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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended June 30, 2004


Commission file number 1-8300

WMS INDUSTRIES INC.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                        
|------------------------------------------------------------------ |  | ---------------------------------------
|Delaware                                                           |  | 36-2814522                             
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                                  
|800 South Northpoint Blvd., Waukegan,
    Illinois                 |  | 60085                                  
|(Address of principal executive offices)                           |  | (Zip Code)                             

Registrants telephone number, including
area code: (847) 785-3000

Securities registered pursuant to
Section 12(b) of the Act:

|                                                   |  |  |  |                        
|-------------------------------------------------- |  |  |  | -----------------------
|                                                   |  |  |  | Name of each Exchange  
|Title of each class                                |  |  |  | on which registered    
|                                                   |  |  |  |                        
|Common Stock, $0.50 par value                      |  |  |  | New York Stock Exchange
|Stock Purchase Rights pursuant to Rights Agreement |  |  |  | New York Stock Exchange

Securities registered pursuant to
Section 12(g) of the Act:None.

Indicate by check
mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing
requirements for the past
90 days.  Yes þ       No o

Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.   þ

Indicate by check
mark whether registrant is an accelerated filer (as defined in
Exchange Act
Rule 12b-2).  Yes þ       No o

The aggregate
market value of the shares of common stock held by
non-affiliates of the registrant, computed by reference to the
closing sales price of the common stock on December 31,
2003, was $744,675,000. Solely for purposes of this calculation,
all shares held by directors and executive officers of the
registrant have been excluded. This exclusion should not be
deemed an admission that these individuals are affiliates of the
registrant. On August 27, 2004, the number of shares of
common stock outstanding (excluding 1,994,955 shares held
as treasury shares) was 30,370,248 shares.

Documents Incorporated By Reference:Portions of the Registrants
definitive proxy statement to be filed on or about
October 28, 2004 with the Securities and Exchange
Commission are incorporated by reference in Part III of
this Report.



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This report contains forward-looking
statements concerning our future business performance, strategy,
outlook, plans, liquidity, pending regulatory matters and
outcomes of contingencies including legal proceedings, among
others. Forward-looking statements may be typically identified
by such words as may, will,
should, expect, anticipate,
seek, believe, estimate, and
intend, among others. These forward-looking
statements are subject to risks and uncertainties that could
cause our actual results to differ materially from the
expectations expressed in the forward-looking statements.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, any or all of our
forward-looking statements may prove to be incorrect.
Consequently, no forward-looking statements may be guaranteed.
Factors that could cause our actual results to differ from
expectations, include the risks set forth under
Item 1. Business and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, among other items in this
report.

Aztec Adventure, Bee Bucks, Bluebird, Classic
TV Game Show Series, CPU-NXT, Double Easy Money, Fairys
Fortune, Grand Hotel, Hot Properties, Instant Winner, Jackpot
Party, Jackpot Stampede, Keepin Up With the Joneses, Life
of Luxury, Milk Money, Money 7s, Money to Burn,
Moneyline, Once Around Deluxe, Pick Your Fortune, Prize Spin,
Puzzle Pays, Quackers, Rakin It In, Reel em In,
Rich Little Piggies, Robin Hoods Sherwood Treasure, Roll
Credits, The Jade Monkey, Toast of the Town, Tour of Stars, Wild
Chance, Wild Wilderness, Winning Recipe, WMS Gamingand X Marks the Spot are
trademarks of our subsidiary WMS Gaming Inc. Product names
mentioned in Item 1. Business 
Products in this report are trademarks of WMS Gaming,
Inc., except where they are licensed. 3 WAY ACTION is a
trademark of Yehia Awada. BOSE is a trademark of Bose
Corporation. HOLLYWOOD SQUARES and THE CENTER SQUARE are
trademarks of King World Productions, Inc. JUMBLE is a trademark
of Tribune Media Services, Inc. MEGAJACKPOTS is a trademark of
International Game Technology, Inc. MEN IN BLACK is a trademark
of Columbia Pictures Industries, Inc. MONOPOLY, SCRABBLE, FREE
PARKING, MR. MONOPOLY, CHANCE and COMMUNITY CHEST are
trademarks of Hasbro, Inc. PAC-MAN and PAC-MAN FRENZY are
trademarks of Namco Ltd. PICTIONARY is a trademark of Pictionary
Incorporated. SURVIVOR is a trademark of Survivor Productions
LLC. MATCH GAME is a trademark of FremantleMedia
Operations BV. POWERBALL is a trademark of the Multi-State
Lottery Association. RAPID ROULETTE is a trademark of Stargames
Corporation Limited and Crown Limited.

PART I

Item 1.     Business.

Development of Our Business

WMS Industries Inc. (WMS) was
incorporated in Delaware on November 20, 1974 under the
name Williams Electronics, Inc. and succeeded to the amusement
game business that had been conducted for almost 30 years
prior to 1974 by our predecessors. For the last five years, our
business has consisted exclusively of the design, manufacture
and marketing of gaming machines and video lottery terminals, or
VLTs.

We conduct our gaming machine business through
our subsidiary, WMS Gaming Inc. (WMS Gaming), which
markets our products under the WMS Gaming trademark. Our fiscal
year begins on July 1 and ends on June 30.

In fiscal 2004, we launched our new generation
game platform, CPU-NXTTM and our new game
cabinet BluebirdTM, and we resumed profitable
quarterly results in the second half of fiscal 2004. For
information about our revenues, net income and assets, see our
consolidated financial statements included in this report and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.

On June 25, 2003, we completed a private
placement of $100 million principal amount of 2.75%
Convertible Subordinated Notes due July 15, 2010. On
July 3, 2003, we issued an additional $15 million of
2.75% Convertible Subordinated Notes upon exercise of the
over-allotment option in the note agreement.

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Our principal executive offices are located at
800 South Northpoint Blvd., Waukegan, Illinois 60085, and our
telephone number is (847) 785-3000. Our Internet website
address is www.wmsgaming.com. Through our Internet website, we
make available free of charge, as soon as reasonably practical
after the information has been filed with or furnished to the
SEC, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to those reports. We will also provide electronic or paper
copies of these reports free of charge upon request to our
principal office, Attention: Treasurer. Information contained on
our website is not part of this report.

Company Overview

We design, manufacture and market innovative
gaming machines and VLTs for the Class III gaming markets,
and we manufacture gaming machines under original equipment
manufacturing agreements, or OEM agreements, with Multimedia
Games, Inc. for the Class II gaming market. There are three
classes of gaming markets as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Class I gaming includes traditional Native
    American social and ceremonial games. Class I gaming is
    regulated exclusively at the Native American tribe level. We do
    not serve this market.                                                                                                                                                    
|
| |  | Class II gaming includes bingo, electronic
    aids to bingo, and, if played at the same location where bingo
    is offered, pull-tabs and other games similar to bingo.
    Class II gaming is regulated by the individual Native
    American tribe, with the National Indian Gaming Commission
    having oversight of the tribal regulatory process.
|
| |  | Class III gaming includes all other forms of
    gaming that are not included in either Class I or
    Class II, including slot machines.                                                                                                                                                                                                                

We seek to develop gaming machines that offer
high entertainment value and generate greater revenues for
casinos and other gaming machine operators than the gaming
machines offered by our competitors. Our gaming machines feature
advanced graphics, digital sound and engaging game themes, and
most incorporate secondary bonus rounds. Some of our games use
licensed, well-recognized brands such as
MONOPOLYTM, HOLLYWOOD
SQUARESTM and MEN IN BLACKTM.
In designing our gaming machines, our designers, engineers,
artists and development personnel build upon our almost
60 years of experience in designing and developing fun,
humorous and exciting games. Our gaming machines are installed
in all of the major regulated gaming jurisdictions in the United
States, as well as in over 50 foreign gaming jurisdictions. For
fiscal 2004, 2003 and 2002, we generated $230.2 million,
$178.7 million and $174.7 million in total revenue,
respectively. The increase in revenues in fiscal 2004 was due to
receipt of regulatory approvals and subsequent shipment of our
new Bluebird video gaming devices and CPU-NXT
upgrade kits.

