advertisements, multimedia content, casino
      services, promotional materials, and wagering
      opportunities.  Since PlayerVision engages the existing video,
      audio and printing functions of the gaming machine, and since our kiosk
      driven ticket redemption system features its own path to the slot
      accounting system, we believe that our PlayerVision system can be used as
      a platform to deliver a wide array of casino services, multimedia or
      gaming content directly to patrons.




PlayerVision
is a single, flexible, and dynamic platform that can be used to deliver casino
services, multimedia or gaming content developed either by us or third parties.
Because of the integration of PlayerVision with all of the functions of the
gaming machine, we expect that PlayerVision can be used by gaming operators
to control all aspects of their gaming machines. By establishing our
PlayerVision system as the premier enhancement system for the installed base of
gaming machines, we believe that we will be able to establish a significant
barrier to entry for any potential competitors.




PlayerVision
System




With
deployment of PlayerVision, players will at once enjoy a
multi-wagering/multi-tasking immersive experience that results in a substantial
increase in percentage of wallet for the operator. A powerful retrofit solution,
we expect that PlayerVision will enable operators to reduce operating costs and
increase efficiencies for both new and legacy gaming floors,
featuring;




·
            On-the-fly
      machine "customization" by casino and customer at minimal cost, using
      existing slot screens for a variety of innovative
      applications;




·
            Increased
      time on device with added wagering and targeted
  marketing;




·
            Beverage-on-demand,
      allowing reduced head count with improved player
    experience;




·
            On-demand
      multimedia offering private access to shows, products and
      services.




We expect
to offer PlayerVision at a little to no up front capital cost to the
operator in exchange for recurring license fees, thereby increasing earning
power and functionality of gaming machines without financial risk.




Slot
operations serve as the primary source of revenue in almost any gaming
operation. In need of sources of incremental revenue and cost savings, the
industry is primed for a technology that utilizes the processing power now
available through server-based environments. By installing off-the-shelf CPUs
into any EGM (a 30-minute process), PlayerVision converts a single-use slot
machine into a multi-dimensional revenue generator and cost container. We
believe we are the developer/owner of some of the most significant IP and
technology in the industry related to deployment of server-based gaming
applications.  No assurances can be given
that the deployment of server-based gaming applications will be
successful or that our IP and technology will play a significant role in
server-based gaming applications.




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Casino
Games




We operate
two keno games, Nevada Numbers and The Million Dollar Ticket, and collect
royalties on several bingo style games. The revenue generated from our casino
games is primarily based on collecting per ticket or per game fees from our
various customers.  On March 31, 2009, our contract with Treasure Island to
maintain the $3.9 million base jackpot bankroll for Nevada Numbers and The
Million Dollar Ticket expired, and we shut down the games as a result.  We
expect to restart the games as soon as we find funding for the $3.9 million base
jackpot.




Nevada
Numbers




Nevada
Numbers is a variation of classic keno which is currently played in many casinos
in Nevada. Keno is a game in which bets are made and recorded on a keno ticket.
This ticket contains 80 numbered squares that correspond exactly to 80 numbered
balls in a selection hopper. A player marks a ticket to play between two and 20
different numbers. The keno operator then draws 20 out of the 80 numbers and
displays the results throughout the casino. The more numbers that match, the
more money the player wins. Payout awards vary from casino to casino and depend
on the amounts wagered.




Nevada
Numbers differs from classic keno in that fewer numbers (five rather than 20)
are drawn and a “linked’’ or “progressive’’ component has been added. We have
linked together the play of Nevada Numbers at multiple casinos so that players
at several different locations all choose numbers that are matched to the same
five-number draw. In addition, Nevada Numbers features a starting jackpot of
$5.0 million that is progressive, in that it grows with the purchase of each
Nevada Numbers ticket and can be won at each draw.  Any winner of the
Nevada Numbers progressive jackpot will be paid the amount of the progressive
meter in equal installments over a period of 20 years.  At our sole
discretion, we may offer the winner an option to receive a discounted value
immediately.  The process of linking games and creating a progressive
jackpot provides an enticement to players because of the potential for a
life-changing event.




Although
Nevada Numbers has traditionally been limited to the keno lounges of casinos, we
are taking measures to expand its visibility.  First, we have
incorporated Nevada Numbers as part of NumberVision.  Through
NumberVision, we propose to position Nevada Numbers as a dynamic game that will
give players the opportunity to win a progressive jackpot of at least $5.0
million. Second, subject to regulatory approval of NumberVision, we will market
the game to third-party race and sports books for use on their existing wagering
terminals.




The
Million Dollar Ticket




Based on
the classic keno game, The Million Dollar Ticket offers the chance to win $1.0
million and a progressive jackpot. In order to win the $1.0 million and the
progressive jackpot, the player must pick 10 numbers correctly out of 20 drawn
from a pool of 80. Although the distribution of The Million Dollar Ticket is
limited, we are anticipating growth in 2009 by making the game available in
third-party race and sports book locations.




Super
Bingo Games




Super
Bingo Games are odds-based bingo games with life-changing prizes that are
offered as side bets to existing bingo games.  We offer these games at
various jackpot levels-as high as $500,000 in some cases.  We purchase
insurance for the larger jackpots.  Our Super Games are structured so
that the bingo operator is guaranteed a profit for each wager
made.  We have placed Super Bingo Games in seven Nevada casinos and
eighteen non-Nevada locations.  We expect to grow the Super Bingo
Games segment in both Nevada and non-Nevada locations throughout
2009.




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Keno
and Bingo Systems and Supplies




The
worldwide keno system market is limited and has been declining for several
years. We are attempting to invigorate the market and gain an additional share
of the market by enhancing our keno system through the addition of several new
games and features to the platform.




Keno and
bingo supplies sales contribute significantly to our revenue, but consist of low
margin items, including crayons, various paper products, and ink.




Other
Businesses




We also
generate revenue through various keno participation agreements and the
maintenance of our equipment under service contracts.




·
            Nevada Keno and Related
      Participation Agreements.Through agreements with participating
      casinos, we offer Nevada Keno, a “satellite-linked’’ traditional keno game
      played in multiple casinos.  Nevada Keno was temporarily
      discontinued on February 29, 2008, and then restarted in the fall of 2008.
      We are currently operating Nevada Keno in two casinos.  However,
      we believe we will soon be operating in 2-3 more.  However, no
      assurances can be given that we will operate Nevada Keno in additional
      casinos.  Additionally, principally in Nebraska, we provide
      equipment in return for a share in the revenue generated in various keno
      salons.




·
            Service Contracts.Most
      of our customers that purchase keno and bingo equipment also purchase a
      service contract from us to provide routine maintenance for the
      equipment.




RoutePromo




RoutePromo
is designed to deliver promotional tickets or vouchers to players upon the
occurrence of an event specified by the operator, such as hitting a
four-of-a-kind or better on a video poker machine.  The key feature of
RoutePromo is its ability to recognize a specified event generated by the game
and deliver the programmed response to the specified event.




RoutePromo
is designed to work as follows:




·
            first,
      the operator specifies the events that will trigger RoutePromo, such as a
      four-of-a- kind or better on a video poker
  machine;




·
            second,
      upon the occurrence of the specified event, RoutePromo is activated and a
      message is sent to the gaming machine to issue a promotional ticket or
      voucher;




·
            third,
      the gaming machine alerts the player and prints the free promotional
      ticket or voucher; and




·
            fourth,
      the gaming machine returns to its original
  state.




We
currently charge a fixed monthly fee for the ability to offer
RoutePromo.




Through
our agreement with United Coin Machine Company, the largest slot route operator
in Nevada, we developed a variation of our keno game called The Million Dollar
Ticket, known as the Gamblers Bonus Million Dollar Ticket, to be used in
conjunction with RoutePromo.  Gamblers Bonus Million Dollar Ticket is
a free promotional game that gives players the chance to win various
prizes,




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including
a $1.0 million grand prize, by matching numbers on their promotional tickets
with numbers picked in a random weekly drawing.  Under our agreement,
we are obligated to provide software, hardware, and support to United Coin for
the game.  In addition, we are financially responsible for the payouts
associated with the game.  In return, United Coin is obligated to pay
us $1.25 for each ticket distributed.  During the second quarter of
2008, we rolled out Gamblers Bonus Million Dollar Ticket at approximately 100
United Coin route locations.  On January 31, 2009, we closed down the
game because there was little interest among bar owners and convenience store
owners to offer an expensive promotion in difficult economic times.




Manufacturing




We
outsource the manufacturing of the various components of our PlayerVision 3
system to Apple, Hitachi, and various other key suppliers.  Lead times
for certain key components can be as long as eight weeks.




Marketing
and Distribution




PlayerVision




As part
of our objective to provide the leading single multimedia and game delivery
system, we have started to implement a plan that will market our PlayerVision
system to customers through direct and indirect channels. Our plan involves the
following steps:




·
            Direct Sales Efforts.Through the hiring of additional personnel to our sales and
      marketing staff, we will market PlayerVision to operators located
      primarily in North America and to Native American tribes. As part of our
      direct sales efforts, we attend trade shows, such as G2E in Las Vegas,
      Nevada.




·
            Strategic Partnerships.We supplement our direct sales efforts by targeting third-party
      distributors and regional operators.  IGT and Ebet are key
      examples of entities that we expect will be distributing our
      product.  By forming strategic relationships with these parties,
      we hope to gain access to smaller and more fragmented markets around
      the globe and secure the broadest placement for
    PlayerVision.




We plan
to conduct all of our sales and marketing efforts from our headquarters in Las
Vegas, Nevada. Although we do not have any current plans to open any sales
offices, we will review the need for such additional offices in response to the
needs of our customers and our strategic partners.




Casino
Games




We
license our games directly to casinos. We make initial contacts through the
mailing of marketing materials, referrals, or direct solicitation by our
employees and marketing agents. We promote licensed games to the general public
using various types of media, including billboards, newspapers, magazines,
radio, and television. Advertising within a particular casino may include
advertisement on strategically placed LCDs, table tents, flyers, signs on the
tops of gaming machines, and show cards to stimulate curiosity and game
play.




Keno
and Bingo Systems and Supplies.




We are
one of the world’s few keno equipment suppliers. Most sales in this area result
from unsolicited inquiries or direct solicitation of customers by our sales
staff. The marketplace for bingo equipment, electronic playing devices, and
supplies in Nevada is relatively small, consisting of approximately 40 potential
customers. However, we believe that the recent introduction of wireless gaming
devices into the marketplace in Nevada and other jurisdictions may increase the
potential market




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for
bingo-related products. No assurance can be given that the market for
bingo-related products will increase.  Direct sales to the casino are
the primary means of sale for these products. The marketplace for gaming
supplies is large and geographically dispersed. Our primary marketing tool is a
catalog that we periodically distribute to our customers and potential
customers.




Competition




PlayerVision
System




We
encounter significant competition in the market for innovative gaming
technologies that deliver interactive gaming, animated content, and
cross-promotional opportunities to gaming operators. The key competitive factors
are functionality, accuracy, reliability, and pricing. We believe that
PlayerVision is a single, integrated solution because of the
following:




·
            PlayerVision
      uses the existing primary screen of the gaming machine or a smaller
      secondary video screen or a mounted side
screen;




·
            PlayerVision
      engages the existing video,  audio and printing functions of the
      gaming machine regardless of the
manufacturer;




·
            PlayerVision
      involves little or no up front capital cost to gaming operators;
      and




·
            PlayerVision
      delivers a broad range of
functionalities.




We are
unaware of any other product that delivers casino services, multimedia and
gaming content through the existing various screens of gaming machines. Although
we face competition from products that use smaller secondary video screens and
cost thousands of dollars, such as iView developed by Bally Systems and NexGen
developed by International Game Technology, we expect to be able to deliver
content for little or no up front capital cost and deliver the content directly
to the patron through all existing screens rather than just an auxiliary
2x6-inch screen. In terms of deployment, we believe that there is no one else
offering a content delivery system for existing gaming machines on the main
screen.




Since we
are able to use all existing screens of a gaming machine, as well as its
existing video, audio and printing functions, we expect to offer to gaming
operators a solution that requires little or no up front capital cost, involves
minimal installation time, and interfaces with virtually all gaming machines. In
addition, although there are products that deliver advertising or promotional
content through secondary video screens installed onto gaming machines, we do
not believe that there are currently any products that can deliver the
additional wagering opportunities that PlayerVision can or any products that can
provide an expandable platform for additional content on the existing screens of
gaming machines.




Nevertheless,
there is no guarantee that PlayerVision will be accepted in the
marketplace.  Many of our potential competitors possess substantially
greater financial, technical, marketing, and other resources than we do, which
affords them competitive advantages over us. As a result, our competitors may
introduce products that have advantages over PlayerVision in terms of features,
functionality, ease of use, and revenue producing potential.  If we
are unable to compete effectively, or incur any delays, either regulatory or
otherwise, in our ability to fully introduce PlayerVision, our operations and
financial condition may be adversely affected.




Keno
and Bingo Systems and Supplies.




The keno
and bingo systems and supplies industry is characterized by limited competition.
We compete primarily with other companies that provide keno and bingo systems,
including electronic systems, keno, bingo supplies, and related services. In
addition, we compete with other similar forms of entertainment, including casino
gaming, other forms of Class II gaming, and lotteries. Our key competitor is
XpertX in the keno market. We compete by providing superior service, lower
prices, innovative games, and a quality fully functional keno
system.




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Research
and Development




Our
research and development efforts focus on developing new applications for our
PlayerVision system and reducing its cost. During 2008 we considerably expanded
our internal R&D effort by employing 5 new software engineers, one of which
became our Chief Technical Officer in March 2008.  In addition to our
own research and development staff, we plan to engage, from time to time,
independent consultants and advisors to assist us.




Intellectual
Property and Other Proprietary Rights




We hold
several patents, including a patent related to Nevada Numbers.  We
have been recently issued a patent for “closed loop,” a key application in our
PlayerVision technology.  In addition, we have several more patents
pending with respect to the PlayerVision system and certain of its various
applications. We also hold several trademarks filed with the state of Nevada and
the U.S. Patent and Trademark Office, including trademark rights to
PlayerVision, Nevada Numbers and The Million Dollar Ticket, and other
intellectual property that is protected by federal copyright and trade secret
laws.




We rely
on the proprietary nature of our intellectual property, primarily in the form of
patent protection, for development of our products.  We believe that
our success depends in part on protecting our intellectual
property.  If we cannot protect our intellectual property against the
unauthorized use by others, our competitive position could be
harmed.




The risks
associated with our intellectual property, include the following:




·
            The
      inability of intellectual property laws to protect our intellectual
      property rights;


·
            Attempts
      by third parties to challenge, invalidate, or circumvent our intellectual
      property rights;


·
            The
      unauthorized use by third parties of information that we regard as
      proprietary despite our efforts to protect our proprietary
      rights;


·
            The
      independent development of similar technology;
  and


·
            The
      inability to protect our intellectual property rights in foreign
      jurisdictions.





We may
not be able to obtain effective patent, trademark, service mark, copyright, and
trade secret protection in every country in which our products are used. We may
find it necessary to take legal action to enforce or protect our intellectual
property rights or to defend against claims of infringement, and such actions
may be unsuccessful.  In addition, we may not be able to obtain a
favorable outcome in any intellectual property
litigation.  Significant amounts could be expended to defend and
protect our intellectual property.  Moreover, our competitors may develop
products or technologies similar to ours without infringing on our intellectual
property rights.




Government
Regulation




We are
subject to regulation by governmental authorities in most jurisdictions in which
we operate. Gaming regulatory requirements vary from jurisdiction to
jurisdiction, and obtaining licenses and findings of suitability for our
officers, directors, and principal stockholders, registrations, and other
required approvals with respect to us, our personnel, and our products are time
consuming and expensive. Generally, gaming regulatory authorities have broad
discretionary powers and may deny applications for or revoke approvals on any
basis they deem reasonable. We have approvals that enable us to conduct our
business in numerous jurisdictions, subject in each case to the conditions of
the particular approvals. These conditions may include limitations as to the
type of game or product we may sell or lease, as well as limitations on the type
of facility, such as riverboats, and the territory within which we may operate,
such as tribal nations.




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Jurisdictions
in which we, and specific personnel, where required, have authorizations with
respect to some or all of our products and activities include New Jersey,
Nevada, Mississippi, Arizona, Nebraska, Oregon, Washington, Iowa, Minnesota and
Montana. In addition to these jurisdictions, we have authorizations with respect
to certain Native American tribes throughout the United States that have
compacts with the states in which their tribal dominions are located or operate
or propose to operate casinos. These tribes may require suppliers of gaming and
gaming-related equipment to obtain authorizations.




Overview




Gaming Devices and Equipment.We sell or lease products that are considered to be “gaming devices’’ or
“gaming equipment’’ in jurisdictions in which gaming has been legalized.
Although regulations vary among jurisdictions, each jurisdiction requires
various licenses, findings of suitability, registrations, approvals, or permits
for companies and their key personnel in connection with the manufacture and
distribution of gaming devices and equipment.




Associated Equipment.Some of
our products fall within the general classification of “associated equipment.’’
“Associated equipment’’ is equipment that is not classified as a “gaming
device,’’ but which has an integral relationship to the conduct of licensed
gaming. Regulatory authorities in some jurisdictions have the discretion to
require manufacturers and distributors to meet licensing or suitability
requirements prior to or concurrently with the use of associated equipment. In
other jurisdictions, the regulatory authorities must approve associated
equipment in advance of its use at licensed locations. We have obtained approval
of our associated equipment in each jurisdiction that requires such approval and
in which our products that are classified as associated equipment are sold or
used.




Regulation of Officers, Directors,
and Stockholders.In many jurisdictions, any officer or director is
required to file an application for a license, finding of suitability, or other
approval and, in the process, subject himself or herself to an investigation by
those authorities. As for stockholders, any beneficial owner of our voting
securities or other securities may, at the discretion of the gaming regulatory
authorities, be required to file an application for a license, finding of
suitability, or other approval and, in the process, subject himself or herself
to an investigation by those authorities. The gaming laws and regulations of
most jurisdictions require beneficial owners of more than 5% of our outstanding
voting securities to file certain reports and may require our key employees or
other affiliated persons to undergo investigation for licensing or findings of
suitability.




