##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-30375
 Las Vegas Gaming, Inc.
 
  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)
 (702) 871-7111
  Title of each class
    
    Name of each exchange on which registered
   
  
  þ o
 o
 o þ
    Common Stock Series A, $.001 par value
    
    9,819,680 shares as of December 31, 2006
  o þ




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##### 



TABLE OF CONTENTS
 ITEM 1. DESCRIPTION OF BUSINESS
    
    
    1ITEM 2. DESCRIPTION OF PROPERTY
    
    
    17ITEM 3. LEGAL PROCEEDINGS
    
    
    17ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    17ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    18ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    21ITEM 7. FINANCIAL STATEMENTS
    
    
    29ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    48ITEM 8A. CONTROLS AND PROCEDURES
    
    
    48ITEM 8B. OTHER INFORMATION
    
    
    48ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT
    
    
    49ITEM 10. EXECUTIVE COMPENSATION
    
    
    55ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
    
    
    59ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
    
    
    61ITEM 13. EXHIBITS
    
    
    62ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
    
    
    63EX-21.1EX-31.1EX-31.2EX-32.1




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PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS.
 Overview
    AdVision
    
    
    PortalVision
    
    
    PromoVision
    
    
    SlottoVision
    
    
    WagerVisionTVWhat 
PortalVision Delivers
    
    
    Advertisements or
information through
still images or
full motion video
    
    
    Picture-in-picture on
full screen
television while
playing slot machine
    
    
    Promotional
opportunities to
patrons
    
    
    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
    
    
    Targeted
promotional content
to patrons
    
    
    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
    
    
    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
    
    
    Fee for each
promotional ticket
issued
    
    
    Installation fees,
activation fees, and
share of revenue
    
    
    Fee for providing
ability to deliver
additional wagers
 -1-




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Industry Overview
 Profile of the
American Casino Gambler: Harrahs Survey 2006
   
    
    Increased popularity and social acceptance of gaming as a leisure activity.
According to the 2006 State of the States: The AGA Survey of Casino Entertainment
presented 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.
    
    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.
  Our Strategy
  
    
    Increased Revenue Potential for Operators.We plan to stress the ability of our
PortalVision system to provide gaming operators with the opportunity to increase
significantly the earning power and functionality of their gaming machines. Since our
PortalVision system
 -2-




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directly interfaces with the existing video, audio, printing, and accounting
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.
    
    Compelling Patron Experience.We plan to offer PortalVision as a single multimedia
delivery system for a wide range of content directly on the existing screens of gaming
machines. By adding PortalVision, 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 PortalVision, 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 PortalVision to interface with the existing video, audio, printing, and
accounting functions of gaming machines. In addition, we can adapt PortalVision 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 generally 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.
    
    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 PortalVision 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 PortalVision system. To date, we have designed our
PortalVision system to deliver advertisements, promotional materials, and wagering
opportunities. Since PortalVision engages the existing video, audio, printing, and
accounting functions of the gaming machine, we believe that our PortalVision system can
be used as a platform to deliver a wide array of multimedia or gaming content directly
to patrons.
  PortalVision System
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AdVision and PortalVision TV
     PromoVision
   
    
    first, the operator specifies the events that will trigger PromoVision, such as a
four-of-a-kind or better;
    
    second, upon the occurrence of the specified event, PromoVision 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
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
    
    fourth, the gaming machine returns to its original state.
    SlottoVision
   
    
    first, during the cash-out process, SlottoVision 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.
   WagerVision
  -5-




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Other Applications
  Casino Games
  Nevada Numbers
    -6-




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The Million Dollar Ticket
  Super Bonanza Bingo
  Keno and Bingo Systems and Supplies
   Other Businesses
  
    
    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.
    
    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.
  Manufacturing
  -7-




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Marketing and Distribution
 PortalVision
  
    
    Direct Sales Efforts.Through the hiring of additional personnel to our sales and
marketing staff, we will market PortalVision 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 PortalVision.
    
    Targeted Public Relations Campaign.In order to increase the recognition of our
PortalVision system, we will launch an aggressive public relations campaign that will
include attending trade shows, speaking on technology and gaming panels, and
distributing advertisements in trade periodicals and other venues.
   Casino Games
  Keno and Bingo Systems and Supplies.
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Letters of Intent
  
    
    Treasure Island Las Vegas.Treasure Island Las Vegas is a hotel casino located on
the Las Vegas Strip with approximately 90,000 square feet of gaming space.
    
    Four Queens Hotel and Casino.The Four Queens is a hotel casino located in downtown
Las Vegas with approximately 50,000 square feet of gaming space.
    
    Caribbean Cage, LLC.Caribbean Cage is a slot route operator based in Puerto Rico.
    
    American Wagering, Inc.American Wagering, Inc. is the leading supplier of sports
wagering hardware and software to the Nevada gaming industry.
  Competition
 PortalVision System
  
    
    PortalVision uses the existing primary screen of the gaming machine rather than a
smaller secondary video screen;
    
    PortalVision engages the existing audio, printing, and accounting functions of the
gaming machine regardless of the manufacturer;
    
    PortalVision involves no capital cost to gaming operators; and
    
    PortalVision delivers a broad range of functionalities.
   -9-




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Keno and Bingo Systems and Supplies.
  Research and Development
  Intellectual Property and Other Proprietary Rights
  Government Regulation
   -10-




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Overview
 Gaming Devices and Equipment.
 Associated Equipment.
 Regulation of Officers, Directors, and Stockholders.
  Regulation and Licensing  Nevada
   
    
    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;
 -11-




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
    
    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.
     -12-




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Regulation of Security Holders.
   -13-




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Regulation of Capital Stock.
  -14-




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Changes in Control.
  
