UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB







X
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended
            December
      31, 2007TRANSITION
      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.(Name
      of small business issuer 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)Issuer’s
      telephone number: (702)
      871-7111Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class
            
            Name
      of each exchange on which registeredSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock Series A, $.001 par value(Title
      of each class)(Title
      of each class)Check
      whether the issuer (1) filed all reports required to be filed by Section
      13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
      months (or for such shorter period that the registrant was required to
      file such reports), and (2) has been subject to such filing requirements
      for the past 90 days.  Yes x   No 
      oCheck
      if there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.  oIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).  Yes o  No
      xState
      issuer’s revenues for its most recent fiscal year:
            $5,063,409State
      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 sold, or the average bid and asked price of such common equity,
      as of a specified date within the past 60 days.  Not
      applicable.State
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.Common
      Stock Series A, $.001 par value
            
            12,562,653
      shares as of December 31, 2007Documents
      Incorporated By Reference:   None.Transitional
      Small Business Disclosure Format (check one):  Yes  o  No 
      x


Table of Contents




TABLE OF CONTENTS








ITEM
      1.
            DESCRIPTION OF BUSINESS
            1ITEM
      2.
            DESCRIPTION OF PROPERTY
            18ITEM
      3.
            LEGAL PROCEEDINGS
            18ITEM
      4.
            SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            19ITEM
      5.
            MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS
            20ITEM
      6.
            MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION
            23ITEM
      7.
            FINANCIAL STATEMENTS
            31ITEM
      8.
            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND FINANCIAL DISCLOSURE
            58ITEM
      8A.
            CONTROLS AND PROCEDURES
            58ITEM
      8B.
            OTHER INFORMATION
            59ITEM
      9.
            DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
              CORPORATE GOVERANCE; COMPLIANCE WITH SECTION 16(A) OF THE
      EXCHANGE ACT
            60ITEM
      10.
            EXECUTIVE COMPENSATION
            66ITEM
      11.
            SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              AND RELATED STOCKHOLDER MATTERS
            69ITEM
      12.
            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            71ITEM
      13.
            EXHIBITS
            71ITEM
      14.
            PRINCIPAL ACCOUNTANT FEES AND SERVICES
            72










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-KSB contains trademarks and trade names of other
parties, corporations and organizations.




Table of Contents


PART
I




ITEM 1. DESCRIPTION
OF BUSINESS.




Overview




We are
now focusing our core business on our proprietary multimedia 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, promotions,
games, and other content on the existing screens of their 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 PlayerVision at no capital cost to most operators in exchange
for recurring fees for services, we can 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 a
leading supplier of keno and bingo games, systems, and supplies.




We have
completed the development of the first four modules of our PlayerVision system.
The PlayerVision system consists of proprietary software that runs our
multimedia hardware device, featuring on-board memory and expansion and
connectivity options. PlayerVision interfaces with the existing
video,  audio and, printing functions of the machine.  By
adding PlayerVision, a gaming machine is transformed from a single use, single
wager option display to a multimedia display that can deliver to the player
multiple wagering opportunities, live video, and targeted promotional content in
addition to traditional gaming activity found on the machine. The PlayerVision
system delivers content on the existing screen of the gaming machine. As a
result, the installation of PlayerVision eliminates the need for operators to
retrofit existing machines or purchase new machines with multiple video displays
in order to deliver multimedia content to their patrons.




Designed
as a multi-faceted delivery system, we currently offer four distinct
applications:




AdVision
            PlayerVision
      TV
            NumberVision
            WagerVisionWhat
      PlayerVision Delivers
            Advertisements
      or information through still images or full motion video
            Picture-in-picture
      on full screen television while playing slot machine
            Impulse
      gaming opportunity upon the decision to cash-out
            Remote
      ability to accept sports and race wageringHow
      Operators Benefit
            Advertisements
      or information delivered during idle time
            Patrons
      stay longer to play with ability to multi-task
            Additional
      wagering revenue opportunity
            Additional
      race and sports wagering revenue opportunityHow
      Patrons Benefit
            Information
      on promotions, entertainment, dining, and other events
            Ability
      to watch recently wagered sporting event or favorite
    program
            Opportunity
      to win substantial jackpot-style cash prizes
            Enhanced
      and more dynamic gaming environmentHow
      We Benefit
            Fee
      for providing ability to deliver advertising
            Fee
      for providing ability to deliver television
            Installation
      fees, activation fees, and share of revenue
            Fee
      for providing ability to deliver additional
  wagers






1
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In
addition, we are continuing to develop new applications that will position
PlayerVision as a platform for a variety of new multimedia and gaming
functions.




In 2006,
we changed our business plan to focus on the development of the PlayerVision
system.  We have received final regulatory approval from Nevada and
Gaming Laboratories International (GLI), an independent accredited testing
laboratory, for two PlayerVision applications, AdVision and PlayerVision TV, on
IGT Game King, WMS and Aristocrat machines.  As of December 31, 2007,
we had installed PlayerVision with AdVision and/or PlayerVision TV on an early
adoption basis with five customers on approximately 150 machines, one-third of
which were with an affiliate.  See, Item 1. “Description of Business –
Marketing and Distribution” and Item 12. “Certain Relationships and Related
Transactions, and Director Independence.”  Although these installments
are on terms substantially less favorable than we ultimately expect to receive,
they provide us with early exposure for our PlayerVision system.  With
respect to the WagerVision and NumberVision applications for PlayerVision, we
anticipate receiving approval from the Nevada regulatory authorities and GLI
during the third quarter of 2008 and, thereafter, we will conduct a 30-day beta
test.  Upon final approval of these applications, we expect to launch
an aggressive sales campaign for our PlayerVision system.  No
assurance can be given, however, that the market will accept our PlayerVision
system or that we will be successful in our plans to install our PlayerVision
system in the timeframes we anticipate or on terms acceptable to
us.  In addition, we cannot assure you that our competitors will not
develop a new technology or product that will make our PlayerVision system
undesirable or obsolete.  We are also subject to substantial costs and
risks in defending our intellectual property rights.  On September 12,
2007, IGT filed a lawsuit against us alleging that our PlayerVision system
infringed on IGT’s Game King® gaming machines.  See, Item 3. “Legal
Proceedings” for a more detailed description of this
lawsuit.  Although the court in that matter, denied IGT’s motion for
preliminary injunction, discovery in the lawsuit is continuing and the costs of
defending this or other claims could have a material adverse effect on our
financial position and business operations.  We cannot assure you that
we will ultimately prevail in, or successfully resolve, our litigation with
IGT.  In addition, PlayerVision is a new sophisticated product and
will likely contain undetected errors or defects, especially when new modules or
applications are released, which could result in the rejection of our
PlayerVision system and jeopardize our relationship with customers. Because
of our focus on developing the PlayerVision system, we will continue to require
substantial third-party financing, in addition to any funds from operations, to
pursue our business plan.  The failure to obtain such financing will
have a material adverse effect upon our financial position and business
operations.  We cannot assure you that we will be successful in
obtaining any additional financing.




Industry
Overview




According
to Datamonitor, mechanical and video gaming machines represented the leading
segment of the overall global casino and gaming industry. In addition, the Profile of the American Casino
Gambler: Harrah’s Survey 2006prepared by Harrah’s Entertainment, Inc.
reports that over 70% of the persons surveyed stated that gaming machines, such
as slot machines and video poker machines, are their favorite casino
games.




PlayerVision
can be installed on most video gaming machines produced by major gaming
equipment manufacturers worldwide. As of 2007, we believe that there were
approximately 3.0 million gaming machines located worldwide, of which over
800,000 are located in the United States and over 200,000 are located in Nevada.
Of the number located in the United States, we believe that approximately 35%
are mechanical reel and approximately 65% are video reel machines.




We
believe that the global casino and gaming industry and the number of machines is
expected to grow as a result of the following trends:




·
            Increased popularity and
      social acceptance of gaming as a leisure activity.According to the
      2006 State of the
      States: The AGA Survey of Casino Entertainmentpresented by the
      American Gaming Association, nearly 80% of Americans believe that casino
      gaming is an acceptable activity for themselves or others. Recent shifts
      in public views of gaming have contributed to its legalization in a number
      of jurisdictions and to increased participation in gaming
      activities.






2
 Table of Contents






·
            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 increased
      replacement of mechanical reel gaming machines with video based machines
      have increased the entertainment value for players of gaming
      machines.




As the
gaming machine base continues to grow and the industry shifts from manual gaming
machines to video-based gaming machines, 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
objective is to provide the premier enhancement system for the installed base of
gaming machines by delivering additional wagering opportunities, promotions,
games, and other content on the existing screens of gaming machines. In order to
achieve this objective, we intend to pursue the following
strategies:




·
            Increased Revenue Potential
      for Operators.We plan to stress 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 to deliver games, promotions,
      additional wagering opportunities, and other content. Our kiosk driven
      ticket redemption system features its own accounting system separate and
      apart from the main slot accounting
system.




·
            Compelling Patron Experience.We plan 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 can enhance the functionality of its existing
      machines and deliver targeted gaming opportunities and promotional content
      to players.  In exchange, the player receives an enhanced
      playing experience, information about promotions, entertainment, and
      dining opportunities, and the opportunity to win jackpots and other
      prizes.




·
            Leverage Industry Trend to
      Video Machines.We plan to take advantage of the accelerating
      industry movement from mechanical to video gaming machines through the
      ability of PlayerVision to interface with the existing video, audio and
      printing functions of gaming machines. In addition, we can adapt
      PlayerVision to mechanical gaming machines by adding the auxiliary screen
      or other hardware needed to deliver the same functionality. The solution
      for mechanical gaming machines will require additional capital and
      installation costs. By offering a gaming operator the ability to transform
      its entire floor of machines, the operator can have a single multimedia
      and game delivery system for its
machines.






3
 Table of Contents






·
            Low Operator Risk.We
      plan to offer gaming operators the ability to increase significantly the
      earning power and functionality of their existing gaming machines at
      little or no financial risk. This strategy involves installing
      PlayerVision at no capital cost to gaming operators in exchange for a
      share of revenue and recurring fees for services
  provided.




·
            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, 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 accounting system,
      we believe that our PlayerVision system can be used as a platform to
      deliver a wide array of multimedia or gaming content directly to
      patrons.




PlayerVision
is a single, flexible, and dynamic platform that can be used to deliver
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,
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 barrier to entry for our competitors.




PlayerVision
System




Designed
to increase the productivity of gaming machines, PlayerVision installs directly
in most gaming machine regardless of the manufacturer and interfaces with the
existing video, audio and printing functions of the machine.  We are
able to integrate fully the PlayerVision system with the gaming machines through
the interaction between our application software and our PlayerVision Control
Unit, or PCU. The PCU is our proprietary multimedia hardware device that
features on-board memory, external memory expansion capabilities, Internet
Protocol, and wireless connectivity options. Through video digital signal
processors and video compression algorithms, the PCU interfaces with the video
display, touch screen, printer, and our own slot accounting system. By using the
gaming machine’s current functionality, we expect to be able to provide
operators with the ability to enhance their equipment and increase their revenue
opportunities. In addition, we believe that gaming operators will be able to use
PlayerVision as a platform to download future applications and
capabilities.




We plan
to earn income from PlayerVision through revenue-sharing and recurring service
fees. We will seek to enter into multi-year contracts with operators. In
addition to the minimal cost to gaming operators, the installation of the PCU
will cause minimal downtime to the gaming machine and will not adversely impact
its operation. We have focused our efforts on developing four distinct
applications for the PlayerVision system: AdVision, PlayerVision TV,
NumberVision and WagerVision.




AdVision
and PlayerVision TV




Through
the existing video and audio capabilities of the gaming machine, we are able to
generate and display information, advertisements, and promotions through
AdVision and provide television programming using a picture-in-picture feed
through PlayerVision TV.  Since AdVision and PlayerVision TV use the
existing video and audio capabilities of the gaming machine, the gaming operator
can avoid the expense of replacing its equipment or purchasing additional video
screens for these types of advertisements and promotions.






4
 Table of Contents






AdVision
enables the operator to dynamically generate and display information,
advertisements, and promotions through the existing screen of a gaming
machine.  This content can be targeted to the person playing the
gaming machine or persons walking by the gaming machine. The timing and content
of the advertising is controlled by the operator to make productive use of the
machine’s idle time.  Through AdVision and its programmable features,
the gaming operator will have at its disposal a means of delivering dynamic
content to and interacting with individual patrons or the entire gaming
floor.




We
currently intend to charge gaming machine operators a per month, per machine fee
for AdVision and PlayerVision TV. We believe that AdVision and PlayerVision TV
are cost-effective means of enhancing an operator’s existing gaming machines
without any additional capital expense.




On March
23, 2007, we obtained regulatory approval of AdVision and PlayerVision TV in
Nevada as associated equipment.  With these approvals, we beta tested
AdVision and PlayerVision TV at Treasure Island Las Vegas in May
2007.  We received final approval of AdVision and PlayerVision TV on
IGT Game King Machines in November 2007, and began shipping our technology to
customers.  As of December 31, 2007, we installed AdVision and/or
PlayerVision TV on an early adoption basis with five customers on approximately
150 machines, one-third of which were installed with an
affiliate.  See, Item 12. “Certain Relationships and Related
Transactions, and Director Independence.”




NumberVision




NumberVision
provides the player with an impulse opportunity to place an additional wager or
experience a different gaming opportunity that, in turn, provides gaming machine
operators with the opportunity to generate additional revenue. In Nevada, the
additional gaming opportunity initially will be the ability to purchase a Nevada
Numbers ticket. In jurisdictions other than Nevada, the additional gaming
opportunity can be the local lottery or other games.




NumberVision
is designed to work in Nevada as follows:




·
            first,
      during the cash-out process, NumberVision takes control over the
      non-gaming functions of the gaming
machine;




·
            second,
      the player is offered an additional on-screen gaming opportunity;
      and




·
            third,
      if the player accepts the offer, the additional gaming opportunity is
      played and a cash voucher is issued for the remaining payout, if any; or,
      if the player declines the offer, a cash voucher is issued for the
      payout.




During
the initial launch of NumberVision in Nevada, we plan to install NumberVision at
no cost to operators in exchange for a share of the increased revenue generated
by NumberVision.  In other jurisdictions, we plan to charge
installation and activation fees to operators.




We
applied for approval of NumberVision from GLI during the third quarter of 2007
and expect that the review process will be completed during the second quarter
of 2008.  After approval, we will beta test WagerVision at Treasure
Island Las Vegas for 30 days.




WagerVision




WagerVision
offers interactive casino sports and race betting to a player in a remote
location, whether through a gaming machine located in another portion of the
casino or a television set located in the player’s home.  From a slot
machine in a casino, WagerVision is designed to offer the same bets currently
available only in the race and sports book along with the ability to watch the
sporting event that was the subject of the wager from the slot machine through
PlayerVision.  In the home environment, WagerVision is designed to
offer proposition race and sports bets to players in real time. As a result of
regulatory factors, in Nevada, we are limiting the application of WagerVision to
sports betting, and in all other states within the United States to race
betting.






5
 Table of Contents






In
Nevada, we have entered into a letter of intent to offer the home version of
WagerVision through Leroy’s Race and Sports Book. Current Nevada gaming rules
and regulations allow sports betting from home (for Nevada residents who
establish accounts under regulatory guidelines) using several alternative
methods of communication, such as the telephone, facsimile machine, and cable,
but not through a television. WagerVision addresses this limitation by
installing and connecting PlayerVision to a telephone line and the television.
PlayerVision then interacts with the television, allowing the player to place
bets on various propositions related to the game or race in real time,
effectively recreating the sports book in the player’s home.




We
applied for approval of WagerVision from Nevada and GLI during the third quarter
of 2007 and expect that the review process will be completed during the second
quarter of 2008.  After approval, we will beta test WagerVision at
Treasure Island Las Vegas for 30 days.




Other
Applications




In
addition to AdVision, PlayerVision TV, NumberVision and WagerVision, we are in
the process of developing other applications for the PlayerVision
system.  We anticipate launching these other applications after the
initial deployment of our PlayerVision system.  As a result of the
flexibility of the PlayerVision system, we can install additional applications
in machines equipped with PlayerVision at no capital cost and with little
downtime.




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 played 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;




·
            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 intend to charge a fixed fee for each promotional ticket or voucher
issued through RoutePromo. In addition to the promotional functions of
RoutePromo, RoutePromo also provides operators with a system that records and
accounts for each event on the gaming machine. RoutePromo will provide
additional accounting functionality for operators and provide them with
additional information, such as the information necessary to identify the
payment of improper bonus points, tickets, or other promotional
items.