In the
event a gaming jurisdiction determines that an officer, director, key employee,
stockholder, or other personnel of our company is unsuitable to act in such a
capacity, we will be required to terminate our relationship with such person or
lose our rights and privileges in that jurisdiction. This may have a materially
adverse effect on us. We may be unable to obtain all the necessary licenses and
approvals or ensure that our officers, directors, key employees, affiliates, and
certain other stockholders will satisfy the suitability requirements in each
jurisdiction in which our products are sold or used. The failure to obtain such
licenses and approvals in one jurisdiction may affect our licensure and
approvals in other jurisdictions. In addition, a significant delay in obtaining
such licenses and approvals could have a material adverse effect on our business
prospects.




Regulation
and Licensing – Nevada




The
manufacture, sale, and distribution of gaming devices for use or play in Nevada
or for distribution outside of Nevada, the manufacturing and distribution of
associated equipment for use in Nevada, and the operation of gaming machine
routes and inter-casino linked systems in Nevada are subject to the Nevada
Gaming Control Act and the regulations promulgated thereunder and various local
ordinances and regulations. These activities are subject to the licensing and
regulatory control of various Nevada gaming authorities, including the Nevada
Gaming Commission, the Nevada State Gaming Control Board, and various local,
city, and county regulatory agencies, collectively referred to as the Nevada
Gaming Authorities.




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The laws,
regulations, and supervisory practices of the Nevada Gaming Authorities are
based upon declarations of public policy with the following
objectives:




·
            preventing
      any direct or indirect involvement of any unsavory or unsuitable persons
      in gaming or the manufacture or distribution of gaming devices at any time
      or in any capacity;




·
            strictly
      regulating all persons, locations, practices, and activities related to
      the operation  of licensed gaming establishments and the
      manufacturing or distribution of gaming devices and
    equipment;




·
            establishing
      and maintaining responsible accounting practices and
      procedures;




·
            maintaining
      effective controls over the financial practices of licensees, including
      requirements covering minimum procedures for internal fiscal controls and
      safeguarding assets and revenue, reliable recordkeeping, and periodic
      reports to be filed with the  Nevada Gaming
      Authorities;




·
            preventing
      cheating and fraudulent practices;
and




·
            providing
      and monitoring sources of state and local revenue based on taxation and
      licensing fees.




Change in
such laws, regulations, and procedures could have an adverse effect on our
operations.




We are
registered with the Nevada Gaming Commission as a publicly traded corporation,
or a Registered Corporation. We are also licensed in Nevada as a manufacturer
and distributor of gaming devices and as an operator of an inter-casino linked
system. We have obtained from the Nevada Gaming Authorities the various
authorizations they require to engage in manufacturing, distribution, and
inter-casino linked system activities in Nevada. The regulatory requirements set
forth below apply to us as a Registered Corporation and as a manufacturer,
distributor, and operator of an inter-casino linked system. Our gaming approvals
and licenses are also conditioned to allow the Chairman of the Nevada State
Gaming Control Board or his designee to order us to cease any gaming activities
if the Chairman determines that the minimum bankroll requirements set forth in
the Nevada Gaming Control Act are not being met.




All
gaming devices that are manufactured, sold, or distributed for use or play in
Nevada, or for distribution outside of Nevada, must be manufactured by licensed
manufacturers and distributed and sold by licensed distributors. The Nevada
Gaming Commission must approve all gaming devices manufactured for use or play
in Nevada before distribution or exposure for play.  The Chairman of
the Nevada State Gaming Control Board must administratively approve associated
equipment before it is distributed for use in Nevada. Inter-casino linked
systems must also be approved by the Nevada Gaming Commission. The approval
process for an inter-casino linked system includes rigorous testing by the
Nevada State Gaming Control Board, a field trial, and a determination as to
whether the inter-casino linked system meets standards that are set forth in the
regulations of the Nevada Gaming Commission. On November 19, 2001, we received
the final approval of the Nevada Gaming Commission for our inter-casino linked
system known as Nevada Numbers. In November 2007, we received final approval
from Nevada for our AdVision and Live TV software applications on the
PlayerVision 2 platform on IGT Game




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King
Machines only. In addition, the Nevada Gaming Control Act requires any person,
such as our company as an operator of an inter-casino linked system, that
receives a share of gaming revenue from a gaming device operated on the premises
of a licensee, to remit and be liable to the licensee for that person’s
proportionate share of the license fees and tax paid by the licensee. The gross
revenue fees for non-restricted locations are 6.75% of gross revenue, which is
equal to the difference between amounts wagered by casino players and payments
made to casino players. Significant increases in the fixed fees or taxes
currently levied per machine or the fees currently levied on gross revenue could
have a material adverse effect on our operations.




As a
gaming licensee (a “Registered Corporation”), we are periodically required to
submit detailed financial and operating reports to the Nevada Gaming Commission
and furnish any other information the Nevada Gaming Commission may require. No
person may receive any percentage of gaming revenue from us without first
obtaining authorizations from the Nevada Gaming Authorities.




The
Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, us in order to determine whether
such individual is suitable or should be licensed as a business associate of a
gaming licensee. Our officers, directors, and certain key employees are required
to file applications with the Nevada Gaming Authorities and may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada
Gaming Authorities may deny an application for licensing for any cause that they
deem reasonable. A finding of suitability is comparable to licensing. Both
require submission of detailed personal and financial information, which is
followed by a thorough investigation. The applicant for licensing or a finding
of suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities. In addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have the power to disapprove a change
in corporate position.




If the
Nevada Gaming Authorities were to find an officer, director, or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
us, we would have to sever all relationships with that person. In addition, the
Nevada Gaming Commission may require us to terminate the employment of any
person who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.




We are
required to submit detailed financial and operating reports to the Nevada Gaming
Commission. In addition, we are required to report to or have approved by the
Nevada Gaming Commission substantially all material loans, leases, sales of
securities, and similar financing transactions.




Should we
be found to have violated the Nevada Gaming Control Act, the licenses we hold
could be limited, conditioned, suspended, or revoked. In addition, we and the
persons involved could be required to pay substantial fines, at the discretion
of the Nevada Gaming Commission, for each separate violation of the Nevada
Gaming Control Act. The limitation, conditioning, or suspension of any of our
licenses could, and revocation of any license would, materially adversely affect
our manufacturing, distribution, and inter-casino linked system
operations.




Regulation of Security Holders.Any beneficial holder of our voting securities, regardless of the number
of shares owned, may be required to file an application, be investigated, and
have his or her suitability as a beneficial holder of our voting securities
determined if the Nevada Gaming Commission finds reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.




The
Nevada Gaming Control Act requires any person that acquires beneficial ownership
of more than 5% of a Registered Corporation’s voting securities to report the
acquisition to the Nevada Gaming Commission. It also requires beneficial owners
of more than 10% of a Registered Corporation’s voting securities to apply to the
Nevada Gaming Commission for a finding of suitability within 30 days after
the




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Chairman
of the Nevada State Gaming Control Board mails a written notice requiring such
filing. Under certain circumstances, an “institutional investor,’’ as defined in
the Nevada Gaming Control Act, which acquires more than 10%, but not more than
15%, of the Registered Corporation’s voting securities may apply to the Nevada
Gaming Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor that has obtained a waiver may, in certain
circumstances, hold up to 19% of a Registered Corporation’s voting securities
for a limited period of time and maintain the waiver.




An
institutional investor is deemed to hold voting securities for investment
purposes if the voting securities were acquired and are held in the ordinary
course of its business as an institutional investor and were not acquired and
are not held for the purpose of causing, directly or indirectly (1) the election
of a majority of the members of the board of directors of the Registered
Corporation; (2) any change in the Registered Corporation’s corporate charter,
bylaws, management, policies, or operations or those of any of its gaming
affiliates; or (3) any other action that the Nevada Gaming Commission finds to
be inconsistent with holding the Registered Corporation’s voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include (a) voting
on all matters voted on by stockholders; (b) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in management, policies or
operations; and (c) other activities the Nevada Gaming Commission may determine
to be consistent with investment intent. If the beneficial holder of voting
securities that must be found suitable is a corporation, partnership, or trust,
it must submit detailed business and financial information, including a list of
beneficial owners. The applicant is required to pay all costs of
investigation.




Any
person who fails or refuses to apply for a finding of suitability or a license
within 30 days after being ordered to do so by the Nevada Gaming Commission or
the Chairman of the Nevada State Gaming Control Board may be found unsuitable.
The same restrictions apply to a record owner if the record owner, after
request, fails to identify the beneficial owner. Any stockholder of a Registered
Corporation found unsuitable and that holds, directly or indirectly, any
beneficial ownership in the voting securities beyond such period of time as the
Nevada Gaming Commission may specify for filing any required application may be
guilty of a criminal offense. Moreover, the Registered Corporation will be
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be a stockholder or to have any other relationship with the
Registered Corporation, it (i) pays that person any dividend on its voting
securities; (ii) allows that person to exercise, directly or indirectly, any
voting right conferred through securities ownership; (iii) pays remuneration in
any form to that person for services rendered or otherwise; or (iv) fails to
pursue all lawful efforts (including, if necessary, the immediate purchase of
said voting securities for cash at fair value) to require such unsuitable person
to completely divest all voting securities held.




The
Nevada Gaming Commission, in its discretion, may require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Gaming Commission finds reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the state of Nevada. If
the Nevada Gaming Commission determines that a person is unsuitable to own such
security, it may sanction the Registered Corporation, which sanctions may
include the loss of its approvals if, without the prior approval of the Nevada
Gaming Commission, it: (i) pays to the unsuitable person any dividend, interest,
or other distribution; (ii) recognizes any voting right of such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.




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Regulation of Capital Stock.We are required to maintain current stock ledgers in Nevada that may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record owner may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record owner
unsuitable. We are also required to render maximum assistance in determining the
identity of the beneficial owners of our securities. The Nevada Gaming
Commission has the power to require us to imprint our stock certificates with a
legend stating that the securities are subject to the Nevada Gaming Control Act.
To date, the Nevada Gaming Commission has not imposed such a requirement on
us.




We may
not make a public offering of our securities without the prior approval of the
Nevada Gaming Commission if the securities or proceeds are to be used to
construct, acquire, or finance gaming facilities in Nevada or to retire or
extend obligations incurred for such purposes. Such approval, if given, does not
constitute a finding, recommendation, or approval by the Nevada Gaming
Commission or the Nevada State Gaming Control Board as to the accuracy or
adequacy of the prospectus or the investment merit of the offered securities,
and any representation to the contrary is unlawful. Any offer by us to sell
common stock will require the review of, and prior approval by, the Nevada
Gaming Commission.




Changes in Control.Changes
in control of a Registered Corporation through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct,
by which anyone obtains control, may not lawfully occur without the prior
approval of the Nevada Gaming Commission. Entities seeking to acquire control of
a Registered Corporation must meet the strict standards established by the
Nevada State Gaming Control Board and the Nevada Gaming Commission prior to
assuming control of a Registered Corporation. The Nevada Gaming Commission also
may require persons that intend to become controlling stockholders, officers, or
directors, and other persons who expect to have a material relationship or
involvement with the acquired company, to be investigated and licensed as part
of the approval process.




The
Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities, and corporate defense tactics
affecting Nevada corporate gaming licensees, and Registered Corporations that
are affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Gaming Commission has established a regulatory
scheme to minimize the potentially adverse effects of these business practices
upon Nevada’s gaming industry and to further Nevada’s policy to:




·
            assure
      the financial stability of corporate gaming licensees and their
      affiliates,




·
            preserve
      the beneficial aspects of conducting business in the corporate form,
      and




·
            promote
      a neutral environment for the orderly governance of corporate
      affairs.




In
certain circumstances, approvals are required from the Nevada Gaming Commission
before the Registered Corporation can make exceptional repurchases of voting
securities above market price and before a corporate acquisition opposed by
management can be consummated. The Nevada Gaming Control Act also requires prior
approval of a plan of recapitalization proposed by the Registered Corporation’s
board of directors in response to a tender offer made directly to the Registered
Corporation’s stockholders for the purpose of acquiring control of the
Registered Corporation.




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License Fees and Taxes.License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, must be paid to the state of Nevada and to the
counties and cities in which gaming operations are conducted. These fees and
taxes, depending upon their nature, are payable monthly, quarterly, or annually
and are based upon either a percentage of the gross revenue received or the
number of gaming devices operated. Annual fees are also payable to the state of
Nevada for renewal of licenses as an operator of a gaming machine route,
manufacturer, and/or distributor.




Any
person who is licensed, required to be licensed, registered, required to be
registered, or who is under common control with any such persons, collectively,
“Licensees,’’ and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada State Gaming Control Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada State Gaming Control Board of his or her
participation outside of Nevada. The revolving fund is subject to increase or
decrease at the discretion of the Nevada Gaming Commission. Thereafter,
Licensees are required to comply with certain reporting requirements imposed by
the Nevada Gaming Control Act. Licensees also are subject to disciplinary action
by the Nevada Gaming Commission if they knowingly violate any laws of the
foreign jurisdiction pertaining to the non-Nevada gaming operations, fail to
conduct the foreign gaming operations in accordance with the standards of
honesty and integrity required of Nevada gaming operations, engage in activities
or enter into associations that are harmful to the state of Nevada or its
ability to collect gaming taxes and fees, or employ, contract with, or associate
with, a person in the non-Nevada operations who has been denied a license or
finding of suitability in Nevada on the ground of unsuitability.




Other
Jurisdictions




All other
jurisdictions that have legalized gaming require various licenses,
registrations, findings of suitability, permits, and approvals of manufacturers
and distributors of gaming devices and equipment as well as licensure provisions
related to changes in control. In general, such requirements involve
restrictions similar to those of Nevada.




For
gaming device and system approvals, most jurisdictions in the United States,
including most Native American tribes and state regulatory agencies, accept
testing results from GLI, a leading private gaming device and systems testing
laboratory. GLI also provides testing services for over 400 gaming regulatory
bodies worldwide. GLI has already approved NumberVision, AdVision and Live TV on
our PlayerVision2 platform.  We expect to submit for approval all
of our software applications on the PlayerVision 3 platform sometime between
June and August 2009.  If necessary, we also plan to apply directly
for approvals from those jurisdictions that do not accept GLI testing results
for certain devices and systems, such as New Jersey, Pennsylvania, and
Montana.




Federal
Regulation




The
Federal Gambling Devices Act of 1962, or the Federal Act, makes it unlawful, in
general, for any person to manufacture, transport, or receive gaming machines,
gaming machine type devices, and components across state lines or to operate
gaming machines unless that person has first registered with the Attorney
General of the United States. We have registered and must renew our registration
annually. In addition, the Federal Act imposes various record keeping and
equipment identification requirements. Violation of the Federal Act may result
in seizure and forfeiture of the equipment, as well as other
penalties.




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Application
of Future or Additional Regulatory Requirements




In the
future, we intend to seek the necessary registrations, licenses, approvals, and
findings of suitability for us, our products, and our personnel in other
jurisdictions throughout the world where significant sales of our products are
expected to be made. However, we may be unable to obtain these registrations,
licenses, approvals, or findings of suitability, which if obtained may be
revoked, suspended, or conditioned. In addition, we may be unable to obtain on a
timely basis, or to obtain at all, the necessary approvals of our future
products as they are developed, even in those jurisdictions in which we already
have existing products licensed or approved. If a registration, license,
approval or finding of suitability is required by a regulatory authority and we
fail to seek or do not receive the necessary registration, license, approval or
finding of suitability, we may be prohibited from selling our products for use
in that jurisdiction or may be required to sell our products through other
licensed entities at a reduced profit.




Employees




As of
December 31, 2008, we had 48 full-time employees, 22 of whom were involved in
keno and bingo operations, 8 of whom were involved in engineering and research
and development, 5 of whom were involved in sales, and 13 of whom were involved
in finance and administration. With the implementation of our new business focus
on our PlayerVision system, we anticipate an increase in employees dedicated to
developing and growing this business in the third quarter of
2009.  Our employees are not subject to any collective bargaining
agreement with us. We have never experienced a work stoppage, and we believe our
employee relations to be good.




Corporate
History




We were
incorporated in the State of Nevada on April 28, 1998.




ITEM 1A.   RISK FACTORS.




Not
required.




ITEM 1B.  UNRESOLVED STAFF COMMENTS.




Not
required.





ITEM 2. PROPERTIES.




Our
headquarters are located at 4000 West Ali Baba Lane, Suite D, Las Vegas, Nevada,
89118, which is comprised of approximately 8,200 square feet of office space and
10,000 square feet of warehouse space under a lease agreement recently extended
to May 31, 2009.  This space adequately meets our facility and
capacity requirements; however, we are currently evaluating our alternatives as
we plan to move to another location.  We also have a Reno, Nevada
office consisting of approximately 7,500 square feet of space under a recently
executed lease that expires in 2012, and an Omaha, Nebraska service office
consisting of approximately 880 square feet of space under a lease expiring on
November 30, 2010.




ITEM 3. LEGAL
PROCEEDINGS




On
September 12, 2007, IGT filed a lawsuit against us in the United States District
Court of Nevada captioned IGT v. Las Vegas Gaming, Inc., case no.
3:07-cv-00415-BES-VPC alleging copyright infringement, trademark infringement,
trade dress infringement and false designation of origin relating to the
operation of our PlayerVision system on IGT’s Game King® gaming
machines.  IGT was seeking injunctive and monetary relief in the case,
including treble damages and profits, claiming that IGT would be irreparably
harmed by LVGI if LVGI’s PlayerVision were deployed in the
marketplace.  On June 12, 2008, IGT and LVGI jointly filed a “stay” of
the lawsuit and began settlement negotiations.  On October 14, 2008,
pursuant to the settlement effective September 30, 2008, the case was dismissed
with prejudice.




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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.





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




No
matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2008.




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PART
II




ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.




Our
authorized capital stock consists of 90,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share, that may be issued in one or more series.




Common
Stock




Our Board
of Directors has designated two series of common stock, one referred to as
“Common Stock’’ and the other referred to as “Common Stock Series
A.’’  As of December  31, 2008, there were no shares of our
Common Stock outstanding and 14,849,690 shares of our Common Stock Series A
outstanding held of record by 575 stockholders.  There is no active
market for our Common Stock or our Common Stock Series A.