    
    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.
  License Fees and Taxes.
  -15-




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Other Jurisdictions
   Federal Regulation
  Application of Future or Additional Regulatory Requirements
  Employees
  Corporate History
  -16-




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ITEM 2. DESCRIPTION OF PROPERTY.
  
 ITEM 3. LEGAL PROCEEDINGS.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  -17-




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PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
  Common Stock
   Preferred Stock
   
    
    Series A Convertible Preferred Stock  2,000,000 shares authorized and 536,400
shares outstanding as of December 31, 2006;
    
    Series B Convertible Preferred Stock  350,000 shares authorized and 346,140
shares outstanding as of December 31, 2006;
 -18-




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
    
    Series C Convertible Preferred Stock  100,000 shares authorized and 50,000
shares outstanding as of December 31, 2006;
    
    Series D Convertible Preferred Stock  125,000 shares authorized and 125,000
shares outstanding as of December 31, 2006; and
    
    Series E Convertible Preferred Stock 
3,300,000 shares authorized and 351,000
shares outstanding as of December 31, 2006.
  
    
    first, holders of Series B Convertible Preferred Stock are entitled to receive $5.00
per share;
    
    second, holders of Series A Convertible Preferred Stock and Series C Convertible
Preferred Stock share equal liquidation preference and are entitled to receive $4.00
per share and $5.00 per share, respectively;
    
    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.
    -19-




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Options
  Warrants
  Unregistered Sales of Equity Securities
  
 -20-




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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
 i.e.
    Critical Accounting Policies and Estimates
  Revenue Recognition
  -21-




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Goodwill
  Stock-based Compensation
 Accounting for Stock-based
Compensation Share Based Payment
 Certain Issuances of our Common Stock Series A
  -22-




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Marketable Securities
  Equipment and Software and Depreciation
  Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial
Instruments Accounting for Derivative Instruments and Hedging Activities Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities FASB Statement No. 125
 Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109
 Fair Value Measurements The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of SFAS No. 115,
 Results of Operations
 Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
 Revenue.
   -23-




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Costs and Expenses.
   Other
Operating Expenses
  Finance Costs.
 Interest
and Other Income.
 Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
 Revenue.
  -24-




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Costs and Expenses.
  Other Operating Expenses
  Finance Costs.
 Interest and Other Income.
 Liquidity and Capital Resources
 Cash
  -25-




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Cash Flows
  Capital Expenditures
  
    
    the purchase of LCD monitors associated with the increased placement of Gamblers
Bonus Million Dollar Ticket through United Coin Machine Company for $190,000, and
    
    the purchase of approximately $7.0 million of PCUs for the rollout of our
PortalVision System.
  Sources of Capital
   -26-




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
    
    a Warrant Agreement to purchase 2,500,000 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
our assets, including all goods, all contract rights 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 have declared
effective by the SEC by December 26, 2007, a registration statement for the offer and
sale of 125% of all shares of Common Stock Series A issuable upon conversion of the
CAMOFI Note, issuable 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.
 Classification of Short-Term Obligations Expected to Be
Refinanced
 Outlook
  -27-




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Off Balance Sheet Financing Arrangements
  Qualitative and Quantitative Disclosures about Market Risk
  -28-




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ITEM 7. FINANCIAL STATEMENTS.
 INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    30Consolidated Balance Sheets
    
    
    31Consolidated Statements of Operations
    
    
    32Consolidated Statements of Stockholders Equity
    
    
    33Consolidated Statements of Cash Flows
    
    
    35Notes to Consolidated Financial Statements
    
    
    36
 -29-




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 
 -30-




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LAS VEGAS GAMING, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2005
    
    2006ASSETSCurrent assetsCash
    
    $
    1,672,381
    
    
    $
    1,675,588Investment in marketable securities
    
    
    
    
    
    
    150,806Accounts receivable, net of allowance of $27,516 and $9,096
    
    
    729,590
    
    
    
    466,222Inventories
    
    
    418,015
    
    
    
    514,972Prepaid expenses, deposits and other
    
    
    81,899
    
    
    
    576,090Jackpot reserve deposits
    
    
    4,180,134
    
    
    
    4,154,1907,082,019
    
    
    
    7,537,868Equipment and software, net of accumulated depreciation
of $1,010,503 and $1,329,140
    
    
    613,645
    
    
    
    917,835Other assetsGoodwill
    
    
    955,277
    
    
    
    955,277Other intangible assets, net of accumulated amortization of $215,821 and $616,170
    
    
    833,597
    
    
    
    1,800,066Other long term assets
    
    
    338,536
    
    
    
    116,878$
    9,823,074
    
    
    $
    11,327,924LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable and accrued expenses
    
    $
    776,791
    
    
    $
    1,189,947Current portion of long-term debt
    
    
    588,434
    
    
    
    1,310,874Progressive jackpot liability
    
    
    1,224,719
    
    
    
    1,625,0512,589,944
    
    
    