6
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Through
our five-year agreement with United Coin Machine Company, the largest slot route
operator in Nevada, we developed a variation of 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, 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 will role out the
Gamblers Bonus Million Dollar Ticket at approximately 100 United Coin route
locations.


We have
obtained regulatory approval for RoutePromo in Nevada.




Casino
Games




We
operate two games, Nevada Numbers and The Million Dollar Ticket, and collect
royalties on several other games. The revenue generated from our casino games is
primarily based on the royalties earned on games played in casinos.




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 the visibility of Nevada
Numbers.  First, we have incorporated Nevada Numbers as part of
NumberVision, although regulatory approval from Nevada has not yet been received
for its use.  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 propose to make the game available to various
Leroy’s Race and Sports Book locations 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 2008 by making the game available in
multiple Leroy’s Race and Sports Book locations.






7
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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 $100,000 to $500,000 in many cases—and price
points to bingo operators based on appeal to players and maximizing
profitability for a particular bingo operation.  In most instances, we
insure the jackpot.  Since we are obligated to pay prize winners, the
bingo operator is guaranteed a profit for each wager made.  We have
placed Super Bingo Games in five Nevada casinos and fourteen non-Nevada
locations.  We expect to grow the Super Bingo Games segment in both
Nevada and non-Nevada locations in throughout 2008.




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 the operation of a keno route, the maintenance of our
equipment under service contracts, and the distribution of bingo
electronics.




·
            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 because one of the two participating
      casinos closed.  We are continuing to offer Nevada Keno and will
      re-commence operations upon obtaining agreements with two or more
      participating casinos.




·
            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.  Service contracts involve low profit
      margins.




In 2006,
we were the distributor in Nevada for the largest electronic bingo manufacturer
in the United States.  This relationship however, was discontinued on
January 1, 2007, which resulted in a monthly loss of revenue of approximately
$35,000.




Manufacturing




We
outsource the manufacture of the PCU portion of our PlayerVision system to
Spectral Response, Inc., an ISO-9000 certified contract manufacturer. Delivery
on the first order of 2,500 units for use with NumberVision, WagerVision,
PlayerVision TV, and AdVision was taken in the second quarter of 2007. It
currently takes our contract manufacturer twelve to sixteen weeks from the date
of order to deliver the PCUs.




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:






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·
            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 will schedule follow-up communications and offer
      live product demonstrations.




·
            Strategic Partnerships.We will supplement our direct sales efforts by targeting
      third-party distributors and regional operators. By forming strategic
      relationships with these parties, we will gain access to smaller and more
      fragmented markets around the globe and secure the broadest placement for
      PlayerVision.




·
            Targeted Public Relations
      Campaign.In order to increase the recognition of our PlayerVision
      system, we have launched an aggressive public relations campaign that has
      included attending trade shows, speaking on technology and gaming panels,
      and distributing advertisements in trade periodicals and other
      venues.




In
November and December 2007, we installed AdVision and/or PlayerVision TV on an
early adoption basis with five customers on approximately 150 machines,
one-third of which were with an affiliate.  Although these
installments are on the terms substantially less favorable than we ultimately
expect to receive, they provide us with early exposure for our PlayerVision
system.  See, Item 12. “Certain Relationships and Related Transactions
and Director Independence.”  In addition, we have received many
non-binding verbal commitments from operators to install our PlayerVision system
pending the approval of WagerVision and NumberVision from the Nevada Gaming
Control Board and GLI.  Upon the approval of WagerVision and
NumberVision, and the completion of the 30-day beta test, we will attempt to
obtain commitments from those operators which have expressed an interest and we
anticipate launching an aggressive sales campaign; however, no assurance can be
given that we will be successful in our plans to install our PlayerVision system
in the timeframes we anticipate or on terms acceptable to us.




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 or slot route operators. 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 for bingo-related products. 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.







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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 rather than a
      smaller secondary video screen;




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




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




·
            PlayerVision
      delivers a broad range of
functionalities.




We are
unaware of any other product that delivers multimedia and gaming content through
the existing primary screen of gaming machines. Although we face competition
from products that use smaller secondary video screens, such as iView developed
by Bally Systems and NexGen developed by International Game Technology, we are
able to deliver content directly to the patron through the existing 15x11-inch
screen rather than an auxiliary 2x6-inch screen. In terms of deployment, we
believe that there is no market leader for a content delivery system for
existing gaming machines.




Since we
are able to use the existing primary screen of a gaming machine, as well as its
existing video, audio and printing functions, we are able to offer to gaming
operators a solution that requires no capital cost, involves minimal
installation, and interfaces with almost any gaming machine. 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 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 have attempted to counter competitive factors by
providing superior service, new, innovative, and quality products; and software
improvements.






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Research
and Development




Our
research and development efforts focus on the continuous innovation of our
products and services to increase the revenue for our customers. Our current
research and development efforts emphasize expanding the applications for the
PlayerVision system and improving its functionality. 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, our flagship
game.  We have been recently issued a patent for “closed loop,” a key
application in our PlayerVision technology.  In addition, we have
several patents pending with respect to the PlayerVision system and 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 Nevada
Numbers and The Million Dollar Ticket, and other intellectual property that is
protected by federal copyright and trade secret laws.  See, Item 3.
“Legal Proceedings.”




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.




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, 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.  We have pending authorizations
with Iowa and Minnesota.




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 PlayerVision TV software applications on IGT
Game King Machines. 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.






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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
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.






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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.




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.






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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.




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






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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 AdVision and PlayerVision
TV.  We anticipate that the review process of GLI for WagerVision and
NumberVision should be completed during the second quarter of
2008.  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.




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, 2007, we had 49 full-time employees, 20 of whom were involved in
keno and bingo, 7 of whom were involved in engineering and research and
development, 11 of whom were involved in sales, and 11 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 management and sales and
marketing personnel and a decrease in the personnel for our traditional
business. 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.






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Corporate
History




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




ITEM 2. DESCRIPTION
OF PROPERTY.




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 expiring on
November 30, 2008.  We are currently evaluating our alternatives and
have made no determination as to whether we will attempt to renew this lease or
move to another location.  We also have a Reno, Nevada office
consisting of approximately 4,200 square feet of space under a lease expiring
May 31, 2008, and an Omaha, Nebraska service office consisting of approximately
880 square feet of space under a lease expiring on June 30, 2008.  On
February 12, 2008, we executed a new lease for space in Reno containing
approximately 7,500 square feet which we plan on moving our office to and
occupying by June 1, 2008.




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
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 is 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 November 16, 2007 the Court denied IGT’s motion
for preliminary injunction, finding that IGT had not shown a likelihood of
success or raised serious questions as to its derivative works claim or other
infringement claims. Discovery continues on this lawsuit.  Management
has made no provision for this matter as it is unable to estimate the minimum
loss, if any, to be incurred by the Company and does not believe the IGT
complaint to be meritorious, and is defending the lawsuit
vigorously.












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




Our 2007
annual meeting of the stockholders was held on November 27,
2007.  Items of business set forth in our proxy statement dated
October 29, 2007 that were voted on and approved at the annual meeting are as
follows:




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




VotesNominee
            
            For
            
            WithheldRussell
      R. Roth
            
            5,209,626
            
            107,423Jon
      D. Berkley
            
            5,246,126
            
            70,923Richard
      H. Irvine
            
            5,246,126
            
            70,923Kyleen
      E. Cane
            
            5,246,126
            
            70,923Terry
      L. Caudill
            
            5,246,126
            
            70,923Stephen
      A. Crystal
            
            5,287,349
            
            100,623Robert
      M. McMonigle
            
            5,246,126
            
            70,923




(2)
            Amendment
      to our Stock Option Plan (2000) fixing the number of shares of Common
      Stock Series A which may be granted under the plan at
      2,500,000:




For
            
            Withheld
            
            Abstain
            
            Broker
      Non-vote5,087,328
            
            47,421
            
            182,300
            
            –














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PART
II




ITEM 5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.




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, 2007, there were no shares of our
Common Stock outstanding and 12,562,653 shares of our Common Stock Series A
outstanding held of record by 537 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. 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 five series of preferred stock, where
the conversion ratio, the authorized number of shares and the outstanding number
of shares for each series are provided:




·
            “Series
      A Convertible Preferred Stock’’ – convertible into Common Stock Series A
      on a one-to-one basis, 2,000,000 shares authorized and 0 shares
      outstanding as of December 31,
2007;






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·
            “Series
      B Convertible Preferred Stock’’ – convertible into Common Stock Series A
      on a one-to-five basis, 350,000 shares authorized and 130,350 shares
      outstanding as of December 31,
2007;




·
            “Series
      C Convertible Preferred Stock’’ – convertible into Common Stock Series A
      on a one-to-five basis, 100,000 shares authorized and 35,000 shares
      outstanding as of December 31,
2007;




·
            “Series
      D Convertible Preferred Stock’’ – convertible into Common Stock Series A
      on a one-to-one basis, 125,000 shares authorized and 125,000 shares
      outstanding as of December 31, 2007;
and




·
            “Series
      E Convertible Preferred Stock” – convertible into Common Stock Series A on
      a one-to-one basis, 3,300,000 shares authorized and 743,800 shares
      outstanding as of December 31,
2007.




None of
our series of preferred stock have dividend or 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 B Convertible Preferred Stock are entitled to receive
      $5.00 per share;




·
            second,
      holders of Series C Convertible Preferred Stock share equal liquidation
      preference and are entitled to receive $5.00 per
  share;




·
            third,
      holders of Series D Convertible Preferred Stock are entitled to receive
      $2.00 per share; and




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




As
indicated above, 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. As of December
31, 2007, holders of 179,890 shares of Series B






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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
have 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.




Options




As of
December 31, 2007, we had outstanding options to purchase an aggregate of
1,139,400 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 $3.86 per
share.




Warrants




As of
December 31, 2007, we had outstanding warrants to purchase an aggregate of
5,035,462 shares of our Common Stock Series A at exercise prices ranging from
$1.00 to $6.00 per share with a weighted average exercise price of $1.98 per
share.




Unregistered
Sales of Equity Securities




From
November 2006 through December 31, 2007, we have conducted a private placement
of our Series E Convertible Preferred Stock through which we have raised
$3,719,000 in gross proceeds and have issued 743,800 shares of Series E
Convertible Preferred Stock.  During the three months ended December
31, 2007, we raised $155,000 in gross proceeds and issued 31,000 shares of
Series E Convertible Preferred Stock.  The proceeds have been and will
be used to fund our general operations and working capital.  Series E
Convertible Preferred Stock is convertible on a one-to-one basis into Common
Stock Series A at any time, at the election of the holder.  The shares
of Series E Convertible Preferred Stock were issued pursuant to exemption from
registration provided by Rule 506 of Regulation D of the Securities Act and
Section 4(2) of the Securities Act.  We did not pay commissions on the
sale of any shares of Series E Convertible Preferred Stock.




During
the three months ended December 31, 2007, holders of 4,000 shares of Series B
Convertible Preferred Stock converted their shares on a one-to-five basis for
20,000 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.




In
October 2007, we issued 10,000 warrants to a consultant with an exercise price
of $5.00 per share and a three year vesting schedule.  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.







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




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




Historically,
we have been one of the leading suppliers of keno and bingo games, systems, and
supplies, a relatively small market associated with nominal growth and smaller
companies.  During 2006 and 2007, we devoted a significant portion of
our resources toward the development, regulatory approval, and marketing of our
PlayerVision system.  In comparison to the keno and bingo market, the
market for our PlayerVision system, i.e., the gaming machine
market, is much larger and more dynamic.  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 2006 and 2007.




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




Based on
the foregoing, and other than the insignificant revenue realized from our early
adoption agreements, we anticipate beginning to realize revenue from our
PlayerVision system during the third quarter of 2008 that would mark a
significant shift in the type of revenue recognized by us.  The
anticipated revenue would be from the installation of AdVision, PlayerVision TV,
WagerVision, and NumberVision at various casino locations in the United States
and elsewhere.




We will
continue for the first three quarters of 2008 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 and in defending the lawsuit from IGT, we will continue to
rely on funds from third party financing sources, in addition to funds from
operations, to sustain our operations in 2008.  See discussion in
“Liquidity – Outlook” below.




Critical
Accounting Policies and Estimates




The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue, and expenses and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. These estimates and assumptions provide a basis for making






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judgment
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 and Other Intangible
Assets.




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






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identification
of reporting units, allocation of related goodwill, assignment of corporate
shared assets and liabilities to reporting units, and determination of the fair
value of each reporting unit.  We determine the fair value of our
reporting units using the discounted cash flow method, and compare the implied
valuation multiples to a group of guideline public companies under the Market
approach to test the reasonableness of the discounted cash flow
results.




Our
intangible assets consist of key patents and technology rights with a five year
life related to PlayerVision which went to market for the first time during the
fourth quarter of 2007.  We recorded no goodwill impairment charges
during the year ended December 31, 2007 and 2006.




Income
Taxes




We have
provided a full valuation allowance for the tax effects of our net operating
losses at December 31, 2006 and 2007.  We have effectively recorded a
100% valuation allowance to offset the deferred tax asset that might otherwise
have been recognized as a result of operating losses in the current period and
prior periods since, because of our history of operating losses, management is
unable to conclude at this time that realization of such benefit is currently
more likely than not.  Although Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109, became effective for
the current year, based on its evaluation, management determined that FIN 48 did
not have a material effect on either our net operating loss carry forwards, the
related deferred tax assets or valuation allowance, or our deficit at January 1,
2007.




Equipment
and Software and Depreciation




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




Recent
Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements.  In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an Amendment of SFAS No. 115,
which will permit the option of choosing to measure certain eligible items at
fair value at specified election dates and report unrealized gains and losses in
earnings.  SFAS Nos. 157 and 159 will become effective for us for
financial statements issued for fiscal year 2008.  We are currently
evaluating the effects, if any, that SFAS Nos. 157 and 159 will have on our
future financial position, results of operations and operating cash
flows.




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




In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements-An Amendment of ARB No. 51, which
establishes new accounting for the noncontrolling interest in a subsidiary or
consolidated variable interest entity and requires that a parent recognize a
gain or loss when a subsidiary is deconsolidated 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






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not now
have and do not contemplate acquiring any interests in subsidiaries or
consolidated variable interest entities with noncontrolling interests, we
currently expect that SFAS 160 will not have an impact on our future
financial position, results of operations and operating cash flows.




Results
of Operations




Year
Ended December 31, 2007 Compared with Year Ended December 31, 2006




Revenue.  Casino
games revenue for the year ended December 31, 2007 increased $240,000 or 14.8%,
to $1,859,000 from $1,619,000 for the year ended December 31, 2006. The higher
casino games revenue principally resulted from higher revenue from Super
Coverall Bingo of $155,000 and from Nevada Numbers of
$84,000.  Revenue from the Nevada Numbers game actually decreased
$45,000 in 2007 from 2006 but we were able to bill $130,000 of tax benefits to
our customers when the jackpot was won for the first time in September
2007.  Our new Keno Multiplier wager also increased revenue by $11,000
during the year ended December 31, 2007 versus December 31, 2006.




Product
sales for the year ended December 31, 2007 decreased by $5,000 to $1,820,000
from $1,825,000 for the year ended December 31, 2006. Keno equipment sales
amounted to $941,000 for the year ended December 31, 2007 versus $773,000 during
the year ended December 31, 2006, an increase of $168,000. The increase was
primarily due to the sales and installation of seven Keno Optima systems to one
customer for seven different properties during the third quarter of 2007. This
increase in Keno equipment and supplies sales was offset by a $166,000 decrease
in bingo equipment and supplies due to loss of two bingo supplies
customers.




Other
revenue for the year ended December 31, 2007, declined by $314,000 or 18.6%, to
$1,384,000 from $1,698,000 for the year ended December 31, 2006. Bingo
electronics revenue decreased from $424,000 for the year ended December 31, 2006
to $70,000 for the year ended December 31, 2007, as we lost our bingo
electronics distributor agreement early in 2007. Revenue from Keno route and
participation agreements increased from $603,000 for the year ended December 31,
2006 to $655,000 for the year ended December 31, 2007 as our keno route business
increased by $22,000 and our keno participation business increased by
$30,000.




Costs and
Expenses.  Cost and expenses of casino games for the year ended
December 31, 2007, decreased by $760,000 or 46.8%, to $863,000 from $1,623,000
for year ended December 31, 2006. The decrease resulted primarily from $862,000
less jackpot expense as Nevada Numbers jackpot was won in September 2007 for the
first time in history of the game and we were able to discount the jackpot
payout at the prime rate rather than the 20 year Treasury bond rate as had
previously been applied in calculating our progressive jackpot liability. Gaming
license application fees increased from $166,000 for the year ended December 31,
2006 to $254,000 during the year ended December 31, 2007, as we expanded our
licensing of individuals in Nevada, Oregon, and Mississippi.