We generate revenue in two principal ways. First,
we have product sales of gaming machines and VLTs, conversion
kits, including theme and/or operating system conversions,
parts, used equipment and original manufactured equipment to
casinos and other licensed gaming machine operators. For fiscal
2004, 2003 and 2002, we generated $145.9 million,
$85.7 million and $75.6 million in product sales
revenues, respectively. Second, we have gaming operations where
we lease participation games and VLTs and earn royalties
that we receive from third parties under license agreements to
use our games. Participation games, as used
throughout this report, refers to gaming machines that we lease
based upon any of the following payment methods: (1) a
percentage of the net win of the gaming machines, (2) fixed
daily fees, or (3) in the case of wide-area progressive
games, a percentage of the amount wagered. For fiscal 2004, 2003
and 2002, we generated $84.3 million, $93.0 million
and $99.1 million in gaming operations revenue,
respectively. We offer our VLTs either for sale or on a leased
basis, but for leased VLTs, we do not include such gaming
devices in our installed base of participation games. In early
fiscal 2005, we began offering our customers a new
hybrid series of gaming devices where the casino can
pay a normal participation rate or has an option to buy the base
gaming device at the normal price and to pay a lower daily fee
for the software and top box.

Our portfolio of participation games includes
games based upon the MONOPOLY, HOLLYWOOD SQUARES, MEN IN
BLACK and PAC-MAN brands, and under our Puzzle
PaysTM series, the JUMBLETM,
SCRABBLETM and PICTIONARYTM
brands, among others. We received our first regulatory approvals
for our

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proprietary wide-area progressive system in May
2004 and have launched the MONOPOLY MoneyTM
themed progressive jackpot in Nevada and in Native American
casinos. We have the ability to place these games on a
participation basis because the popularity of branded games
generates higher wagering and net win to the casino or gaming
machine operator than traditional gaming machines. Our
participation game installed base:




| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | consisted of 4,240 participation gaming machines
    as of June 30, 2004;                                        
|
| |  | generated average daily revenue to us of $39.60
    per gaming machine for fiscal 2004; and                      
|
| |  | achieved an 81.9% gross margin during fiscal
    2004, together with our other gaming operations revenue sources.

The products that we offered for sale throughout
fiscal 2004 consisted primarily of multi-coin, multi-line video
gaming machines. We are one of the original developers of
multi-coin, multi-line video gaming machines in the
U.S. market. Our video gaming machines include engaging
themes, advanced graphics and digital sound effects and music.
We have also developed and recently received regulatory
approvals for mechanical reel-spinning gaming devices and poker
games, which we will ship to customers in fiscal 2005 as part of
our efforts to fully serve the gaming device needs of a casino.

In fiscal 1999, we introduced the first of our
participation games, a series of four MONOPOLY themed
gaming machines, under our exclusive license to use the
widely-recognized MONOPOLY trademark on casino-style
gaming machines. Since then, we have continued to introduce
additional MONOPOLY and other themed gaming machines.

In 2001, we experienced software anomalies in the
operating system software that drives our gaming devices, and
certain of these anomalies permitted player cheating. As a
result of these anomalies and the publicity concerning them, we
experienced delays in receiving approvals for new games pending
completion of regulatory review of upgrades to our operating
system software. These delays resulted in both lower game sales
and lower participation game revenues because we were unable to
refresh our installed base of participation games on our planned
schedule. To address the software anomaly issues and to
revitalize our technology foundation, in January 2002, we
announced a three-part technology improvement plan to improve
the stability of the operating system software. In fiscal 2003,
we stabilized our existing operating system software and began
to receive approvals for new games. We also met key milestones
on the mid-term phase of our technology improvement plan, which
consisted of developing a new operating system and circuit board
called CPU-NXT.

In fiscal 2004, we began shipping new games using
our new CPU-NXT operating system in the Bluebird
cabinet. In fiscal 2005, we are expanding our product offerings
to include video poker and mechanical reel-spinning games, and
we intend to offer an increased number of new game themes. By
September 30, 2004 we expect to have received substantially
all of the regulatory approvals required in North America to
ship CPU-NXT, Bluebird, video poker games and mechanical
reel-spinning gaming devices. We believe that this introduction
of an increasing number of games and a broader range of new
products will enable us to increase product sales, participation
game installations and profitability going forward.

Industry Overview

Casino operators continuously seek to increase
revenue growth and profitability at their casinos. The
importance of gaming machine revenue to the casino
operators profitability has created demand for gaming
machines that have the ability to generate superior net win. As
a result, the pace of innovation in game design has accelerated,
and gaming equipment manufacturers have increasingly focused on
enhancing the overall entertainment value of gaming machines. We
believe that three of the most significant recent developments
in gaming machine design have been the development of video
gaming machines that simulate mechanical reel-spinning slot
machines, the introduction of gaming machines with secondary
bonus rounds, and cashless gaming.



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Video gaming machines that simulate a mechanical
    reel-spinning slot machine on a video screen are predominantly
    multi-coin, multi-line gaming machines that offer multiple
    distinct pay lines and allow

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | up to 200 or more coins to be wagered on a single
    play. This tends to increase the average wager per play.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Secondary bonusing allows a player to advance
    beyond the primary game into a bonus round if the player attains
    a specified result in the primary game. The bonus rounds are
    designed to create significant player appeal by giving the
    player more interactive options and a sense of investment in the
    game. This encourages the player to continue to play the primary
    game in an effort to achieve all of the bonus rounds in a game.
    In addition, the bonus rounds give game designers an opportunity
    to incorporate additional entertaining content into the game.
|
| |  | Various forms of cashless gaming reduce casino
    operators costs and machine downtime as coins are no
    longer dispensed from the gaming device when a casino patron
    wants to cash out. Instead, the gaming device prints tickets or,
    through casino systems, banks the payout in an account for the
    casino patron. This technology has proved popular with casino
    patrons.                                                                                                                                                                                                       

We expect continued demand for multi-coin,
multi-line video gaming machines and other gaming machines that
offer the player secondary bonus rounds and other enhanced
entertainment features, which we believe result in higher
amounts wagered and net win per machine for casinos. As casino
operators continue to adopt cashless gaming in their casinos, we
believe demand for gaming devices that support cashless gaming
will continue to increase.

Some of the gaming machines with secondary
bonusing features and entertaining themes generate significantly
more coin in per day than the other gaming machines on the
casino floors, allowing gaming machine manufacturers to lease
some of the highest-earning machines to casino operators as
participation games. This allows gaming machine manufacturers to
share in the superior earnings of these games and to generate a
recurring revenue stream for themselves.