    4,125,872Long-term debt
    
    
    3,011,163
    
    
    
    3,144,903Conditionally redeemable equityCommon Stock Series A, 75,000 shares
    
    
    25,000
    
    
    
    Series B Convertible Preferred Stock, $.001 par value, 350,000 shares
authorized, 346,140 shares issued and outstanding
    
    
    1,730,700
    
    
    
    1,730,7001,755,700
    
    
    
    1,730,700Stockholders equityConvertible Preferred Stock, $.001 par, 10,000,000 shares authorized:Series A: 2,000,000 shares authorized, 536,400 shares issued and outstanding
    
    
    536
    
    
    
    536Series C : 100,000 shares authorized, 56,000 and 50,000 shares issued and
outstanding
    
    
    56
    
    
    
    50Series D: 125,000 shares authorized, 125,000 shares issued and outstanding
    
    
    125
    
    
    
    125Series E: 3,300,000 shares authorized, 351,000 shares issued and outstanding
    
    
    
    
    
    
    351Common Stock, $.001 par value, 90,000,000 shares authorized:Common Stock Series A: 25,000,000 shares authorized, 8,465,020 and
9,819,680 shares issued and outstanding
    
    
    8,465
    
    
    
    9,820Common Stock: 65,000,000 shares authorized, no shares issued or outstanding
    
    
    
    
    
    
    Deferred compensation
    
    
    (161,805
    )
    
    
    (123,031
    )Additional paid-in capital
    
    
    15,558,130
    
    
    
    21,576,045Less due from officers and stockholders
    
    
    (388,942
    )
    
    
    Deficit
    
    
    (12,550,298
    )
    
    
    (19,137,447
    )2,466,267
    
    
    
    2,326,449$
    9,823,074
    
    
    $
    11,327,924
  -31-




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LAS VEGAS GAMING, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 YEARS ENDED DECEMBER 31, 2005 AND 2006
 2005
    
    2006RevenuesCasino games
    
    $
    1,719,753
    
    
    $
    1,618,801Product sales
    
    
    2,118,032
    
    
    
    1,824,937Other
    
    
    1,865,585
    
    
    
    1,698,4045,703,370
    
    
    
    5,142,142Costs and expensesCasino games
    
    
    1,947,355
    
    
    
    1,601,828Product costs
    
    
    1,434,528
    
    
    
    1,069,383Other
    
    
    1,356,939
    
    
    
    1,345,1274,738,822
    
    
    
    4,016,338Gross operating income
    
    
    964,548
    
    
    
    1,125,804Other operating expensesSelling, general, and administrative
    
    
    2,632,974
    
    
    
    4,748,048Research and development
    
    
    817,455
    
    
    
    940,706Depreciation and amortization
    
    
    444,604
    
    
    
    763,3043,895,033
    
    
    
    6,452,058Operating loss
    
    
    (2,930,485
    )
    
    
    (5,326,254
    )Other income and expenseFinance costs
    
    
    (250,975
    )
    
    
    (1,571,143
    )Interest and other income
    
    
    256,499
    
    
    
    310,248Net loss
    
    $
    (2,924,961
    )
    
    $
    (6,587,149
    )Net loss per share
    
    $
    (0.37
    )
    
    $
    (0.70
    )Weighted average shares outstanding
    
    
    7,903,285
    
    
    
    9,370,991
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LAS VEGAS GAMING, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 YEARS ENDED DECEMBER 31, 2005 AND 2006
 Series A
    
    Series C
    
    Series D
    
    Series EConvertible
    
    Convertible
    
    Convertible
    
    Convertible
    
    Common
    
    Deferred
    
    Additional
    
    Due FromPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    Stock
    
    Compen-
    
    Paid-In
    
    Officer/Stock
    
    Stock
    
    Stock
    
    Stock
    
    Series A
    
    sation
    
    Capital
    
    Stockholder
    
    DeficitBalances, January
1, 2005
    
    $
    541
    
    
    $
    76
    
    
    $
    
    
    
    $
    
    
    
    $
    7,049
    
    
    $
    
    
    
    $
    13,852,317
    
    
    $
    (388,942
    )
    
    $
    (9,625,337
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,924,961
    )Issuance of shares
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    499,750Conversion of
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    9,990Conversion of
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    
    
    
    
    89,820Stock-based
employee
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    596
    
    
    
    (161,805
    )
    
    
    741,733Issuance of common
stock in connection
with acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    399,600Sale of common
stock to
consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,000
    )Conversion of
preferred stock
into common stock
    
    
    (5
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    (80
    )Balances, December
31, 2005
    
    $
    536
    
    
    $
    56
    
    
    $
    125
    
    
    $
    
    
    
    $
    8,465
    
    
    $
    (161,805
    )
    
    $
    15,558,130
    
    
    $
    (388,942
    )
    
    $
    (12,550,298
    )
 -33-




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##### Table of Contents



Series A
    
    Series C
    
    Series D
    
    Series EConvertible
    
    Convertible
    
    Convertible
    
    Convertible
    
    Common
    
    Deferred
    
    Additional
    
    Due FromPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    Stock
    
    Compen-
    
    Paid-In
    
    Officer/Stock
    
    Stock
    
    Stock
    
    Stock
    
    Series A
    
    sation
    
    Capital
    
    Stockholder
    
    DeficitBalances, January
1, 2006
    
    $
    536
    
    
    $
    56
    
    
    $
    125
    
    
    $
    
    
    