Product
costs and expenses for the year ended December 31, 2007, decreased $15,000 or
1.5% to $1,054,000 from $1,069,000 for the year ended December 31,
2006.  Gross margin increased to 42.1% for the year ended December 31,
2007 versus 41.4% for the year ended December 31, 2006 as we had more sales of
our Keno Optima system in 2007 than 2006 which carry a higher
margin.




Other
cost and expenses for the year ended December 31, 2007, decreased only $1,000 to
$1,344,000 from $1,345,000 for the year ended December 31, 2006, due to a
$106,000 decrease in jackpot expenses for our keno route for the year ended
December 31, 2007, as the company played luckier this year than in 2006,
partially offset by a $98,000 increase in salaries during the year ended
December 31, 2007.   Gross margin also decreased to 2.8% for the
year ended December 31, 2007 versus 20.8% for the year ended December 31, 2006
due to lost profits from the bingo electronics distribution agreement being
canceled.






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Other Operating Expenses.
Selling, general and administrative expenses for the year ended December 31,
2007 increased $1,859,000 or 38.4% to $6,696,000 from $4,837,000 for the year
ended December 31, 2006. As we prepare for the rollout of our new PlayerVision
System, we have increased our administrative infrastructure through additional
salaries of $941,000 during the year ended December 31, 2007 versus December 31,
2006. In addition, consulting and professional fees and travel and entertainment
expenses have increased by $485,000 and $98,000 respectively, during the year
ended December 31, 2007 versus the same period in 2006. The increase in
consulting and professional fees is primarily related to consulting costs for
marketing and money raising and legal fees associated with an acquisition that
was not completed and legal fees incurred in defending the IGT
lawsuit.  Rent, utilities, and telephone have increased by $140,000
during the year ended December 31, 2007 versus the same period in the prior year
due to additional administrative infrastructure for PlayerVision. Advertising
and promotion has increased by $222,000 in order to promote PlayerVision during
the year ended December 31, 2007 versus the same period in the prior
year.




Research
and development costs for the year ended December 31, 2007 have increased by
$93,000 or 9.8% to $1,038,000 from $945,000 for the year ended December 31, 2006
due to salary increases.




Depreciation
and amortization for the year ended December 31, 2007, increased $92,000 or
12.1%, to $856,000 from $763,000 for the year ended December 31, 2006, as a
result of incremental amortization of intangibles from the acquisition of
additional technology rights from AdLine Network, LLC in February 2006 and
depreciation on additional purchases of PlayerVision and Keno
equipment.




Finance Costs. Finance
costs for the year ended December 31, 2007, decreased $81,000 or 4.8% to
$1,591,000 from $1,672,000 for the year ended December 31, 2006. The decreased
finance costs related to the recording of the fair market value of the
derivative liability.




Interest and Other Income.Interest and other income for the year ended December 31, 2007 decreased
by $194,000 or 62.6%, to $116,000 from $310,000 for the year ended December 31,
2006. The decrease was a result of lower cash balances outstanding caused by the
additional investment in administrative infrastructure as we prepare for the
rollout of our new PlayerVision system.




Liquidity
and Capital Resources




Cash




As of
December 31, 2007, we had cash of $489,000, reflecting a $1.2 million decrease
resulting primarily from the net cash outflows discussed below.




Cash
Flows




Cash used
in operating activities increased by $3.3 million for 2007 primarily because of
the foregoing revenue decreases and expense increases.  Investing
activities consisted principally of cash outflows in connection with capital
expenditures for reasons discussed below.  Our cash flows from
financing activities in 2007 consisted principally of inflows of $1,964,000 of
new capital from the sale of Series E Convertible Preferred Stock, and $574,000
for exercise of options and warrants to purchase shares of Common Stock Series
A.




Capital
Expenditures




Capital
expenditures decreased by $135,000 for 2007.  We incurred $374,000 of
expenditures to support PlayerVision, purchased keno equipment of $29,000 to
support our participation agreements, purchased office furniture and equipment
of $44,000, and purchased LCD monitors of $4,200 to support Gamblers Bonus
Million Dollar Ticket.  For 2008, other than our obligation to pay any
jackpots that may be won, we anticipate that our most significant capital
resource requirement will relate to the purchase of approximately $15 million of
PCUs for the rollout of our PlayerVision System.






27
 Table of Contents






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




Sources
of Capital




We have
traditionally relied on various forms of third-party financing in order to
sustain our operations.  In 2007, we raised $1.96 million 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 agreed to maintain the required base jackpot bankroll requirement in the
aggregate of $3.9 million for our Nevada Numbers and Million Dollar Ticket
games.  In 2006, we raised $2.0 million in bridge financing from
CAMOFI Master LDC, or CAMOFI, and raised $1.75 million from our private
placement of Series E Convertible Preferred Stock.




As
amended, the senior secured convertible promissory note in favor of CAMOFI, or
the CAMOFI Note, in the principal amount of $5,250,000 is due January 1, 2009,
and is convertible into shares of Common Stock Series A at $1.345 per share,
subject to certain limitations, including the limitation that the total number
of shares of Common Stock Series A to be issued cannot cause CAMOFI’s ownership
of Common Stock Series A to exceed 4.99% of our issued and outstanding shares of
Common Stock Series A after the issuance.  For further discussion of
our financing with CAMOFI see Note 7 in our consolidated financial
statements.  In addition to the CAMOFI Note, the key terms and
conditions of the bridge financing from CAMOFI include:




·
            a
      Warrant Agreement to purchase 2,675,000 shares of our Common Stock Series
      A at an exercise price of $1.48 for five years beginning on March 31,
      2006, but subject to the limitation that the shares issued upon exercise,
      together with shares issuable under the CAMOFI Note, cannot result in the
      beneficial ownership of more than 4.99% of our issued and outstanding
      shares of Common Stock Series A.




·
            a
      Security Agreement that secures the repayment of the CAMOFI Note and our
      performance under the related agreements and grants to CAMOFI a security
      interest in all of our assets, including all goods, all contract rights,
      patents, patents in process, and intangibles, all accounts, all documents,
      all letter-of-credit rights, all instruments and chattel paper, all
      commercial tort claims, all deposit accounts and cash, excluding cash tied
      to jackpot requirements, all investment property, all supporting
      obligations, all files, records, books of account, business papers and
      computer programs, and all products and proceeds of the forgoing
      collateral.




·
            a
      Registration Rights Agreement, as amended, that requires us to file a
      registration statement by September 30, 2008, and to be declared effective
      by the SEC by January 31, 2009, for the offer and sale of 125% of all
      shares of Common Stock Series A issuable upon conversion of the CAMOFI
      Note, issuable upon exercise of all warrants issued to CAMOFI, and issued
      or issuable under the terms and conditions of the bridge financing from
      CAMOFI.




·
            a
      Subsidiary Guarantee that obligates our subsidiaries to guarantee our
      performance under the CAMOFI Note and related
  agreements.




·
            a
      Lock-Up Agreement that restricts Russell R. Roth from selling his shares
      of Common Stock Series A for a period of six months following the
      effective date of the registration
statement.






28
 Table of Contents






We closed
the offering for our Series E Convertible Preferred Stock on February 24,
2008.   We are in the process of drafting documents for a private
placement offering for Series F Convertible Preferred Stock.  We
anticipate that this offering will be 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 the
initial public offering price; however, we cannot assure you that we will be
successful in raising sufficient funds in this offering.  We expect
that the net proceeds from this offering will be used principally 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, less offering costs and
expenses.  We expect to close this offering in the second quarter of
2008.




Outlook




We will
continue for at least the first three quarters of 2008 to incur expenses related
to the development and regulatory approval for the remaining PlayerVision
modules.  We will also have ongoing costs in defending the lawsuit against
IGT.   Accordingly, we will continue to rely on funds from third party
financing sources, in addition to funds from operations, to sustain our
operations in 2008.  We believe that our cash balances and the proceeds
from our private placement of Series E Convertible Preferred Stock (which was
closed on February 24, 2008) and our pending private placement of Series F
Convertible Preferred Stock, together with funds from operations, will be
sufficient to fund our anticipated working capital requirements and our business
expansion plans for at least the next 12 months.  The failure to obtain
such financing will have a material adverse effect upon our financial position
and business operations.  We cannot assure you that we will be successful
in completing the Series F placement or obtaining any other additional
financing.  We also intend to negotiate with CAMOFI the extension of the
January 2009 due date of our financing arrangements with them.  Although
gaming revenues in Nevada for the first part of 2008 are down, we believe that
our PlayerVision system will provide casinos with an additional revenue source
without any upfront capital expenditure.  Other than the insignificant
revenue realized from our early adoption agreements, we anticipate beginning to
realize revenue from our PlayerVision system during the third quarter of
2008.  We cannot assure you that the market will accept our PlayerVision
system.  Any failure by us to obtain approval of WagerVision and/or
NumberVision, or to install our PlayerVision system within our anticipated
schedule or on terms acceptable to us will have a material adverse impact on our
cash position and financial condition.  In addition, we will face
competition from larger, more formidable competitors as we enter the gaming
machine market.  An unexpected lack of market acceptance of our
PlayerVision system, a failure to prevail in our patent litigation with IGT,
 a failure to extend the terms of our CAMOFI financing arrangements,
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.




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




Off
Balance Sheet Financing Arrangements




We have operating leases totaling
$1,016,024 that have the following payment schedule: $407,747 in 2008, $142,848
in 2009, $138,008 in 2010, $138,941 in 2011, $140,735 in 2012, and $47,745 in
2013.






29
 Table of Contents





Qualitative
and Quantitative Disclosures about Market Risk




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




30
 Table of Contents







ITEM 7. FINANCIAL
STATEMENTS.









INDEX
TO FINANCIAL STATEMENTS










Report
      of Independent Registered Public Accounting Firm
            32Consolidated
      Balance Sheet
            33Consolidated
      Statements of Operations
            34Consolidated
      Statement of Stockholders’ Equity
            35Consolidated
      Statements of Cash Flows
            37Notes
      to Consolidated Financial Statements
            38













31
 Table of Contents







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, 2006 and 2007, 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 audit.





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, 2006 and 2007, 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.










PIERCY
BOWLER TAYLOR & KERN,


Certified
Public Accountants & Business Advisors


A
Professional Corporation





April 15,
2008


LAS
VEGAS, NEVADA








32
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,ASSETS
            
            2006
      (Restated)
            
            
            2007Current
      assetsCash
            
            $
            1,675,588
            
            
            $
            489,262Investment
      in marketable securities
            
            
            150,806
            
            
            
            87,881Accounts
      receivable, net of allowance of $9,096 and $708
            
            
            466,222
            
            
            
            567,186Inventories
            
            
            514,972
            
            
            
            1,161,707Prepaid
      expenses, deposits and other
            
            
            576,090
            
            
            
            149,596Jackpot
      reserve deposits
            
            
            4,154,190
            
            
            
            276,0127,537,868
            
            
            
            2,731,644Equipment
      and software, net of accumulated depreciation of $1,329,140 and
      $1,565,560
            
            
            917,835
            
            
            
            1,033,349Other
      assetsGoodwill
            
            
            955,277
            
            
            
            955,277Trademarks,
      copyrights, patents and other identifiable intangibles, net of accumulated
      amortization of $616,170 and $1,098,867
            
            
            1,800,066
            
            
            
            1,317,369Other
      long term assets
            
            
            116,878
            
            
            
            884,350$
            11,327,924
            
            
            $
            6,921,989LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            1,189,947
            
            
            $
            1,453,525Current
      portion of long-term debt
            
            
            685,875
            
            
            
            787,550Progressive
      jackpot liability
            
            
            1,625,051
            
            
            
            375,5083,500,872
            
            
            
            2,616,583Long-term
      debt
            
            
            5,122,572
            
            
            
            5,940,925Conditionally
      redeemable equitySeries
      B Convertible Preferred Stock, $.001 par value, 346,140 and
      130,350
              shares
      issued and outstanding
            
            
            1,730,700
            
            
            
            651,7501,730,700
            
            
            
            651,750Stockholders'
      equityConvertible
      Preferred Stock, $.001 par, 10,000,000 shares authorized:Series
      A: 2,000,000 shares authorized, 536,400 and 0 shares issued and
      outstanding
            
            
            536
            
            
            
            -Series
      C : 100,000 shares authorized, 50,000 and 35,000 shares issued and
      outstanding
            
            
            50
            
            
            
            35Series
      D:  125,000 shares authorized, 125,000 shares issued and
      outstanding
            
            
            125
            
            
            
            125Series
      E:  3,300,000 shares authorized, 351,000 and 743,800 shares
      issued and outstanding
            
            
            351
            
            
            
            744Common
      Stock, $.001 par value, 90,000,000 shares authorized:Common
      Stock Series A:  25,000,000 shares authorized, 9,819,680 and
      12,562,653 shares issued and outstanding
            
            
            9,820
            
            
            
            12,563Common
      Stock: 65,000,000 shares authorized, no shares issued or
      outstanding
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            21,263,775
            
            
            
            26,497,097Less
      due from officers and stockholders
            
            
            -
            
            
            
            (235,414
            )Deficit
            
            
            (20,300,878
            )
            
            
            (28,562,419
            )973,780
            
            
            
            (2,287,269
            )$
            11,327,924
            
            
            $
            6,921,989


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


33
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


YEARS
ENDED DECEMBER 31, 2006 AND 2007





2006
              (Restated)
            
            
            2007RevenuesCasino
      games
            
            $
            1,618,801
            
            
            $
            1,859,165Product
      sales
            
            
            1,824,937
            
            
            
            1,820,375Other
            
            
            1,698,404
            
            
            
            1,383,8695,142,142
            
            
            
            5,063,409Costs
      and expensesCasino
      games
            
            
            1,623,148
            
            
            
            862,817Product
      costs
            
            
            1,069,383
            
            
            
            1,053,650Other
            
            
            1,345,127
            
            
            
            1,344,3284,037,658
            
            
            
            3,260,795Gross
      operating income
            
            
            1,104,484
            
            
            
            1,802,614Other
      operating expensesSelling,
      general, and administrative
            
            
            4,836,634
            
            
            
            6,696,336Research
      and development
            
            
            945,175
            
            
            
            1,038,032Depreciation
      and amortization
            
            
            736,304
            
            
            
            855,1116,545,113
            
            
            
            8,589,479Operating
      loss
            
            
            (5,440,629
            )
            
            
            (6,786,865
            )Other
      income and expenseFinance
      costs
            
            
            (1,672,049
            )
            
            
            (1,590,691
            )Interest
      and other income
            
            
            310,248
            
            
            
            116,015Net
      loss
            
            $
            (6,802,430
            )
            
            $
            (8,261,541
            )Net
      loss per share
            
            $
            (0.73
            )
            
            $
            (0.72
            )Weighted
      average shares outstanding
            
            
            9,370,991
            
            
            
            11,443,117





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





34
 Table of Contents







LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


YEARS ENDED DECEMBER 31, 2006 AND
2007








Series
      A Convertible
              Preferred
              Stock
            
            
            Series
      C Convertible
              Preferred
              Stock
            
            
            Series
      D Convertible
              Preferred
              Stock
            
            
            Series
      E Convertible
              Preferred
              Stock
            
            
            Common
              Stock
      (Including Series A)
            
            
            Additional
              Paid-In
              Capital
            
            
            Due
      From
              Officer/
              Stockholder
            
            
            DeficitBalances,
      January 1, 2006 (as previously reported)
            
            $
            536
            
            
            $
            56
            
            
            $
            125
            
            
            $
            -
            
            
            $
            8,465
            
            
            $
            15,396,325
            
            
            $
            (320,000
            )
            
            $
            (12,550,298
            )Prior
      Period Adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (948,150
            )Balances,
      January 1, 2006 (as restated)
            
            
            536
            
            
            
            56
            
            
            
            125
            
            
            
            -
            
            
            
            8,465
            
            
            
            15,396,325
            
            
            
            (320,000
            )
            
            
            (13,498,448
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,802,430
            )Exercise
      of warrants and options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            520
            
            
            
            684,730Issuance
      of warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,891,800Stock
      based compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            134,222Elimination
      of conditionally redeemable equity
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            75
            
            
            
            24,925Series
      C Convertible Preferred Stock converted to Common Stock Series
      A
            
            
            
            
            
            
            (6
            )
            
            
            
            
            
            
            
            
            
            
            30
            
            
            
            (24
            )Shares
      issued in connection with acquisition
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            700
            