Each
share of Common Stock and Common Stock Series A has identical rights and
privileges in every respect. Each holder of either Common Stock or Common Stock
Series A has the right to cast one vote for each share held of record on all
matters submitted to a vote of our holders of common stock. The holders of
either series of common stock vote together as a single class except to the
extent that voting as a separate class or series is required by law. The holders
of both series of common stock are entitled to receive dividends on a pro rata
basis, payable in cash, stock, or otherwise, as may be declared by our Board of
Directors out of any funds legally available for the payment of dividends,
subject to the rights of holders of any outstanding preferred stock. We did not
declare any cash dividend on our Common Stock or Common Stock Series A in fiscal
2008 or 2007. Upon our liquidation, dissolution or winding-up, the holders of
both series of common stock will be entitled to receive after distribution in
full of any preferential amounts owed to debt holders or holders of our
preferred stock, all of the remaining assets available for distribution ratably
in proportion to the number of shares of common stock held by them. Neither
series of our common stock provides holders with preferences or any preemptive,
conversion or exchange rights. There are no redemption or sinking fund
provisions applicable to either series of common stock.




Preferred
Stock




Our
articles of incorporation authorize our Board of Directors, without further
stockholder action, to issue up to 10,000,000 shares of preferred stock in one
or more series and to fix the designations, powers, preferences, and privileges
of the preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preference, sinking fund terms, and
number of shares constituting any series or the designation of any series. Our
Board of Directors, without stockholder approval, has the authority to issue
preferred stock with voting, conversion, or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Depending upon the terms of preferred stock established by our Board of
Directors, any or all series of preferred stock could have preference over
common stock with respect to dividends and other distributions and upon our
liquidation, and could have the effect of delaying or preventing a change in
control or making removal of management more difficult. If any shares of
preferred stock are issued with voting powers, the voting power of the
outstanding common stock would be diluted. Additionally, the issuance of
preferred stock may have the effect of decreasing the market price of our common
stock.




Our Board
of Directors has designated the following six series of preferred stock, where
the conversion ratio, the authorized number of shares and the outstanding number
of shares for each series are provided:




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·
            “Series
      B Convertible Preferred Stock’’ – convertible into Common Stock Series A
      on a one-to-five basis, 76,750 shares authorized and 50,000 shares
      outstanding as of December 31,
2008;




·
            “Series
      E Convertible Preferred Stock” – convertible into Common Stock Series A on
      a one-to-one basis, 810,800 shares authorized and 810,800 shares
      outstanding as of December 31,
2008.




·
            “Series
      F Convertible Preferred Stock” – 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.  There are 200,000 shares authorized
      and 200,000 shares outstanding as of December 31,
  2008.




·
            “Series
      G Convertible Preferred Stock” – 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.  There are 150,000 shares authorized
      and 150,000 shares outstanding as of December 31,
  2008.




·
            “Series
      H Convertible Preferred Stock” – convertible into Common Stock Series A at
      the lower of $2.50 or 30% off the IPO price, where “IPO price” means the
      per share price to the public of any common shares offered by us that in
      the aggregate results in capital in excess of $10.0 million being raised
      and the shares of a class of our common stock being listed and traded on a
      national stock exchange.  There are 98,500 shares authorized and
      98,500 shares outstanding as of December 31,
  2008.




·
            “Series
      I Preferred Stock” – convertible into Common Stock Series A on a
      one-for-one basis.  There are 4,693,878 shares authorized and
      4,693,878 shares outstanding as of December 31,
  2008.




In
October 2008, we filed Certificates of Withdrawal with the Nevada Secretary of
State whereby we withdrew the designations of our Series A, Series C and Series
D Convertible Preferred Stock, as no shares of these series were then
outstanding.  Except for Series F, G and I, none of our series of
preferred stock have dividend rights. In 2008, we paid $97,233 in dividends to
the holders of our Series F and G Convertible Preferred Stock.  Except
for Series I, none of our series of preferred stock have voting
rights.  With respect to the rights upon liquidation, dissolution, or
winding up, our preferred stock ranks senior to both series of common stock, but
junior to any existing or future indebtedness. Among the holders of our
outstanding preferred stock, the following preferences upon liquidation,
dissolution or winding up are applicable:




·
            first,
      holders of Series F Convertible Preferred Stock are entitled to receive
      $5.00 per share before Series I, Series B, Series E,  Series G
      and Series H Convertible Preferred Stock as to the $1,000,000 jackpot
      bankroll reserve for our Gamblers Bonus Million Dollar Ticket
      game;




·
            second,
      holders of Series I Preferred Stock are entitled to receive $2.45 per
      share;




·
            third,
      holders of Series B Convertible Preferred Stock are entitled to receive
      $5.00 per share;




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·
            fourth,
      holders of Series E and G Convertible Preferred Stock are entitled to
      receive $5.00  per share;
and




·
            fifth,
      holders of Series H convertible Preferred Stock are entitled to receive
      $5.00 per share.




The
liquidation preference for each series of preferred stock is equal to the
original purchase price of the preferred stock.




On
February 12, 2007, we issued notices to holders of our Series A Convertible
Preferred Stock and holders of our Series B Convertible Preferred Stock as a
result of an agreement with Treasure Island Las Vegas, a wholly-owned subsidiary
of MGM Mirage, whereby Treasure Island agreed to maintain the required base
jackpot bankroll of $2.9 million for our linked, progressive keno game, Nevada
Numbers.  Since the cash attributable to the Series A and Series B
Convertible Preferred Stock was no longer required to bankroll Nevada Numbers,
we provided notices to holders of our Series A Convertible Preferred Stock of
our right to convert all of the outstanding shares of Series A Convertible
Preferred Stock into shares of Common Stock Series A on a one-for-one basis and
to holders of our Series B Convertible Preferred Stock of the opportunity to
exchange one-half of their respective shares for either the return of their
original investment or shares of Common Stock Series A.




The
conversion date for the Series A Convertible Preferred Stock was March 15, 2007.
Accordingly all 536,400 shares of Series A Convertible Preferred Stock were
converted into 536,400 shares of Common Stock Series A. To holders of Series B
Convertible Preferred Stock, we advised said holders of their right to exchange
one-half of their respective shares of Series B Convertible Preferred Stock for
either the return of their original investment (i.e., $5.00 per share) or five
shares of Common Stock Series A for each share of Series B Convertible Preferred
Stock.  We have also notified holders of our Series B Convertible
Preferred Stock that they may convert all of their shares into shares of Common
Stock Series A on the same basis. The holders of our Series B Convertible
Preferred Stock had until May 13, 2007 to make their decision. At December 31,
2007, holders of 179,890 shares of Series B Convertible Preferred Stock had
converted their shares on a one-to-five basis for 899,450 shares of Common Stock
Series A. We also redeemed 35,900 shares of Series B Convertible Preferred Stock
at $5.00 per share for a total redemption of $179,500 during the year ended
December 31, 2007.  Late in 2007, pursuant to an agreement with
Treasure Island Las Vegas, Treasure Island began maintaining the required base
jackpot bankroll of $1 million for our Million Dollar Ticket game.  We
sent a letter dated January 28, 2008 to holders of our Series B Convertible
Preferred Stock informing them that they had 90 days to exchange their shares on
a one-to-five basis for Common Stock Series A or receive $5.00 in cash per share
for their shares of Series B Convertible Preferred Stock.  At December
31, 2008 only 50,000 Series B preferred shares remained
outstanding.




During
2008, all shares of Series C and D Convertible Preferred Stock were converted to
Common Stock Series A.




During
the year ended December 31, 2008, holders of 52,850 shares of Series B
Convertible Preferred Stock converted their shares on a one-to-five basis for
264,250 shares of Common Stock Series A.  We also redeemed 27,500
shares of Series B Convertible Preferred Stock at $5 per share for a total
redemption of $137,500 during the year ended December 31, 2008.




Options




As of
December 31, 2008 we had outstanding options to purchase an aggregate of
2,645,900 of our Common Stock Series A at exercise prices ranging from $1.00 to
$5.00 per share, with a weighted average exercise price of $3.36 per
share.




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Warrants




As of
December 31, 2008, we had outstanding warrants to purchase an aggregate of
6,010,309 shares of our Common Stock Series A at exercise prices ranging from
$1.00 to $5.00 per share with a weighted average exercise price of $2.08 per
share.




Unregistered
Sales of Equity Securities




During
the year ended December 31, 2008, holders of 52,850 shares of Series B
Convertible Preferred Stock converted their shares on a one-to-five basis for
264,250 shares of Common Stock Series A.  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.  We also redeemed 27,500 shares of Series B Convertible
Preferred Stock at $5 per share for a total redemption of $137,500 during the
year ended December 31, 2008.





During
the year ended December 31, 2008, holders of 35,000 shares of Series C
Convertible Preferred Stock converted their shares on a one-to-five basis for
175,000 shares of Common Stock Series A.  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 year ended December 31, 2008, holders of 125,000 shares of Series D
Convertible Preferred Stock converted their shares on a one-to-one basis for
125,000 shares of Common Stock Series A.  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 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.  During the year ended December
31, 2007, we issued 392,800 shares of Series E Convertible Preferred Stock and
raised $1,964,000.





The
holder of Series F Convertible Preferred Stock is entitled to receive $5 per
share as a liquidation preference after payment of all existing and future
indebtedness and before Series I, Series B, Series E, Series G and Series H
Convertible Preferred Stock as to the $1,000,000 jackpot bankroll reserve for
our Gamblers Bonus Million Dollar Ticket game.  On May 9, 2008, we
issued 200,000 shares of Series F Convertible Preferred Stock which carries a
12% dividend rate which is cumulative and payable on January 1, 2010 immediately
after paying IGT their 6.5% dividend on Series I Preferred
Stock.  Series F Convertible Preferred Stock is convertible into
Common Stock Series A at the lower of $3.50 or 30% off of the IPO price, where
“IPO price” means the per share price to the public of any common shares offered
by us that in the aggregate results in capital in excess of $10.0 million being
raised and the shares of a class of our common stock being listed and traded on
a national stock exchange.  On January 31, 2009, we discontinued the
Gamblers Bonus Million Dollar Ticket game and the jackpot bankroll reserve of
$1,000,000 was transferred to our Nevada Numbers game.





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 F, I, and B
Convertible Preferred Stock.  On May 9, 2008, we issued 150,000 shares
of Series G Convertible Preferred Stock which carries a 12% dividend rate which
is cumulative and 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.


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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 F, 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.





On
October 1, 2008, we acquired the tangible and intangible assets of AdLine
Network Holdings Inc. (AdLine), AdLine Media LLC, AdLine Network LLC and
Freeview Network LLC for 750,000 shares of our Common Stock Series
A.  The intent of the transaction was to reacquire and consolidate all
of the rights associated with various technologies and intellectual property
licenses held by AdLine, including the license previously granted to
AdLine.  The transaction was structured as an asset purchase to ensure
the complete reacquisition of the licenses and technologies.  Any
other assets acquired were immaterial and incidental.  The purchase
price of $1,500,000 was allocated as follows:  $80,000 to fixed
assets, $4,117 to miscellaneous expense and $1,415,883 to goodwill. In addition,
one of the owners of AdLine received a one-year consulting agreement with LVGI
for $15,000 per month.





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 on a one-for-one basis into shares of our Common Stock Series
A.   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 our Common Stock Series A at an
exercise price of $2.45 per share.  The warrants have a three-year
term and are 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 one seat on the Company’s Board of Directors, which
to date they have not chosen to activate.  In addition, IGT forgave a
receivable from the Company from a prior legal settlement for $614,027 (see Note
6).  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.





During
the year ended December 31, 2008, 1,510,917 shares of Common Stock Series A were
issued pursuant to the following:  1) 750,000 shares for the purchase
of the remaining assets of Adline Network Holdings LLC (AdLine), AdLine Media
LLC, AdLine Network LLC, and Freeview Network LLC, which allowed us to reacquire
and consolidate all the rights associated with various technologies and
intellectual property licenses held by AdLine, including the license previously
granted to AdLine; 2) 500,000 shares as an incentive for the Preferred Series F
and G transactions; and 3) 260,917 shares as payment for employee,
consultant and board services.  We also issued 53,750 shares of Common
Stock Series A to retire $107,500 of long-term debt.  In addition, we
issued 55,361 shares of Common Stock Series A to employees in lieu of salary and
sold 10,100 shares to present stockholders.  These transactions were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act in that the issuances did not involve any
public offerings.


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ITEM 6. SELECTED
FINANCIAL DATA.




Not
required.





ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.




The
following discussion of our financial condition and results of operations should
be read together with the consolidated financial statements and the related
notes included in this report. This discussion contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below as well as those
discussed elsewhere in this report. We disclaim any obligation to update
information contained in any forward-looking statement.




Overview





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 includes Nevada
Numbers, Super Bonanza Bingo, and Million Dollar Ticket.  On March 31,
2009, because of the expiration of our contract with Treasure Island
whereby Treasure Island had agreed to maintain the $3.9 million base jackpot
bankroll, we shut down Nevada Numbers and Million Dollar Ticket.  We
we expect to restart the games as soon as we find funding for the $3.9 million
base jackpot.  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.  Although we have recently focused our business on the
development of our proprietary multimedia delivery system, known as
PlayerVision, we have not generated significant revenues 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.  Due to our focus on the development of our PlayerVision
system, we have incurred expenses in excess of our revenue and have generated
losses for 2007 and 2008.





We have received regulatory approval
from Nevada with respect to RoutePromo, and we have received regulatory approval
from Nevada and GLI for AdVision and Live TV on IGT Game King, WMS, and
Aristocrat machines on our PlayerVision 2 platform.  We have also
received approval from GLI with respect to NumberVision on our PlayerVision 2
platform. PlayerVision 3 is the next generation of our PlayerVision
system.  We expect that the following applications will be
submitted for regulatory review and approval to Nevada and GLI in early April,
2009 with respect to our PlayerVision 3 platform: Beverage on Demand,
ServiceVision, ValetVision, AdVision, Live TV, Casino Tunes, You Tube, and
VoyeurVision.  Because these eight software applications do not
interface with the slot accounting system and because the regulators are
familiar with the earlier PlayerVision 2 platform, we expect a shorter approval
time period from the regulators.  We expect to submit
WagerVision and NumberVision for regulatory review and approval on the
PlayerVision 3 platform in Nevada and GLI sometime between June and August
2009.  Because the regulatory approval of new gaming applications is a
complex process, we may experience delays in developing and
introducing the PlayerVision 3 applications.





We will continue for the first three
quarters of 2009 to incur expenses related to the development and regulatory
approval for the remaining PlayerVision modules, and we will face competition
from larger, more formidable competitors as we enter the gaming machine
market.  Due to continuing expenses related to our PlayerVision
system without substantial generation of revenues during this time, we will
be using cash, and we will require funds from third party financing sources, in
addition to funds from operations, to sustain our operations in
2009.  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.


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We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. These estimates and
assumptions provide a basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions, and these differences may be material.





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





Revenue Recognition





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





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. We recognize distribution royalties from the placement of
electronic bingo devices over time, based on customer usage. 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 wins and losses. We reflect amounts due to
the owners of the facilities in which the keno games are conducted (effectively
contingent rent) as an expense.





Goodwill and other Intangible
Assets





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





Our forecasted future cash flows used
to test the recoverability or determine the fair value of intangibles are based
on assumptions that are consistent with plans used to manage the underlying
business.  Factors used in our evaluations of potential impairment and
fair value require significant judgments about respective estimated useful
lives, risk rates, forecasted growth rates, brand history, expected market
growth, competitive environment, market share, future business prospects and
success of our products.  Changes in these estimates and assumptions
could materially affect the determination of recoverability or fair value. While
we believe that our estimates of future revenues and cash flows
are


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reasonable,
different assumptions could materially affect our assessment of useful lives,
recoverability and fair values.  Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, allocation of related goodwill, assignment of corporate shared assets and
liabilities to reporting units, and determination of the fair value of each
reporting unit.  We determine the fair value of our reporting units
using the discounted cash flow method, and compare the implied valuation
multiples to a group of guideline public companies under the Market approach to
test the reasonableness of the discounted cash flow results.





Our intangible assets consist of key
patents and technology rights with a five year life related to PlayerVision
which went to market for the first time during the fourth quarter of
2007.  We recorded an intangibles impairment charge of $606,667 during
the year ended December 31, 2008 as we have abandoned our plans to develop and
market “at home” wagering.





Income Taxes





We have effectively provided a
full valuation allowance for the tax effects of our net operating losses at
December 31, 2007 and 2008 to offset the deferred tax asset that might otherwise
have been recognized as a result of operating losses in the current period and
prior periods since, because of our history of operating losses, management is
unable to conclude at this time that realization of such benefit is currently
more likely than not.  Although Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109, became effective in
2007, based on its evaluation, management determined that FIN 48 did not have a
material effect on either our net operating loss carryforwards, the related
deferred tax assets or valuation allowance, or our deficit at January 1,
2007.





Recent Accounting
Pronouncements


In
December 2007, the FASB issued SFAS 141R, Business Combinations, which
will significantly change the accounting for business combinations and certain
other covered transactions.  Also, in April of 2008, the FASB issued FSP
SFAS 141R-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, to address some of the application issues under SFAS
141R.  FSP SFAS 141R-1 deals with the initial recognition and measurement
of an asset acquired or a liability assumed in a business combination that
arises from a contingency (provided the fair value on the date of acquisition of
the related asset or liability can be determined). Both SFAS 141R and FSP SFAS
141R-1 will be applicable for us prospectively only to business combinations and
other covered transactions for which the acquisition date is during or after
2009.  Because we are not now contemplating any covered transactions after
their effective date, we currently do not expect either SFAS 141R or FSP SFAS
141R-1 to have a material effect on our future financial position, results of
operations, and operating cash flows.
  In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51, which
establishes new accounting for the noncontrolling interest in a subsidiary or
consolidated variable interest entity and requires that a parent recognize a
gain or loss when a subsidiary is deconsolidated and measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date.  SFAS 160 will be effective for 2009, and earlier adoption is
prohibited.  Since we do not now have and do not contemplate acquiring
any interest in subsidiaries or consolidated variable interest entities with
noncontrollling interest, we currently expect that SFAS 160 will not have an
impact on or future financial position, results of operations and operating cash
flow.





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


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Results of Operations





Year Ended December 31, 2008 Compared
with Year Ended December 31, 2007





Revenue.  Casino games
revenue for the year ended December 31, 2008 increased $667,000 or 35.9%, to
$2,526,000 from $1,859,000 for the year ended December 31, 2007. The higher
casino games revenue principally resulted from higher revenue from Super
Coverall Bingo of $512,000 offset by a decline in Nevada Numbers of $182,000 and
a decline in Million Dollar Ticket revenue of $8,000.  In addition we
launched our Gamblers Bonus Million Dollar Ticket in April 2008, which generated
$332,000 of new revenue.