    $
    8,465
    
    
    $
    (161,805
    )
    
    $
    15,558,130
    
    
    $
    (388,942
    )
    
    $
    (12,550,298
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,587,149
    )Exercise of
warrants and
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520
    
    
    
    
    
    
    
    684,730Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,088,652Stock-based
employee
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (102,243
    )
    
    
    87,835Vesting of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,017Elimination of
conditionally
redeemable equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    24,925Conversion of
preferred stock
into common stock
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    (24
    )Issuance of common
stock in connection
with technology acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    1,399,300Issuance of common
stock to
consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    219,890Return of
common stock by
officer/stockholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    (242,042
    )
    
    
    258,942Payment from
officer/stockholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130,000Sale of Series
E Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    351
    
    
    
    
    
    
    
    
    
    
    
    1,754,649Balances, December
31, 2006
    
    $
    536
    
    
    $
    50
    
    
    $
    125
    
    
    $
    351
    
    
    $
    9,820
    
    
    $
    (123,031
    )
    
    $
    21,576,045
    
    
    $
    
    
    
    $
    (19,137,447
    )
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LAS VEGAS GAMING, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 YEARS ENDED DECEMBER 31, 2005 AND 2006
 2005
    
    2006Operating activitiesNet loss
    
    $
    (2,924,961
    )
    
    $
    (6,587,149
    )Investment in marketable security received from licensing
    
    
    
    
    
    
    (150,806
    )Depreciation and amortization of equipment and software
    
    
    444,604
    
    
    
    772,167Amortization of debt issuance costs and intangibles
    
    
    210,087
    
    
    
    1,496,633Stock-based compensation
    
    
    502,899
    
    
    
    279,801Other
    
    
    1,584
    
    
    
    (191,686
    )Changes in operating assets and liabilitiesAccounts receivable
    
    
    (103,576
    )
    
    
    263,368Inventories
    
    
    109,530
    
    
    
    (96,957
    )Prepaid expenses, deposits and other
    
    
    15,182
    
    
    
    (568,480
    )Jackpot reserve deposits
    
    
    (187,454
    )
    
    
    25,944Accounts payable and accrued expenses
    
    
    62,532
    
    
    
    500,905Progressive jackpot liability
    
    
    243,083
    
    
    
    400,332Net cash used in operating activities
    
    
    (1,626,490
    )
    
    
    (3,855,928
    )Investing activitiesBusiness acquisition
    
    
    (502,749
    )
    
    
    Purchase of property and equipment
    
    
    (241,674
    )
    
    
    (622,826
    )Acquisition of intangible assets
    
    
    
    
    
    
    (20,000
    )Collection of receivable from officer/stockholder
    
    
    8,573
    
    
    
    155,179Net cash used for investing activities
    
    
    (735,850
    )
    
    
    (487,647
    )Financing activitiesProceeds from litigation settlements
    
    
    659,992
    
    
    
    178,440Proceeds from issuance of Senior Secured Convertible
Notes
    
    
    3,000,000
    
    
    
    2,000,000Debt issuance costs
    
    
    (475,045
    )
    
    
    (167,000
    )Proceeds from other debt borrowings
    
    
    324,185
    
    
    
    Repayment of other debt borrowings
    
    
    (625,580
    )
    
    
    (7,441
    )Sale of common and preferred stock
    
    
    465,000
    
    
    
    1,755,000Exercise of warrants
    
    
    100,000
    
    
    
    587,782Net cash provided by financing activities
    
    
    3,448,552
    
    
    
    4,346,781Net increase in cash and cash equivalents
    
    
    1,086,212
    
    
    
    3,207Cash and cash equivalents, beginning of period
    
    
    586,169
    
    
    
    1,672,381Cash and cash equivalents, end of period
    
    $
    1,672,381
    
    
    $
    1,675,588Non-cash investing and financing activitiesCommon Stock
Series A issued for business and technology acquisitions
    
    $
    400,000
    
    
    $
    1,400,000Elimination of conditionally redeemable equity
    
    
    
    
    
    
    25,000Issuance of warrants
    
    
    239,430
    
    
    
    2,140,360Exercise of stock warrants and options offset against
accrued expenses
    
    
    
    
    
    
    87,750Conversion of Series C Convertible Preferred Stock to
Common Stock Series A
    
    
    105
    
    
    
    30Common Stock Series A acquired from officer/stockholder
offset against receivable from stockholder
    
    
    
    
    
    
    (242,122
    )Other
    
    
    100,000
    
    
    
    Conversion of debt to equity
    
    
    
    
    
    
    10,000
  -35-




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LAS VEGAS GAMING, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Nature of operations:
  
    
    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 PortalVision 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.
  2. Summary of significant accounting policies:
 Principles of consolidation.
 Revenue and cost recognition.
 PortalVision.
 Casino Games.
  -36-




---



##### Table of Contents



Products.
 Other.
 Cash and cash equivalents.
 Other intangible assets
 Use of estimates
 Marketable securities.
 Equipment and software and depreciation.
 Certain issuances of our Common Stock Series A.
 Net loss per share
 -37-




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##### Table of Contents



Stock-based compensation Accounting for Stock-based Compensation , Share Based Payment
  Advertising
 Reclassifications
 3. Jackpot reserve deposits:
  4. Equipment and software
  December 31, 2005
    