            
            
            1,399,300Common
      Stock Series A issued to consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            110
            
            
            
            219,890Shares
      acquired from officer/stockholder
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (80
            )
            
            
            (242,042
            )
            
            
            190,000Payment
      received from officer/stockholder
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            130,000Sale
      of Series E Convertible Preferred Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            351
            
            
            
            
            
            
            
            1,754,649Balances,
      December 31, 2006 (restated)
            
            $
            536
            
            
            $
            50
            
            
            $
            125
            
            
            $
            351
            
            
            $
            9,820
            
            
            $
            21,263,775
            
            
            $
            -
            
            
            $
            (20,300,878
            )








35
 Table of Contents








Series
      A
              Convertible
              Preferred
              Stock
            
            
            
            Series
      C
              Convertible
              Preferred
              Stock
            
            
            
            Series D
              Convertible
              Preferred
              Stock
            
            
            
            Series
      EConvertiblePreferredStock
            
            
            
            CommonStock(IncludingSeries
      A)
            
            
            
            AdditionalPaid-InCapital
            
            
            
            Due
      FromOfficer/Shareholder
            
            
            
            DeficitBalances,
      January 1, 2007
            
            $
            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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            216,293Stock-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
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            536
            
            
            
            -Conversion
      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
            
            $
            (0
            )
            
            $
            35
            
            
            $
            125
            
            
            $
            744
            
            
            $
            12,563
            
            
            $
            26,497,097
            
            
            $
            (235,414
            )
            
            $
            (28,562,419
            )









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





36
 Table of Contents


LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOW


YEARS
ENDED DECEMBER 31, 2006 AND 2007





2006
              (Restated)
            
            
            2007Operating
      activitiesNet
      loss
            
            $
            (6,802,430
            )
            
            $
            (8,261,541
            )Marketable
      security (received for licensing fee adjusted to fair
    value)
            
            
            (150,806
            )
            
            
            62,925Depreciation
      and amortization of equipment and software
            
            
            318,636
            
            
            
            372,415Amortization
      of debt issuance costs and intangibles
            
            
            2,159,778
            
            
            
            1,324,379Fair
      market value adjustment of debt derivative liability
            
            
            (108,707
            )
            
            
            (63,181
            )Stock-based
      compensation
            
            
            354,222
            
            
            
            386,082Other
            
            
            (161,450
            )
            
            
            105,463Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            263,368
            
            
            
            (100,964
            )Inventories
            
            
            (96,957
            )
            
            
            (646,735
            )Prepaid
      expenses, deposits and other
            
            
            (568,480
            )
            
            
            431,113Accounts
      payable and accrued expenses
            
            
            500,905
            
            
            
            470,028Progressive
      jackpot liability
            
            
            400,332
            
            
            
            (1,249,543
            )Net
      cash used in operating activities
            
            
            (3,891,589
            )
            
            
            (7,169,559
            )Investing
      activitiesPurchase
      of property and equipment
            
            
            (622,826
            )
            
            
            (400,509
            )Acquisition
      of intangible assets
            
            
            (20,000
            )
            
            
            -Jackpot
      reserve deposits
            
            
            25,944
            
            
            
            3,878,178Net
      cash provided by (used in) investing activities
            
            
            (616,882
            )
            
            
            3,477,669Financing
      activitiesProceeds
      from litigation settlements
            
            
            178,440
            
            
            
            43,094Repayment
      of debt
            
            
            (7,441
            )
            
            
            (26,241
            )Net
      proceeds from Senior Secured Convertible Note
            
            
            1,833,000
            
            
            
            -Sale
      of Series E Convertible Preferred Stock
            
            
            1,755,000
            
            
            
            1,964,000Exercise
      of warrants
            
            
            597,500
            
            
            
            573,625Redemption
      of Series B Convertible Preferred Stock
            
            
            -
            
            
            
            (179,500
            )Collection
      of receivable from officer/stockholder
            
            
            155,179
            
            
            
            -Collection
      of stock subscriptions receivable
            
            
            -
            
            
            
            130,586Net
      cash provided by financing activities
            
            
            4,511,678
            
            
            
            2,505,564Net
      increase (decrease) in cash and cash equivalents
            
            
            3,207
            
            
            
            (1,186,326
            )Cash
      and cash equivalents, beginning of period
            
            
            1,672,381
            
            
            
            1,675,588Cash
      and cash equivalents, end of period
            
            $
            1,675,588
            
            
            $
            489,262Non-cash
      investing and financing activitiesCommon
      Stock Series A issued for acquisition of
      technology rights
            
            $
            1,400,000Conversion
      of Series B Convertible Preferred Stock to Common Stock Series
      A
            
            
            
            
            
            $
            899,450Elimination
      of conditionally redeemable equity
            
            
            25,000Issuance
      of warrants
            
            
            1,891,800Exercise
      of stock warrants and options for accrued expenses
            
            
            87,750Exercise
      of stock warrants and options increasing subscriptions
      receivable
            
            
            
            
            
            
            366,000Conversion
      of Series C Convertible Preferred Stock to Common Stock Series
      A
            
            
            30
            
            
            
            75Common
      Stock Series A acquired from officer/stockholder in payment of stock
      subscriptions receivable
            
            
            242,122Exercise
      of warrants in settlement of accounts payable
            
            
            
            
            
            
            257,750Costs
      of warrants for debt modification
            
            
            
            
            
            
            255,273Equipment
      acquired directly with proceeds of new borrowing
            
            
            
            
            
            
            87,419Conversion
      of debt to equity
            
            
            10,000Increase
      in debt due to modification of terms
            
            
            
            
            
            
            250,000Common
      Stock Series A issued for debt modification
            
            
            
            
            
            
            600,000




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


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LAS
VEGAS GAMING, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.  Nature
of operations:




We are in
the business of providing equipment, supplies, and casino games for use by our
customers in the keno and bingo segments of the gaming industry. As part of our
business, we have acquired various businesses, products, and technologies. Key
business and technology acquisitions include the following:




·
            the
      February 2005 acquisition of 100% of the stock in AdLine Gaming, Inc., a
      subsidiary of AdLine Network, LLC, whereby we acquired significant
      technology and engineering talent that supports the PlayerVision system
      and its related applications; and




·
            the
      February 2006 acquisition from AdLine Network, LLC of technology related
      to the ability to accept wagers through WagerVision from the homes of
      players.




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




2.  Summary
of significant accounting policies:




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




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, if any, are to be paid the amount of
the progressive meter in equal installments over 20 years.  However,
we, at our sole discretion, may 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, 2007), in the event a discounted value is not paid
immediately at the option of the winner, management intends to purchase
discounted U.S. Treasury securities to meet the obligation for the annual
payments.  We also 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.  For keno system installations, we require a 50%
deposit in advance as a good faith down payment for the system
installation.  We have customer






38
 Table of Contents




acceptance
provisions in our keno system sales contract and, therefore, we do not recognize
revenue until the system is installed and performing properly.  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 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.




Cash and cash equivalents. 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 4), 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 in the statement of
cash flows.  We classify these funds as current assets because we use
these funds to support operations.




Other intangible
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 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 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 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
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.  Losses during 2006 and 2007 resulted from significant cash
resources expensed on the development, regulatory approval, administrative
infrastructure, and marketing of PlayerVision, which are best demonstrated by
our significant increases in selling and administrative expenses.




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 are particularly
vulnerable to material changes in the next year.




Marketable securities.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.






39
 Table of Contents






Equipment and software and
depreciation.Equipment and software are stated at
cost.  Expenditures for maintenance and repairs are expensed as
incurred.  When equipment and software are 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).




Certain issuances of 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. We
believe this is still the best indication of the fair value of Common Stock
Series A. 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 2006 and 2007.




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
Financial Accounting Standard Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-based
Compensation, for valuing employee and other compensatory stock and
option awards (Note 8).




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 5%, expected option life of four to 10 years,
volatility of 30% and no expected dividends.




Advertising.  Advertising
costs are expensed as incurred and totaled $134,064 and $229,100 for 2006 and
2007, 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.




3.  Prior
year adjustments restatement of 2006 financial statements:




We have restated our
beginning retained earnings and debt derivative liability at January 1, 2006,
for an error in the original recording of 1,050,000 warrants issued with the
$3,000,000 financing in July 2005 with CAMOFI Master LDC, or
CAMOFI.  The CAMOFI financing had an associated Registration Rights
Agreement for the registration of shares if CAMOFI were to convert its debt and
for the outstanding warrants.  In light of the liquidated damages
provision in the Registration Rights Agreement, settlement of the warrants with
unregistered shares and the payment of a penalty would have been an uneconomic
settlement alternative and, therefore, would not be considered a realistic
alternative for us.  We would have been required to settle in
registered shares which are outside our control under the guidelines of EITF
00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.  Although the value of the warrants was
immaterial at the time of issuance, these warrants are a derivative liability
which must be adjusted to fair value at the end of each reporting
period.  The effect of this error on our 2005 financial statements was
an increase in interest expense and the debt derivative liability by $948,150,
primarily due to the fact that the fair value of our Common Stock Series A
increased from $0.50 per share at the time we did the CAMOFI financing to $2.00
per share in November 2005 due to a $250,000 equity raise at the
time.  This has been reflected in the 2006 financial statements as an
adjustment to beginning retained earnings and debt derivative liability at
January 1, 2006.






40
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In
addition, we did a second financing with CAMOFI on April 1, 2006 for $2,000,000
with 1,450,000 warrants attached.  The warrants were improperly valued
under EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instrument, and EITF 98-5, Accounting for Convertible
Securities and Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios, and should have been valued using the Black-Scholes
option pricing model and 30% volatility factor rather than
1%.   The embedded conversion feature within the debt instrument
was beneficial to the holder and required valuation.  The total debt
discount should have been $2,600,387 and we recorded a discount of
$2,088,000.  A debt derivative liability of $816,000 should also have
been recorded because of the existence of the Registration Rights Agreement with
CAMOFI referred to previously.




Finally,
with the adoption of FAS 123R, stock-based compensation also should have been
valued using 30% volatility rather than 1% volatility and should have been
valued using a $2 per share price for our Common Stock Series A rather than a $5
per share price.  We incorrectly valued our Common Stock Series A at
the same value as our Series E Convertible Preferred Stock ($5 per
share).




The
combined effects of these error corrections on the 2006 financial statements,
including recording the adjusted fair value of the warrants and debt derivative,
the proper amortization of the debt discount and the proper value of the stock
based compensation were as follows:




Increase
      (decrease)Retained
      earnings
              
              $
              (948,150
              )Paid
      in capital
              
              
              (189,238
              )Interest
      expense
              
              
              100,906Debt
      discount
              
              
              302,774Debt
      derivative liability
              
              
              1,655,443Stock
      based compensation expense
              
              
              114,375


The
overall effect of the 2006 restatement on net loss was an increase of $215,281
or $0.02 per share.  (See unaudited Note 15 regarding related
restatements of quarterly financial statements.)




4.  Jackpot
reserve deposits:




At
December 31, 2006 and December 31, 2007, as required by gaming regulators, we
held aside on deposit cash amounts of $4,154,190 and $276,012, respectively that
are restricted for funding our various jackpot-oriented games (Note
9).








41
 Table of Contents






5.  Equipment
and software:




Equipment
and software consist of the following:




December
      31, 2006
            
            
            December
      31, 2007Software
            
            $
            404,946
            
            
            $
            422,560Production
      equipment
            
            
            1,484,348
            
            
            
            1,669,461Other
      equipment, furniture, and fixtures
            
            
            314,053
            
            
            
            463,261Leasehold
      improvements
            
            
            43,627
            
            
            
            43,6272,246,974
            
            
            
            2,598,909Less
      accumulated depreciation and amortization
            
            
            1,329,139
            
            
            
            1,565,560$
            917,835
            
            
            $
            1,033,349





6.
Other intangible assets:





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





December
      31, 2006
            
            
            December
      31, 2007PlayerVision
      technology rights
            
            $
            1,016,236
            
            
            $
            1,016,236PlayerVision
      technology rights for
              “at
      home”
      wagering
            
            
            1,400,000
            
            
            
            1,400,0002,416,236
            
            
            
            2,416,236Less
      accumulated amortization
            
            
            616,170
            
            
            
            1,098,867$
            1,800,066
            
            
            $
            1,317,369








These intangible assets are amortized
on a straight-line basis over their estimated useful lives, which are currently
five years. Implementing “at home” wagering is scheduled for 2008 following the
product roll out of PlayerVision. Total amortization for other intangible assets
amounted to $444,667 and $482,697 for the years ended December 31, 2006 and
2007, respectively. The estimated aggregate amortization for the next five years
is as follows:





2008
            
            $
            483,2472009
            
            
            483,2472010
            
            
            302,2082011
            
            
            48,6672012
            
            
            -0-$
            1,317,369





7.  Debt:




In April 2006, we refinanced and
increased the amount of our bridge financing from $3,000,000 to $5,000,000 with
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 will be
restricted for a period of time).






42
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The note is 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 are
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
will 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 will remain due and payable on that date, so $833,332
in total is due and payable on that date.  The aggregate redemption
amount is 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 shall have 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 shall 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 is due
and payable.  The prepayment for early payoff of the Note was raised
and is now 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 will be 23.2 %
(including the effects of the debt modifications on March 22 and September 28,
2007) in the future as compared to 10% previously.




Because
of the Registration Rights Agreement with CAMOFI, the registration of CAMOFI’s
converted shares and warrants are outside of our control.  The
Registration Rights Agreement with CAMOFI states that if 125 % of the registered
securities for CAMOFI are not effective by the 120th
calendar day following the filing date of September 30, 2008, we must 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 fail to pay any partial liquidating damages within
seven days from the date payable, we will accrue 20% annual interest on any
amount in arrears.  Settlement of the warrants with unregistered
shares and the payment of a penalty would be an uneconomic settlement
alternative and thereby would not be considered a realistic alternative for
us.  Consequently, the initial value of the warrants must be recorded
as a derivative liability and changes to the fair value of those warrants must
be included in the statement of operations.  See Note 3 for the effect
on 2005 which was recorded as a restatement of beginning retained earnings at
January 1, 2006.






43
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Pursuant
to SFAS No. 6, Classification
of Short-Term Obligations Expected to Be Refinanced, the March, September
and December 2007 refinancings were given retroactive effect as of December 31,
2006; accordingly, the following tables of debt outstanding and future
maturities have been prepared based on the retroactive effects of the
refinancing as of those dates:




December
      31, 2006
            
            
            December
      31, 2007Debt
      derivative liability
            
            $
            1,655,444
            
            
            $
            1,592,263Bridge
      financing
            
            $
            3,463,408
            
            
            $
            4,342,345Settlement
      due third parties
            
            $
            570,933
            
            
            $
            614,027Other
      notes payable
            
            $
            118,662
            
            
            $
            179,840$
            5,808,447
            
            
            $
            6,728,475Less
      amounts due within one year
            
            $
            685,875
            
            
            $
            787,550$
            5,122,572
            
            
            $
            5,940,925





Scheduled
debt maturities are $787,550 in 2008 and $5,940,925 in 2009.




We have
received all monies due from a settlement with a customer of our wholly-owned
subsidiary, Imagineering, and will distribute 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.




8.  Stockholders'
equity:




From time
to time, we issue shares of common stock and preferred stock through
transactions that are exempt from registration under the Securities Act of 1933
(Securities Act), or pursuant to Section 4(2) of the Securities Act and Rule 506
of Regulation D. In March 2007, an officer and a board member were each awarded
50,000 shares of Common Stock Series A for their respective promotions. 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, 2006, we issued 520,000
shares of Common Stock Series A pursuant to the exercise of options and warrants
and eliminated 75,000 shares of conditionally redeemable Common Stock Series A.
Also in March 2006, we issued warrants to purchase 230,000 shares as
compensation to a consultant and as severance to an employee. In addition, in
April 2006, we issued additional warrants to purchase 1,450,000 shares of Common
Stock Series A in connection with our refinancing with CAMOFI and issued 110,000
shares of Common Stock Series A as costs connected with the
refinancing.  In June and July 2006, we issued warrants to purchase a
total of 50,000 shares of Common Stock Series A for consulting services
rendered.




In
February 2006, we purchased certain technology rights from AdLine Network, LLC,
the same company from which we acquired AdLine Gaming, Inc. in 2005 for 700,000
shares of our Common Stock Series A, plus contingent technology license fees
(Note 9). We valued these assets and the stock issued in consideration at an
estimated fair value of $1,400,000 or $2.00 per share and are amortizing the
technology rights acquired as identifiable intangible assets over a five-year
period.  The rights purchased in 2006 allow us to extend the use of
previously acquired technology for “wagering” or “betting” activity to be
conducted in the home.