Another revenue-sharing model that has been
employed by some manufacturers is a wide-area progressive
system. A wide-area progressive system (WAP) links gaming
machines in multiple casinos within a gaming jurisdiction to
contribute to and compete for large system-wide progressive
jackpots. WAP systems are designed to increase gaming machine
play for participating casinos by giving the players the
opportunity to win a larger jackpot than on a non-linked,
stand-alone gaming machine. Net win per gaming machine on WAP
systems are generally higher than on non-linked gaming machines
on a casino floor. We expect the demand for wide-area
progressive jackpot games to increase.

VLTs include both video and mechanical
reel-spinning gaming machines. VLTs are sold, leased to, or
operated as participation games by government agencies that
desire to raise revenue for the jurisdictions in which they
operate. Most VLTs are linked to a central computer for
accounting and security purposes and are monitored by state
lotteries or other government authorities. Unlike gaming
machines designed for the casino market, most VLTs are located
in places where casino-type gaming is not the principal
attraction, such as racetracks, bars and restaurants. In the
last decade, several U.S. states such as New York,
Delaware, Oregon and Rhode Island have enacted legislation
permitting VLTs.

Business Strategy

Our business strategy is to increase our market
penetration in major regulated gaming jurisdictions worldwide by
developing entertaining products and providing outstanding
service. This strategy includes the following elements:

Our Technology Foundation:In January 2002, we embarked on a
technology improvement plan designed to stabilize and update our
existing operating system and position us for future growth. We
have received the requisite regulatory approvals for the
upgraded version of our legacy operating system software. We
have also received approvals for CPU-NXT, our new
operating system and gaming platform, from all North American
regulators beginning with our first regulatory approval for this
platform in September 2003. We continue to work to incorporate
new technologies into our software and platforms in anticipation
of evolving customer preferences and future regulatory
requirements.

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Leveraging Our Product Development Expertise
to Introduce Innovative New Games:We
have almost 60 years of experience developing fun, humorous
and exciting games. Over the past three years, we have enhanced
our game development efforts by adding key management, design
personnel and software engineers to our product development
group. We have renovated our facilities and organized our game
development team into a studio format to help promote innovation
while maintaining a focused development approach in an effort to
maximize the entertainment value of our products. We believe
that our proven game development capabilities, combined with the
additional functionalities and enhanced features of our new
gaming platform, will enable us to increase our market share.

Offering our new Bluebird Cabinets:We have received approvals of our new
Bluebird cabinets from all North American regulators,
beginning with our first regulatory approval of this new cabinet
in November 2003. The Bluebird cabinet is used for our
video, mechanical reel-spinning, poker and wide-area progressive
products. Bluebird cabinets incorporate features such as
an ergonomically engineered design, 18-inch digital,
high-resolution flat screen monitors for the video version of
the product, sound systems by Bose Corporation
(BOSE®) and simultaneous coin-in/
coin-out and cashless capabilities. At the American Gaming
Summit in January 2003, industry experts selected the
Bluebird cabinet as one of the top three most innovative
new gaming products.

Expanding the Breadth of Our Product
Offerings:We have expanded our
product lines to be able to fully serve casino operators
gaming machine requirements. Our former product line focused
primarily on the multi-coin, multi-line video-based market
sector. Our new product offerings also include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mechanical Reel-Spinning Gaming
    Machines We introduced our
    first new mechanical reel-spinning gaming devices in the spring
    of 2004 as part of our launch of our wide-area progressive
    jackpot system. Our first shipment of a for sale mechanical reel
    spinning gaming device is expected in September 2004. We believe
    the mechanical reel-spinning gaming machine market is an
    attractive opportunity, as it represents the largest portion of
    the global installed base of gaming machines.                                                              
|
| |  | Video Poker
    Games We introduced our
    first proprietary video poker game on our new CPU-NXT
    operating system in July 2004. We expect to introduce more video
    poker games in fiscal 2005. The video poker games are offered as
    a CPU-NXT conversion kit to our legacy gaming device or
    in a new Bluebird cabinet.                                                                                                                                                                                                                                                      
|
| |  | Wide-Area Progressive
    Systems Wide-area
    progressive systems are inter-casino systems that electronically
    link gaming machines located in various casinos to a central
    computer, which controls a progressive jackpot that increases
    with every wager placed on the linked gaming machines. By May
    2004 we received all of the regulatory approvals needed to
    operate our proprietary wide-area progressive system in Nevada
    casinos and for Native American casinos and introduced our first
    proprietary wide-area progressive jackpot to our customers.

Maximizing the Potential of Our Participation
Games and Exclusive Licenses of Popular
Themes:As the exclusive licensee of
the MONOPOLY brand for use with gaming machines, we have
converted a popular board game brand into a successful line of
superior-earning gaming machines. We have also licensed
additional brands and now have five series of participation game
themes with an aggregate installed base of 4,240 participation
games as of June 30, 2004. We introduced a new branded
series, MEN IN BLACK in late June 2004. The name
recognition and creative game design of our branded products
have allowed us to lease them to casino operators as
participation games, generating a high-margin recurring revenue
stream for ourselves, as well as the casinos. We continue to
pursue new licensed brands and additional themes based on the
guidance of focus group testing of casino patrons.

Continuing Our Expansion into International
Markets:We are authorized to conduct
business in over 50 foreign gaming jurisdictions. Revenues from
our foreign customers increased by 23.8% to $59.9 million
for fiscal 2004 from $48.4 million for fiscal 2003. We
anticipate continued growth in foreign markets with the
continued penetration of CPU-NXT, Bluebird, and the
introduction of mechanical reel-spinning gaming machines and
video poker games, wide-area progressive systems and additional
game titles.

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To enhance our focus on foreign markets we
recently appointed one of our senior executives as managing
director of international operations. We currently have offices
in Australia, South Africa, Spain and most recently we have
opened an office in the United Kingdom. This new office will
house our second internationally focused game development studio
and, if gaming regulations are amended in the United Kingdom,
would also include sales and distribution functions. The United
Kingdom continues in its efforts to modify its gaming
legislation, which we believe will turn into revenue
opportunities in calendar 2006. We also view Macau and Russia as
two markets with high growth potential. We have been an active
supplier to the Russian market for the past two years, and in
May 2004, we launched the first Bluebirdgaming devices
there. See Note 4 to our consolidated financial statements
included in this report.

Products

We offer video and mechanical reel-spinning
gaming machines and VLTs incorporating highly entertaining game
themes and innovative gaming features. Our new CPU-NXT
operating system supports added functionality and increased
graphical capability and speed of play.

Our Bluebird gaming cabinet includes a
number of features that we believe improve the experience of
players, including the Bose Free Field® directed audio
system, which reduces peripheral distracting noises; an 18-inch
LCD monitor, which can display advanced graphics generated by
our new CPU-NXT operating system; and a recessed coin
tray to provide players with greater comfort. The
Bluebird cabinet supports both video and mechanical reel
games and is easier and faster to service than our legacy
cabinets, with 80% of the internal components interchangeable
between upright and slant models.

Engaging and humorous themes and a high degree of
player interactivity are incorporated into each of our games,
particularly in the secondary bonus rounds. We believe that by
designing games and gaming machines that are fun and interesting
to play and incorporating the latest gaming technologies, we
supply games and gaming machines with superior player appeal.

Our games integrate secondary bonus rounds as
additions to the basic game to create a game-within-a-game for
more exciting and interactive play. If players achieve various
milestones in the game, they move on to play a secondary game
without additional wagering for additional bonuses. The
secondary game gives the player a sense of investment in the
game. The player is encouraged to continue wagering on the basic
game in the hope of being awarded a secondary bonus game. The
player can win in both the basic game and the secondary game. In
our secondary bonus games, the player has various choices to
make regarding the bonus features. For example, in some games
the player can select from a variety of tokens or characters
that will be used to obtain or reveal the bonus. Amusing,
entertaining or familiar graphics and musical themes add to the
player appeal of our games.