Product sales for the year ended
December 31, 2008 decreased by $565,000 to $1,255,000 or 31.0% from $1,820,000
for the year ended December 31, 2007. Keno equipment sales amounted to $225,000
for the year ended December 31, 2008 compared to $647,000 during the year ended
December 31, 2007, as new system purchases are being deferred into
2009.  Bingo equipment and supplies also decreased by $197,000 from
$702,000 during the year ended December 31, 2007 to $505,000 during the year
ended December 31, 2008 as we continue to lose market share due to the loss of
our bingo electronics business in February 2007.





Other revenue for the year ended
December 31, 2008, declined by $386,000 or 27.9%, to $998,000 from $1,384,000
for the year ended December 31, 2007. Bingo electronics revenue decreased from
$70,000 for the year ended December 31, 2007 to $0 for the year ended December
31, 2008, as we lost our bingo electronics distributor agreement early in 2007.
Revenue from Keno route and participation agreements decreased from $655,000 for
the year ended December 31, 2007 to $360,000 for the year ended December 31,
2008 as we closed our Keno route business on February 29, 2008 due to renovation
at one of our key customers locations and reopened at two locations in September
2008.





Costs and Expenses.  Cost and
expenses of casino games for the year ended December 31, 2008, increased by
$2,091,000 or 242.3%, to $2,954,000 from $863,000 for year ended December 31,
2007. The increase resulted primarily from the decrease in jackpot expense
during the year ended December 31, 2007, as the Nevada Numbers jackpot was won
for the first time in the history of the game, and we were able to discount the
jackpot payment at the prime rate rather than the 20-year Treasury bond rate as
had previously been applied in calculating our progressive jackpot
liability.  Accordingly, the decrease includes a $780,000 credit for
this change.  Inclusive of the credit, our games jackpot expense
increased by $1,639,000 during the year ended December 31, 2008 due to the
accumulation of interest rates declines and its effects on our jackpot liability
account.





In addition, games salaries increased
by $173,000 for the year ended December 31, 2008 compared to December 31, 2007
as we hired a business unit leader for bingo in February 2008.  Our
jackpot expense for Super Coverall Bingo increased by $286,000 for the year
ended December 31, 2008 compared to the same period in 2007 consistent with our
increase in this game’s revenue.





Product costs and expenses for the year
ended December 31, 2008, increased $254,000 or 24.1% to $1,307,000 from
$1,054,000 for the year ended December 31, 2007 as we had a market write-down of
our PlayerVision 2 inventory of $678,000 for obsolescence as it has been
replaced by a more robust PlayerVision 3 platform which is the product we are
now taking to market.





Other cost and expenses for the year
ended December 31, 2008, decreased $113,000 or 8.4% to $1,232,000 from
$1,344,000 for the year ended December 31, 2007 consistent with the decline in
other revenues.  Gross margin also decreased to (23.4)% for the year
ended December 31, 2008 compared to 2.9% for the year ended December 31, 2007
due to lost profits from the bingo electronic distribution agreement being
canceled, and additional salaries of $23,000.


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Other Operating Expenses. Selling,
general and administrative expenses for the year ended December 31, 2008
decreased $49,000 or 0.7% to $6,647,000 from $6,696,000 compared to the same
period in 2007.  We have decreased our administrative infrastructure
through salary reductions of $370,000 during the year ended December 31, 2008
compared to the year ended December 31, 2007.  In addition, consulting
and professional fees have increased by $371,000 during the year ended December
31, 2008 compared to the same period in 2007.  The increase in
consulting and professional fees is primarily related to consulting costs for
capital raising and legal fees incurred in defending and negotiating the
settlement of the IGT lawsuit.  Advertising and promotion has
decreased by $145,000 as we reduced advertising costs to promote PlayerVision
during the year ended  December 31, 2008 compared to the same period
in the prior year.  Our software and additional maintenance costs have
increased by $74,000 during the year ended December 31, 2008, as we are using
third-party software as our primary data management tool.





Research and development costs for the
year ended December 31, 2008 have increased by $369,000 or 39.6% to $1,407,000
from $1,038,000 for the year ended December 31, 2007 due to the addition of
three engineers to our staff.





Depreciation and amortization for the
year ended December 31, 2008, increased $590,000 or 69.0%, to $1,445,000 from
$855,000 for the year ended December 31, 2007, as a result of the write off of
the technology rights associated with “at home” wagering as this intangible
asset is no longer part of our strategic product plan in the
future.





Finance Costs.  Finance costs
for the year ended December 31, 2008, increased $822,000 or 51.7% to $2,413,000
from $1,591,000 for the year ended December 31, 2007. The increased finance
costs related to the recording of the fair market value of the derivative
liability and the increased finance costs from the debt modifications to the
CAMOFI note in 2007 and May 2008 and the loss on the extinguishment of the
CAMOFI debt of $641,000 in October, 2008.





Interest and Other
Income.  Interest and other income for the year ended December 31,
2008 decreased by $235,000 or 202.7%, to $(119,000) from $116,000 for the year
ended December 31, 2007. The decrease was a result of lower cash balances
outstanding, and the loss in fair value incurred on our marketable
securities.





Liquidity and Capital
Resources





Cash Flows





Cash used in operating activities
decreased by $149,000 for the year ended December 31, 2008 primarily because of
the foregoing revenue decreases and expense increases. Investing activities
consisted principally of cash out flows in connection with $327,000 of capital
expenditures and $955,000 increase in jackpot reserve deposits, most of
which covered our new $1,000,000 Gamblers Bonus Million Dollar Ticket game
bankroll.  Our cash flows from financing activities in the year ended
December 31, 2008 consisted principally of in flows of $335,000 of new capital
from the sale of Series E Convertible Preferred Stock, $112,000 for exercise of
options and warrants to purchase shares of Common Stock Series A,
$111,000 for the sale of Common Stock Series A to employees, $1,500,000
from the sale of Series F and G Convertible Preferred Stock, $492,500 from the
sale of Series H Convertible Preferred Stock, $11,500,000 from the sale of
Series I Preferred Stock and an advance from a shareholder of $600,000 offset by
a cash outflow of $137,500 to redeem our Series B Convertible Preferred Stock,
the repayment of debt of $6,122,539 (primarily CAMOFI), and the payment of
dividends to the holders of our Series F and G Convertible Preferred Stock of
$97,233.


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Capital Expenditures





Capital expenditures decreased by
$73,000 for the year ended December 31, 2008 compared to the same period in the
prior year due to our present cost reduction program.  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 $7 million of PlayerVision platforms for the rollout of our
PlayerVision System.





We believe that we will be able to pay
for these capital expenditures from our existing cash balances, from funds
advanced by IGT in our Series J Convertible Preferred Stock, from funds
generated from future operations, and from funds generated by additional
third-party financings, including the establishment of a master equipment lease
agreement with financing sources that we have used in the past.  No
assurance can be given, however, that we will be able to secure any third-party
financing or that such financing will be available to us on acceptable
terms.





Sources of Capital





We have traditionally relied on various
forms of third-party financing to sustain our operations.  In 2008, we
raised $2,577,500 from our private placement of Series E, F, G and H Convertible
Preferred Stock.  Additionally, we raised $11.5 million from IGT
through the sale of 4,693,878 shares of our Series I Preferred Stock and
$112,000 from the exercise of options and warrants.  In 2007, we
raised $1,964,000 from our private placement of Series E Convertible Preferred
Stock, and $1,182,000 from the exercise of options and warrants.  In
addition, Treasure Island Hotel and Casino was maintaining the required
base jackpot bankroll requirements in the aggregate of $3.9 million for our
Nevada Numbers and Million Dollar Ticket games.  Our contract with Treasure
Island to maintain the $3.9 million base jackpot bankroll  for Nevada
Numbers and Million Dollar Ticket expired on March 31, 2009, and we shut down
the games as a result.  We expect to restart the games as soon as we find
funding for the $3.9 million base jackpot.





In 2008, with the proceeds from our
Series I Preferred Stock, we paid off our senior secured convertible promissory
note in favor of CAMOFI Master LDC (CAMOFI) in the principal amount of
$6,051,250.  All that remains of the transaction with CAMOFI are
warrants to purchase 2,675,000 shares of our Common Stock Series A at an
exercise price of $1.48, most of which will expire in April
2011.  Additionally, CAMOFI holds 300,000 shares of our Common Stock
Series A.





We closed the offering for our Series E
Convertible Preferred Stock on February 24, 2008, having raised $335,000 in 2008
for operating purposes.  We closed our offerings for Series F and G
Convertible Preferred Stock on May 9, 2008.  These offerings were for
350,000 shares at $5.00 per share and will be convertible at the lower of $3.50
per share or a 30% discount from initial public offering price.  The
net proceeds from these offerings were used for two purposes: (i) $1,000,000 to
fund the jackpot bankroll for Gamblers Bonus Million Dollar Ticket, and (ii)
$750,000 for operating expenses.  We closed our offering for Series H
Convertible Preferred Stock on June 9, 2008.  This offering was for
98,500 shares at $5.00 per share and will be convertible at the lower of $3.50
per share or a 30% discount from the initial public offering
price.  We closed our offering for Series I Preferred Stock on October
24, 2008.  This offering was for 4,696,878 shares at $2.45 per share
and included a warrant to purchase 1,500,000 shares of our Common Stock Series A
at an exercise price of $2.45 and life of 3 years.





Outlook





The United States is currently
experiencing a recession accompanied by weakness in the commercial and
investment banking systems resulting in reduced credit and capital financing
availability.  Lack of credit and reduced availability of funds have
resulted in curtailed gaming and reduction of recreational activities and
general discretionary consumer spending.  These conditions 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 may likely be significant.


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We will continue, for the foreseeable
future, to incur significant expenses related to the development and regulatory
approval for various PlayerVision modules.  Accordingly, we will
continue to rely on funds from third-party financing sources, in addition to
funds from operations, to sustain our operations in 2009.  We believe
that our existing cash balances, proceeds from third-party
financings, master lease equipment financings, and the exercise of options
and warrants, together with funds from operations, will be sufficient to fund
our anticipated working capital requirements and our 2009 business
expansion plans.  Ifwe
fail to complete or obtain additional third-party financing, or we are unable to
establish a master equipment lease agreement, this would have a material adverse
effect on our cash flow, results of operations and financial condition. No
assurance can be given, however, that we will be able to secure any third-party
financing or that such financing will be available to us on acceptable terms.
Given the current financial market disruptions, credit crisis and state of the
economy, including the current downturn in the gaming industry, it may be
particularly 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.  There is also no
assurance that if we secure such third-party financing, that such
financing will be sufficient to permit us to operate
profitably.  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.  These
restrictive covenants include a right of first negotiation granted to IGT
regarding any transaction pursuant to which we or any of our subsidiaries
considers to (i) offer or sell any debt securities or any rights with respect to
any debt securities of ours or any of our subsidiaries, (ii) enter into any
merger, consolidation, share exchange, business combination, or similar
transaction, including an acquisition of assets (including pursuant to a
license), in which we will issue, sell, transfer or otherwise convey 30% or more
of our issued and outstanding capital stock, or (iii) enter into any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 15% or more
of our issued and outstanding capital stock or assets as part of a capital
raising transaction (each, a “Material Transaction”).  Prior to
entering into a Material Transaction, we will provide IGT with notice of the
proposed terms of such transaction. IGT will have 10 days to exercise its right
of first negotiation after which time we and IGT will then have another 10 days
to engage in good faith negotiations and execute a definitive agreement related
to such proposed transaction, and if no agreement is reached during that
negotiation period, we will be free to pursue the Material Transaction with a
third party.  IGT’s right of first negotiation expires on April 24,
2010.  Also, as long as IGT or its affiliates hold or have the right
to acquire the Minimum Investment (as defined in the Investment Agreement dated
September 1, 2008 between us and IGT, or the “Investment Agreement”), then we
shall not, except with IGT’s consent, sell, convey or otherwise issue, directly
or indirectly, any shares of capital stock, any rights to acquire capital stock,
or any documents or instruments convertible, exercisable or exchangeable for any
shares of capital stock (regardless of whether such rights are then exercisable
or whether such documents or instruments may be then convertible, exercisable or
exchangeable for any such capital stock) to a Competitor (as defined in the
Investment Agreement) or an affiliate of a Competitor.  We have also
agreed not to create or issue capital stock unless the same ranks junior to the
Series I Preferred Stock with respect to the distribution of assets upon our
liquidation, dissolution or winding up, the payment of dividends and rights of
redemption.




We expect that 2009 will be the first
year of significant placement of our PlayerVision system.  We expect
the first significant placement (on approximately 2,700 slot machines) of our
system to occur at two casinos on the Las Vegas Strip in the second and third
quarters of 2009.  No assurance can be given, however, that we
will be successful in placing our PlayerVision system at two Las Vegas Strip
casinos or in any additional locations.





While we do not believe we have any
direct competitors at the present time, we will face competition from larger,
more formidable competitors as we capture more and more of the retrofit gaming
machine market.  An unexpected lack of market acceptance of our
PlayerVision system, a failure of our early installations to perform as
expected, the failure to obtain additional financing, a sudden increase in
product demand requiring a significant increase in manufacturing capability, or
unforeseen adverse competitive, economic, or other factors may adversely impact
our cash position and thereby adversely affect our financial condition and
business operations.


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   In addition, on February 13, 2009, we signed a binding term sheet (“Term Sheet”)
with IGT whereby IGT advanced $1.5 million (“Advance”) to the
Company.  If the Company and IGT do not execute an investment
agreement (“Second Investment Agreement”) on or before August 15, 2009, IGT will
have the option of (i) converting the Advance into shares of preferred stock of
the Company, or (ii) having the Company repay the Advance.  If IGT
elects to convert the Advance into preferred stock, the Advance shall be
converted into shares of the same series of the Company’s preferred stock as is
being offered in the Company’s private placement (the “Private Placement”) as
previously disclosed in the Company’s Form 8-K dated January 16,
2009.  The number of shares to be issued shall be based on the closing
price of the Private Placement, or $3.25 per share if the Private Placement is
not completed.  If the Private Placement is not completed prior to
August 15, 2009, the Advance shall become immediately due and payable to
IGT.  The Company granted a security interest in all of its present
and future assets as security for such obligation.
  Pursuant to the Term Sheet, the Company and IGT shall endeavor to enter into the
Second Investment Agreement for a total investment in the Company of $3.0
million inclusive of the Advance (the “$3.0 Million Investment”).  In
consideration of the $3.0 Million Investment, the Company intends to issue to
IGT a new series of preferred stock convertible into shares of the Company’s
Common Stock Series A at the price of the Private Placement, or, if the Private
Placement does not close, $3.25 per share.  The preferred stock will
be entitled to a mandatory annual 5% cash dividend.  The annual
dividend will be personally guaranteed by our chairman and chief financial
officer.  The Company and IGT also agreed to amend the License and
Application Support Agreement dated September 30, 2008 between the Company and
IGT, and the Intellectual Property Access Agreement dated September 30, 2008
between the Company and IGT.




In
2009, we believe that we will be required to raise approximately $10.0 million
in additional funds through public or private financing, strategic
relationships, master lease equipment financingsor other
arrangements to implement our 2009 plan. We may be unable to secure such
funding, if needed and such financing may not be available on terms acceptable
to us, or at all.  Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.  Strategic arrangements, if necessary to raise
additional funds, may require that we relinquish rights to certain of our
technologies or products or agree to other material obligations and
covenants.  Failure to generate sufficient revenue or to raise capital
when needed could have an adverse impact on our business, operating results, and
financial condition, as well as our ability to achieve intended business
objectives.




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 $874,808 that have the following payment schedule:
$323,827 in 2009, $190,686 in 2010, $162,597 in 2011, $147,804 in 2012 and
$49,894 in 2013.




ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.




Not
required.






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ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.









INDEX
TO FINANCIAL STATEMENTS




Report of
Independent Registered Public Accounting
Firm                                                                           33




Consolidated
Balance
Sheets                                                                                                                              
34




Consolidated
Statements of
Operations                                                                                                           
 35




Consolidated
Statements of Stockholders'
Equity                                                                                      
     36




Consolidated
Statements of Cash
Flows                                                                                                     
      38




Notes to
Consolidated Financial
Statements                                                                                            
        39









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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Shareholders
and Board of Directors


Las Vegas
Gaming, Inc.


Las
Vegas, Nevada





We have
audited the accompanying consolidated balance sheets of Las Vegas Gaming, Inc.
and subsidiaries as of December 31, 2007 and 2008, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Las Vegas Gaming, Inc. and
Subsidiaries as of December 31, 2007 and 2008, and the results of their
operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.