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.






44
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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.
Additionally, the holders of Series B Convertible Preferred Stock have the
right, at their election, to sell their shares of Series B Convertible Preferred
Stock to us for $5.00 per share at any time beginning July 31, 2008 through and
including October 31, 2008.  Upon our liquidation, dissolution or
winding up, holders of Series B Convertible Preferred Stock are entitled to
receive a priority payment of $5.00 per share.




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




On
February 12, 2007, because 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
Convertible Preferred Stock have until April 28, 2008 to make their
decision.  Holders of Series B Convertible Preferred Stock have a
liquidation preference over holders of Series C, Series D and Series E
Convertible Preferred Stock.




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, holders 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.  Holders of Series C
Convertible Preferred Stock are entitled to receive $5 per share as a
liquidation preference after Series B Convertible Preferred Stock shareholders
have been liquidated over Series D and Series E Convertible Preferred
Stock.




In June
2006, a holder of our Series C Convertible Preferred Stock converted 6,000
shares of Series C Convertible Preferred Stock on a one-to-five basis for 30,000
shares of Common Stock Series A.






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Series D Convertible Preferred
Stock.  In November 2005, we issued 125,000 shares of Series D
Convertible Preferred Stock at $2 per share which have a liquidation preference
over Series E Convertible Preferred Stock.




Series E Convertible Preferred
Stock.Holders of Series E Convertible Preferred Stock are
entitled to receive $5 per share as a liquidation preference after Series B,
Series C, and Series D Convertible Preferred Stock shareholders have beenliquidated.In the year ended
December 31, 2006 and 2007, we issued 351,000 and 392,800 shares respectively
under our Series E private placement offering raising $1,755,000 and $1,964,000,
respectively.




Stock Warrants and
Options.  We have both a qualified and a non-qualified stock
option plan. Since 2000, options have been granted only under the qualified plan
and there are 1,139,400 options presently outstanding under the qualified
plan. The Compensation and Stock Option Committee of our Board of Directors
administers the plans. The exercise price of options issued pursuant to the
qualified plan cannot be less than the fair 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 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 615,000 and
630,000 shares of Common Stock Series A were issued to officers and directors
during the year ended December 31, 2006 and 2007, respectively. Total
compensation cost recognized in operations from grants of options and warrants
amounted to $354,222 and $386,082 for the years ended December 31, 2006 and
2007, respectively.  Unrecognized costs related to employee stock
options and warrants outstanding at December 31, 2007 totaled $187,551 and are
expected to be amortized over a weighted average period of 2.75
years.




The
weighted average exercise price of our options and warrants at December 31,
2007, was $2.33.  The following table summarizes our stock option and
warrant activity followed by the applicable weighted average prices during the
year ended December 31, 2007:




Balance,
      January 1,
      2007
            
            
            6,461,741$
            1.65Granted
            
            
            1,000,000$
            4.14Exercised
            
            
            (830,123
            )$
            1.41Forfeited
            
            
            (456,756
            )$
            1.67Balance,
      December 31, 2007
            
            
            6,174,862$
            2.33





As of
December 31, 2007, 785,943 options and warrants are outstanding, but have
not vested. The aggregate intrinsic value of options and warrants at December
31, 2007 is $3,313,383.






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Non-vested
      Options
            
            
            Weighted
      Average PriceBalance,
      January 1, 2007
            
            
            65,041
            
            
            $
            2.05Granted
            
            
            685,000
            
            
            
            5.00Vested
            
            
            (234,431
            )
            
            
            (5.00
            )Forfeited
            
            
            -0-
            
            
            
            5.00Balance,
      December 31, 2007
            
            
            515,610
            
            
            $
            5.00







Non-vested
      Warrants
            
            
            Weighted
      Average PriceBalance,
      January 1, 2007
            
            
            673,667
            
            
            $
            2.55Granted
            
            
            20,000
            
            
            
            5.00Vested
            
            
            (423,334
            )
            
            
            (2.45
            )Forfeited
            
            
            -0-
            
            
            
            -0-Balance,
      December 31, 2007
            
            
            270,333
            
            
            $
            2.85







The
following table summarizes stock options and warrants outstanding at December
31, 2007 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
            
            2.0
            
            270,000
            
            2.0$3.00
            
            100,900
            
            2.2
            
            100,900
            
            2.2$4.55
            
            38,000
            
            1.4
            
            38,000
            
            1.4$5.00
            
            730,500
            
            4.4
            
            214,890
            
            4.4Warrants
            $1.00
            
            740,000
            
            1.5
            
            678,000
            
            1.3$1.48
            
            2,675,000
            
            3.3
            
            2,675,000
            
            3.3$2.00
            
            220,000
            
            2.3
            
            208,333
            
            2.2$2.10
            
            23,809
            
            2.9
            
            23,809
            
            2.9$3.00
            
            1,012,752
            
            2.7
            
            846,085
            
            2.1$4.00
            
            100,000
            
            2.1
            
            100,000
            
            2.1$4.55
            
            61,646
            
            0.7
            
            61,646
            
            0.7$5.00
            
            150,000
            
            3.2
            
            120,000
            
            3.0$6.00
            
            52,255
            
            0.1
            
            52,255
            
            0.16,174,862
            
            2.9
            
            5,388,916
            
            3.0




There are
785,943 options and warrants that have been issued but have not
vested.  Of these options and warrants, 440,141 will vest in 2008,
194,982 in 2009 and 150,820 in 2010.




9.  Concentrations,
commitments and contingencies:




Concentrations. There are no
significant concentrations of credit risk. Our receivables are
uncollateralized.  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 doubtfulcollection, we consider
the customer’s credit history and our relationship, the relative strength of our
legal position, therelated cost of any
proceedings, and general economic conditions.






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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.




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




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




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




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




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




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, 2006
and December 31, 2007, and related assumptions:






48
 Table of Contents







December
      31, 2006Present
      value of Nevada Numbers $5.0 million base progressive jackpot, payable in
      20 equal annual installments using a 4.91% discount rate, the prevailing
      20-year U.S. treasury bond
            
            $
            3,293,613Present
      value at 4.91% of the Nevada Numbers $1,306,433 increase to the
      progressive jackpot meter
            
            
            860,577Less
      portion insured through conventional insurers
            
            
            (2,900,000
            )Other
      games
            
            
            370,861$
            1,625,051







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




Change in
estimate.  When the Nevada Numbers jackpot was hit and won on
September 25, 2007, we changed the discount rate for the lump sum payment to the
winner from the prevailing 20-year treasury bond rate to the current prime rate,
which is a change in estimate.  This change in estimate had the effect
of reducing our net loss by approximately $780,000 or $0.08 per share and is not
expected to have a significant effect in 2008.




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




2008
            
            $
            407,7472009
            
            
            142,8482010
            
            
            138,0082011
            
            
            138,9412012
            
            
            140,7352013
            
            
            47,745$
            1,016,024





Rent
expense for 2006 and 2007 was $258,169 and $345,072 respectively.




Legal Matter.  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 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 is seeking injunctive and monetary relief in the case,
including treble damages and profits, claiming that IGT would be irreparably
harmed by LVGI if






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LVGI’s
PlayerVision were deployed in the marketplace.  On November 16, 2007,
the Court denied IGT’s motion for preliminary injunction, finding that IGT had
not shown a likelihood of success or raised serious questions as to its
derivative works claim or other infringement claims. Discovery continues on this
lawsuit.  Management has made no provision for this matter as it is
unable to estimate the minimum loss, if any, to be incurred by the Company and
does not believe the IGT complaint to be meritorious, and is defending the
lawsuit vigorously.




Noncompliance with Gaming
Regulation.  The Nevada Gaming Commission adopted amendments to
Regulation 5.115 on November 18, 1999 that allow licensees to use the “reserve
method” to fund periodic payments of any game, including a race book or sports
pool, tournament, contest, or promotional activity.  The reserve
method may be used 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 always have presented a plan acceptable to the Nevada Gaming
Commission to satisfactorily meet the objectives of the Regulation if not cure
the situation prospectively through future raises of capital.  In our
nine-year history, all of our jackpot liabilities have been paid by us or
through insurance coverage, and we have received no indication 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 financial ratios above.  The
Nevada Gaming Commission has not made any demand for the one-year letter of
credit.  Based on our history of working with the gaming authorities
when out of compliance with these requirements, we believe there will be no
significant adverse consequences to the Company as a result of its continuing
noncompliance for the foreseeable future.




10.
Income taxes:





As of
December 31, 2007, net operating loss carryovers for federal income tax
reporting purposes total approximately $27.0 million and expire between 2013 and
2025. However, because we have not achieved a satisfactory level of operations,
realization of any future income tax benefit of the net operating loss
carryovers accumulated to date is not yet viewed by management at this time as
more likely than not to occur.  Therefore, the related deferred tax
asset of $9.5 million has been effectively reduced by a 100% valuation
allowance.  In addition, we may be limited in our ability to fully
utilize our net operating loss carryforwards and realize any benefit therefrom
in the event of any of certain ownership changes described in Internal Revenue
Code Section 382.




In 2007,
the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (FIN 48).  The adoption of FIN 48 did not have a
material impact on the Company’s financial statements or
disclosures.




11.
Acquisition:




During February 2006, we issued 700,000
shares of Common Stock Series A at $2.00 per share in exchange for the rights to
certain intellectual property from AdLine Network, LLC, the same company from
which we acquired AdLine Gaming, Inc. in 2005.  The rights purchased
allow for “wagering” or “betting” activity to be conducted in the home via
AdLine Network, LLC technology.  We are currently amortizing this
asset over an estimated useful life of five years.  Further, we will
pay AdLine Network, LLC 5% of our net revenue (gross revenue less the
theoretical cost of any pay-outs) derived from the purchased
rights.






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 Table of Contents






12.
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
fair values of these financial instruments are considered to be equal to book
value because of their proximity to cash and current interest rates
approximating original interest rates.




13.
Segment Information:




We conduct our operations in three
primary business segments: “Casino Games,” “Products” and “Other.” The “Casino
Games” segment generates income from three games with a fourth one nearly ready
to launch.  The three games are played in 25 casinos in Nevada and
another 14 outside Nevada.  Our games consist of keno style games
(Nevada Numbers and The Million Dollar Ticket), and Super Bonanza, a bingo style
game.  The composition of our casino games revenue was approximately
67% bingo and 33% keno for the year ended December 31, 2006 and 67% bingo and
33% keno during the year ended December 31, 2007.




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
68% and 65% of our products sales during the year ended December 31, 2006 and
2007, respectively.  Keno system sales accounted for 32% and 35%of
products sales for the year ended December 31, 2006 and 2007,
respectively.




The “Other” segment includes revenue
from equipment maintenance contracts which accounted for 40% and 47% of other
revenue during the years ended December 31, 2006 and 2007, respectively;
operation of a keno route (26%  and 34% for the year ended December
31, 2006 and 2007, respectively), the distribution of “hand-held” bingo
electronics (25% and 5% for the year ended December 31, 2006 and 2007,
respectively) and keno route participation agreements (9% and 14% for the years
ended December 31, 2006 and 2007, respectively).




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




2006
            
            
            2007RevenueCasino
      Games
            
            $
            1,618,801
            
            
            $
            1,859,165Product
      Sales
            
            
            1,824,937
            
            
            
            1,820,375Other
            
            
            1,698,404
            
            
            
            1,383,869$
            5,142,142
            
            
            $
            5,063,409Operating
      income (loss)Casino
      Games
            
            $
            (4,347
            )
            
            $
            996,348Product
      Sales
            
            
            755,554
            
            
            
            766,725Other
            
            
            353,277
            
            
            
            39,541Unallocated
            
            
            (6,545,113
            )
            
            
            (8,589,479
            )$
            (5,440,629
            )
            
            $
            (6,786,865
            )Identifiable
      assetsCasino
      Games
            
            $
            7,219,569
            
            
            $
            3,504,892Product
      Sales
            
            
            466,536
            
            
            
            368,219Other
            
            
            441,242
            
            
            
            416,890Unallocated
            
            
            3,200,577
            
            
            
            2,631,988$
            11,327,924
            
            
            $
            6,921,989









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Identifiable
assets of $11,322,924 and $6,231,989 at December 31, 2006 and 2007,
respectively, included recorded goodwill of $955,277 that relates to the Project
Sales segment from prior acquisitions.




Capital
      expenditures
            
            2006
            
            
            2007Casino
      Games
            
            $
            272,729
            
            
            $
            325,438Product
      Sales
            
            
            1,300
            
            
            
            1,509Other
            
            
            85,804
            
            
            
            36,327Unallocated
            
            
            262,993
            
            
            
            124,655$
            622,826
            
            
            $
            487,928





14.
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 have
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 for the first year of installation. The price per machine increases to $2
per day in the second year of installation. The contract was cancelable after
the first 60 days but remains in force today.




15.
Restatement of quarterly financial statements (unaudited):





The individual line item effects of the
error corrections on the 2006 quarterly financial statements for recording the
proper value of the Company’s warrants, the fair value of its debt derivative
liability, the proper amortization of the debt discount, and the proper value of
stock-based compensation were as follows (see Note 3):





March 31,
      2006Previous
            
            
            Adjustment
            
            
            RestatedRevenue
            
            $
            1,336,218
            
            
            $
            -
            
            
            $
            1,336,218Costs
      and expenses
            
            
            1,171,437
            
            
            
            -
            
            
            
            1,171,437Other
      operating expenses
            
            
            1,008,723
            
            
            
            55,242
            
            
            
            1,063,965Operating
      loss
            
            
            (843,942
            )
            
            
            (55,242
            )
            
            
            (899,184
            )Other
      income and expenses:Finance
      costs
            
            
            (141,326
            )
            
            
            210
            
            
            
            (141,116
            )Interest
      and other income
            
            
            46,973
            
            
            
            -
            
            
            
            46,973Net
      loss
            
            $
            (938,295
            )
            
            $
            (55,032
            )
            
            $
            (993,327
            )Net
      loss per share
            
            $
            (0.11
            )
            
            $
            (0.01
            )
            
            $
            (0.12
            )Weighted
      average shares o/s
            
            
            8,905,020
            
            
            
            8,905,020
            
            
            
            8,905,020






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Balance
      sheet itemsBeginning
      retained earnings 1/1/06
            
            $
            (12,550,298
            )
            
            $
            (948,150
            )
            
            $
            (13,498,448
            )Debt
      derivative liability 1/1/06
            
            
            -
            
            
            
            948,150
            
            
            
            948,150Debt
      derivative liability
            
            
            -
            
            
            
            947,940
            
            
            
            947,940Paid-in
      capital
            
            
            17,152,401
            
            
            
            55,242
            
            
            
            17,207,643Ending
      retained earnings
            
            
            (13,311,509
            )
            
            
            (1,003,182
            )
            
            
            (14,314,691
            )





June 30,
      2006Previous
            
            
            Adjustment
            
            
            RestatedRevenue
            
            $
            2,491,996
            
            
            $
            -
            
            
            $
            2,491,996Costs
      and expenses
            
            
            2,019,148
            
            
            
            -
            
            
            
            2,019,148Other
      operating expenses
            
            
            2,293,939
            
            
            
            141,422
            
            
            
            2,435,361Operating
      loss
            
            
            (1,821,091
            )
            
            
            (141,422
            )
            
            
            (1,962,513
            )Other
      income and expenses:Finance
      costs
            
            
            (660,997
            )
            
            
            (56,989
            )
            
            
            (717,986
            )Interest
      and other income
            
            
            108,337
            
            
            
            -
            
            
            
            108,337Net
      loss
            
            $
            (2,373,751
            )
            
            $
            (198,411
            )
            
            $
            (2,572,162
            )Net
      loss per share
            
            $
            (0.26
            )
            
            $
            (0.02
            )
            
            $
            (0.28
            )Weighted
      average shares o/s
            
            
            9,129,971
            
            
            
            9,129,971
            
            
            
            9,129,971Balance
      sheet itemsDebt
      derivative liability
            
            $
            -
            
            
            $
            1,751,268
            
            
            $
            1,751,268Paid-in
      capital
            
            
            19,136,521
            
            
            
            (162,191
            )
            
            
            18,974,330Debt
      discount
            
            
            1,803,273
            
            
            
            442,516
            
            
            
            2,245,789Ending
      retained earnings
            
            
            (14,924,049
            )
            
            
            (1,201,593
            )
            
            
            (16,125,642
            )





September 30,
      2006Previous
            
            
            Adjustment
            
            
            RestatedRevenue
            
            $
            3,701,409
            
            
            $
            -
            
            
            $
            3,701,409Costs
      and expenses
            
            
            3,132,053
            
            
            
            -
            
            
            
            3,132,053Other
      operating expenses
            
            
            3,705,839
            
            
            
            (145,281
            )
            
            
            3,851,120Operating
      loss
            
            
            (3,136,483
            )
            
            
            (145,281
            )
            
            
            (3,281,764
            )Other
      income and expenses:Finance
      costs
            
            
            (1,110,775
            )
            
            
            (58,388
            )
            
            
            (1,169,163
            )Interest
      and other income
            
            
            189,782
            
            
            
            -
            
            
            
            189,782Net
      loss
            
            $
            (4,057,476
            )
            
            $
            (203,669
            )
            
            $
            (4,261,145
            )Net
      loss per share
            
            $
            (0.44
            )
            
            $
            (0.02
            )
            
            $
            (0.46
            )Weighted
      average shares o/s
            
            
            9,244,884
            
            
            
            9,244,884
            
            
            
            9,244,884Balance
      sheet itemsDebt
      derivative liability
            
            $
            -
            
            
            $
            1,682,796
            
            
            $
            1,682,796Paid-in
      capital
            
            
            19,683,611
            
            
            
            (158,332
            )
            
            
            19,525,279Debt
      discount
            
            
            1,518,545
            
            
            
            372,645
            
            
            
            1,891,190Ending
      retained earnings
            
            
            (16,607,774
            )
            
            
            (1,405,262
            )
            
            
            (18,013,036
            )











53
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Correction of errors in 2007
quarterly financial statements





Corrections
are necessary to the 2007 quarterly financial statements for errors in
accounting for the Company’s debt modification at March 22, 2007, as discussed
in Note 7.  Although it did not meet the 10% test under EITF 96-19,
Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in, a Company’s Own
Stock, we valued the 175,000 warrants issued to CAMOFI at $1.48 per share
at $5.00 per share, an interest rate of 4.43%, no dividends, and 1% volatility
factor and arrived at a value of $667,468.  We should have valued the
warrants based on a Common Stock Series A price of $2.00 per share, an interest
rate of 4.43%, no dividends, and a 30% volatility factor, or
$164,273.  We also have a beneficial conversion feature of $0.52 for
the 175,000 warrants, or $91,000. The additional $25,000 we paid CAMOFI in cash
resulted in $280,273 of additional debt discount, which was to be amortized over
the next 21 months.  This also should have been recorded as a debt
derivative liability because of the Registration Rights Agreement previously
mentioned.