Games for Sale

We offer the following products for sale:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multi-coin, multi-line video gaming machines.Our line of multi-coin, multi-line-
    gaming machines combine advanced graphics, digital sound effects
    and music, and secondary bonus games. In the basic game, the
    video screen of these gaming machines simulates traditional
    mechanical reel-spinning slot machines. In our bonus games, the
    video screen shows a variety of amusing interactive themed
    content. Depending on the machine, the player can wager up to
    200 coins per play.                      
|
| |  | Mechanical reel-spinning slot machines.Following the expiration of the
    Telnaes extended-odds technology patent in 2002, we developed
    and are now introducing a new line of mechanical reel-spinning
    gaming devices in our new Bluebird cabinet. We expect to
    increase our presence in this market starting in September 2004.
    We did not introduce any new mechanical reel-spinning games in
    fiscal 2004 and 2003. We introduced one new mechanical
    reel-spinning game in fiscal 2002 on our legacy platform.
|
| |  | Poker.For our new
    poker products, our first poker game, 3 WAY
    ACTIONTM, was approved by the first regulatory
    lab in June 2004, and we shipped our first game to customers in
    July 2004. We expect to                                                                                                                                                                                                                                                                                                                     

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| |  |                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | receive approvals from the other key gaming labs
    in the September 2004 quarter and approval of additional poker
    games throughout fiscal 2005.

During fiscal 2004 and 2003, we released the
following new video games for sale:

|                                |  |                          
|------------------------------- |  | -------------------------
|2004                            |  | 2003                     
|                                |  |                          
|CPU-NXT Operating System       |  |                          
|Milk MoneyTM                    |  |                          
|Rakin It In®                   |  |                          
|Quackers®                       |  |                          
|Wild Wilderness®                |  |                          
|Rich Little Piggies®            |  |                          
|Reel em In®                    |  |                          
|Instant WinnerTM                |  |                          
|Money to Burn®                  |  |                          
|Jackpot Party®                  |  |                          
|Fairys FortuneTM               |  |                          
|Robin Hoods Sherwood Treasure® |  |                          
|Life of Luxury® 2               |  |                          
|Pick Your Fortune®              |  |                          
|The Jade Monkey®                |  |                          
|Keepin Up with the Joneses®    |  |                          
|3 WAY-ACTION Poker              |  |                          
|                               
|Legacy Operating System        |  | Legacy Operating System 
|Life of Luxury 2                |  | Roll Credits®            
|Aztec AdventureTM               |  | Jackpot StampedeTM       
|                                |  | Toast of the Town®       
|                                |  | X Marks the Spot®        

Our sales of new gaming machines, primarily video
gaming machines, were 12,661 units in fiscal 2004 compared to
6,867 units in fiscal 2003 and 6,916 units in fiscal 2002. The
lower unit levels for the previous two fiscal years resulted
from the delay of new game approvals and our customers delaying
purchases as they scrutinized our progress in implementing our
three-part technology improvement plan to stabilize our
operating system software and awaited our new products on our
new platform. In September 2003, we received the first approvals
for nine video games for sale on our new CPU-NXT
operating system. We expect to introduce over 40 games for
sale in fiscal 2005, subject to regulatory approval. See
Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations
for a discussion of revenues contributed by games for sale and
other product sales.

Participation Games

In fiscal 1999, we introduced the first of our
participation games, a series of four MONOPOLY themed
games under an exclusive license from Hasbro, Inc. Our game
designers use secondary bonus rounds in combination with the
actual elements of the MONOPOLY board game to create the
highly entertaining games. These elements include
MR. MONOPOLYTM,
CHANCETM, COMMUNITY CHESTTM and the
distinctive game board and tokens, some set to a background of
big band music. Most of our participation games are multi-coin,
multi-line video games, although some of the earlier games are
mechanical reel-spinning gaming machines.

8



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##### 



In fiscal 2001, we introduced Puzzle Pays,
a second series of participation games, based on popular
licensed puzzle game themes. The first game in the Puzzle
Pays series was JUMBLETM, based on the
popular scrambled word game appearing in newspapers nationwide.
Two additional Puzzle Pays gaming machines followed:
Bee BucksTM, the sequel to JUMBLE, and
a SCRABBLETM themed game.

In fiscal 2002, we launched three new
participation game series: HOLLYWOOD SQUARES, based on
the popular television game show, in the winter of 2001;
PAC-MAN, based on the popular classic arcade game, in the
spring of 2002; and SURVIVORTM, based on the
popular television show in the spring of 2002. The
SURVIVOR themed game was commercialized in association
with International Game Technology, or IGT, which placed these
games on its MEGAJACKPOTSTM wide-area
progressive (WAP) system. WAP systems are inter-casino systems
that electronically link gaming machines located in various
casinos to a central computer, which controls a progressive
jackpot that increases with every wager placed on the linked
gaming machines.

In April 2003, we introduced FREE
PARKINGTM, the eleventh game in the
MONOPOLY series. In fiscal 2003, we had limited
introductions of two additional Puzzle Pays gaming
machines, PICTIONARYTM and SCRABBLE Winning
RecipeTM. In September 2003, we extended our
agreement with Hasbro, Inc. for use of their MONOPOLY
brand through calendar 2011. As a result, we intend to devote
more development efforts and intellectual property to the
MONOPOLY brand over the coming years. In October 2003, we
introduced Moneyline, the twelfth game in the
MONOPOLY series.

In January 2004, the remaining SURVIVOR
WAP themed system was shut down. In February 2004, we introduced
Grand Hotel®, the thirteenth game in the
MONOPOLY series, and the first MONOPOLY game
offered as a CPU-NXT upgrade conversion. In June 2004, we
introduced Once Around Deluxe® as the first
MONOPOLY game offered as both a CPU-NXT conversion
and also in a new Bluebird cabinet. We intend to
introduce two new MONOPOLY branded participation games
per year to keep the brand fresh and entertaining.

In addition, we used the MONOPOLY brand
for our first wide-area progressive jackpot, called MONOPOLY
Money that we launched in May 2004. By May 2004 we received
all of the regulatory approvals needed to operate our
proprietary WAP system in Nevada casinos and for Native American
casinos and introduced our first proprietary WAP jackpot to our
customers.

During fiscal 2004 and 2003, we released the
following new participation games:

|                                      |  |                                          
|------------------------------------- |  | -----------------------------------------
|2004                                  |  | 2003                                     
|                                      |  |                                          
|MONOPOLY Moneyline                    |  | MONOPOLY Hot Properties®                 
|MONOPOLY Grand Hotel                  |  | MONOPOLY FREE PARKING                    
|MONOPOLY Money
    7sTM              |  | HOLLYWOOD SQUARES THE CENTER
    SQUARETM
|MONOPOLY Wild
    ChanceTM            |  | PAC-MAN
    FRENZYTM                     
|MONOPOLY Once Around Deluxe           |  | PICTIONARY                               
|HOLLYWOOD SQUARES Tour of
    StarsTM |  | SCRABBLE Winning Recipe                  
|HOLLYWOOD SQUARES Prize
    SpinTM    |  |                                          
|MEN IN BLACK                          |  |                                          

After substantially increasing our game
development staff over the last 18 months, we expect to
launch over 10 new participation games in fiscal 2005,
subject to regulatory approval.