    
    December 31, 2006Software
    
    $
    248,911
    
    
    $
    404,946Production equipment
    
    
    1,117,301
    
    
    
    1,484,348Other equipment, furniture, and fixtures
    
    
    257,936
    
    
    
    314,053Leasehold improvements
    
    
    
    
    
    
    43,6271,624,148
    
    
    
    2,246,974Less accumulated depreciation and
amortization
    
    
    1,010,503
    
    
    
    1,329,139$
    613,645
    
    
    $
    917,835
 5. Debt
  -38-




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##### Table of Contents



Classification of Short-Term Obligations Expected to Be Refinanced
 December 31, 2005
    
    
    December 31, 2006Bridge financing
    
    $
    3,000,000
    
    
    $
    3,766,182Settlement due third parties
    
    
    509,992
    
    
    
    678,433Other notes payable
    
    
    89,605
    
    
    
    11,1623,599,597
    
    
    
    4,455,777Less amounts due within one year
    
    
    588,434
    
    
    
    1,310,874$
    3,011,163
    
    
    $
    3,144,903
   -39-




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##### Table of Contents



6. Stockholders Equity
       -40-




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##### Table of Contents



Stock Warrants and Options .
   Shares Reserved for Options and Warrants and
Weighted Average Exercise Price Per Share
 2005
    
    2006Beginning balance
    
    
    3,427,589
    
    
    
    5,132,922$
    2.50
    
    
    $
    2.33Granted (1)
    
    
    1,967,809
    
    
    
    3,400,500$
    1.89
    
    
    $
    1.85Exercised
    
    
    (190,000
    )
    
    
    (520,000
    )$
    0.53
    
    
    $
    1.32Forfeited
    
    
    (72,476
    )
    
    
    (1,551,681
    )$
    3.52
    
    
    $
    1.83Ending balance
    
    
    5,132,922
    
    
    
    6,461,741$
    2.33
    
    
    $
    1.86
 
 (1)
    
    The estimated fair value of shares granted was
$1.00-$2.00 and $4.80-$5.00 during 2005 and 2006,
respectively. -41-




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##### Table of Contents



AverageAverage
    
    
    
    
    
    RemainingExercise
    
    Number
    
    Remaining
    
    Number
    
    Life inPrice
    
    Outstanding
    
    Life in years
    
    Exercisable
    
    yearsOptions
    
    $
    1.00
    
    
    
    362,623
    
    
    
    2.3
    
    
    
    319,667
    
    
    
    2.4$
    2.00
    
    
    
    10,000
    
    
    
    3.9
    
    
    
    10,000
    
    
    
    3.9$
    3.00
    
    
    
    125,900
    
    
    
    3.2
    
    
    
    125,900
    
    
    
    3.2$
    4.55
    
    
    
    43,000
    
    
    
    2.2
    
    
    
    38,000
    
    
    
    2.1$
    5.00
    
    
    
    35,500
    
    
    
    4.9
    
    
    
    18,415
    
    
    
    4.9Warrants
    
    $
    1.00
    
    
    
    1,518,500
    
    
    
    1.4
    
    
    
    1,404,475
    
    
    
    1.2$
    1.48
    
    
    
    2,500,000
    
    
    
    4.3
    
    
    
    2,500,000
    
    
    
    4.3$
    1.15
    
    
    
    130,000
    
    
    
    0.6
    
    
    
    129,987
    
    
    
    0.6$
    2.00
    
    
    
    230,000
    
    
    
    3.3
    
    
    
    173,326
    
    
    
    3.2$
    2.10
    
    
    
    23,809
    
    
    
    3.9
    
    
    
    23,809
    
    
    
    3.9$
    3.00
    
    
    
    1,211,508
    
    
    
    3.3
    
    
    
    791,807
    
    
    
    2.7$
    4.00
    
    
    
    100,000
    
    
    
    3.1
    
    
    
    100,000
    
    
    
    3.1$
    4.55
    
    
    
    68,646
    
    
    
    1.0
    
    
    
    68,646
    
    
    
    1.0$
    5.00
    
    
    
    50,000
    
    
    
    4.9
    
    
    
    16,500
    
    
    
    4.9$
    6.00
    
    
    
    52,255
    
    
    
    1.1
    
    
    
    52,255
    
    
    
    1.16,461,741
    
    
    
    3.1
    
    
    
    5,772,787
    
    
    
    3.0
   Due from Officers/Stockholders .
 Redeemable Preferred Stock Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equity
 -42-




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##### Table of Contents



7. Concentrations, commitments and contingencies:
 Concentrations
     Gaming Regulations and Licensing
  -43-




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##### Table of Contents



December 31, 2005ProgressiveJackpot
    
    
    GrossLiability
    
    
    CommitmentNevada NumbersPresent value of $5.0 million base
progressive jackpot, payable in 20 equal
annual installments using a 4.60% discount
rate, the prevailing 20-year Treasury Bond
rate
    
    $
    3,372,291
    
    
    $
    3,372,291Less portion insured through conventional
insurance providers
    
    
    (2,900,000
    )
    
    
    Other participants
    
    
    (236,146
    )
    
    
    Uninsured portion of base progressive jackpot
    
    
    236,145
    
    
    