We also accounted for the debt
modification with CAMOFI at September 28, 2007 inappropriately under EITF
96-19.  We expensed the $250,000 additional balance of the note as the
loss on a debt extinguishment.  We have since determined that we
should have accounted for the $250,000 as a debt modification and included it in
the new interest calculations.




The additional $250,000 note does have
a beneficial conversion feature.  As previously indicated, the current
price of our Common Stock Series A is $2.00 per share and the note is
convertible at $1.345 per share.  Therefore, there are 185,873 shares
of Common Stock Series A that the note can be converted into that carry a $0.655
benefit or $121,746.  This beneficial conversion feature was not
recorded at September 30, 2007 and should be amortized over the remaining 15
months of the note.




As
discussed in Note 3, above, with regard to the restatement of the 2006 financial
statements, all stock-based compensation in 2007 should have been recorded with
30% volatility rather than 1% volatility and the Black-Scholes calculation
should have been made with a $2 per share price for our Common Stock Series A
rather than a $5 per share price.  This would have resulted in a
decrease to our stock based compensation expense and a decrease to paid-in
capital of $490,588 from amounts previously reported.  Recording the
fair value of the three debt derivative liabilities results in a reduction of
interest expense and the related debt derivative liabilities of approximately
$142,000 from amounts previously reported.  The combined effects of
restatement entries needed for the 2007 financial statements (including the
effects of the restatement from the 2006 financial statements were as
follows:





Increase
      (decrease)Retained
      earnings
            
            $
            (1,163,431
            )Paid
      in capital
            
            
            (1,134,548
            )Interest
      expense
            
            
            301,274Stock-based
      compensation expense
            
            
            (490,558
            )Debt
      deviation liability
            
            
            1,677,172Debt
      discount
            
            
            (431,494
            )








54
 Table of Contents








The
individual line item effects of the error corrections on the 2007 financial
statements for recording the March 22, 2007 debt modification properly, for
accounting for the September, 28, 2007 debt modification properly, for recording
the fair value of the debt derivative liabilities, the proper amortization of
the debt discount, and the proper value of stock-based compensation were as
follows:





March 31,
      2007Previous
            
            
            Adjustment
            
            
            RestatedRevenue
            
            $
            1,256,052
            
            
            $
            -
            
            
            $
            1,256,052Costs
      and expenses
            
            
            950,870
            
            
            
            -
            
            
            
            950,870Other
      operating expenses
            
            
            2,501,636
            
            
            
            366,395
            
            
            
            2,135,241Operating
      loss
            
            
            (2,196,454
            )
            
            
            366,395
            
            
            
            (1,830,059
            )Other
      income and expenses:Finance
      costs
            
            
            (385,899
            )
            
            
            (99,850
            )
            
            
            (485,749
            )Interest
      and other income
            
            
            62,458
            
            
            
            -
            
            
            
            62,458Net
      loss
            
            $
            (2,519,895
            )
            
            $
            266,545
            
            
            $
            (2,253,350
            )Net
      loss per share
            
            $
            (0.24
            )
            
            $
            0.02
            
            
            $
            (0.22
            )Weighted
      average shares o/s
            
            
            10,305,972
            
            
            
            10,305,972
            
            
            
            10,305,972Balance
      sheet itemsDebt
      derivative liability
            
            $
            -
            
            
            $
            1,774,456
            
            
            $
            1,774,456Paid-in
      capital
            
            
            24,145,908
            
            
            
            (942,863
            )
            
            
            23,203,045Debt
      discount
            
            
            1,716,719
            
            
            
            (254,442
            )
            
            
            1,462,277Ending
      retained earnings
            
            
            (21,657,342
            )
            
            
            (896,886
            )
            
            
            (22,554,228
            )





June 30,
      2007Previous
            
            
            Adjustment
            
            
            RestatedRevenue
            
            $
            2,343,173
            
            
            $
            -
            
            
            $
            2,343,173Costs
      and expenses
            
            
            1,750,608
            
            
            
            -
            
            
            
            1,750,608Other
      operating expenses
            
            
            4,512,803
            
            
            
            423,411
            
            
            
            4,089,392Operating
      loss
            
            
            (3,920,238
            )
            
            
            423,411
            
            
            
            (3,496,827
            )Other
      income and expenses:Finance
      costs
            
            
            (816,793
            )
            
            
            (57,961
            )
            
            
            (874,754
            )Interest
      and other income
            
            
            98,728
            
            
            
            -
            
            
            
            98,728Net
      loss
            
            $
            (4,638,303
            )
            
            $
            365,450
            
            
            $
            (4,272,853
            )Net
      loss per share
            
            $
            (0.43
            )
            
            $
            0.03
            
            
            $
            (0.40
            )Weighted
      average shares o/s
            
            
            10,815,514
            
            
            
            10,815,514
            
            
            
            10,815,514Balance
      sheet itemsDebt
      derivative liability
            
            $
            -
            
            
            $
            1,760,493
            
            
            $
            1,760,493Paid-in
      capital
            
            
            26,254,089
            
            
            
            (999,879
            )
            
            
            25,254,210Debt
      discount
            
            
            1,471,474
            
            
            
            (226,537
            )
            
            
            1,244,937Ending
      retained earnings
            
            
            (23,775,750
            )
            
            
            (531,436
            )
            
            
            (24,307,186
            )











55
 Table of Contents














September 30,
      2007Previous
            
            
            Adjustment
            
            
            RestatedRevenue
            
            $
            3,736,658
            
            
            $
            -
            
            
            $
            3,736,658Costs
      and expenses
            
            
            2,165,030
            
            
            
            -
            
            
            
            2,165,030Other
      operating expenses
            
            
            6,494,368
            
            
            
            490,588
            
            
            
            6,003,780Operating
      loss
            
            
            (4,922,740
            )
            
            
            490,588
            
            
            
            (4,432,152
            )Other
      income and expenses:Finance
      costs
            
            
            (1,501,695
            )
            
            
            303,245
            
            
            
            (1,198,450
            )Interest
      and other income
            
            
            127,233
            
            
            
            -
            
            
            
            127,233Net
      loss
            
            $
            (6,297,202
            )
            
            $
            793,833
            
            
            $
            (5,503,369
            )Net
      loss per share
            
            $
            (0.56
            )
            
            $
            0.07
            
            
            $
            (0.49
            )Weighted
      average shares o/s
            
            
            11,177,756
            
            
            
            11,177,756
            
            
            
            11,177,756Balance
      sheet itemsDebt
      derivative liability
            
            $
            -
            
            
            $
            1,677,172
            
            
            $
            1,677,172Paid-in
      capital
            
            
            26,843,211
            
            
            
            (1,067,056
            )
            
            
            25,776,155Debt
      discount
            
            
            1,226,228
            
            
            
            (76,884
            )
            
            
            1,149,344Ending
      retained earnings
            
            
            (25,434,649
            )
            
            
            262,397
            
            
            
            (25,172,252
            )








56
 Table of Contents







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




Not
applicable.




ITEM 8A. 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,
2007.  Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the disclosure controls and procedures
were not effective given the material weaknesses in the internal control over
financial reporting discussed below and a late Form 8-K filed on January 24,
2008, which should have been filed in December 2007.




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.  The errors that occurred in our financial reporting and
in our accounting for certain complex accounting transactions in 2005, 2006 and
2007 are the result of material weaknesses in our accounting controls.  In
the past, we have not taken the time to complete an SEC and GAAP disclosure
checklist and we have had insufficient oversight of the Chief Financial
Officer.  In addition, our equity shares in our financial records for
2007 were not reconciled with our transfer agent’s share ledger until the
inconsistencies were detected in the audit process.




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, 2007. 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.  As a result of the material
weaknesses described above, management believes that, as of December 31, 2007,
our internal control over financial reporting was not effective based on those
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 these material weaknesses in internal control
over financial reporting with respect to future periods by hiring Bruce Shepard,
a former audit partner with PricewaterhouseCoopers LLP, as our chief financial
officer on August 1, 2006, 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 holding an audit
committee meeting prior to each annual and quarterly report being filed with the
SEC, 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,






57
 Table of Contents






all of
which procedures were implemented prior to the filing of this
report.  With respect to disclosure controls and procedures relating
to timely filing of Form 8-Ks, management plans to train its compliance officer
in, and assign him the responsibility of indentifying, the events requiring
Form 8-K reports, and develop procedures for communications on a timely basis
between him and the person in management with the information necessary to make
these determinations.




ITEM 8B.OTHER INFORMATION.




None.











58
 Table of Contents


PART
III




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




Executive
Officers and Directors




The
following table sets forth certain information regarding our executive officers
and directors.




Name
            
            Age
            
            PositionRussell
      R.
      Roth
            
            61
            
            ChairmanRichard
      H. Irvine(1)(2)
            
            66
            
            Vice-ChairmanJon
      D. Berkley (3)
            
            43
            
            Director,
      Chief Executive Officer and PresidentKyleen
      E. Cane(1)(2)
            
            53
            
            DirectorTerry
      L. Caudill(2)(3)
            
            60
            
            DirectorRobert
      M. McMonigle(1)
      (3)
            
            63
            
            DirectorZak
      Khal
            
            44
            
            Chief
      Operating Officer and SecretaryBruce
      Shepard
            
            58
            
            Chief
      Financial Officer and TreasurerTimothy
      P.
      Britt
            
            50
            
            Chief
      Technical Officer and Chief Information
Officer




(1)
Member of the Compensation and Stock Option Committee.




(2)
Member of the Audit Committee.




(3)
Member of the Corporate Governance and Nominating Committee.




Russell R. Rothhas served as
our Chairman since April 1998 and has previously served as our Chief Executive
Officer until March 2007, as our Chief Financial Officer and Treasurer until
July 2006 and as our Secretary until October 2006.  Mr.Roth was the feature
writer, editor, and co-owner of the Las Vegas Investment Report and managed
portfolios for a few select individuals. He served as President of National
Investment & Tax Managers, Inc. from September 1994 to April 1996. Mr.Roth was Chief Financial
Officer of Sotheby’s Holdings, Inc., an art auction company, from January 1987
to April 1993.




Richard H. Irvinehas served
as our Vice-Chairman since March 2007 and as a director of our company since
January 2001. Currently, Mr.Irvine is retired. From
April 2004 to April 2005, Mr. Irvine served as Senior Vice President, North
America for Bally’s Gaming. From January 2002 through January 2004, Mr.Irvine served as Vice
President of Sales for A. C. Coin, a gaming company headquartered in Atlantic
City, New Jersey. Mr.Irvine served as Chief
Operating Officer and Executive Vice President of Planning and Development for
GameTech International, Inc. from February 1999 through November 2001. Mr.Irvine served as
President and Chief Operating Officer of Mikohn Gaming Corporation from July
1995 until September 1998. From 1993 to 1995, Mr.Irvine served as Senior
Vice President – Marketing and Entertainment for Boomtown, Inc. Mr.Irvine was Vice
President of Marketing for worldwide Walt Disney attractions from 1991 to 1993.
Mr. Irvine has served as a director of GameTech International, Inc. since
September 2005.






59
 Table of Contents






Jon D. Berkleyhas served as
our Chief Executive Officer, President and a director of our company since June
2007. Prior to joining us, Mr. Berkley served as Senior Vice President and
BUSINESS Manager of Global Gaming and Lottery for TransAct Technologies from
March 2003 to June 2007.   From January 2001 to March 2003, Mr.
Berkley acted as Chief Executive Officer for Tech-I-Bank, Wellzone.com, and
Display America. Mr. Berkley holds a Bachelor’s Degree in Economics from
Southern Methodist University and a Masters Degree in Business Administration
from Darden School at the University of Virginia, and he is a member of the
Board of Directors and Executive Committee of the Gaming Standards
Association.




Kyleen E. Canehas served as
a director of our company since July 2001.  Since 1997, Ms. Cane has
maintained a securities law practice at the firm of Cane Clark, LLP in Las
Vegas, Nevada. Cane Clark, LLP has provided legal services to us from time to
time since 2000. From May 1989 to June 2001, Ms. Cane served as the President
and Chief Executive Officer of Tele-Lawyer, Inc., a company that was
subsequently acquired by Legal Access Technologies, Inc., a publicly reporting
Nevada corporation in 2001. From June 2001 until December 2004, Ms. Cane served
as Chairman and Chief Executive Officer of Legal Access Technologies,
Inc.




Terry L. Caudillhas served
as a director of our company since July 2006.  Since August 2003,
Mr.Caudill has
owned and served as President, Treasurer, Secretary, and director of Four Queens
Hotel and Casino in downtown Las Vegas, Nevada.  Mr.Caudill also currently
owns the Magoo’s Gaming Group, which operates 14 full service restaurants and
gaming bars. From 1983 to 1994, Mr.Caudill worked for
Circus Circus Enterprises, Inc., the predecessor of the Mandalay Resort Group,
in various positions including internal auditor, Corporate Vice President and
Chief Accounting Officer, and Corporate Treasurer.




Robert M. McMoniglehas
served as a director of our company since November 2006.  Mr.McMonigle spent 17 years
with International Game Technology, 13 years of which he served as the Executive
Vice President of Sales, leading the company through worldwide gaming
development and a driving force behind domestic and international sales. In
2003, Mr.McMonigle
joined American Gaming & Electronics as its President and Chief Operating
Officer.  Mr.McMonigle later founded
Roger Enterprises, a Nevada-based novelty sign company. Mr.McMonigle also consults
in sales and marketing activities for Aristocrat Technologies.




Zak Khalhas served as our
Chief Operating Officer since July 2005 and as our Secretary since October 2006.
Mr. Khal served as our President from July 2005 until October 2006 and as our
Vice President of Operations from 2001 to 2004.  From April 1994
through September 2001, Mr. Khal held a variety of positions with Park Place
Entertainment, which develops, owns, and operates gaming facilities, including
the following: Director of Operations at Park Place Corporate; Assistant Vice
President of Casino Operations and Marketing, and Director of Casino
Administration at Paris/Bally’s; Games Manager, Casino Administrator, and Senior
Operations Analyst at Las Vegas Hilton; and Senior Internal Auditor at Hilton
Hotels Corporation.