Our installed base of participation games
decreased from 5,086 units at June 30, 2003 to 4,240 units
at June 30, 2004. Net win per day per gaming device
increased from $39.19 in fiscal 2003 to $39.60 in fiscal

9



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2004, as we continued to refresh the installed
base with new games. We believe the decline in the installed
base of units was due to:




| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the removal of our participation games by casinos
    due to our legacy platform not supporting features and
    functionality required by the customers and our game performance
    not meeting operators expectations, and
|
| |  | our removal of participation games in
    low-performing casinos,                                                                                                                                                             

The average installed base decreased from 5,509
units in fiscal 2003 to 4,430 units in fiscal 2004. At
August 27, 2004 we have issued orders for over
2,617 conversions or new units, of which over 2,000 are for
placement of new games on Bluebird gaming devices. See
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations for a
discussion of revenues contributed by gaming operations.

Additional Revenue Sources

In addition to the gaming machine categories
described above, we also supply the following products:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Video Lottery Terminals.Our VLTs include both video and
    mechanical reel-spinning gaming machines. They feature advanced
    graphics, digital sound effects and music and incorporate many
    of the same features as our other gaming machines. We offer a
    variety of multi-game and single-themed VLTs. Our VLTs may be
    operated as stand-alone units or may interface with central
    monitoring computers operated by government agencies. Our VLTs
    typically are located in places where casino-type gaming is not
    the principal attraction, such as racetracks, bars and
    restaurants. We expect to offer VLTs with CPU-NXT
    and Bluebird in fiscal 2005. We do not include the leased
    VLTs in our installed base of participations games. At
    June 30, 2004 we had 1,928 leased VLTs installed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Parts Sales, Game Conversions, OEM and Used
    Games.We sell replacement parts and
    game theme conversions for our gaming machines. In fiscal 2004,
    we began selling CPU-NXT game conversion kits, which
    enable casinos to obtain all the features and functionality of
    the CPU-NXT operating system for a lesser price than the
    purchase of a new Bluebird cabinet. We also sell used
    games that are acquired on a trade-in basis or that were
    previously placed on a participation basis. We expect that our
    revenues from these sources will increase in the future as our
    installed base of gaming machines sold expands. In addition, we
    manufacture and sell gaming stations for Multimedia Games Inc.,
    or Multimedia, under original equipment manufacturing, or OEM,
    agreements. In fiscal 2004 and 2003, we manufactured and sold
    2,000 and 1,000 gaming stations, respectively, to Multimedia.
    Effective April 1, 2004 we entered into a strategic
    two-year agreement with Multimedia to expand and extend our
    relationship to address opportunities in Class II and other
    centrally controlled gaming markets.                                                                                                                                                                                                                                                                              
|
| |  | Licensing.We
    entered into new licensing agreements with Sierra Design Group,
    or SDG, now a wholly owned subsidiary of Alliance Gaming
    Corporation, and Multimedia in fiscal 2004. We granted SDG
    non-exclusive rights to distribute the MONOPOLY branded
    games in Washington State, as well as a non-exclusive license to
    commercialize our proprietary game themes in Washington State,
    New York State and the state of Florida. We also granted a
    non-exclusive license to Multimedia for the HOLLYWOOD
    SQUARES series of games in Washington State as well as a
    non-exclusive license to commercialize our proprietary game
    themes in Washington State. As part of the agreement we signed
    with Multimedia effective April 1, 2004, we have granted
    Multimedia an exclusive license to all of our game themes for
    Class II, Charitable Gaming and Tribal Instant Lottery
    Gaming venues, subject to existing license agreements and, for
    our licensed participation themes, our licensors
    approvals. We also have a licensing agreement with Stargames
    Corporation Pty. Ltd., or Stargames, to serve the Australian
    market. See Sales and Marketing below. We earn a
    royalty fee from Multimedia, SDG and Stargames for each of our
    licensed games that they place, and in general, for
    participation themes they place, we receive a daily royalty
    revenue for each game.
|
| |  | Hybrid Product.In
    early fiscal 2005, we began supplying our customers with a new
    series of gaming devices where the casino can pay our normal
    participation rate or has an option to purchase the base gaming
    device at the normal price and to pay a lower daily fee for the
    software and top box. Our                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

10



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| |  |                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3-WAY ACTIONPoker
    product and our Classic TV Game ShowTM series
    of products will be distributed in this manner beginning in the
    September 2004 quarter.

Design, Research and Product
Development

In designing our gaming machines, our designers,
engineers and artists build upon almost 60 years of
experience that our predecessors and we have in designing and
developing fun, humorous and exciting games. We are continually
developing new games in order to refresh the installed base of
our gaming devices, and implementing new technologies and
functionality to enhance player entertainment. Our gaming
machines and games are usually designed and programmed by our
internal engineering staff and game design studios. Our game
design teams operate in a studio environment that encourages
creativity, productivity and cooperation among design teams.

Each of our eight studios works concurrently on
multiple games and is staffed with software developers, graphic
artists, mathematicians and game developers. In some cases, we
may outsource testing and graphic design functions to
independent designers under contract to us. Games and gaming
machines may be tested by regulatory authorities who must
approve the product before it can be shipped to gaming
jurisdictions.

During fiscal 2004, 2003 and 2002, we spent
approximately $44.8 million, $40.3 million and
$26.0 million, respectively, on design, research and
product development. In fiscal 2003, we finished the renovation
of our existing Chicago research and design facility to create a
state-of-the-art technology campus. We are currently planning
expansion of this facility or the purchase and renovation of
additional space in fiscal 2005. We substantially increased our
staff in fiscal 2004, 2003 and 2002 to execute our technology
improvement plan, to expand our product lines and also to
increase the number of game themes we offer. As of
August 27, 2004, we employed 382 persons in our
design, research and development teams. In fiscal 2005, we
intend to ship our complete product lines including new
mechanical reel-spinning games, using extended odds technology
and new video poker games.

Some of our gaming machines are based on popular
brands licensed from third parties, such as Hasbro Inc., CBS
Consumer Products and Sony Pictures Consumer Products Inc.
Typically, we are obligated to make minimum guaranteed royalty
payments over the term of our license and to advance payment
against those guarantees. The licensor typically must inspect
and approve any use of the licensed property. In addition, each
license typically provides that the licensor retains the right
to exploit the licensed property for all other purposes,
including the right to license the property for use with any
products not related to gaming machines.

Sales and Marketing

We are authorized to sell or lease our gaming
machines to casinos in 141 tribal jurisdictions and
75 other gaming jurisdictions worldwide. See
Government Regulation  General below.
Generally, we sell our gaming machines directly, rather than
through the use of distributors, which we believe allows us to
provide superior customer service and enhances profitability. In
some instances, our gaming machines are installed in casinos on
a trial basis, and only after a successful trial period are the
machines purchased by the customers. In addition, we offer some
of our most popular game themes on a participation or lease
basis. See Company Overview above. We sell or lease
VLTs, depending on the jurisdictions where they are placed.

Since we commenced the sales process last
September, as of August 27, 2004, we have issued sales
orders or executed agreements to sell 22,285 Bluebird
video gaming devices or CPU-NXT upgrade kits representing
about 45% of the 50,000+ WMS video units in casinos. Of the
22,285 units for which weve issued sales orders or
executed agreements, 8,591 of them or 17% of the legacy video
gaming devices were installed by June 30, 2004. Of the
remaining units, 10,576 are Bluebird units and 3,118
CPU-NXTare upgrade kits. We expect to deliver the
balance of these units over the next several quarters.