/s/ 
PIERCY BOWLER TAYLOR &
KERN


PIERCY
BOWLER TAYLOR & KERN,


Certified
Public Accountants & Business Advisors


A
Professional Corporation





April
7, 2009


LAS
VEGAS, NEVADA








- 33
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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,ASSETS
                
                2007
                
                
                2008Current
      assetsCash
      and cash equivalents
                
                $
                489,262
                
                
                $
                497,529Investment
      in marketable securities
                
                
                87,881
                
                
                
                5,068Accounts
      receivable, net of allowance of $708 and $578
                
                
                567,186
                
                
                
                576,847Inventories
                
                
                1,161,707
                
                
                
                454,026Prepaid
      expenses, deposits and other
                
                
                149,596
                
                
                
                79,881Jackpot
      reserve deposits
                
                
                276,012
                
                
                
                1,230,7612,731,644
                
                
                
                2,844,112Equipment,
      net of accumulated depreciation of $1,246,825 and
    $1,238,739
                
                
                929,524
                
                
                
                924,256Other
      assetsGoodwill
                
                
                955,277
                
                
                
                2,371,178Trademarks,
      copyrights, patents and other identifiable intangibles, net of accumulated
      amortization of $1,417,602 and $1,165,742
                
                
                1,421,194
                
                
                
                278,330Other
      long term assets
                
                
                884,350
                
                
                
                56,451$
                6,921,989
                
                
                $
                6,474,327LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAdvances
      from stockholders
                
                
                -
                
                
                $
                600,000Accounts
      payable and accrued expenses
                
                $
                1,453,525
                
                
                
                1,624,740Current
      portion of long-term debt
                
                
                787,550
                
                
                
                11,957Current
      portion of progressive jackpot liability
                
                
                375,508
                
                
                
                1,555,3602,616,583
                
                
                
                3,792,057Long-term
      debt
                
                
                5,940,925
                
                
                
                23,119Conditionally
      redeemable equitySeries
      B Convertible Preferred Stock, $.001 par value, 130,350 and
      50,000
                  shares
      issued and outstanding
                
                
                651,750
                
                
                
                250,000651,750
                
                
                
                250,000Stockholders'
      equityConvertible
      Preferred Stock, $.001 par, 10,000,000 shares authorized:Series
      A: 2,000,000 shares authorized, 0 and 0 shares issued and
      outstanding
                
                
                -
                
                
                
                -Series
      C : 76,000 shares authorized, 35,000 and 0 shares issued and
      outstanding
                
                
                35
                
                
                
                -Series
      D:  125,000 shares authorized, 125,000 and 0 shares issued and
      outstanding
                
                
                125
                
                
                
                -Series
      E:  810,800 shares authorized, 743,800 and 810,800 shares issued
      and outstanding
                
                
                744
                
                
                
                811Series
      F: 200,000 shares authorized, 200,000 shares issued and
      outstanding
                
                
                -
                
                
                
                200Series
      G: 150,000 shares authorized, 150,000 shares issued and
      outstanding
                
                
                -
                
                
                
                150Series
      H: 98,500 shares authorized, 98,500 shares issued and
      outstanding
                
                
                -
                
                
                
                99Series
      I: 4,693,878 shares authorized, 4,693,878 shares issued and
      outstanding
                
                
                -
                
                
                
                4,694Common
      Stock, $.001 par value, 90,000,000 shares authorized:Common
      Stock Series A:  25,000,000 shares authorized, 12,562,653 and
      14,849,690 shares issued and outstanding
                
                
                12,563
                
                
                
                14,850Common
      Stock: 65,000,000 shares authorized, no shares issued or
      outstanding
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                26,497,097
                
                
                
                44,160,702Less
      due from officers and stockholders
                
                
                (235,414
                )
                
                
                (188,245
                )Deficit
                
                
                (28,562,419
                )
                
                
                (41,584,110
                )(2,287,269
                )
                
                
                2,409,151$
                6,921,989
                
                
                $
                6,474,327


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


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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


YEARS
ENDED DECEMBER 31, 2007 AND 2008





2007
                
                
                2008RevenuesCasino
      games
                
                $
                1,859,165
                
                
                $
                2,525,884Product
      sales
                
                
                1,820,375
                
                
                
                1,255,428Other
                
                
                1,383,869
                
                
                
                997,6805,063,409
                
                
                
                4,778,992Costs
      and expensesCasino
      games
                
                
                862,817
                
                
                
                2,953,973Product
      costs
                
                
                1,053,650
                
                
                
                1,307,205Other
                
                
                1,344,328
                
                
                
                1,231,8203,260,795
                
                
                
                5,492,998Gross
      operating income
                
                
                1,802,614
                
                
                
                (714,006
                )Other
      operating expensesSelling,
      general, and administrative
                
                
                6,696,336
                
                
                
                6,646,859Research
      and development
                
                
                1,038,032
                
                
                
                1,407,308Depreciation
      and amortization
                
                
                855,111
                
                
                
                1,445,1298,589,479
                
                
                
                9,499,296Operating
      loss
                
                
                (6,786,865
                )
                
                
                (10,213,302
                )Other
      income and expenseFinance
      costs
                
                
                (1,590,691
                )
                
                
                (2,413,102
                )Interest
      income and other
                
                
                116,015
                
                
                
                (119,095
                )Net
      loss
                
                
                (8,261,541
                )
                
                
                (12,745,499
                )Preferred
      stock dividends
                
                
                -
                
                
                
                (276,192
                )Net
      loss attributed to common stockholders
                
                $
                (8,261,541
                )
                
                $
                (13,021,691
                )Net
      loss per share attributed to common stockholders
                
                $
                (0.72
                )
                
                $
                (0.96
                )Weighted
      average shares outstanding
                
                
                11,443,117
                
                
                
                13,611,837


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


- 35
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


YEARS ENDED DECEMBER 31, 2007 AND
2008








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 Preferred
                                          Stock
                                        
                                        Common
                                          Stock
                                          (Including
                                          Series
      A)
                                        
                                        
                                        Additional
                                          Paid-In
                                          Capital
                                        
                                        Less
      Due From
                                          Officers
      and
                                          Stockholders
                                        
                                        DeficitBalances,
      January 1, 2007 (restated)
                                        $
                                        536
                                        
                                        $
                                        50
                                        
                                        $
                                        125
                                        
                                        $
                                        351
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        
                                        -
                                        
                                        $
                                        9,820
                                        
                                        
                                        $
                                        21,263,775
                                        
                                        $
                                        -
                                        
                                        $
                                        (20,300,878
                                        )Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (8,261,541
                                        )Exercise
      of warrants and options
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        831
                                        
                                        
                                        
                                        1,181,544
                                        
                                        
                                        (235,414
                                        )Issuance
      of warrants
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        216,293Other
      Stock-based compensation
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        169,789Issuance
      of Common Stock Series A to officer and board member
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        102
                                        
                                        
                                        
                                        203,898Issuance
      of Common Stock Series A for debt modification
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        300
                                        
                                        
                                        
                                        599,700Conversion
      of Series A Convertible Preferred Stock to Common Stock Series
      A
                                        
                                        (536
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        536Conversion
      of Series B Convertible Preferred Stock to Common Stock Series
      A
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        899
                                        
                                        
                                        
                                        898,551Conversion
      of Series C Convertible Preferred Stock to Common Stock Series
      A
                                        
                                        
                                        
                                        
                                        (15
                                        )
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        75
                                        
                                        
                                        
                                        (60
                                        )Sale
      of Series E Convertible Preferred Stock
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        393
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        1,963,607Balances,
      December 31, 2007
                                        $
                                        -
                                        
                                        $
                                        35
                                        
                                        $
                                        125
                                        
                                        $
                                        744
                                        
                                        $
                                        -
                                        
                                        $
                                        -
                                        
                                        $
                                        -
                                        
                                        $
                                        -
                                        
                                        $
                                        12,563
                                        
                                        
                                        $
                                        26,497,097
                                        
                                        $
                                        (235,414
                                        )
                                        $
                                        (28,562,419
                                        )











- 36
-
 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
                                            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
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (12,745,499
                                          )Dividends
      payable Series F and Series G Convertible Preferred Stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (276,192
                                          )Exercise
      of warrants and options
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          103
                                          
                                          
                                          118,696
                                          
                                          
                                          (16,831
                                          )Issuance
      of warrants for services
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          356,109Other
      Stock based compensation
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          1,065
                                          
                                          
                                          2,128,269
                                          
                                          
                                          52,000Repayments
      of amounts due from officers and stockholders
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          12,000Conversion
      of Series B Convertible Preferred Stock to Common Stock Series
      A
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          264
                                          
                                          
                                          263,986Conversion
      of Series C Convertible Preferred Stock to Common Stock Series
      A
                                          
                                          
                                          
                                          
                                          (35
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          175
                                          
                                          
                                          (140
                                          )Conversion
      of Series D Convertible Preferred Stock to Common Stock Series
      A
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (125
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          125Sale
      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 Series I Preferred Stock
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          4,694
                                          
                                          
                                          
                                          
                                          
                                          11,290,207Issuance
      of warrants to IGT
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          819,126Sale
      of Common Stock Series A to Employees
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          55
                                          
                                          
                                          110,667Sale
      of Common Stock Series A
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          500
                                          
                                          
                                          629,574Balances,
      December 31, 2008
                                          $
                                          -
                                          
                                          $
                                          -
                                          
                                          $
                                          -
                                          
                                          $
                                          811
                                          
                                          $
                                          200
                                          
                                          $
                                          150
                                          
                                          $
                                          99
                                          
                                          $
                                          4,694
                                          
                                          $
                                          14,850
                                          
                                          $
                                          44,160,702
                                          
                                          $
                                          (188,245
                                          )
                                          $
                                          (41,584,110
                                          )






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





- 37
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOW


YEARS
ENDED DECEMBER 31, 2007 AND 2008





2007
                              
                              
                              2008Operating
      activitiesNet
      loss
                              
                              $
                              (8,261,541
                              )
                              
                              $
                              (12,745,499
                              )Write
      off of loan costs and costs of warrants with debt
      extinguishment
                              
                              
                              -
                              
                              
                              
                              (569,368
                              )Marketable
      security received for licensing fee
                              
                              
                              62,925
                              
                              
                              
                              82,814Depreciation
      and amortization of equipment and software
                              
                              
                              372,415
                              
                              
                              
                              355,404Market
      write down of inventory for obsolescence
                              
                              
                              -
                              
                              
                              
                              678,175Loss
      on disposal of assets
                              
                              
                              -
                              
                              
                              
                              72,040Amortization
      of debt issuance costs and intangibles
                              
                              
                              1,324,379
                              
                              
                              
                              1,866,432Impairment
      of intangibles
                              
                              
                              -
                              
                              
                              
                              606,667Fair
      market value adjustment of debt derivative liability
                              
                              
                              (63,181
                              )
                              
                              
                              (168,449
                              )Stock-based
      compensation to employees and consultants
                              
                              
                              386,082
                              
                              
                              
                              823,450Other
                              
                              
                              105,463
                              
                              
                              
                              (2,604
                              )Changes
      in operating assets and liabilitiesAccounts
      receivable
                              
                              
                              (100,964
                              )
                              
                              
                              (9,661
                              )Inventories
                              
                              
                              (646,735
                              )
                              
                              
                              46,907Prepaid
      expenses, deposits and other
                              
                              
                              431,113
                              
                              
                              
                              124,415Accounts
      payable and accrued expenses
                              
                              
                              470,028
                              
                              
                              
                              340,956Progressive
      jackpot liability
                              
                              
                              (1,249,543
                              )
                              
                              
                              1,179,852Net
      cash used in operating activities
                              
                              
                              (7,169,559
                              )
                              
                              
                              (7,318,459
                              )Investing
      activitiesPurchase
      of property and equipment
                              
                              
                              (400,509
                              )
                              
                              
                              (327,303
                              )Proceeds
      from sale of equipment
                              
                              
                              -
                              
                              
                              
                              55,250Decrease
      (increase) in jackpot reserve deposits
                              
                              
                              3,878,178
                              
                              
                              
                              (954,749
                              )Net
      cash provided by (used in) investing activities
                              
                              
                              3,477,669
                              
                              
                              
                              (1,226,802
                              )Financing
      activitiesDividends
      paid on Series F Convertible Preferred Stock
                              
                              
                              -
                              
                              
                              
                              (97,233
                              )Proceeds
      from litigation settlements
                              
                              
                              43,096
                              
                              
                              
                              -Repayment
      of debt
                              
                              
                              (26,241
                              )
                              
                              
                              (6,122,539
                              )Sale
      of Series E Convertible Preferred Stock
                              
                              
                              1,964,000
                              
                              
                              
                              335,000Sale
      of Series F Convertible Preferred Stock
                              
                              
                              -
                              
                              
                              
                              640,072Sale
      of Series G Convertible Preferred Stock
                              
                              
                              -
                              
                              
                              
                              480,054Sale
      of Series H Convertible Preferred Stock
                              
                              
                              -
                              
                              
                              
                              492,501Sale
      of Series I Preferred Stock
                              
                              
                              -
                              
                              
                              
                              11,500,000Redemption
      of Series B Convertible Preferred Stock
                              
                              
                              (179,500
                              )
                              
                              
                              (137,500
                              )Advances
      from stockholders
                              
                              
                              -
                              
                              
                              
                              2,435,000Repayment
      of advances from stockholders
                              
                              
                              -
                              
                              
                              
                              (1,835,000
                              )Exercise
      of warrants and options for common stock
                              
                              
                              573,623
                              
                              
                              
                              110,387Collection
      of stock subscriptions receivable
                              
                              
                              130,586
                              
                              
                              
                              12,000Sale
      of common stock
                              
                              
                              
                              
                              
                              
                              740,796Net
      cash provided by financing activities
                              
                              
                              2,505,564
                              
                              
                              
                              8,553,528Net
      increase (decrease) in cash and cash equivalents
                              
                              
                              (1,186,326
                              )
                              
                              
                              8,267Cash
      and cash equivalents, beginning of period
                              
                              
                              1,675,588
                              
                              
                              
                              489,262Cash
      and cash equivalents, end of period
                              
                              $
                              489,262
                              
                              
                              $
                              497,529Non-cash
      investing and financing activitiesConversion
      of Series B Convertible Preferred Stock to Common Stock Series
      A
                              
                              $
                              899,450
                              
                              
                              $
                              264,250Exercise
      of stock warrants and options increasing subscriptions
      receivable
                              
                              
                              366,000
                              
                              
                              
                              8,412Conversion
      of Series C Convertible Preferred Stock to Common Stock Series
      A
                              
                              
                              75
                              
                              
                              
                              35Conversion
      of Series D Convertible Preferred Stock to Common Stock Series
      A
                              
                              
                              
                              
                              
                              
                              125Exercise
      of warrants in settlement of accounts payable
                              
                              
                              257,750Costs
      of warrants for debt modification
                              
                              
                              255,273Equipment
      acquired directly with proceeds of new borrowing
                              
                              
                              87,419
                              
                              
                              
                              34,025Debt
      retired through issuance of Common Stock Series A
                              
                              
                              
                              
                              
                              
                              107,500Prepayment
      of lease costs with Common Stock Series A
                              
                              
                              600,000
                              
                              
                              
                              106,000Accrued
      and prepaid interest added to face amount of note due to debt
      modification
                              
                              
                              250,000
                              
                              
                              
                              801,250Dividends
      declared on Series F, G and I Preferred Stock
                              
                              
                              
                              
                              
                              
                              276,192Forgiveness
      of debt in connection with the IGT investment and issuance of
      warrant
                              
                              
                              
                              
                              
                              
                              614,027Acquisition
      of business for common stock
                              
                              
                              
                              
                              
                              
                              1,495,882


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


- 38
-
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO 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 includes Nevada
Numbers, Super Bonanza Bingo, and Million Dollar Ticket.  On March 31,
2009, we shut down Nevada Numbers and Million Dollar Ticket
(Note 13).  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.  Although we have recently focused our business on
the development of our proprietary multimedia delivery system, known as
PlayerVision, PlayerVision has not had a significant revenue effect on our
financial statements to date.  We continue to provide equipment,
supplies and casino games for use by our customers in the keno and bingo
segments of the gaming industry.





2.  Summary
of significant accounting policies:




Principles of
consolidationand basis
of accounting.The consolidated
financial statements include the accounts of Las Vegas Gaming, Inc. (LVGI or the
parent company), Imagineering Gaming, Inc. and  Las Vegas Gaming
Acquisition Corp., our wholly owned subsidiaries, and Las Vegas Keno
Incorporated, an inactive 85%-owned subsidiary (collectively, the
“Company”).  All significant intercompany transactions and balances
have been eliminated in consolidation.





The Company has not elected to adopt
the option available under Financial Accounting Standards Board (FASB)  No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities, to measure any of its
eligible financial instruments or other items.  Accordingly, it
continues to measure all of its assets and liabilities on the historical cost
basis of accounting except as required by generally accepted accounting
principles and otherwise disclosed herein.





Revenue and cost
recognition.





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.





Winners of the Nevada Numbers
progressive jackpot are to be paid the amount of the progressive meter in equal
installments over 20 years.  However, we may, at our discretion, offer
the winner an option to receive a discounted value immediately using a
designated prime rate of interest as a discount rate.  Once an
inter-linked progressive jackpot is won (one as of December 31, 2008), in the
event a discounted value is not paid immediately at the option of the winner,
management would purchase discounted U.S. Treasury securities to meet the
obligation for the annual payments.  We expect to classify these
investments as “held-to-maturity”, to be stated at cost adjusted for the
amortization or accretion of any premiums or discounts over the term of the
security using the interest method.





Products. We generally
recognize sales of bingo and keno equipment when installed and sales of supplies
when the products are shipped.  Title to the goods has passed when
they leave our shipping dock.  Sales and similar revenue-based taxes
collected from customers are excluded from revenue but rather are recorded as a
liability payable to the appropriate taxing authority and included in accrued
expenses.  Shipping and handling charges to customers and related
costs are included respectively in


- 39
-
 Table of Contents


sales
revenues and cost of sales.  For keno system installations, we require
a 50% deposit in advance as a good faith down payment for the system
installation.  We have customer acceptance provisions in our keno
system sales contract and, therefore, we do not recognize revenue until the
system is installed and performing properly.  Warranty costs and
related liabilities associated with product sales have not been
material.  We recognize fees from equipment maintenance contracts sold
separately (rather than as bundled deliverables) evenly over the term of
the contract.  Prior to shipment, we include equipment and supplies in
inventories stated at the lower of cost, as determined on a “first-in-first-out”
basis, or market.  We had a market write-down of our PlayerVision 2
inventory of $678,000 for obsolescence as it has been replaced by a more robust
PlayerVision 3 platform which is the product we are now taking to
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 wins and
losses.  We reflect amounts due to the owners of the facilities in
which the keno games are conducted (effectively contingent rent) as an
expense.





Cash and cash equivalentsand jackpot reserve
deposits. We
consider all highly liquid investments with an original maturity of three months
or less at the date of purchase to be cash equivalents. For financial statement
purposes, jackpot reserve deposits (Note 3), a form of restricted cash, is
excluded from cash and cash equivalents.  Changes in the funds set
aside for such purposes are treated as investing activities and reported net in
the statement of cash flows.  We classify these funds as current
assets because we use these restricted funds to support operations.





Inventories.  Inventories
consist primarily of bingo and keno finished goods and keno equipment and spare
parts and are stated at the lower of cost or market, with cost determined using
the first-in, first-out (“FIFO”) cost method.  Appriopriate write offs
are made to reduce the cost of excess and obsolete inventories to their
estimated net realizable value.





Otherintangible
assets.  Other intangible assets consist primarily of the costs
of trademarks, copyrights, and patents (some of which are
pending).  Other intangible assets are amortized on a straight line
basis over the estimated economic life of the asset, usually less than 10 years.
We review goodwill and other intangible assets for impairment annually and
whenever events or circumstances indicate the carrying values are not likely to
be recoverable or warrant a revision to the estimated remaining useful life, in
accordance with the Statement of Financial Accounting Standards (SFAS) 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets, and SFAS 142, Goodwill and Other Intangible
Assets.