    Present value at 4.60% of the $1,197,766
increase to the progressive jackpot meter
    
    
    807,843
    
    
    
    807,843Other Games
    
    
    180,731
    
    
    
    1,180,731$
    1,460,864
    
    
    $
    5,360,865
 December 31, 2006ProgressiveJackpot
    
    
    GrossLiability
    
    
    CommitmentNevada NumbersPresent value of $5.0 million base
progressive jackpot, payable in 20 equal
annual installments using a 4.91% discount
rate, the prevailing 20-year Treasury Bond
    
    $
    3,293,613
    
    
    $
    3,293,613Present value at 4.91% of the $1,306,433
increase to the progressive jackpot meter
    
    
    860,577
    
    
    
    860,577Less portion insured through conventional
insurance providers
    
    
    (2,900,000
    )
    
    
    Other Games
    
    
    32,697
    
    
    
    1,032,697$
    1,286,887
    
    
    $
    5,186,887
 Lease commitments.
 2007
    
    $
    395,7472008
    
    
    322,1472009
    
    
    4,8722010
    
    
    4,8722011
    
    
    2,436$
    730,074
  8. Income taxes
  -44-




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##### Table of Contents



9. Acquisitions
   10. Financial Instruments
  11. Segment Information
    -45-




---



##### Table of Contents



2005
    
    
    2006RevenueCasino Games
    
    $
    1,719,753
    
    
    $
    1,618,801Product Sales
    
    
    2,118,032
    
    
    
    1,824,937Other
    
    
    1,865,585
    
    
    
    1,698,404$
    5,703,370
    
    
    $
    5,142,142Operating income (loss)Casino Games
    
    $
    (227,602
    )
    
    $
    16,973Product Sales
    
    
    683,504
    
    
    
    755,554Other
    
    
    508,646
    
    
    
    353,277Unallocated
    
    
    (3,895,033
    )
    
    
    (6,452,058
    )$
    (2,930,485
    )
    
    $
    (5,326,254
    )Identifiable assetsCasino Games
    
    $
    5,809,723
    
    
    $
    7,219,569Product Sales
    
    
    456,634
    
    
    
    466,536Other
    
    
    496,801
    
    
    
    441,242Unallocated
    
    
    3,059,916
    
    
    
    3,200,577$
    9,823,074
    
    
    $
    11,327,924
  2005
    
    
    2006Capital expendituresCasino Games
    
    $
    94,005
    
    
    $
    272,729Product Sales
    
    
    5,318
    
    
    
    1,300Other
    
    
    92,852
    
    
    
    85,804Unallocated
    
    
    90,501
    
    
    
    262,993$
    282,676
    
    
    $
    622,826
 12. Related Party Transaction
  13. Subsequent Events
  -46-




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i.e.
  -47-




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##### Table of Contents



ITEM 8.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 8A. CONTROLS AND PROCEDURES.
    
 ITEM 8B. OTHER INFORMATION.
  -48-




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##### 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
  Name
    
    Age
    
    PositionBruce Shepard
    
    
    57
    
    
    Interim Chief Executive Officer,
Interim President, Chief Financial
Officer and TreasurerZak Khal
    
    
    43
    
    
    Chief Operating Officer and SecretarySam Johnson
    
    
    41
    
    
    Chief Technical OfficerRussell R. Roth
    
    
    60
    
    
    ChairmanRichard H. Irvine(1)(2)
    
    
    65
    
    
    Vice-ChairmanKyleen E. Cane(1)(2)
    
    
    52
    
    
    DirectorTerry L. Caudill(2)(3)
    
    
    59
    
    
    DirectorStephen Crystal
    
    
    41
    
    
    DirectorRobert M. McMonigle(1)(3)
    
    
    63
    
    
    DirectorRobert B. Washington(3)
    
    
    64
    
    
    Director
 
 (1)
    
    Member of the Compensation and Stock Option Committee.(2)
    
    Member of the Audit Committee.(3)
    
    Member of the Corporate Governance and Nominating Committee. Bruce A. Shepard
 Zak Khal
 Sam Johnson
 -49-




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##### Table of Contents



Russell R. Roth
 Richard H. Irvine
 Kyleen E. Cane
 Terry L. Caudill
 Stephen A. Crystal
 Robert M. McMonigle
 -50-




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##### Table of Contents



Robert B. Washington
 Board Composition
   Board Committees
  Audit Committee
  
    
    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,
 -51-




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##### Table of Contents



management judgments and estimates, new accounting polices, and disagreements with
management.
   Compensation and Stock Option Committee
  
    
    reviewing and approving compensation strategy,
    
    reviewing and determining the compensation of executive officers and non-employee
directors, and
    
    administering our equity incentive plans.
   Corporate Governance and Nominating Committee
  -52-




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##### Table of Contents




    
    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.
  