We sell and lease our gaming machines through
20 salespeople in offices in several United States
locations, and six salespeople in our international offices: two
in our office in Spain, two in our office in South Africa, and
one in each of Canada and the United Kingdom. Our salespeople
earn a salary and commissions. Our gaming machines are primarily
marketed through direct sales, trade shows, promotional
videotapes, our

11



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proprietary website and advertising in trade
journals. No single customer accounted for 10% or more of our
revenues in fiscal 2004, 2003 or 2002.


Our foreign game sales continued to increase in
fiscal 2004 with over 5,159 games sold abroad compared to 4,333
in fiscal 2003 and 2,784 in fiscal 2002. We have translated our
most popular domestic game themes into Spanish, Portuguese,
French, Russian and Italian. Export sales and leases of our
products were approximately $59.9 million, or 26.0% of
revenues, for fiscal 2004, compared with $48.4 million, or
27.1% of revenues, for fiscal 2003, and $30.7 million, or
17.6% of revenues, for fiscal 2002. Substantially all foreign
sales are made in United States dollars. Revenue from
participation games has been primarily limited to North America,
and we expect this trend to continue.

Since fiscal 2001, we have developed games in
Australia. These games are distributed under our cross-license
agreement with Stargames using their PC3 hardware platform, and
we receive a royalty payment for each of our games sold by
Stargames. Our agreement with Stargames was renewed in December
2003 and extends through January 31, 2006.

We entered into new licensing agreements with
SDG, now a wholly owned subsidiary of Alliance Gaming, and
Multimedia in fiscal 2004. We granted SDG non-exclusive rights
to distribute the MONOPOLY branded games in Washington
State, as well as a non-exclusive license to commercialize our
proprietary game themes in Washington State, New York State and
the state of Florida. We also granted a non-exclusive license to
Multimedia for the HOLLYWOOD SQUARES series of games in
Washington State as well as a non-exclusive license to
commercialize our proprietary game themes in Washington State.
As part of the agreement we signed with Multimedia effective
April 1, 2004, we have granted Multimedia an exclusive
license to all of our game themes for Class II, Charitable
Gaming and, in California, Tribal Instant Lottery Gaming,
subject to existing license agreements and, for our licensed
participation themes, our licensors approvals.

In addition, we manufacture and sell gaming
stations for Multimedia under an OEM agreement. In fiscal 2004
and 2003, we manufactured and sold 2,000 and 1,000 gaming
stations, respectively, to Multimedia. Effective April 1,
2004 we entered into a strategic two-year agreement with
Multimedia to expand and extend our relationship to address
opportunities in Class II and other central determinant
system-based gaming markets.

Competition

The gaming machine market is intensely
competitive and is characterized by the continuous introduction
of new game titles and new technologies. Our ability to compete
successfully in this market is based, in large part, upon our
ability to:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | create an expanding and constantly refreshed
    portfolio of games with high earnings performance;     
|
| |  | offer gaming machines that consistently
    out-perform gaming machines manufactured by our competitors;
|
| |  | identify and develop or obtain rights to
    commercially marketable intellectual properties; and       
|
| |  | adapt our products for use with new technologies.                                                       

In addition, successful competition in this
market is also based upon:



| |   |                                        
| | - | ---------------------------------------
| |  | engineering innovation and reliability;
|
| |  | mechanical reliability;                
|
| |  | brand recognition;                     
|
| |  | marketing and customer support; and    
|
| |  | competitive prices and lease terms.    

12



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We estimate that about 25 companies in the
world manufacture gaming machines and VLTs for legalized gaming
markets. Of these companies, we believe that International Game
Technology (IGT), Bally Gaming, Aristocrat Technologies, Atronic
Casino Technology, Gtech Holdings and WMS control a majority of
this worldwide market. Our competitors vary in size from small
companies with limited resources to a few large corporations
with greater financial, marketing and product development
resources than ours. The larger competitors, particularly IGT,
have an advantage in being able to spend greater amounts than us
to develop new technologies and features that are attractive to
players and customers. In addition, some of our competitors have
developed, sell or otherwise provide to customers security,
centralized player tracking and accounting systems which allow
casino operators to accumulate slot accounting and performance
data about the operation of gaming devices. We do not currently
offer these systems. Several of our competitors pooled their
intellectual property patents that provide cashless gaming
alternatives, specifically ticket-in ticket-out technology so
that when a casino patron cashes out from a gaming machine they
may receive a printed ticket instead of coins. We license this
technology from these competitors and passthrough the license
fee to our customers.

In the video and mechanical reel-spinning gaming
machine market, we compete with market leader IGT, as well as
Bally Gaming, Sigma Game, Atronic Casino Technology, Mikohn
Gaming, Konami, Franco, Unidesa and Aristocrat Technologies. In
the VLT market, we compete primarily with IGT, G-Tech Holdings
and Scientific Games.

Manufacturing

We have manufactured all of our gaming devices at
our facility in Waukegan, Illinois, since fiscal 2001. This
modern facility has allowed us to achieve increased operating
efficiencies over our previous facility. We have added
additional assembly lines to increase our practical assembly
capacity, which we believe will lower our product lead times in
fiscal 2005. We intend to expand our Waukegan facility beginning
in fiscal 2005 to provide for further production capacity.

Manufacturing commitments are generally based on
sales orders from customers. In some cases, however, component
parts are purchased and assembled into finished goods, which are
inventoried in order to be able to quickly fill customer orders.
Our manufacturing process generally consists of assembling
component parts to complete a gaming machine. We generally
warrant our gaming machines sold in the U.S. for a period
of 90 days.

The raw materials used in manufacturing our
gaming machines include various metals, plastics, wood, glass
and numerous component parts, including electronic
subassemblies, video monitors and LCD screens. We believe that
our sources of supply of component parts and raw materials are
generally adequate.

Patent, Trademark, Licenses, Copyright and
Product Protection

Each gaming machine embodies a number of
separately protected intellectual property rights, including
trademarks, copyrights and patents. We believe these
intellectual property rights are significant assets to our
business in the aggregate, and three licenses impacted the
majority of our consolidated revenue in fiscal 2004. We seek to
protect our investment in research and development and the
unique and distinctive features of our products and services by
maintaining and enforcing our intellectual property rights.

We have obtained patent rights protection
covering many of our products. In fiscal 2004, we were issued
12 U.S. patents, covering a variety of aspects of
video and electronic gaming machines and associated equipment.
We generally seek to obtain trademark protection in the
U.S. for the names or symbols under which we market and
license our products. We also rely on our copyrights, trade
secrets and proprietary know-how. In addition, some of our most
popular gaming machines are based on trademarks and other
intellectual property licensed from third parties.

13



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Government Regulation

General

We sell our games in legal gaming jurisdictions
worldwide. The manufacture and distribution of gaming equipment
and related software is subject to regulation and approval by
various city, county, state, provincial, federal, tribal and
foreign agencies.

We believe we hold all of the licenses and
permits necessary to conduct our business. In all, we hold over
200 licenses or permits to conduct gaming worldwide,
including over 50 foreign licenses or permits.