Our forecasted future cash flow used to
test the recoverability or determine the fair value of intangibles are based on
assumptions that are objective and consistent with our best estimates and the
plan used to manage the underlying business. Factors used in the evaluations of
potential impairment and fair value estimates require significant judgments and
respective estimated useful lives, risk rates, expected market growth rates,
brand history, competitive environment, market share, future business prospects
and success of our products. Changes in these expectations and related estimates
and assumptions, for example, resulting from the economic conditions and
uncertainties discussed in Note 8, could materially affect the estimated
recoverability and/or fair value. While we believe that our estimates of future
revenues and cash flows are reasonable, different assumptions could materially
affect our assessments of useful lives, recoverability and fair values.
Application of the goodwill impairment test also requires judgment regarding
such factors as the identification of reporting units, allocation of related
goodwill, assignment of corporate shared assets and liabilities to reporting
units, and determination of estimated fair value of each reporting unit. We
estimate the fair value of our operating components using the discounted cash
flow method, and compare the implied valuation multiples to guidelines for
public companies under the market approach to test the reasonableness of the
discounted cash flow results. Our recorded goodwill relates to our bingo and
keno product sales business component and to our recent acquisition of Adline
Network Holdings, Inc. (Note 7).  Losses during 2007 and 2008 resulted
from significant cash resources expensed on the development, regulatory
approval, administrative infrastructure, and marketing of
PlayerVision.


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Use of estimates.  The
preparation of these financial statements requires the use of estimates and
judgments and the reported actual results may differ from these estimates under
different assumptions or conditions, and these differences may be
material.  Management’s estimates related to the recoverability of the
carrying values of the intangible assets and goodwill are particularly
vulnerable to material changes in the next year.





Marketablesecurities.Securities classified
as “trading securities” are carried in the financial statements at fair
value.  Unrealized and realized gains and losses are included in
earnings currently.





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





Certainissuancesof our Common Stock Series
A.Our Common Stock Series A does not trade in the market and,
therefore, quoted stock prices are not available.  In November 2005 we
raised $250,000 by issuing common stock at $2 per share. A limited number of
sales between shareholders and third parties interested in buying our Common
Stock Series A have predominately occurred at $2.00 per share in 2007 and
2008.  We used this price as the best indication of the fair value of
Common Stock Series A until the IGT investment transaction on October 24, 2008
at which time we performed a reevaluation of the price given the strategic
nature of IGT’s investment and established a new fair value of $2.50 per
share.  In January 2009, this price was further validated as the fair
value as we raised $562,500 by selling 225,000 shares of Common Stock Series A
at $2.50 per share.





Net loss per
share.  Basic net loss per share is computed by dividing net
loss by the weighted average number of common shares outstanding during the
year.  Potentially dilutive securities such as convertible preferred
stock, options and warrants were not considered outstanding because the effect
would have been anti-dilutive.





Stock-based
compensation.  Effective January 1, 2006 we adopted SFAS No.
123R, Share Based
Payment, using the modified-prospective-transition method, which requires
no retroactive adjustments. Prior to January 1, 2006, we had been utilizing SFAS
No. 123, Accounting for
Stock-based Compensation, for valuing employee and other compensatory
stock and option awards (Note 7).





We use the Black-Scholes option pricing
model to estimate the fair value of options and warrants and the amounts to be
expensed as it relates to employee and non-employee stock-based compensation. In
using the Black-Scholes option-pricing model, the principal assumptions selected
to value the options and warrants for calculating the “minimum value,” included
a “risk-free” interest rate of approximately 2%, expected option life of four to
10 years, volatility of 30% and no expected dividends.





Advertising.  Advertising
costs are expensed as incurred and totaled $229,100 and $83,770 for 2007 and
2008 respectively.





Income taxes.Our
policy is to treat any income tax-related interest or penalties as a component
of income tax expense (benefit).





Reclassifications.  Certain
minor reclassifications to previously reported amounts have been made to conform
to the current year presentation.


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3.  Jackpot
Reserve Deposits:




At
December 31, 2007 and 2008, as required by gaming regulators, we held aside cash
on deposit of $276,012 and $1,230,761, respectively, that are restricted for
funding our various jackpot-oriented games.  (Note 8).




4.  Equipment:




Equipment
consists of the following:




December
      31, 2007
                  
                  
                  December
      31, 2008Production
      equipment
                  
                  $
                  1,669,461
                  
                  
                  $
                  1,561,513Other
      equipment, furniture, and fixtures
                  
                  
                  463,261
                  
                  
                  
                  557,855Leasehold
      improvements
                  
                  
                  43,627
                  
                  
                  
                  43,6272,176,349
                  
                  
                  
                  2,162,995Less
      accumulated depreciation and amortization
                  
                  
                  1,246,825
                  
                  
                  
                  1,238,739$
                  929,524
                  
                  
                  $
                  924,256





5.
Other intangible assets:





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





December
      31, 2007
                  
                  
                  December
      31, 2008PlayerVision
      technology rights
                  
                  $
                  1,016,236
                  
                  
                  $
                  1,016,236Software
                  
                  
                  422,560
                  
                  
                  
                  427,836PlayerVision
      technology rights for
                    “at
      home”
      wagering
                  
                  
                  1,400,0002,838,796
                  
                  
                  
                  1,444,072Less
      accumulated amortization
                  
                  
                  1,417,602
                  
                  
                  
                  1,165,742$
                  1,421,194
                  
                  
                  $
                  278,330





The intangible assets are amortized
over their estimated useful lives, which are currently 5 years.  Total
amortization for other intangible assets amounted to $550,140 and $541,474 for
the years ended December 31, 2007 and 2008, respectively.  In
addition, we are not proceeding with “at home” wagering as part of our strategic
product plan in the future and have expensed $606,667 of remaining unamortized
asset value in the fourth quarter of 2008, which has been included in
depreciation and amortization in the Consolidated Statement of
Operations.  The estimated aggregate future amortization is as
follows:





2009
                    
                    $
                    249,7262010
                    
                    
                    25,3692011
                    
                    
                    3,235$
                    278,330





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6.  Debt:




In April 2006, we refinanced and
increased the amount of our bridge financing from $3,000,000 to $5,000,000 with
CAMOFI Master LDC, or CAMOFI. We replaced our previously issued warrant to
purchase 1,050,000 shares of Common Stock Series A with a warrant to purchase
2,500,000 shares of Common Stock Series A. Under the 2006 financing arrangement,
we were obligated to make monthly principal payments beginning in April 2007 of
$208,333 (plus additional amounts that would have become due upon certain
contingencies, such as our raising of equity financing) with a balloon payment
of $3,125,003 due in January 2008 and quarterly payments of $125,000 in
financing costs to be recognized appropriately as expense over the loan period
beginning July 1, 2006, until paid or converted as described below. Under the
terms of the note agreement, all of our assets were pledged as collateral
(except those subject to operating leases and the cash attributable to Series A
and Series B Convertible Preferred Stock; and the sale of Common Stock Series A
by our Chairman of the Board were to be restricted for a period of
time).





The note was convertible into shares of
our Common Stock Series A at the option of the note holder, in whole or in part,
at any time at $1.345, subject to certain limitations. In addition, we were
obligated under a related agreement to register with the SEC, by a specified
date, shares of Common Stock Series A issuable under the conversion and other
features of the note agreement.





The terms and conditions of our
financing from CAMOFI were further amended on March 22, 2007 to extend the
maturity date of the CAMOFI Note, delay the start of the monthly principal
payments and delay the registration rights obligations owed to CAMOFI. As
consideration for these amendments, we issued to CAMOFI warrants to purchase
175,000 shares of Common Stock Series A at an exercise price per share of
$1.48 and a payment of $25,000.





The terms and conditions of our
financing from CAMOFI were further amended on September 28, 2007, as the
quarterly commitment fee payment of $125,000 due on October 1, 2007 pursuant to
the notes was deferred until January 1, 2008 at which time it was to be due and
payable along with the additional $125,000 quarterly commitment fees due at the
time for a total of $250,000.  The monthly redemption amount of
$208,333 due on October 1, November 1, and December 1, 2007 were each deferred
to April 1, 2008.  The monthly redemption amount of $208,333 payable
on April 1, 2008 remained due and payable on that date, so $833,332 in total was
due and payable on that date.  The aggregate redemption amount was due
on January 1, 2009.  The filing date and effectiveness date as such
terms are defined in the Registration Rights Agreement were amended to be
February 28, and June 30, 2008, respectively. For these concessions, the note
was increased from $5,000,000 to $5,250,000. We further agreed to give CAMOFI at
least ten business day’s notice prior to any prepayments and repayments pursuant
to the note, during which time CAMOFI had the right to convert any portion of
its note into common stock.  We also agreed to reduce our recurring
cash burn to no more than $460,000 per month.





On December 21, 2007, we further
amended our financing with CAMOFI whereby the commitment fees due on January 1,
2008 of $256,250 as well as the commitment fees of $131,250 due each on April 1,
2008 and July 1, 2008 were to be payable on July 1, 2008.  In addition
monthly redemption payments of $208,333 which were to begin January 1, 2008 were
deferred to the maturity date of the note, January 1, 2009, when the entire
amount of the note or $5,250,000 was due and payable.  The prepayment
for early payoff of the Note was raised to 120% and the filing date and the
effectiveness date of the Registrations Rights Agreement were changed to
September 30, 2008 and January 31, 2009, respectively.  We issued
CAMOFI 300,000 shares of Common Stock Series A at $2.00 per share and have
accounted for this transaction as a debt modification.  The revised
commitment fee was 23.2 % (including the effects of the debt modifications on
March 22 and September 28, 2007) as compared to 10%
previously.


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





Because of the Registration Rights
Agreement with CAMOFI, the registration of CAMOFI’s converted shares and
warrants were outside of our control.  The Registration Rights
Agreement with CAMOFI stated that if 125 % of the registered securities for
CAMOFI were not effective by the 120th calendar day following the filing
date of September 30, 2008, we would have to pay cash liquidating damages
equal to 1.5 % of the outstanding principal of the bridge financing and an
additional 1.5% for any subsequent 30-day period thereafter.  If we
failed to pay any partial liquidating damages within seven days from the date
payable, we were to accrue 20% annual interest on any amount in
arrears.  Settlement of the warrants with unregistered shares and the
payment of a penalty would have been an uneconomic settlement alternative and
thereby would not have been considered a realistic alternative for
us.  Consequently, the initial value of the warrants was recorded as a
derivative liability and changes to the fair value of those warrants were
included in the statement of operations.





On October 24, 2008, the CAMOFI note
for $6,051,250, a prepayment penalty of, $1,210,250 and accrued interest of
$357,022 were paid off with the proceeds of the IGT investment (Note 7). This
early extinguishment of debt resulted in a loss of $640,882.  After
the payoff, CAMOFI has 2,675,000 warrants at $1.48 and incidental registration
rights which allows them to join a registration statement after the company and
IGT shares have been registered if there is availability in any future
registration statement.





Long term debt is as
follows:





December
      31, 2007
                  
                  
                  December
      31, 2008Debt
      derivative liability
                  
                  $
                  1,592,263Bridge
      financing
                  
                  
                  4,342,345Settlement
                  
                  
                  614,027Other
      notes payable
                  
                  
                  179,840
                  
                  
                  $
                  35,0766,728,475
                  
                  
                  
                  35,076Less
      amounts due within one year
                  
                  
                  787,550
                  
                  
                  
                  11,957$
                  5,940,925
                  
                  
                  $
                  23,119




Scheduled debt maturities are $11,957 in 2009 and $23,119 in
2010.




During the year ended December 31, 2008, we received five stockholder
advances totaling $2,435,000 and paid back all but $600,000 of those advances at
December 31, 2008.  The last $600,000 advance was paid back in January
2009.




We have received all
monies due from a settlement with a customer of our wholly-owned subsidiary,
Imagineering, and have distributed all monies due except for $107,500 which is
due to the prior owners of Imagineering who agreed to convert their debt into
Common Stock Series A at $2.00 per share or 53,750 shares in March
2008.  As part of the IGT investment on October 24, 2008 (Note 7), the
$614,027 due IGT above under settlement was forgiven and has been included,
along with the $11,500,000 cash investment by IGT, in the
allocation between the Series I Preferred Stock (valued at
$11,294,901) and the 1,500,000 warrant (valued at $819,126).




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7.  Stockholders'
equity:




From time to time, we issue shares of
common stock and preferred stock through transactions that are exempt from
registration under the Securities Act of 1933 (Securities Act), or pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D.  In
March 2007, an officer and a board member were each awarded 50,000 shares of
Common Stock Series A for their respective promotions.  In September
2007, we awarded 2,000 shares of Common Stock Series A to a consultant for
engineering services rendered.  For the year ended December 31, 2007,
we issued 830,123 shares of Common Stock Series A pursuant to the exercise of
options and warrants.  For the year ended December 31, 2008, we
issued 102,659 shares of Common Stock Series A pursuant to the exercise of
options and warrants.





During the year ended December 31,
2008, we issued 260,917 shares of Common Stock Series A for salaries, bonuses,
consulting services, and board of directors fees and 500,000 shares of Common
Stock Series A as an incentive for our sale of series F and Series G Preferred
Stock.  Additionally, if our Common Stock Series A, as a result of a
qualified financing, commences trading at less than $5 per share, our Series F
and G shareholder will also 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.  We also issued 53,750 shares to retire
$107,500 of long-term debt.  In addition, we sold 55,361 shares of
Common Stock Series A to employees and 10,100 shares to present
shareholders.  On October 24, 2008, we declared a cash dividend of $97,233
on our Series F and G Convertible Preferred Stock in total.





On October 1, 2008, we acquired the
tangible and intangible assets of AdLine Network Holdings Inc. (AdLine), AdLine
Media LLC, AdLine Network LLC and Freeview Network LLC for 750,000 shares of our
Common Stock Series A.  The intent of the transaction was to reacquire
and consolidate all of the rights associated with various technologies and
intellectual property licenses held by AdLine, including the license previously
granted to AdLine.  The transaction was structured as an asset purchase to
ensure the complete reacquisition of the licenses and technologies.  Any
other assets acquired were immaterial and incidental.    The
purchase price of $1,500,000 was allocated as follows:  $80,000 to
fixed assets, $4,117 to miscellaneous expense and $1,415,883 to
goodwill.  In addition, one of the owners of AdLine received a
one-year consulting agreement with LVGI for $15,000 per month.





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 one seat 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 (see Note 6).  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.


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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 Convertible Preferred Stock
transaction.





In connection with the IGT transaction,
we filed Amended and Restated Certificates of Designation with 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.





Series A Convertible Preferred
Stock.On March 15, 2007, pursuant to the terms and conditions
of our Series A Convertible Preferred Stock, we exercised our right to convert
all shares of Series A Convertible Preferred Stock into shares of Common Stock
Series A on a one-for-one basis.  Accordingly, all 536,400 shares of
Series A Convertible Preferred Stock were converted into 536,400 shares of
Common Stock Series A.  In October 2008, we filed a Certificate of
Withdrawal with the Nevada Secretary of State whereby we withdrew the
designation of our Series A Convertible Preferred Stock, as no shares of this
series were outstanding.





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.   Holders of Series B Convertible Preferred Stock have a
liquidation preference of $5 per share.  The Series B liquidation
preference is over holders of Series E, Series G, and Series H Convertible
Preferred Stock.





On February 12, 2007, because Treasure
Island, LLC, dba Treasure Island Hotel and Casino (Treasure Island), had begun
maintaining the required base jackpot bankroll for Nevada Numbers, 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:
exchange one-half of their shares of Series B Convertible Preferred Stock for
either (a) their original investment in the shares exchanged, i.e., $5.00 per
share, or (b) shares of Common Stock Series A at the rate of five shares of
Common Stock Series A for each share of Series B Convertible Preferred Stock; or
to exchange all of their shares of Series B Convertible Preferred Stock for
shares of Common Stock Series A at the rate of five shares of Common Stock
Series A for each share of Series B Convertible Preferred Stock.  The
holders of Series B Convertible Preferred Stock had until May 13, 2007 to
make their decision.  As of December 31, 2007, holders of 179,890
shares of Series B Convertible Preferred Stock had converted their shares on a
one-to-five basis for 899,450 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 during the year ended December 31,
2007.





On January 28, 2008, because Treasure
Island had begun maintaining the required base jackpot bankroll for 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: exchange their shares of Series B Convertible Preferred Stock
for either (a) their original investment in the shares exchanged, i.e., $5 per
share, or (b) shares of Common Stock Series A at the rate of five shares of
Common Stock Series A for each share of Series B Convertible Preferred Stock.
The holders of Series B


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Convertible
Preferred Stock had until April 28, 2008 to make their decision.  At
December 31, 2008 holders of 52,850 shares of Series B Convertible Preferred
Stock had converted their shares on a one-to-five basis for 264,250 shares of
Common Stock Series A.  We also redeemed 27,500 shares of Series B
Convertible Preferred Stock at $5 per share for a total redemption of $137,500
during the year ended December 31, 2008.





Series C Convertible Preferred
Stock.In January 2007, holders of our Series C Convertible
Preferred Stock converted 3,000 shares of Series C Convertible Preferred Stock
on a one-to-five basis for 15,000 shares of Common Stock Series A.  In
September 2007, holder of our Series C Convertible Preferred Stock converted
8,000 shares of Series C Convertible Preferred Stock on a one-to-five-basis for
40,000 shares of Common Stock Series A.  In August 2008, the remaining
holders of 35,000 shares of Series C Convertible Preferred Stock converted their
shares on a one-to-five basis into 175,000 shares of Common Stock Series
A.  In October 2008, we filed a Certificate of Withdrawal with the
Nevada Secretary of State whereby we withdrew the designation of our Series C
Convertible Preferred Stock, as no shares of this series were
outstanding.





Series D Convertible Preferred
Stock.  In November 2005, we issued 125,000 shares of Series D
Convertible Preferred Stock at $2 per share.  In August, 2008, the
holder of 125,000 shares of Series D Convertible Preferred Stock converted his
shares on a one-to-one basis into 125,000 shares of Common Stock Series
A.  In October 2008, we filed a Certificate of Withdrawal with the
Nevada Secretary of State whereby we withdrew the designation of our Series D
Convertible Preferred Stock, as no shares of this series were
outstanding.