Bruce A. Shepard has served
as our Chief Financial Officer since August 2006 and as our Treasurer since
October 2006.  Mr. Shepard served as our Interim Chief Executive
Officer and Interim President from March 2007 until replaced by Mr. Berkley in
June 2007.  From July 1989 to July 2006, Mr. Shepard was a partner
with PricewaterhouseCoopers LLP in Portland, Oregon. As the head of the Private
Companies Section practice, Mr. Shepard worked closely with privately held
businesses, assisting them as a proactive business advisor with acquisitions and
divestitures, corporate financings, and strategic plans, and public company
clients with initial public offerings, secondary offerings, and regulatory SEC
filings.




Timothy P. Britthas served
as our Chief Technical Officer and Chief Information Officer since March
2008.  From January 2006 to March 2008, Mr. Britt served in various
capacities, including as Uber Architect, Director of Innovation and IT Strategy
for Harrah’s Entertainment, Inc. His prior accomplishments include acting as
President/CTO of Paradigm Gaming Systems which he sold to Konami in 2001 and
continued as Senior VP of Konami Systems Division until 2003. Mr. Britt is a
well known and accomplished Gaming Technologist who has also served as a
consultant/independent innovator to General Electric, Oracle, and
Apple.






60
 Table of Contents




Board
Composition




Our Board
of Directors currently consists of six members: RussellR.Roth, Jon D. Berkley,
KyleenE.Cane, TerryL.Caudill, RichardH.Irvine, and RobertM.McMonigle. Unless the
director resigns or is removed, each director serves until the next annual
meeting of stockholders, at which time the director is re-elected. There are no
family relationships among our directors and executive officers. Our Board of
Directors has determined that Ms. Cane, Mr. Irvine, Mr. Caudill and Mr.
McMonigle are currently independent under the listing standards of the Nasdaq
Global Market (Nasdaq).




During
2007, our Board of Directors held nine regularly scheduled meetings and no
special meetings.  Each member of our Board of Directors attended at
least 75% of our regularly scheduled meetings and special
meetings.  Our Board of Directors also took action by written consent
on three occasions.




Board
Committees




Our Board
of Directors has the authority to appoint committees to delegate the authority
of the full Board of Directors to perform certain functions. Our Board of
Directors currently has an Audit Committee, a Compensation and Stock Option
Committee, and a Corporate Governance and Nominating Committee.




Audit
Committee




We are
not required to but nevertheless have an Audit Committee that oversees our
accounting, reporting, and financial control practices. Our Board of Directors
has adopted an Audit Committee charter setting forth the responsibilities of the
audit committee, which includes the following:




·
            overseeing
      and monitoring our accounting, financial reporting processes, audits, and
      the integrity of our financial
statements;




·
            appointing
      and overseeing the work of our independent accountants and reviewing the
      adequacy of our system of overseeing the independent accountant’s
      qualifications, independence, and
performance;




·
            assisting
      our Board of Directors in the oversight and monitoring of our compliance
      with legal and regulatory
requirements;




·
            reviewing
      our internal accounting and financial controls;
  and




·
            reviewing
      our audited financial statements and reports and discussing the financial
      statements and reports with management, including any significant
      adjustments, management judgments and estimates, new accounting polices,
      and disagreements with management.




The
members of our Audit Committee are Terry L. Caudill, Richard H. Irvine, and
Kyleen E. Cane.  Mr. Caudill serves as the chairman of the Audit
Committee. Our Board of Directors has determined that each of the members of our
Audit Committee is “independent’’ under the Nasdaq independence requirements
applicable to audit committees.  We are not listed on Nasdaq but are
required by SEC rules to select a standard for determining independence for
disclosure purposes.  Our Board of Directors has determined that Mr.
Caudill would qualify as an “audit committee financial expert’’ under the rules
of the SEC.






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During
2007, our Audit Committee held two regularly scheduled meetings and no special
meetings.  Each member of our Audit Committee attended at least 75% of
our regularly scheduled meetings and special meetings.  Our Audit
Committee also took no action by written consent.




Compensation
and Stock Option Committee




Our
Compensation and Stock Option Committee reviews the performance and development
of management in achieving corporate goals and objectives and assures that our
senior executives are compensated in a manner consistent with our corporate
strategy, competitive practice, and the requirements of the appropriate
regulatory bodies. Toward that end, the Compensation and Stock Option Committee
oversees, reviews, and administers all compensation, equity, and employee
benefit plans and programs. Currently, our Compensation and Stock Option
Committee has no existing policy with respect to the specific relationship of
corporate performance to executive compensation. Our Compensation and Stock
Option Committee plans to set executive compensation to attract and retain high
quality and experienced individuals and to align the interests of management and
stockholders by providing executives with equity incentives. Our Board of
Directors has adopted a Compensation and Stock Option Committee charter setting
forth the responsibilities of the Compensation and Stock Option Committee, which
includes the following:




·
            reviewing
      and approving compensation
strategy,




·
            reviewing
      and determining the compensation of executive officers and non-employee
      directors, and




·
            administering
      our equity incentive plans.




The
members of our Compensation and Stock Option Committee are Kyleen E. Cane,
Robert M. McMonigle, and Richard H. Irvine. Ms. Cane serves as the chairman of
the Compensation and Stock Option Committee. Our Board of Directors has
determined that each of the members of our Compensation and Stock Option
Committee is “independent’’ as required by Nasdaq standards.




During
2007, our Compensation and Stock Option Committee held one regularly scheduled
meeting and no special meetings.  Each member of our Compensation and
Stock Option Committee attended the one meeting held.  Our
Compensation and Stock Option Committee also took no action by written
consent.




Corporate
Governance and Nominating Committee




The
purpose of the Corporate Governance and Nominating Committee is to identify
qualified individuals to become members of our Board of Directors, select the
director nominees to be presented for election at each annual meeting of
stockholders, regularly develop, review, and recommend to the board a set of
corporate governance policies applicable to us, and provide oversight for the
evaluation of the performance of the board. Our Board of Directors has adopted a
Corporate Governance and Nominating Committee charter setting forth the
responsibilities of the Corporate Governance and Nominating Committee which,
among other functions, include:




·
            nominating
      and qualifying directors,




·
            identifying
      and recommending appointees to serve on key
  committees,




·
            reviewing
      and recommending changes to the size of the Board of Directors,
      and




·
            assessing
      and evaluating corporate governance
principles.






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The
Corporate Governance and Nominating Committee identifies individuals qualified
to stand for re-election or to become new members of the Board of Directors by
reviewing the candidate’s qualifications, expertise, and characteristics, as
well as the candidate’s availability and willingness to serve. A candidate for
nomination for the Board of Directors must have the following minimum
qualifications:




·
            the
      candidate must demonstrate integrity, accountability, informed judgment,
      financial literacy, creativity, and
vision;




·
            the
      candidate must be prepared to represent the best interests of all of our
      stockholders, not just those of one particular
    constituency;




·
            the
      candidate must have a record of professional accomplishment in his or her
      chosen field; and




·
            the
      candidate must be prepared and able to participate fully in board of
      director  activities, including membership on board
      committees.




In
addition to the above guiding qualifications, the Corporate Governance and
Nominating Committee’s decisions regarding director nominations are based upon
the belief that it is important to have directors from various backgrounds and
professions to assure that the Board of Directors has a wealth of experience
from which to base its decisions. Consistent with this philosophy, in addition
to the minimum standards set forth above, business and managerial experience and
an understanding of financial statements are very important.




The
members of our Corporate Governance and Nominating Committee are Robert M.
McMonigle, Terry Caudill and Jon D. Berkley.  Mr. McMonigle serves as
chairman of the Corporate Governance and Nominating Committee. Our Board of
Directors has determined that each member, except Mr. Berkley, of our Corporate
Governance and Nominating Committee is “independent’’ under the Nasdaq
independence requirements applicable to corporate governance and nominating
committees.




During
2007, our Corporate Governance and Nominating Committee held no regularly
scheduled meetings and no special meetings. Our Corporate Governance and
Nominating Committee also took no action by written consent.




Section
16(a) Beneficial Ownership Reporting Compliance




Section 16(a)
of the Exchange Act requires our directors and officers, and persons who
beneficially own more than 10% of a registered class of our equity securities,
to file reports of beneficial ownership and changes in beneficial ownership of
our securities with the SEC on Forms 3, 4 and 5.  Officers, directors
and greater than 10% stockholders are required by SEC regulation to furnish us
with copies of all Section 16(a) forms they file.




Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
during the year ended December 31, 2007, and upon a review of Forms 5 and
amendments thereto furnished to us with respect to the year ended December 31,
2007, or upon written representations received by us from certain reporting
persons that no Forms 5 were required for those persons, we believe that during
the fiscal year ended December 31, 2007, such reporting persons complied
with the filing requirements of Section 16(a), except for Stephen A.
Crystal with respect to the filing of two Form 4’s, Bruce A. Shepard with
respect to the filing of two Form 4’s, Richard H. Irvine with respect to the
filing of one Form 4 and Russell R. Roth with Respect to the filing of one Form
4.  Such Form 4’s were subsequently filed.







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Code
of Business Conduct and Ethics




We have
adopted a Code of Business Conduct and Ethics, or the Code of Conduct, that
applies to all of our directors, officers, and employees. The Code of Conduct is
available upon written request to Las Vegas Gaming, Inc., Attention: Secretary,
4000 West Ali Baba, Suite D, and Las Vegas, Nevada 89118. The Audit Committee of
the Board of Directors is responsible for overseeing the Code of Conduct. Our
Board of Directors must approve any waivers of the Code of Conduct for directors
and executive officers.













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ITEM 10. EXECUTIVE
COMPENSATION.




The
compensation of our executive officers is administered by our Compensation and
Stock Option Committee.  In particular, this committee establishes the
compensation of our executive officers and reviews the performance and
development of our executive officers in achieving corporate goals and
objectives.  Generally, the compensation of our executive officers
consists of two cash components, base salary and year-end bonus, and one
long-term incentive component, stock options.  The base salary and
year-end bonus are designed to compensate the executive for individual
performance and for overall company performance.  The stock options
are granted to aid in the retention of executive officers and are designed to
align the interests of executive officers with those of our
stockholders.




Summary
Compensation Table




The
following table sets forth, for the periods indicated, compensation for services
rendered in all capacities to us for the period indicated, received by those
serving as our Chief Executive Officer and our two most highly compensated
executive officers who served as executive officers as of December 31,
2007.





Name
      and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
              Awards
              ($)
            
            Option
      Awards
              ($)
            
            All
      Other Compen-sation(1)
              ($)
            
            Total(2)
              ($)Russell
      R. Roth(3)
            
            2007
            
            135,729
            
            -
            
            -
            
            -
            
            -
            
            135,729Chief
      Executive Officer and Chairman
            
            2006
            
            125,630
            
            120,000
            
            -
            
            -
            
            -
            
            245,630Jon
      D. Berkley(4)
            
            2007
            
            142,269
            
            -
            
            -
            
            62,160
            
            -
            
            204,229Chief
      Executive Officer and PresidentZak Khal(1)
            
            2007
            
            200,000
            
            -
            
            -
            
            -
            
            15,308
            
            215,308Chief
      Operating Officer
            
            2006
            
            176,931
            
            -
            
            -
            
            -
            
            -
            
            176,931Bruce
      A. Shepard(5)
            
            2007
            
            200,000
            
            -
            
            100,000
            
            29,448
            
            -
            
            329,448Chief
      Financial Office and Treasurer





(1)
            In
      terms of perquisites, Mr. Khal is the only person in the table above that
      receives a perquisite, where said perquisite relates to the use of a
      vehicle leased by us.




(2)
            Since
      the executive officers did not receive any non-equity incentive plan
      compensation or any nonqualified deferred compensation earnings, we have
      intentionally omitted these columns from this
  table.




(3)
            On
      March 13, 2007, Mr. Roth resigned as our Chief Executive Officer, but
      remains as our Chairman.  In 2006, we issued to Mr. Roth
      warrants to purchase 160,000 shares of Common Stock Series
    A.






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(4)
            Mr.
      Berkley assumed the position of Chief Executive Officer and President in
      June 2007.  In 2007, we issued to Mr. Berkley options to
      purchase 400,000 shares of Common Stock Series
  A.




(5)
            In
      March 2007, we issued a stock bonus award of 50,000 shares of Common Stock
      Series A to Mr. Shepard for serving as interim Chief Executive Officer and
      President. In August 2007, we issued options to purchase 200,000 shares of
      Common Stock Series A to Mr. Shepard.  Mr. Shepard did not earn
      compensation in excess of $100,000 in
2006.




Employment
Arrangements




All
employees, including executive officers, are required to execute an employee
invention assignment and confidentiality agreement. In addition, we have agreed
to severance arrangements with all executive officers that provide for the
payment of six months of base salary following termination of employment for
other than cause.




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




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




Stock
Option Plan (2000)




In 2000,
our Board of Directors adopted Stock Option Plan (2000).  The plan was
amended by our Board of Directors and approved by our stockholders in November
2007.  Pursuant to the plan, we are authorized to issue options to
officers, directors, employees and consultants to purchase an aggregate of
2,500,000 shares of Common Stock Series A. As of December 31, 2007, we have
issued options to purchase 1,139,400 shares of Common Stock Series A and
have 1,360,600 shares of Common Stock Series A reserved for issuance under
the plan.




The plan
is administered by our Compensation and Stock Option Committee. The exercise
price shall be determined at the time of grant and shall not be less than 85% of
the fair value of our Common Stock Series A. In the case of any option granted
to an employee possessing more than 10% of the total voting power of our Common
Stock Series A, the exercise price shall not be less than 110% of the fair value
of our Common Stock Series A. Unless otherwise determined by our Compensation
and Stock Option Committee, each option shall expire upon the earlier of ten
years from the date of grant; five years from the date of grant for an option
holder who possesses more than 10% of the voting power of our Common Stock
Series A; three months after the termination of the option holder’s status as an
officer, director, employee, or consultant; and one year after the death or
disability of the option holder. The plan may be amended by our Board of
Directors without stockholder approval unless the amendment increases the total
number of shares reserved under the plan, changes the class of persons eligible
to receive options under the plan, reduces the exercise price, extends the term
of the option, or adversely affects any of the then outstanding
options.






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Outstanding
Equity Awards At Fiscal Year-End




The
following table sets forth certain information with respect to unexercised stock
options (including warrants) held by our named executive officers as of December
31, 2007.




Option/Warrant
      AwardsName
            
            Number
      of Securities
              Underlying
              Unexercised
              Options/
      Warrants
              (#)
              Exercisable
            
            Number
      of
              Securities
              Underlying
              Unexercised
              Options/
      Warrants
              (#)
              Unexercisable
            
            Option/Warrant
              Exercise
              Price
              ($)
            
            Option/Warrant
              Expiration
              DateRussell
      R. Roth
            
            25,000
            
            -
            
            $2.00
            
            05/01/2008Russell
      R. Roth
            
            160,000
            
            -
            
            $1.00
            
            12/31/2009Russell
      R. Roth
            
            21,500
            
            -
            
            $3.00
            
            03/01/2010Jon
      D. Berkley
            
            100,000
            
            300,000
            
            $5.00
            
            06/10/2012Zak
      Khal
            
            200,000
            
            -
            
            $1.00
            
            08/31/2008Zak
      Khal
            
            15,000
            
            -
            
            $4.55
            
            11/11/2008Zak
      Khal
            
            100,000
            
            
            
            $1.00
            
            12/31/2009Zak
      Khal
            
            99,000
            
            
            
            $3.00
            
            05/09/2010Bruce
      Shepard
            
            166,667
            
            83,333
            
            $3.00
            
            06/13/2011Bruce
      Shepard
            
            50,000
            
            150,000
            
            $5.00
            
            06/13/2011





Director
Compensation




The
following table sets forth certain information with respect to stock options and
warrants granted to the members of our Board of Directors outstanding as of
December 31, 2007.  The members of our Board of Directors were not
issued any equity incentive plan awards or any nonqualified deferred
compensation earnings as of December 31, 2007.




Name
            
            Fees
      Earned or Paid in Cash
              ($)
            
            Stock
      Awards
              ($)
            
            Option
              Awards
              ($)
            
            All
      Other Compen-sation
              ($)
            
            Total
              ($)KyleenE.Cane
            
            21,000
            
            -
            
            -
            
            -
            
            21,000TerryL.Caudill
            
            18,000
            
            -
            
            -
            
            -
            
            18,000RichardH.Irvine
            
            39,000
            
            100,000
            
            -
            
            -
            
            139,000Stephen
      A. Crystal(1)
            
            6,000
            
            -
            
            -
            
            -
            
            6,000RobertM.McMonigle
            
            18,000
            
            -
            
            -
            
            -
            
            18,000Robert
      B. Washington(2)
            
            -
            
            -
            
            -
            
            -
            
            -





(1)
            Mr.
      Crystal resigned as a director in February
2008.