WMS and its key personnel have obtained or
applied for all approvals necessary to maintain compliance with
these regulatory agency requirements. The regulatory
requirements vary among jurisdictions, but the majority of
jurisdictions require licenses, permits, or findings of
suitability for the company, individual officers, directors,
major stockholders and key employees, and documentation of
qualification. We must satisfy all conditions for each gaming
license or permit.

In some jurisdictions, regulators govern not only
the activities within their own jurisdiction but also activities
that occur in other jurisdictions to ensure that the entities it
licenses are in compliance with local standards on a worldwide
basis. Nevada is such a jurisdiction. The Nevada gaming
authorities require WMS and our gaming subsidiary, WMS Gaming,
to maintain Nevada standards of conduct for all our gaming
activities and operations worldwide. To make our compliance
efforts more efficient, we have centralized all licensing,
compliance and non-product approval gaming regulatory matters,
including the shipment of gaming equipment and related software
worldwide.

The gaming industry by its very nature is complex
and constantly evolving, particularly in the new jurisdictions.
Over the past two years, we have devoted significant resources
to ensure regulatory compliance throughout our company.
Additionally, we have an active gaming compliance committee of
our board of directors that works in concert with our compliance
department to avoid any appearances of impropriety as a result
of a business relationship or new market opportunity. We have
never been denied a gaming-related license, nor have our
licenses ever been suspended or revoked.

Nevada Regulations

Overview of
Regulatory Framework:

The manufacture, sale and distribution of gaming
machines for use or play in Nevada or for use outside of Nevada
are subject to extensive state and local laws, regulations and
ordinances of the Nevada Gaming Commission, the Nevada State
Gaming Control Board, and various county and municipal
regulatory authorities (collectively, the Nevada gaming
authorities). The laws, regulations and ordinances
primarily cover the responsibility, financial stability and
character of gaming equipment manufacturers, distributors and
operators, as well as persons financially interested in or
involved in gaming operations. We currently hold all necessary
gaming licenses to manufacture, distribute and operate a slot
route or a wide-area progressive system.

The laws, regulations and supervisory procedures
of the Nevada gaming authorities are based on public policy and
seek to:



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | prevent unsavory or unsuitable persons from
    having a direct or indirect involvement with gaming at any time
    or in any capacity;                                                                                                                                                                                   
|
| |  | establish and maintain responsible accounting
    practices and procedures;                                                                                                                                                                                                                                               
|
| |  | maintain effective control over the financial
    practices of licensees, including establishing minimum
    procedures for internal fiscal affairs and safeguarding the
    assets and revenues, providing reliable record keeping and
    requiring the filing of periodic reports to the Nevada gaming
    authorities;
|
| |  | prevent cheating and fraudulent practices;                                                                                                                                                                                                                                                                                
|
| |  | provide a source of state and local revenues
    through taxation and licensing fees; and                                                                                                                                                                                                                                 

14



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| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | provide strict regulation of all persons,
    locations, practices, associations and activities relating to
    casino operations and the manufacture and distribution of gaming
    devices and related software and equipment.

Licensing
Requirements:

Of
Our Security Holders

A holder of our stock or of our issued debt may
be required to file an application, be investigated and be
subject to a suitability hearing as a beneficial holder if the
Nevada Gaming Commission has reason to believe that the
holders ownership in our securities would be inconsistent
with its public policies and those of the State of Nevada. As
with any other gaming applicant, the holder will be required to
pay all costs associated with any investigation conducted by the
Nevada gaming authorities.

A security holder will have to abide by the
following requirements:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If the holder acquires 5% or more of our
    securities, report acquisition of beneficial interest in our
    securities to the Nevada gaming authorities.                                    
|
| |  | If the holder acquires 10% or more of our
    securities, file a gaming application within 30 days after
    receiving written notice from the Chairman of the State Gaming
    Control Board.

If the person holding our voting securities is a
corporation, partnership or a trust, and is required to be found
suitable, the entity will be required to submit to the Nevada
gaming authorities detailed business and financial information
including a list of its beneficial owners.

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 authorities may be
found unsuitable and may be subject to criminal penalties. The
same restrictions apply to a record owner if the record owner,
after request, fails to identify the beneficial owner. We are
required to render maximum assistance to the Nevada gaming
authorities in determining the identity of our beneficial owners.

If an institutional investor holds more than 10%,
but not more than 15%, of our voting securities, that investor
can apply to the Nevada gaming authorities for a waiver of the
finding of suitability if it holds the voting securities for
investment purposes only. Under certain circumstances, an
institutional investor may be able to hold up to 19% for a
limited period of time. To qualify for this waiver, the
institutional investor must have acquired the voting securities
in the ordinary course of business. In addition, the
institutional investor may not hold the securities for the
purpose of causing (1) the election of a majority of the
members of our board of directors, (2) a change in our
corporate charter, bylaws, management, policies or operations,
or those of any of our gaming affiliates, or (3) any other
action which the Nevada gaming authorities would find
inconsistent with holding our voting securities for investment
purposes only.

Of
Our Company:

We are registered with the Nevada Gaming
Commission as a publicly traded corporation. We are required to
periodically file detailed financial and operating reports to
the agency and furnish any other information which the Nevada
gaming authorities may require.

As a registered company, we also adhere to the
following restrictions imposed by the Nevada gaming authorities:



| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Any individual having a material relationship or
    material involvement with us may be required to be found
    suitable and individually licensed.                            
|
| |  | Our officers, directors and key employees must
    file license applications with the Nevada Gaming Authorities and
    may be required to be licensed or found suitable by them.
|
| |  | Each applicant is required to pay all costs of
    any investigation, and we would reimburse any such applicant.                                                                 

15



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Changes of an applicants position with us
    must be reported to the Nevada gaming authorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | We must sever all relationships with an officer,
    director or key employee that the Nevada gaming authorities have
    found unsuitable and may be required to terminate the employment
    of any person that refuses to file a gaming application when
    requested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | We are required to maintain a current stock
    ledger in the State of Nevada, which may be examined by the
    Nevada gaming authorities at any time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Nevada gaming authorities have the power to
    require that our stock certificates bear a legend indicating
    that the securities are subject to the Nevada Gaming Control Act
    (although compliance with this requirement has not been
    requested to date).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We may not make a public offering of our
    securities without the prior approval of the Nevada Gaming
    Commission if the securities or the proceeds are intended to be
    used to construct, acquire or finance gaming facilities in
    Nevada, or to retire or extend obligations incurred for these
    purposes or for similar transactions. We currently hold an
    approval to make certain public offerings through March 2005,
    subject to certain conditions. This shelf approval can be
    rescinded for good cause and does not mean that for any offering
    we may make, the Nevada gaming authorities have found,
    recommended or approved the issued securities or passed on the
    accuracy or adequacy of the prospectus or the investment merits
    of the securities offered. Any representation to the contrary is
    unlawful.
|
| |  | We are subject to disciplinary action if, after
    we receive notice that a person is unsuitable to be a security
    holder or to have any other relationship with us, we:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay that unsuitable person any dividend, interest
    or other distribution on any of our securities;                                                                                                                   
|
| |  | allow that person to exercise, directly or
    indirectly, any voting rights conferred through securities held
    by that person;                                                                                      
|
| |  | pay remuneration in any form to that person;                                                                                                                                                                            
|
| |  | fail to pursue all lawful efforts to require the
    unsuitable person to relinquish voting securities including, if
    necessary, the immediate repurchase of the voting securities for
    cash at fair market value;
|
| |  | fail to pursue all lawful efforts to terminate
    our relationship with that person; or                                                                                                                                
|
| |  | make any payment to the unsuitable person by way
    of principal, redemption, conversion, exchange, liquidation or
    similar transaction.                                                                            



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If we violate the Nevada gaming authorities
    rules and regulations, our gaming licenses could be limited,
    conditioned, suspended or revoked and we could and those
    involved with us could be fined for each separate violation.                                                                                                                                                                                 
|
| |  | Changes in control whether through merger,
    consolidation, stock or asset acquisitions, management or
    consulting agreements, or any act or conduct by a person where
    control of WMS is obtained, may not occur without the prior
    approval of the Nevada gaming authorities. Persons seeking to
    acquire control of us must satisfy the Nevada gaming
    authorities standards prior to assuming control.