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 F,
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.  During the year ended December 31, 2007, we issued 392,800
shares of Series E and raised $1,964,000.





Series F Convertible Preferred
Stock.The holder of Series F Convertible Preferred Stock is
entitled to receive $5 per share as a liquidation preference after payment of
all existing and future indebtedness and before Series I, Series B, Series E,
Series G and Series H Convertible Preferred Stock as to the $1,000,000 jackpot
bankroll reserve for our Gamblers Bonus Million Dollar Ticket
game.  On January 31, 2009, we discontinued the Gamblers Bonus Million
Dollar Ticket game and the jackpot bankroll reserve of $1,000,000 was
transferred to our Nevada Numbers game. On May 9, 2008, we issued 200,000
shares of Series F 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 F Convertible Preferred
Stock is convertible into Common Stock Series A at the lower of $3.50 or 30% off
of the IPO price, where “IPO price” means the per share price to the public of
any common shares offered by us that in the aggregate results in capital in
excess of $10.0 million being raised and the shares of a class of our common
stock being listed and traded on a national stock exchange.





Series G Convertible Preferred
Stock.The holder of Series G Convertible Preferred Stock is
entitled to receive $5 per share as a liquidation preference pari passu with the
liquidation preference of Series E Convertible Preferred Stock and after payment
of all existing and future indebtedness and the liquidation preference of Series
F, I, and B Convertible Preferred Stock.  Series G Convertible
Preferred Stock has a liquidation preferences over Series H Convertible
Preferred Stock.  On May 9, 2008, we issued 150,000


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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 F, 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.





Stock Warrants and
Options. We have both a qualified and a non-qualified stock option
plan.  There are 1,995,900 qualified options presently outstanding under
the qualified plan, with another 650,000 non-qualified options also outstanding.
The exercise price of options issued pursuant to either plan cannot be less than
the fair market value at the time of the grant and vesting is at the discretion
of the Compensation and Stock Option Committee, though limited to ten years.
Only employees and board members are qualified to receive
options.  The stock subject to the qualified plan is limited to
2,500,000 shares of Common Stock Series A.





We have, from time to time,
granted common stock, warrants and options to employees and others as employment
incentives, 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 630,000 and 960,000
shares of Common Stock Series A were issued to officers and directors during the
years ended December 31, 2007 and 2008, respectively.  Total
compensation cost recognized in operations from grants of options and warrants
amounted to $483,994 and $742,398 for the years ended December 31, 2007 and
2008, respectively.  Unrecognized costs related to employee stock
options and warrants outstanding at December 31, 2008 totaled $556,327 and are
expected to be amortized over a weighted average period of three years.





The weighted average exercise price of
our outstanding options and warrants at December 31, 2008, was $2.46. The
following table summarizes our stock option and warrant activity followed by the
applicable weighted average prices during the year ended December 31,
2008:





Options/Warrants
                
                
                Weighted
                  Average
      PriceBalance,
      January 1, 2008
                
                
                6,174,862
                
                
                $
                2.33Granted
                
                
                3,192,000
                
                
                
                2.72Exercised
                
                
                (102,659
                )
                
                
                1.17Forfeited
                
                
                (607,994
                )
                
                
                2.68Balance,
      December 31, 2008
                
                
                8,656,209
                
                
                $
                2.46





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As of
December 31, 2008, 1,503,627 options and warrants are outstanding, but have not
vested. The aggregate intrinsic value of options and warrants at December 31,
2008, is $560,531.




Non-vested
      Options
                    
                    
                    Weighted
      Average PriceBalance,
      January 1, 2008
                    
                    
                    515,610
                    
                    
                    $
                    5.00Granted
                    
                    
                    1,064,250
                    
                    
                    
                    2.97Vested
                    
                    
                    (186,650
                    )
                    
                    
                    5.00Balance,
      December 31, 2008
                    
                    
                    1,393,210
                    
                    
                    $
                    3.45







Non-vested
      Warrants
                    
                    
                    Weighted
      Average PriceBalance,
      January 1, 2008
                    
                    
                    270,333
                    
                    
                    $
                    2.85Granted
                    
                    
                    93,750
                    
                    
                    
                    2.50Vested
                    
                    
                    (253,666
                    )
                    
                    
                    2.86Balance,
      December 31, 2008
                    
                    
                    110,417
                    
                    
                    $
                    2.52




The
following table summarizes stock options and warrants outstanding at December
31, 2008, as to number exercisable and average remaining life in
years:




Exercise
      Price
                      
                      
                      Number
                        Outstanding
                      
                      
                      Weighted
      Average Remaining
                        Life
      in years
                      
                      
                      Number
                        Exercisable
                      
                      
                      Weighted
      Average
                        Remaining
                        Life
      in yearsOptions
                      
                      $
                      1.00
                      
                      
                      
                      270,000
                      
                      
                      
                      1.0
                      
                      
                      
                      270,000
                      
                      
                      
                      1.0$
                      2.00
                      
                      
                      
                      460,000
                      
                      
                      
                      4.3
                      
                      
                      
                      158,500
                      
                      
                      
                      1.5$
                      2.50
                      
                      
                      
                      667,000
                      
                      
                      
                      4.6
                      
                      
                      
                      166,750
                      
                      
                      
                      1.2$
                      3.00
                      
                      
                      
                      100,900
                      
                      
                      
                      1.2
                      
                      
                      
                      100,900
                      
                      
                      
                      1.2$
                      4.55
                      
                      
                      
                      25,000
                      
                      
                      
                      1.0
                      
                      
                      
                      25,000
                      
                      
                      
                      1.0$
                      5.00
                      
                      
                      
                      1,123,000
                      
                      
                      
                      3.7
                      
                      
                      
                      531,540
                      
                      
                      
                      1.7Warrants
                      
                      $
                      1.00
                      
                      
                      
                      367,500
                      
                      
                      
                      1.3
                      
                      
                      
                      357,500
                      
                      
                      
                      1.1$
                      1.48
                      
                      
                      
                      2,675,000
                      
                      
                      
                      2.3
                      
                      
                      
                      2,675,000
                      
                      
                      
                      2.3$
                      1.50
                      
                      
                      
                      30,000
                      
                      
                      
                      4.3
                      
                      
                      
                      30,000
                      
                      
                      
                      4.3$
                      2.00
                      
                      
                      
                      185,000
                      
                      
                      
                      1.7
                      
                      
                      
                      185,000
                      
                      
                      
                      1.7$
                      2.10
                      
                      
                      
                      23,809
                      
                      
                      
                      1.9
                      
                      
                      
                      23,809
                      
                      
                      
                      1.9$
                      2.45
                      
                      
                      
                      1,500,000
                      
                      
                      
                      2.8
                      
                      
                      
                      1,500,000
                      
                      
                      
                      2.8$
                      2.50
                      
                      
                      
                      125,000
                      
                      
                      
                      4.6
                      
                      
                      
                      31,250
                      
                      
                      
                      4.6$
                      3.00
                      
                      
                      
                      854,000
                      
                      
                      
                      2.1
                      
                      
                      
                      854,000
                      
                      
                      
                      2.1$
                      4.00
                      
                      
                      
                      100,000
                      
                      
                      
                      1.1
                      
                      
                      
                      100,000
                      
                      
                      
                      1.1$
                      5.00
                      
                      
                      
                      150,000
                      
                      
                      
                      2.3
                      
                      
                      
                      143,333
                      
                      
                      
                      2.18,656,209
                      
                      
                      
                      2.7
                      
                      
                      
                      7,152,582
                      
                      
                      
                      2.1




There are
1,503,627 options and warrants that have been issued but have not
vested.  Of these options and warrants 628,801 will vest in 2009,
584,819 in 2010, and 290,007 in 2011.




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8.  Concentrations,
commitments and contingencies:




Concentrations. There are no
significant concentrations of credit risk among our receivables. Our receivables
are uncollaterized.  The maximum losses that we would incur if a
customer or customers failed to pay would be limited to the amount due after any
allowances provided.  In managing credit risk and establishing any
allowance necessary for doubtful collection, we consider the customer’s credit
history and our relationship, the relative strength of our legal position, the
related cost of any proceedings, and general economic
conditions.  Historically, we have depended on relatively few
suppliers for components and programming for certain of our
games.  However, this dependence has been substantially mitigated as a
result of acquisitions, mostly in 2003, and we believe that such other suppliers
are sufficiently available so that any disruption of service would be brief and
not have a material adverse effect on our business financial condition, or
results of operations.





The United States is currently
experiencing a 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 may likely be
significant.





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.





Severance.  We have
agreed to severance arrangements with all executive officers that provide for
the payment of six months (12 months for our CEO) of base salary following
termination of employment for other than cause which amounts to $692,000 of
financial commitment.  We are presently working on employment
agreements with our CEO, CFO and CTO.  These employment agreements
will include covenants not to compete.  Presently, all employees
except the CEO, CTO and two engineers have signed covenants not to
compete.




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





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




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







December
      31, 2008Present
      value of Nevada Numbers $5.0 million base progressive jackpot, payable in
      20 equal annual installments using a 3.25% discount rate, the prevailing
      prime rate
                
                $
                3,752,968Present
      value at 3.25% of the progressive jackpot meter for Nevada
      Numbers
                
                
                79,499Less
      portion insured through conventional insurers
                
                
                (2,900,000
                )Other
      Games
                
                
                622,893$
                1,555,360




Lease commitments.We lease office and
warehouse space under various non-cancellable operating leases expiring through
2013.  The lease agreements require us to pay fixed monthly base rent
plus variable common area maintenance charges.  Future minimum lease
payments under the leases are:




2009
                    
                    $
                    323,8272010
                    
                    
                    190,6862011
                    
                    
                    162,5972012
                    
                    
                    147,8042013
                    
                    
                    49,894$
                    874,808





Rent
expense on all operating leases for 2007 and 2008 was $345,072 and $419,650
respectively.




Legal Matter.  On
September 12, 2007, International Game Technology (IGT) filed a lawsuit against
us alleging copyright infringement, trademark infringement, trade dress
infringement and false designation of origin relating to the operation of our
PlayerVision system on IGT’s Game King® gaming machines.  IGT was
seeking injunctive and monetary relief in the case, including treble damages and
profits, claiming that IGT would be irreparably harmed by us if our PlayerVision
system was deployed in the marketplace.  On June 12, 2008, IGT and
LVGI jointly filed a “stay” of the lawsuit and began settlement
negotiations.  On October 14, 2008, pursuant to the settlement
effective September 30, 2008 (Note 7), the case was dismissed with
prejudice.




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On
September 15, 2008, a lawsuit was filed against LVGI and certain other
defendants concerning their provisional patent for “slot lottery”.  We
are unable to estimate minimum costs to be incurred by LVGI, if any, upon the
ultimate disposition of this matter and, accordingly, no provision has been
made, but we believe the case is without merit and will vigorously defend
ourselves.




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




The
forgoing 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.  For
this matter we have agreed to pay a fine of $10,000 in full settlement and
satisfaction of the allegations.  However, we can give no assurance
that we will be in compliance with these financial requirements in the
future.  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 and no further disciplinary action was
taken.




9.
Income taxes:




As of
December 31, 2008, net operating loss carryovers for federal income tax
reporting purposes were approximately $38.0 million and expire between 2013 and
2027. However, because we have not achieved a satisfactory level of operations,
realization of any future income tax benefit of the net operating loss
carryovers accumulated to date is not yet viewed by management at this time as
more likely than not.  Therefore, the related deferred tax asset of
$13.3 million has been effectively reduced by a 100% valuation
allowance.  In addition, we may be limited in our ability to utilize
our net operating loss carryforwards and realize any benefit therefrom in the
event of any of certain ownership changes described in Internal Revenue Code
Section 382.




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




10.
Financial Instruments:




Our financial instruments consist of
cash, jackpot reserve deposits, accounts receivable, accounts payable, and
progressive jackpot liability, other accrued expenses, 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.




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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 are played in
7 casinos and 100 bars and convenience stores in Nevada and another 18
casinos outside Nevada.





Our games consist of keno style games
(Nevada Numbers and The Million Dollar Ticket), and Super Bonanza, a bingo style
game and Gamblers Bonus Million Dollar Ticket, a promotional sweepstakes game,
which was launched on April 14, 2008 and discontinued on January 31,
2009.  The composition of our casino games revenue was approximately
67% bingo and 33% keno for the year ended December 31, 2007 and 69.6% bingo,
16.7% keno and 13.7% promotional sweepstakes during the year ended December 31,
2008.





The “Products” segment generates
revenue essentially through the sale of keno and bingo supplies and keno
equipment.  Supplies include paper products, inside/outside tickets,
promotional items and ink for bingo daubers.  Supplies accounted for
65% and 73% of our products sales during the years ended December 31, 2007 and
2008, respectively.  Keno system sales accounted for 35% and 27% of
products sales for the years ended December 31, 2007 and 2008,
respectively.





The “Other” segment includes revenue
from equipment maintenance contracts which accounted for 47% and 64% of other
revenue during the years ended December 31, 2007 and 2008, respectively;
operation of a keno route (34%  and 16% for the year ended December
31, 2007 and 2008 respectively), the distribution of “hand-held” bingo
electronics (5% and 0% for the year ended December 31, 2007 and 2008,
respectively) and keno route participation agreements (14% and 20% for the years
ended December 31, 2007 and 2008, respectively).





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




2007
                  
                  
                  2008RevenueCasino
      Games
                  
                  $
                  1,859,165
                  
                  
                  $
                  2,525,884Product
      Sales
                  
                  
                  1,820,375
                  
                  
                  
                  1,255,428Other
                  
                  
                  1,383,869
                  
                  
                  
                  997,680$
                  5,063,409
                  
                  
                  $
                  4,778,992Operating
      income (loss)Casino
      Games
                  
                  $
                  996,348
                  
                  
                  $
                  (428,089
                  )Product
      Sales
                  
                  
                  766,725
                  
                  
                  
                  (51,777
                  )Other
                  
                  
                  39,541
                  
                  
                  
                  (234,140
                  )Unallocated
                  
                  
                  (8,589,479
                  )
                  
                  
                  (9,499,296
                  )$
                  (6,786,865
                  )
                  
                  $
                  (10,213,302
                  )Identifiable
      assetsCasino
      Games
                  
                  $
                  3,504,892
                  
                  
                  $
                  2,668,200Product
      Sales
                  
                  
                  368,219
                  
                  
                  
                  381,176Other
                  
                  
                  416,890
                  
                  
                  
                  386,004Unallocated
                  
                  
                  2,631,988
                  
                  
                  
                  3,038,947$
                  6,921,989
                  
                  
                  $
                  6,474,327







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Identifiable
assets of $6,921,989 and $6,474,326 at December 31, 2007 and 2008, respectively,
included recorded goodwill of $2,371,178 that relates to the Product Sales
segment from prior acquisitions and the recent acquisition of Adline Network
Holdings, Inc.




Capital
      expenditures
                  
                  2007
                  
                  
                  2008Casino
      Games
                  
                  $
                  325,438
                  
                  
                  $
                  197,790Product
      Sales
                  
                  
                  1,509
                  
                  
                  
                  -Other
                  
                  
                  36,327
                  
                  
                  
                  109,034Unallocated
                  
                  
                  124,655
                  
                  
                  
                  134,504$
                  487,928
                  
                  
                  $
                  441,328




12.
Related Party Transactions:




Agreements for Services




In
2006, we entered into a consulting agreement with JMC Investments, L.L.C., an
entity managed and owned by Stephen A. Crystal, then a director of our company.
During the 90-day term of the consulting agreement, JMC Investments, L.L.C. was
to assist in designing, developing, and implementing our sales efforts and in
fulfilling our funding needs. In exchange, we agreed to pay JMC Investments,
L.L.C. compensation of $10,000 per month and a one-time grant of 60,000 shares
of Common Stock Series A. On June 15, 2006, Mr. Crystal accepted our offer of
employment as our President and Chief Marketing Officer and agreed to terminate
any further obligation under the consulting agreement.  As an
employee, Mr. Crystal was issued a warrant to purchase 250,000 shares of Common
Stock Series A with an exercise price of $3.00 per share.  On March
16, 2007, Mr. Crystal was re-appointed to our Board of Directors and
concurrently resigned as our President and Chief Marketing Officer. As part of
his severance package, Mr. Crystal received $30,000 and 10,000 shares of Common
Stock Series A. Mr. Crystal subsequently resigned from our Board of Directors on
February 4, 2008.




PlayerVision
Contract




We
entered into a contract dated December 13, 2007 with the Four Queens Hotel and
Casino, a hotel casino controlled by Terry L. Caudill, a director of our
company, and installed AdVision on 52 slot machines for $1.00 per machine per
day. The contract was cancelable after the first 60 days but remains in force
today.




Board Service





Russell R. Roth, Chairman of the Board,
and Jon D. Berkley, CEO, were each granted 10,000 stock options for Board of
Directors service in 2008.  Each of Mr. Roth and Mr. Berkley receive
salaries from us unrelated to their service on our Board of
Directors.





Guarantees





Russell R. Roth, Chairman of the Board,
and Bruce A. Shepard, CFO, were each granted 30,000 stock options for personal
guarantees of shareholder advances and Mr. Shepard was granted 5,000 shares for
personal advances made to us during the year ended December 31,
2008.


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13. Subsequent
Events:





In
January 2009, we raised $562,500 from our Series F and G Preferred shareholder
by selling him 225,000 shares of Common Stock Series A at $2.50 per
share.  In addition, On February 13, 2009, we signed a binding term
sheet (“Term Sheet”) with IGT whereby IGT advanced $1.5 million (“Advance”) to
the Company.  If the Company and IGT do not execute an investment
agreement (“Second Investment Agreement”) on or before August 15, 2009, IGT will
have the option of (i) converting the Advance into shares of preferred stock of
the Company, or (ii) having the Company repay the Advance.  If IGT
elects to convert the Advance into preferred stock, the Advance shall be
converted into shares of the same series of the Company’s preferred stock as is
being offered in the Company’s private placement (the “Private Placement”) as
previously disclosed in the Company’s Form 8-K dated January 16,
2009.  The number of shares to be issued shall be based on the closing
price of the Private Placement, or $3.25 per share if the Private Placement is
not completed.  If the Private Placement is not completed prior to
August 15, 2009, the Advance shall become immediately due and payable to
IGT.  The Company granted a security interest in all of its present
and future assets as security for such obligation.