    
    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.
    Section 16(a) Beneficial Ownership Reporting Compliance
  -53-




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##### Table of Contents



Code of Business Conduct and Ethics
  -54-




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##### Table of Contents



ITEM 10. EXECUTIVE COMPENSATION.
  Summary Compensation Table
  All OtherStock
    
    Option
    
    Compen-Name and Principal
    
    
    
    
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    sation(2)
    
    Total(3)Position(1)
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Russell R. Roth
    
    
    2006
    
    
    
    125,630
    
    
    
    120,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,630Chief Executive
Officer and
    
    
    2005
    
    
    
    133,305
    
    
    
    15,000
    
    
    
    (4)
    
    
    
    
    
    
    
    
    
    
    
    148,305Chairman(4)
    
    
    2004
    
    
    
    125,030
    
    
    
    
    
    
    
    
    
    
    
    (4)
    
    
    
    
    
    
    
    125,030Sam Johnson
    
    
    2006
    
    
    
    235,764
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,764Chief Technical
Officer(5)
    
    
    2005
    
    
    
    201,375
    
    
    
    
    
    
    
    (5)
    
    
    
    (5)
    
    
    
    
    
    
    
    201,3752004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Zak Khal
    
    
    2006
    
    
    
    176,931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,931President and Chief
    
    
    2005
    
    
    
    144,000
    
    
    
    
    
    
    
    (6)
    
    
    
    (6)
    
    
    
    
    
    
    
    144,000Operating
Officer(6)
    
    
    2004
    
    
    
    144,000
    
    
    
    
    
    
    
    
    
    
    
    (6)
    
    
    
    
    
    
    
    144,000John English
    
    
    2006
    
    
    
    215,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,700
    
    
    
    236,047Senior Vice
President(7)
    
    
    2005
    
    
    
    214,965
    
    
    
    
    
    
    
    (7)
    
    
    
    
    
    
    
    2,537
    
    
    
    217,5022004
    
    
    
    56,354
    
    
    
    
    
    
    
    
    
    
    
    (7)
    
    
    
    
    
    
    
    56,354
 
 (1)
    
    Mr. Shepard and Mr. Crystal are not listed in this table as they were employed by us
for only a portion of 2006 and did not earn compensation in excess of $100,000 during 2006.(2)
    
    In terms of perquisites, Mr. English 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. -55-




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##### Table of Contents



(3)
    
    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.(4)
    
    On March 13, 2007, Mr. Roth resigned as our Chief Executive Officer, but remains as our
Chairman. We issued to Mr. Roth 85,000 shares of Common Stock Series A in 2005 and
warrants to purchase 160,000 shares of Common Stock Series A in 2006.(5)
    
    In 2005, we issued to Mr. Johnson 22,500 shares of Common Stock Series A and warrants
to purchase 100,000 shares of Common Stock Series A.(6)
    
    In 2005, we issued to Mr. Khal 50,000 shares of Common Stock Series A and warrants to
purchase 99,000 shares of Common Stock Series A. In 2004, we issued to Mr. Khal warrants
to purchase 100,000 shares of Common Stock Series A in 2004.(7)
    
    On June 11, 2006, Mr. English resigned as an executive officer, but remained as our
Senior Vice President in charge of gaming development. In 2005, we issued to Mr. English
20,000 shares of Common Stock Series A. In 2004, we issued to Mr. English warrants to
purchase 259,000 shares of Common Stock Series A. Employment Arrangements
   Stock Option Plan (2000)
   -56-




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##### Table of Contents



Outstanding Equity Awards At Fiscal Year-End
  Option/Warrant AwardsNumber of
    
    Number ofSecurities
    
    SecuritiesUnderlying
    
    UnderlyingUnexercised
    
    UnexercisedOptions/
    
    Options/
    
    Option/WarrantWarrants
    
    Warrants
    
    Exercise
    
    Option/Warrant(#)
    
    (#)
    
    Price
    
    ExpirationName
    
    Exercisable
    
    Unexercisable
    
    ($)
    
    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
    
    
    
    03/01/2010Sam Johnson
    
    
    125,335
    
    
    
    33,333
    
    
    $
    2.00
    
    
    
    09/19/2010Zak Khal
    
    
    200,000
    
    
    
    
    
    
    $
    1.00
    
    
    
    08/31/2008Zak Khal
    
    
    15,000
    
    
    
    
    
    
    $
    4.55
    
    
    
    11/11/2008Zak Khal
    
    
    75,000
    
    
    
    25,000
    
    
    $
    1.00
    
    
    
    12/31/2009Zak Khal
    
    
    66,000
    
    
    
    33,000
    
    
    $
    3.00
    
    
    
    05/09/2010John English
    
    
    126,000
    
    
    
    84,000
    
    
    $
    1.00
    
    
    
    08/09/2009Bruce Shepard
    
    
    83,333
    
    
    
    166,667
    
    
    $
    3.00
    
    
    
    06/13/2011
 Director Compensation
  Fees Earned
    
    
    
    
    
    
    
    
    
    All Otheror Paid in
    
    Stock
    
    Option
    
    Compen-Cash
    
    Awards
    
    Awards
    
    sation
    
    TotalName
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)Russell R. Roth
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kyleen E. Cane
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Terry L. Caudill
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Stephen Crystal(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard H. Irvine
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    George Kelesis(2)
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Robert M. McMonigle
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Robert B. Washington
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000
 
 (1)
    
    Mr. Crystal resigned as a director in October 2006. -57-




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(2)
    
    Mr. Kelesis resigned as a director in October 2006.   -58-




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##### Table of Contents



ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  
    
    each of our executive officers and directors; and
    
    all of our executive officers and directors as a group.
  Number of Shares
    
    Percent BeneficiallyName of Beneficial Owner(1)
    
    Beneficially Owned(2)
    
    Owned(2)Executive Officers and Directors:Russell R. Roth (3)
    