(2)
            Mr.
      Washington resigned as a director in June
2007.




Our
directors who are also our employees do not receive additional compensation for
their service as directors.  Beginning in April 2007, we paid each of
our non-employee directors a monthly director’s fee of $3,000 for serving on our
Board of Directors. At each meeting at which they are elected or re-elected, our
non-employee directors will receive options to purchase 10,000 shares of our
Common Stock Series A.  Our directors will be also reimbursed for
out-of-pocket expenses incurred in attending board and committee
meetings.






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In
exchange for his services as acting chairman of the board, we issued 50,000
shares of Common Stock Series A to Richard Irvine in March 2007.




ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.




The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock Series A as of December 31, 2007 by the
following:




·
            each
      of our executive officers and directors;
and




·
            all
      of our executive officers and directors as a
  group.




As of
December 31, 2007, we were not aware of any person beneficially owning more than
5% of our outstanding Common Stock Series A. Although we have issued to CAMOFI a
warrant to purchase 2,675,000 shares of Common Stock Series A and a senior
secured convertible note convertible into shares of our Common Stock Series A,
CAMOFI is contractually restricted from owning more than 4.99% or our
outstanding shares of common stock.




Name of
      Beneficial Owner (1)
            
            Number of Shares
      Beneficially Owned (2)
            
            Percent Beneficially
      Owned(2)Executive
      Officers and Directors:Russell R.
      Roth (3)
            
            1,265,677
            
            9.9%Zak Khal
      (4)
            
            504,000
            
            3.9%Bruce
      A. Shepard (5)
            
            266,666
            
            2.1%Richard
      H. Irvine (6)
            
            150,000
            
            1.2%Kyleen E.
      Cane (7)
            
            121,000
            
            1.0%Terry
      L. Caudill (8)
            
            110,000
            
            *Jon
      D. Berkley(9)
            
            100,000
            
            *Robert
      M. McMonigle(10)
            
            10,000
            
            *All
      officers and directors as a group (8 persons)(11)
            
            2,527,343
            
            18.6%




*
            Less
      than 1%.




(1)
            The
      address of each officer or director is c/o Las Vegas Gaming, Inc.,
      Attention: Investor Relations, 4000 West Ali Baba, Suite D, Las Vegas,
      Nevada 89118.




(2)
            Unless
      otherwise indicated, the persons named in the table have sole voting and
      investment power with respect to all shares of Common Stock Series A shown
      beneficially owned, subject to applicable community property laws.
      Beneficial ownership is determined in accordance with the rules and
      regulations of the SEC. In computing the number of shares beneficially
      owned by a person and the percentage ownership of that person, shares of
      our Common Stock Series A subject to derivative securities held by that
      person that are exercisable within 60 days of December 31, 2007 are deemed
      outstanding. These shares, however, are not deemed outstanding for the
      purposes of computing ownership of any other person. The percentages shown
      are calculated based on 12,562,653 shares of Common Stock Series A
      outstanding on December 31, 2007.






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(3)
            Represents
      999,177 shares of Common Stock Series A; 60,000 shares of Common Stock
      Series A held by Mr. Roth’s spouse; options to purchase 181,500 shares of
      Common Stock Series A; and warrants to purchase 25,000 shares of Common
      Stock Series A. The beneficial ownership of Mr. Roth does not include 100
      shares of Common Stock Series A beneficially owned by Rebecca Candelaria,
      Mr. Roth’s daughter; 100 shares of Common Stock Series A beneficially
      owned by Danielle Roth, Mr. Roth’s daughter; and 2,500 Common Stock Series
      A beneficially owned by Nancy Roth, Mr. Roth’s
  sister.




(4)
            Represents
      90,000 shares of Common Stock Series A; options to purchase 100,000 shares
      of Common Stock Series A all of which are vested and exercisable; and
      warrants to purchase 314,000 shares of Common Stock Series A all of which
      are vested and exercisable.




(5)
            Represents
      50,000 shares of Common Stock Series A; warrants to purchase 250,000
      shares of Common Stock Series A, of which warrants to purchase 166,666
      shares are vested and exercisable; and options to purchase 200,000 shares
      of Common Stock Series A, of which options to purchase 50,000 shares are
      vested and exercisable.




(6)
            Represents
      60,000 shares of Common Stock Series A; options to purchase 40,000 shares
      of Common Stock Series A; and warrants to purchase 50,000 shares of Common
      Stock Series A.




(7)
            Represents
      121,000 shares of Common Stock Series
A.




(8)
            Represents
      100,000 shares of Common Stock Series A, and warrants to purchase 10,000
      shares of Common Stock Series A, all of which are vested and
      exercisable.




(9)
            Represents
      options to purchase 400,000 shares of Common Stock Series A, of which
      options to purchase 100,000 shares are vested and
    exercisable.




(10)
            Represents
      options to purchase 10,000 shares of Common Stock Series A all of which
      are exercisable.




(11)
            Represents
      1,480,177 shares of Common Stock Series A; options to purchase 481,500
      shares of Common Stock Series A; and Warrants to purchase 565,666 shares
      of Common Stock Series A.




Equity
Compensation Plan Information




The
following table sets forth certain information as of December 31, 2007,
about our equity compensation plans under which our equity securities are
authorized for issuance.




(a)
            
            
            (b)
            
            
            (c)Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders (1)
            
            
            1,139,400
            
            
            $
            3.86
            
            
            
            1,360,600Equity
      compensation plans not approved by security holders (2)
            
            
            5,335,462
            
            
            $
            2.15
            
            
            
            N/ATotal
            
            
            6,174,862
            
            
            $
            2.33
            
            
            
            N/A







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(1)
            Relates
      to stock options issued and remaining for future issuance under our Stock
      Option Plan (2000).




(2)
            Relates
      to stock options and warrants issued to employees, including executive
      officers, directors and consultants pursuant to individual
      agreements.




We have a
stock option program, which consists of the Stock Option Plan (2000), as
amended.  For an explanation of the material features of the Stock
Option Plan (2000) see Item 10, “Stock Option Plan (2000),”
above.  Pursuant to individual agreements, we have also periodically
issued options and warrants to purchase Common Stock Series A to employees,
including executive officers, directors and consultants for services rendered or
as an aid in the retention of executive officers and employees and as a way to
align the interests of executive officers and employees with those of our
stockholders.  The options and warrants granted pursuant to these
individual agreements have generally been on the same terms as those required by
our Stock Option Plan (2000).




ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.




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 have
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 for the first year of installation. The price per machine increases to $2
per day in the second year of installation.  The contract was
cancelable after the first 60 days but remains in force today.  The
terms of the contract are similar to the terms of other early adoption contracts
for our AdVision application, which are substantially less favorable than we
ultimately expect to receive.  The early adoption contracts, however,
provide us with early exposure for our PlayerVision system.




ITEM 13. EXHIBITS.




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






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ITEM 14. PRINCIPAL
ACCOUNTANTS’ FEES AND SERVICES.




Piercy
Bowler Taylor & Kern, Certified Public Accountants, Las Vegas, Nevada, or
PBTK, served as our independent registered public accounting firm and auditors
for fiscal years ended December 31, 2007 and 2006.




Our Board
of Directors is responsible for pre-approving all audit and permissible
non-audit services provided by PBTK, with certain limited
exceptions.  Our Board of Directors has concluded that the non-audit
services provided by PBTK are compatible with maintaining auditor
independence.  All of the services provided and fees charged by PBTK
in 2007 and 2006 were approved by our Board of Directors.




For the
fiscal years ended December 31, 2007 and 2006, the fees for services billed by
PBTK were as follows:




December
      31, 2007
            
            
            December
      31, 2006Audit
      fees
            
            $
            161,378
            
            
            $
            186,939Audit-related
      fees
            
            
            0
            
            
            
            0Tax
      fees
            
            
            11,351
            
            
            
            11,583All
      other fees
            
            
            0
            
            
            
            0$
            172,729
            
            
            $
            198,522




Audit
fees generally included fees related to the audit of our annual financial
statements included in our Annual Reports on Form 10-KSB, the review of our
interim financial statements included in our Quarterly Reports on Form 10-QSB
and the consents and assistance in connection with other filings and public
offering documents filed with the Securities and Exchange
Commission.




Audit
related fees generally included fees for assurance and related services that are
reasonably related to the performance of the audit or review of our financial
statements, such as accounting consultations concerning financial accounting and
reporting standards, internal control reviews and other non-statutory
attestation services.




Tax fees
generally included fees for professional services rendered with respect to tax
compliance, tax advice and tax planning, such as the preparation of tax returns,
claims for refunds, payment planning and tax law interpretation.




All other
fees generally included fees related to miscellaneous, non-recurring
engagements, such as attending meetings and other miscellaneous financial
consulting.






71
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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
      15, 2008







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
      15, 2008Jon
      D. Berkley
            
            Officer
      (Principal Executive Officer)/s/
      Bruce A. Shepard
            
            Chief
      Financial Officer and
            
            April
      15, 2008Bruce
      A. Shepard
            
            Treasurer
      (Principal Financial and Accounting Officer)/s/
      Russell R. Roth
            
            Director
            
            April
      15, 2008Russell
      R. Roth/s/
      Kyleen E. Cane
            
            Director
            
            April
      15, 2008Kyleen
      E. CaneDirectorTerry
      L. Caudill/s/
      Richard H. Irvine
            
            Director
            
            April
      15, 2008Richard
      H. Irvine/s/
      Robert M. McMonigle
            
            Director
            
            April
      15, 2008Robert
      M. McMonigle





72
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EXHIBIT
INDEX




Exhibit
            
            Document
      Description
            
            Page2.1
            
            Stock
      Purchase Agreement dated June 30, 2002, by and among registrant,
      Imagineering Systems, Inc., Ron Mach, and Alicia Mach and Bill
      Williams.
            
            (8)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.
            
            (3)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.
            
            (4)2.4
            
            Agreement
      and Plan of Merger dated January 14, 2005, among the registrant, AdLine
      Gaming, Inc. and AdLine Network, LLC.
            
            (5)3.1
            
            Articles
      of Incorporation, as filed with the Nevada Secretary of State on April 28,
      1998.
            
            (1)3.2
            
            Certificate
      of Amendment to Articles of Incorporation, as filed with the Nevada
      Secretary of State on June 7, 2000.
            
            (2)3.3
            
            Certificate
      of Amendment to Articles of Incorporation, as filed with the Nevada
      Secretary of State on December 8, 2005.
            
            (8)3.4
            
            Certificate
      of Correction, as filed with the Nevada Secretary of State on July 14,
      2006.
            
            (9)3.5
            
            Certificate
      of Designation for Series A Convertible Preferred Stock, as filed with the
      Nevada Secretary of State on July 17, 2006.
            
            (9)3.6
            
            Certificate
      of Designation for Series B Convertible Preferred Stock, as filed with the
      Nevada Secretary of State on July 17, 2006.
            
            (9)3.7
            
            Certificate
      of Designation for Series C Convertible Preferred Stock, as filed with the
      Nevada Secretary of State on July 17, 2006.
            
            (9)3.8
            
            Certificate
      of Designation for Series D Convertible Preferred Stock, as filed with the
      Nevada Secretary of State on July 17, 2006.
            
            (9)3.9
            
            Certificate
      of Designation for Common Stock, as filed with the Nevada Secretary of
      State on July 17, 2006.
            
            (9)3.10
            
            Certificate
      of Designation for Series E Convertible Preferred Stock, as filed with the
      Nevada Secretary of State on December 29, 2006.
            
            (11)3.11
            
            Amended
      Bylaws dated as of July 23, 2001.
            
            (8)10.1
            
            Stock
      Option Plan (2000) dated January 1, 2000.
            
            (16)10.2
            
            First
      Amendment to the Stock Option Plan (2000) dated October 15,
      2007.
            
            (17)10.3
            
            Consulting
      Agreement dated March 31, 2005 by and between registrant and Michael
      Shillan/Shillan Co., LLC.
            
            (8)10.4
            
            Gamblers
      Bonus Sweepstakes Agreement dated March 31, 2005 between registrant and
      United Coin Machine Company.
            
            (8)10.5
            
            License
      Agreement dated July 8, 2005 between registrant and Leroy’s Sports and
      Horse Place.
            
            (8)10.6
            
            License
      Agreement dated July 11, 2005 between registrant and Leroy’s Sports and
      Horse Place.
            
            (8)10.7
            
            Memorandum
      of Understanding for the Use of PortalVision for Account Wagering between
      registrant and Computerized Bookmaking Systems, Inc.
            
            (8)10.8
            
            Waiver
      and Release Agreement dated February 1, 2006 between registrant and AdLine
      Network, LLC.
            
            (6)10.9
            
            Assignment
      Agreement dated February 1, 2006 between registrant and AdLine Network,
      LLC.
            
            (8)






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Exhibit
            
            Document
      Description
            
            Page10.10
            
            Securities
      Purchase Agreement dated March 31, 2006 between registrant and CAMOFI
      Master LDC.
            
            (7)10.11
            
            Senior
      Secured Convertible Note dated March 31, 2006 in favor of CAMOFI Master
      LDC.
            
            (8)10.12
            
            Registration
      Rights Agreement dated March 31, 2006 between registrant and CAMOFI Master
      LDC.
            
            (8)10.13
            
            Warrant
      Agreement dated March 31, 2006 between registrant and CAMOFI Master
      LDC.
            
            (8)10.14
            
            Security
      Agreement dated March 31, 2006 between registrant and CAMOFI Master
      LDC.
            
            (8)10.15
            
            Subsidiary
      Guarantee dated March 31, 2006 between registrant and CAMOFI Master
      LDC.
            
            (8)10.16
            
            Consulting
      Agreement dated April 1, 2006 between registrant and JMC Investments,
      L.L.C.
            
            (8)10.17
            
            Subcontractor
      Purchase Agreement dated May 20, 2006 between registrant and Spectral
      Response, Inc.
            
            (10)10.18
            
            Form
      Offer of Employment.
            
            (8)10.19
            
            Letter
      Agreement with CAMOFI Master LDC dated March 22, 2007.
            
            (12)10.20
            
            Executive
      Employment Agreement of Jon D. Berkley dated May 15, 2007
            
            (14)10.21
            
            Letter
      Agreement with CAMOFI Master LDC dated September 28, 2007.
            
            (15)10.22
            
            Form
      of Non-Qualified Stock Option Agreement
            
            (18)10.23
            
            Form
      of Warrant Agreement
            
            (18)10.24
            
            Letter
      Agreement with CAMOFI Master LDC dated December 21, 2007.
            
            (19)21.1
            
            List
      of Subsidiaries of Registrant.
            
            (13)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.
            
            *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.
            
            *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)
            
            Incorporated
      by reference to the registrant’s Registration Statement on Form 10-SB12G/A
      filed June 19, 2000.(2)
            
            Incorporated
      by reference to the registrant’s Annual Report on Form 10-KSB filed April
      12, 2001.(3)
            
            Incorporated
      by reference to the registrant’s Quarterly Report on Form 10-QSB filed May
      20, 2003.(4)
            
            Incorporated
      by reference to the registrant’s Quarterly Report on Form 10-QSB filed
      August 9, 2003.(5)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed January
      24, 2005.(6)
            
            Incorporated
      by reference to the registrant’s Annual Report on Form 10-KSB filed April
      17, 2006.(7)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed April 7,
      2006.(8)
            
            Incorporated
      by reference to the registrant’s Annual Report, as amended, on Form
      10-KSB/A filed July 19, 2006.(9)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed July 19,
      2006.(10)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed July 28,
      2006.






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Exhibit
            
            Document
      Description
            
            Page(11)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed January
      8, 2007.(12)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed March
      28, 2007.(13)
            
            Incorporated
      by reference to the registrant’s Annual Report on Form 10-KSB filed April
      4, 2007.(14)
            
            Incorporated
      by reference to the registrant’s Quarterly Report on Form 10-QSB filed
      August 14, 2007.(15)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed October
      4, 2007.(16)
            
            Incorporated
      by reference to Appendix A of the registrant’s definitive proxy statement
      dated October 29, 2007 filed with the SEC on October 29,
    2007.(17)
            
            Incorporated
      by reference to Appendix B of the registrant’s definitive proxy statement
      dated October 29, 2007 filed with the SEC on October 29,
    2007.(18)
            
            Incorporated
      by reference to the registrant’s Quarterly Report on Form 10-QSB filed
      November 19, 2007.(19)
            
            Incorporated
      by reference to the registrant’s Current Report on Form 8-K filed January
      24, 2008.
















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