Pursuant
to the Term Sheet, the Company and IGT shall endeavor to enter into the Second
Investment Agreement for a total investment in the Company of $3.0 million
inclusive of the Advance (the “$3.0 Million Investment”).  In
consideration of the $3.0 Million Investment, the Company intends to issue to
IGT a new series of preferred stock convertible into shares of the Company’s
Common Stock Series A at the price of the Private Placement, or, if the Private
Placement does not close, $3.25 per share.  The preferred stock will
be entitled to a mandatory annual 5% cash dividend.  The annual
dividend will be personally guaranteed by our chairman and chief financial
officer.  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.


.


In January 2009, our Board of Directors
adopted the 2009 Stock Option Plan, subject to approval at the 2009 Annual
Meeting of Stockholders.  The maximum number of shares of the
Company’s common stock that can be optioned and sold under the 2009 Stock Option
Plan is 20% of the issued and outstanding shares of common stock.  The
maximum number of shares for which a stock option may be may be granted to any
optionee during any calendar year shall not exceed 3% of the issued and
outstanding common stock.  The purchase price for the shares subject
to any stock option shall be determined at the time of the grant by the
administrator of the 2009 Stock Option Plan, but shall not be
less than 85% of the fair market value per share.




Our contract with Treasure Island for the $3.9 million base jackpot bankroll for
Nevada Numbers and Million Dollar Ticket expired on March 31, 2009, and we shut
down the games as a result.  We expect to restart the games  as soon
as we find funding for the $3.9 million base jackpot.


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ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.




Not
applicable.




ITEM 9A(T). CONTROLS AND PROCEDURES.




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (Exchange Act) is recorded, processed,
summarized and reported within the time period specified in the SEC’s rules and
forms and that such information is accumulated and communicated to our
management, including the Chief Executive Officer and the Chief Financial
Officer.




Our
management, including the Chief Executive Officer and the Chief Financial
Officer, has conducted an evaluation of the effectiveness of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15(c) as of December 31,
2008.  Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed
with the Securities and Exchange Commission has been made known to them in a
timely fashion.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to our management and board of directors regarding
the preparation and fair presentation of published financial
statements.




Management
assessed the effectiveness of our internal control over financial reporting (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) as
of December 31, 2008. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control—Integrated Framework.  Based on the assessment
performed on the effectiveness of our internal controls, management believes
that, as of December 31, 2008, our internal controls were effective based on the
above criteria.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.




Changes
in Internal Control over Financial Reporting




Management
believes that we have addressed prior material weaknesses in internal control
over financial reporting with respect to future periods by requiring the
completion of a detailed SEC and GAAP disclosure checklist in connection with
our financial closing process at the end of each quarter and at the end of the
year, by having a detailed cold review of our financial statements and notes
thereto performed by another independent accounting firm prior to each annual
and quarterly report being filed with the SEC and reporting the results of that
cold review to the audit committee, by subscribing to an online accounting
reference service, and by assigning responsibility for regular reconciliation of
our equity shares to the transfer agent ledger to a full-time accounting staff
person, all of which procedures were implemented prior to the filing of this
report.




ITEM 9B.   OTHER INFORMATION.




None.


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PART
III




ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
SEC within 120 days after the end of our 2008 fiscal year (the “2009 Proxy
Statement”).





ITEM 11. EXECUTIVE
COMPENSATION.




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.





ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.





ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.





ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.





PART
IV





ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.




(a)(1)  Financial
Statements




Included
in Part II of this report:




Consolidated
Balance Sheets at December 31, 2008 and 2007.




Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007.




Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2008
and 2007.




Consolidated
Statements of Cash Flow for the Years Ended December 31, 2008 and
2007.




Notes to
Consolidated Financial Statements




(a)(2)  Financial Statement
Schedules




Not
required.




(a)(3)
and (c) Exhibits




Included as Exhibits are the items
listed in the Exhibit Index.




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SIGNATURES




In
accordance with Section 13 or 15(d) 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)By:
              /s/
      Jon D. BerkleyJon
      D. Berkley
                President
      and Chief Executive Officer
                (Principal
      Executive Officer)Date:
              April
      7, 2009





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Signature
            
            Title
            
            Date/s/
      Jon D. Berkley
            
            Director,
      President and Chief Executive
            
            April
      7, 2009Jon
      D. Berkley
            
            Officer
      (Principal Executive Officer)/s/
      Bruce A. Shepard
            
            Chief
      Financial Officer and
            
            April
      7, 2009Bruce
      A. Shepard
            
            Treasurer
      (Principal Financial and Accounting Officer)/s/
      Russell R. Roth
            
            Director
            
            April
      7, 2009Russell
      R. Roth/s/
      Harlan D. Braaten
            
            Director
            
            April 7,
      2009Harlan
      D. Braaten/s/
      Kyleen E. Cane
            
            Director
            
            April
      7, 2009Kyleen
      E. Cane/s/
      Terry L. Caudill
            
            Director
            
            April
      7, 2009Terry
      L. Caudill/s/
      Richard H. Irvine
            
            Director
            
            April
      7, 2009Richard
      H. Irvine/s/
      Robert M. McMonigle
            
            Director
            
            April
      7, 2009Robert
      M. McMonigle





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EXHIBIT
INDEX
  Exhibit
              
              Document
      Description2.1
              
              Stock
      Purchase Agreement dated June 30, 2002, by and among registrant,
      Imagineering Systems, Inc., Ron Mach, and Alicia Mach and Bill Williams,
      incorporated by reference to registrant’s Annual Report, as amended, on
      Form 10-KSB/A, as filed with the SEC on July 19, 2006.2.2
              
              Agreement
      and Plan of Merger dated April 30, 2003 among registrant, Las Vegas Twin,
      Inc., Triple Win in Nevada, Inc. and Robert G. Ducaj, II, John Mulligan,
      Leta K. Mulligan, and Michael Cassidy, incorporated by reference to
      registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on May
      20, 2003.2.3
              
              Closing
      Agreement for Stock Purchase dated July 1, 2003 by and among the
      registrant, Imagineering Systems, Inc., Ron Mach and Alicia Mach and Bill
      Williams, incorporated by reference to registrant’s Quarterly Report on
      Form 10-QSB, as filed with the SEC on August 9, 2003.2.4
              
              Agreement
      and Plan of Merger dated January 14, 2005, among the registrant, AdLine
      Gaming, Inc. and AdLine Network, LLC, incorporated by reference to
      registrant’s Current Report on Form 8-K, as filed with the SEC on January
      24, 2005.3.1
              
              Articles
      of Incorporation, as filed with the Nevada Secretary of State on April 28,
      1998, incorporated by reference to registrant’s Registration Statement on
      Form 10-SB12G/A, as filed with the SEC on June 19,
2000.3.2
              
              Certificate
      of Amendment to Articles of Incorporation, as filed with the Nevada
      Secretary of State on June 7, 2000, incorporated by reference to
      registrant’s Annual Report of Form 10-KSB, as filed with the SEC on April
      12, 2001.3.3
              
              Certificate
      of Amendment to Articles of Incorporation, as filed with the Nevada
      Secretary of State on December 8, 2005, incorporated by reference to
      registrant’s Annual Report, as amended, on Form 10-KSB/A, as filed with
      the SEC on July 19, 2006.3.4
              
              Certificate
      of Correction, as filed with the Nevada Secretary of State on July 14,
      2006, incorporated by reference to registrant’s Current Report on Form
      8-K, as filed with the SEC on July 19, 2006.3.5
              
              Certificate
      of Designation for Common Stock, as filed with the Nevada Secretary of
      State on July 17, 2006, incorporated by reference to registrant’s Current
      Report on Form 8-K, as filed with the SEC on July 19,
  2006.3.6
              
              Certificate
      of Withdrawal of Certificate of Designation for Series A Convertible
      Preferred Stock, as filed with the Nevada Secretary of State on October 3,
      2008, incorporated by reference to registrant’s Current Report on Form
      8-K, as filed with the SEC on October 7, 2008.3.7
              
              Certificate
      of Withdrawal of Certificate of Designation for Series C Convertible
      Preferred Stock, as filed with the Nevada Secretary of State on October 3,
      2008, incorporated by reference to registrant’s Current Report on Form
      8-K, as filed with the SEC on October 7, 2008.3.8
              
              Certificate
      of Withdrawal of Certificate of Designation for Series D Convertible
      Preferred Stock, as filed with the Nevada Secretary of State on October 3,
      2008, incorporated by reference to registrant’s Current Report on Form
      8-K, as filed with the SEC on October 7, 2008.3.9
              
              Amended
      and Restated Certificate of Designation for Series B Convertible Preferred
      Stock, as filed with the Nevada Secretary of State on October 22, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on October 28,
2008.
 
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 Exhibit
                  
                  Document
      Description3.10
                  
                  Amended
      and Restated Certificate of Designation for Series E Convertible Preferred
      Stock, as filed with the Nevada Secretary of State on October 22, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on October 28, 2008.3.11
                  
                  Amended
      and Restated Certificate of Designation for Series F Convertible Preferred
      Stock, as filed with the Nevada Secretary of State on October 22, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on October 28, 2008.3.12
                  
                  Amended
      and Restated Certificate of Designation for Series G Convertible Preferred
      Stock, as filed with the Nevada Secretary of State on October 22, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on October 28, 2008.3.13
                  
                  Amended
      and Restated Certificate of Designation for Series H Convertible Preferred
      Stock, as filed with the Nevada Secretary of State on October 22, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on October 28, 2008.3.14
                  
                  Certificate
      of Designation for Series I Preferred Stock, as filed with the Nevada
      Secretary of State on October 22, 2008, incorporated by reference to
      registrant’s Current Report on Form 8-K, as filed with the SEC on October
      28, 2008.3.15
                  
                  Restated
      Bylaws of registrant, incorporated by reference to registrant’s
      Registration Statement on Form 8-A12G, as filed with the SEC on January
      26, 2009.10.1
                  
                  Stock
      Option Plan (2000), incorporated by reference to Appendix A of
      registrant’s definitive proxy statement dated October 29, 2007, as filed
      with the SEC on October 29, 2007.(1)10.2
                  
                  First
      Amendment to the Stock Option Plan (2000), incorporated by reference to
      Appendix B of registrant’s definitive proxy statement dated October 29,
      2007, as filed with the SEC on October 29, 2007.(1)10.3
                  
                  Consulting
      Agreement dated March 31, 2005 by and between registrant and Michael
      Shillan/Shillan Co., LLC, incorporated by reference to registrant’s Annual
      Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19,
      2006.10.4
                  
                  Gamblers
      Bonus Sweepstakes Agreement dated March 31, 2005 between registrant and
      United Coin Machine Company, incorporated by reference to registrant’s
      Annual Report, as amended, on Form 10-KSB/A, as filed with the SEC on July
      19, 2006.10.5
                  
                  License
      Agreement dated July 8, 2005 between registrant and Leroy’s Sports and
      Horse Place, incorporated by reference to registrant’s Annual Report, as
      amended, on Form 10-KSB/A, as filed with the SEC on July 19,
      2006.10.6
                  
                  License
      Agreement dated July 11, 2005 between registrant and Leroy’s Sports and
      Horse Place, incorporated by reference to registrant’s Annual Report, as
      amended, on Form 10-KSB/A, as filed with the SEC on July 19,
      2006.10.7
                  
                  Memorandum
      of Understanding for the Use of PortalVision for Account Wagering between
      registrant and Computerized Bookmaking Systems, Inc., incorporated by
      reference to registrant’s Annual Report, as amended, on Form 10-KSB/A, as
      filed with the SEC on July 19, 2006.10.8
                  
                  Waiver
      and Release Agreement dated February 1, 2006 between registrant and AdLine
      Network, LLC incorporated by reference to registrant’s Annual Report on
      Form 10-KSB, as filed with the SEC on April 17, 2006.10.9
                  
                  Assignment
      Agreement dated February 1, 2006 between registrant and AdLine Network,
      LLC, incorporated by reference to registrant’s Annual Report, as amended,
      on Form 10-KSB/A, as filed with the SEC on July 19,
  2006.
 
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 Exhibit
                  
                  Document
      Description10.10
                  
                  Securities
      Purchase Agreement dated March 31, 2006 between registrant and CAMOFI
      Master LDC, incorporated by reference to registrant’s Current Report on
      Form 8-K, as filed with the SEC on April 7, 2006.10.11
                  
                  Amended
      and Restated Senior Secured Convertible Note with Original Issue Date of
      March 31, 2006 in favor of CAMOFI Master LDC, incorporated by reference to
      registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on
      August 19, 2008.10.12
                  
                  Amended
      and Restated Registration Rights Agreement dated April 30, 2008 between
      registrant and CAMOFI Master LDC, incorporated by reference to
      registrant’s Quarterly Report on Form 10-Q, as filed with the SEC on
      August 19, 2008.10.13
                  
                  Warrant
      Agreement dated March 31, 2006 between registrant and CAMOFI Master LDC,
      incorporated by reference to registrant’s Annual Report, as amended, on
      Form 10-KSB/A, as filed with the SEC on July 19, 2006.10.14
                  
                  Security
      Agreement dated March 31, 2006 between registrant and CAMOFI Master LDC,
      incorporated by reference to registrant’s Annual Report, as amended, on
      Form 10-KSB/A, as filed with the SEC on July 19, 2006.10.15
                  
                  First
      Amendment to Security Agreement dated April 30, 2008, incorporated by
      reference to registrant’s Quarterly Report on Form 10-Q, as filed with the
      SEC on August 19, 200810.16
                  
                  Subsidiary
      Guarantee dated March 31, 2006 between registrant and CAMOFI Master LDC,
      incorporated by reference to registrant’s Annual Report, as amended, on
      Form 10-KSB/A, as filed with the SEC on July 19, 2006.10.17
                  
                  First
      Amendment to Subsidiary Guarantee dated April 30, 2008, incorporated by
      reference to registrant’s Quarterly Report on Form 10-Q, as filed with the
      SEC on August 19, 2008.10.18
                  
                  Satisfaction
      and Termination Agreement between registrant, Imagineering Gaming, Inc.,
      Las Vegas Keno, Inc. and CAMOFI Master LDC dated October 24, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on November 19, 2008.10.19
                  
                  First
      Amendment to Warrants between registrant and CAMOFI Master LDC dated
      October 24, 2008, incorporated by reference to registrant’s Current Report
      on Form 8-K, as filed with the SEC on November 19,
2008.10.20
                  
                  Investment
      Agreement between registrant and IGT dated September 30, 2008,
      incorporated by reference to registrant’s Current Report on Form 8-K, as
      filed with the SEC on November 19, 2008.10.21
                  
                  Form
      of Warrant to purchase Common Stock and Common Stock Series A issuable to
      IGT, incorporated by reference to registrant’s Current Report on Form 8-K,
      as filed with the SEC on November 19, 2008.10.22
                  
                  License
      Application and Support Agreement between registrant and IGT dated
      September 30, 2008, incorporated by reference to registrant’s Quarterly
      Report on Form 10-Q, as filed with the SEC on November 19, 2008.(2)10.23
                  
                  Intellectual
      Property Access Agreement between registrant and IGT dated September 30,
      2008, incorporated by reference to registrant’s Quarterly Report on Form
      10-Q, as filed with the SEC on November 19, 2008.10.24
                  
                  Retrofit
      License Agreement between registrant and IGT dated September 30, 2008,
      incorporated by reference to registrant’s Quarterly Report on Form 10-Q,
      as filed with the SEC on November 19, 2008.(2)
 
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 Exhibit
                  
                  Document
      Description10.25
                  
                  Binding Term Sheet between registrant and IGT dated
      February 13, 2009, filed herewith.(3)10.26
                  
                  Consulting
      Agreement dated April 1, 2006 between registrant and JMC Investments,
      L.L.C., incorporated by reference to registrant’s Annual Report, as
      amended, on Form 10-KSB/A, as filed with the SEC on July 19,
      2006.10.27
                  
                  Subcontractor
      Purchase Agreement dated May 20, 2006 between registrant and Spectral
      Response, Inc, incorporated by reference to registrant’s Current Report on
      Form 8-K, as filed with the SEC on July 28, 2006.10.28
                  
                  Asset
      Acquisition Agreement between registrant, Las Vegas Gaming Acquisition
      Corp., Adline Network Holdings, Inc., Adline Media, LLC, Adline Network,
      LLC, Freeview Network, LLC, Sam Johnson and Larry L. Enterline dated
      September 29, 2008 , incorporated by reference to registrant’s
      Current Report on Form 8-K, as filed with the SEC on November 19,
      2008.10.29
                  
                  Form
      Offer of Employment, incorporated by reference to registrant’s Annual
      Report, as amended, on Form 10-KSB/A, as filed with the SEC on July 19,
      2006.10.30
                  
                  Executive
      Employment Agreement of Jon D. Berkley dated May 15, 2007, incorporated by
      reference to registrant’s Quarterly Report on Form 10-QSB, as filed with
      the SEC on August 14, 2007.(1)10.31
                  
                  Form
      of Non-Qualified Stock Option Agreement, incorporated by reference to
      registrant’s Quarterly Report on Form 10-QSB, as filed with the SEC on
      November 19, 2007.10.32
                  
                  Form
      of Warrant Agreement, incorporated by reference to registrant’s Quarterly
      Report on Form 10-QSB, as filed with the SEC on November 19,
      2007.21.1
                  
                  List of Subsidiaries of Registrant, filed
      herewith.31.1
                  
                  Certification of Chief Executive Officer pursuant to
      Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002, filed
      herewith.31.2
                  
                  Certification of Chief Financial Officer pursuant to
      Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002, filed
      herewith.32.1
                  
                  Certification of Chief Executive Officer and Chief
      Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
      herewith.(1)
                  
                  Management
      contracts or compensatory plans or arrangements that were previously filed
      as exhibits pursuant to Item 601(b)(10)(iii) of
      Regulation S-K.(2)
                  
                  Confidential
      treatment has been granted by the SEC for portions of this
      exhibit.  These portions have been omitted from the exhibit as
      filed with the registrant’s Quarterly Report on Form 10-Q, as filed with
      the SEC on November 19, 2008.(3)
                  
                  Confidential
      treatment has been requested for portions of this
      exhibit.  These portions have been omitted from the exhibit
      filed with this Annual Report on Form 10-K and have been filed separately
      with the SEC.
 
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