    
    1,225,677
    
    
    
    12.5
    %Sam Johnson (4)
    
    
    577,017
    
    
    
    5.9
    %Zak Khal (5)
    
    
    471,000
    
    
    
    4.8
    %Stephen A. Crystal(6)
    
    
    403,333
    
    
    
    4.1
    %Kyleen E. Cane (7)
    
    
    143,500
    
    
    
    1.5
    %Terry L. Caudill (8)
    
    
    110,000
    
    
    
    1.1
    %Richard H. Irvine (9)
    
    
    100,000
    
    
    
    1.0
    %Bruce A. Shepard (10)
    
    
    83,333
    
    
    
    *Robert B. Washington(11)
    
    
    10,000
    
    
    
    *Robert M. McMonigle(12)
    
    
    10,000
    
    
    
    *All officers and directors as a
group (10 persons)(13)
    
    
    3,133,860
    
    
    
    31.9
    %
 
 *
    
    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, 2006 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 9,819,680 shares of Common Stock Series A outstanding on December 31,
2006.(3)
    
    Represents 959,177 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. -59-




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##### Table of Contents



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 warrants to purchase Common Stock Series A
beneficially owned by Nancy Roth, Mr. Roths sister, all of which are vested and
exercisable.(4)
    
    Represents 451,682 shares of Common Stock Series A and warrants to purchase 158,668 shares of
Common Stock Series A of which warrants to purchase 125,335 shares are vested and exercisable.(5)
    
    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 of which warrants to purchase 281,000 shares are
vested and exercisable.(6)
    
    Represents 185,000 shares of Common Stock Series A issued to JMC Investments, L.L.C.; 125,000
shares of Common Stock Series A issuable upon conversion of 125,000 shares of Series D
convertible preferred stock issued to JMC Investments, L.L.C.; options to purchase 10,000
shares of Common Stock Series A all of which are vested; and warrants to purchase 250,000
shares of Common Stock Series A of which warrants to purchase 83,333 shares are vested and
exercisable. Mr. Crystal is the manager and member of JMC Investments, L.L.C. and has sole
voting and dispositive power with respect to such shares.(7)
    
    Represents 53,500 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. All
options and warrants were exercised into Common Stock Series A in March 2007.(8)
    
    Represents 100,000 shares of Common Stock Series A and warrants to purchase 10,000 shares of
Common Stock Series A.(9)
    
    Represents 10,000 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 all of
which are vested and exercisable.(10)
    
    Represents warrants to purchase 250,000 shares of Common Stock Series A, of which warrants to
purchase 83,333 shares are vested and exercisable.(11)
    
    Represents warrants to purchase 10,000 shares of Common Stock Series A all of which are
exercisable.(12)
    
    Represents options to purchase 10,000 shares of Common Stock Series A.(13)
    
    Represents 1,909,359 shares of Common Stock Series A; 125,000 shares of Common Stock Series A
issuable upon conversion of 125,000 shares of Series D convertible preferred stock; options to
purchase 356,500 shares of Common Stock Series A; and warrants to purchase 718,000 shares of
Common Stock Series A. -60-




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##### Table of Contents



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 Loans to Executive Officers
   Compensation Arrangements
  Separation Agreement with Gary G. Baldwin
  Acquisitions Involving AdLine Network, LLC
    -61-




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Agreements for Services
   Sale of Series D Convertible Preferred Stock
  Letters of Intent
  
 ITEM 13. EXHIBITS.
  -62-




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES.
    December 31, 2006
    
    
    December 31, 2005Audit fees
    
    $
    150,492
    
    
    $
    55,436Audit-related fees
    
    
    1,318
    
    
    
    14,849Tax fees
    
    
    7,752
    
    
    
    17,600All other fees
    
    
    0
    
    
    
    16,264$
    159,562
    
    
    $
    104,149
      -63-




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##### Table of Contents



SIGNATURES
  Las Vegas Gaming, Inc. (Registrant)By:
    
    /s/ Bruce A. ShepardBruce A. Shepard, Interim Chief Executive Officer,
Interim President, Chief Financial Officer and
Treasurer (Principal Executive Officer and
Principal Financial Officer)Date:
    
    April 2, 2007
  Signature
    
    Title
    
    Date/s/ Bruce A. Shepard

Bruce A. Shepard
    
    Interim Chief Executive Officer, Interim President,
Chief Financial Officer and
Treasurer (Principal Executive Officer
and Principal Financial Officer)
    
    April 2, 2007/s/ Russell R. Roth

Russell R. Roth
    
    Director
    
    April 2, 2007/s/ Kyleen E. Cane

Kyleen E. Cane
    
    Director
    
    April 2, 2007DirectorTerry L. CaudillDirectorStephen Crystal/s/ Richard H. Irvine

Richard H. Irvine
    
    Director
    
    April 2, 2007/s/ Robert M. McMonigle

Robert M. McMonigle
    
    Director
    
    April 2, 2007DirectorRobert B. Washington
 -64-




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##### Table of Contents



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.
    
    
    (10
    )10.2
    
    
    First Amendment to the Stock Option Plan (2000) dated July 27, 2006.
    
    
    (10
    )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
    )
 -65-




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##### Table of Contents



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
    )21.1
    
    
    List of Subsidiaries of Registrant.
    
    
    *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.(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. -66-