Any decision made by the Nevada gaming
authorities regarding a persons suitability or licensing
is not subject to judicial review. We believe we have obtained
all required licenses and/or approvals necessary to carry on our
business in Nevada, including receiving the necessary findings
of suitability of our officers, directors and key personnel.

Of
Our Gaming Subsidiary

WMS Gaming manufactures, sells and distributes
gaming devices in Nevada and for use outside Nevada, and
recently began to operate a wide-area progressive system in
Nevada casinos. WMS Gaming holds the

16



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necessary license to conduct this activity in
addition to sharing in gaming revenue under our slot route
operators license which covers our participation games.


WMS Gamings gaming licenses are subject to
the following restrictions:



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Nevada gaming authorities have broad
    discretion in reviewing the conduct of a licensee on a
    continuing basis.                                                                                                                      
|
| |  | The officers, directors and key employees of our
    gaming subsidiary must file license applications with the Nevada
    Gaming Authorities and may be required to be licensed or found
    suitable by them.                                 
|
| |  | A person may not become a stockholder of or
    receive any percentage of profits from our licensed gaming
    subsidiary without first obtaining licenses and approvals from
    the Nevada gaming authorities.                               
|
| |  | We are required to report substantially all
    loans, leases, sales of securities and similar financing
    transactions of a material nature to the State Gaming Control
    Board and/or have them approved by the Nevada Gaming Commission.
|
| |  | Our gaming activity licenses are not transferable.                                                                                                                                                                                             

Changes
in Control:

The Nevada legislature has declared that some
corporate acquisitions opposed by management, repurchases of
voting securities and corporate defense tactics affecting Nevada
gaming licensees, and publicly traded corporations that are
affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Gaming Commission has
established a regulatory framework to guard against the
potentially adverse effects of these business practices upon
Nevadas gaming industry.

Approvals are, in certain circumstances, required
from the Nevada Gaming Commission before we can make exceptional
repurchases of voting securities above their current market
price and before a corporate acquisition opposed by management
can be consummated. Nevadas gaming laws and regulations
also require prior approval by the Nevada Gaming Commission if
we were to adopt a plan of recapitalization proposed by our
board of directors in opposition to a tender offer made directly
to our stockholders for the purpose of acquiring control of us.

Gaming
Equipment Approvals:

Nevada has its own laboratory within its agency.
Before we can sell a new gaming machine in Nevada, it must first
be approved by the Nevada agency. The agency conducts rigorous
testing of the gaming device and related equipment, and may
require a field trial of the gaming device and platform before
determining that the gaming device and platform meet the
agencys strict technical standards. Throughout the course
of offering our gaming devices and related software in Nevada,
the Nevada gaming authorities may require subsequent
modifications and subsequent approvals.

We do not have any control over the length of
time that the agency takes to review our products. However, we
work closely with the agencys staff to timely respond to
their inquiries and assist them, where we can, in their
evaluation, inspection and review of our products. We also do
this for all other state labs (Michigan, Mississippi, New
Jersey, Ontario) and Gaming Laboratories International, an
independent lab used by many jurisdictions worldwide.

Taxes
and License Fees:

License fees and taxes are imposed by the Nevada
gaming authorities and are either payable quarterly or annually.
The fees and taxes are computed in various ways depending on the
type of gaming or activity conducted by our subsidiary and on
the cities and counties in which our subsidiary conducts
operations. Annual fees are payable to the State Gaming Control
Board for renewal of licenses as a manufacturer, distributor,
operator of a slot machine route and operator of an inter-casino
linked system. Nevada law also

17



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requires that we pay our proportionate share of
the gaming taxes from the revenue generated from our
participation games placed in Nevada casinos.


Any person who is licensed, required to be
licensed, registered, required to be registered, or is under
common control with any such person, and who proposes to
participate in the conduct of gaming operations outside of
Nevada, is required to deposit with the Nevada Control Gaming
Board, and thereafter maintain, a revolving fund to pay the
expenses of investigation of the licensees participation
in foreign gaming. The revolving fund is subject to increase or
decrease at the discretion of the Nevada Gaming Commission. As a
licensee, we are required to comply with reporting requirements
imposed by Nevada law. We are also subject to disciplinary
action by the Nevada gaming authorities if we:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | knowingly violate any laws of the foreign
    jurisdiction pertaining to our foreign gaming operations;                                                                                          
|
| |  | fail to conduct the foreign gaming operation in
    accordance with the standards of honesty and integrity required
    of Nevada gaming operations;                                             
|
| |  | engage in activities 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 foreign operation who has been denied a license or
    finding of suitability in Nevada on the grounds of personal
    unsuitability.

Federal Registration

WMS Gaming is required to register annually with
the Criminal Division of the United States Department of Justice
in connection with the sale, distribution or operation of gaming
equipment. The Federal Gambling Devices Act of 1962 (commonly
known as the Johnson Act) makes it unlawful, in general, for a
person to manufacture, transport or receive gaming machines,
gaming devices or components across interstate lines unless that
person has first registered with the U.S. Attorney General
of the Department of Justice. We also have various
record-keeping and equipment-identification requirements imposed
by this act. Violation of the Johnson Act may result in seizure
and forfeiture of the equipment, as well as other penalties. Our
gaming subsidiary is required to register and renew our
registration annually.

Native American Gaming Regulation

Numerous Native American tribes have become
engaged in or have licensed gaming activities on Native American
tribal lands as a means of generating revenue for tribal
governments. Gaming on Native American lands, including the
terms and conditions under which gaming equipment can be sold or
leased to Native American tribes, is or may be subject to
regulation under the laws of the tribes, the laws of the host
state, and the Indian Gaming Regulatory Act of 1988, which is
administered by the National Indian Gaming Commission and the
Secretary of the United States Department of the Interior.
Furthermore, gaming on Native American lands may also be subject
to the provisions of statutes relating to contracts with Native
American tribes, which are also administered by the Secretary of
the United States Department of the Interior.

The Indian Gaming Regulatory Act of 1988 requires
that the tribe and the host state enter into a written agreement
called a tribal-state compact, that specifically authorizes
Class III gaming, and that the compact has been approved by
the Secretary of the United States Department of the Interior,
with the notice of approval published in the Federal Register.
Tribal-state compacts vary from state to state. Many require
that equipment suppliers meet ongoing registration and licensing
requirements of the state and/or the tribe and some impose
background check requirements on the officers, directors,
principals and shareholders of gaming equipment suppliers. Under
the Indian Gaming Regulatory Act of 1988, tribes are required to
regulate all commercial gaming under ordinances approved by the
National Indian Gaming Commission. These ordinances may impose
standards and technical requirements on hardware and software
and may impose registration, licensing and background check
requirements on gaming equipment suppliers and their officers,
directors, principals and shareholders.

18



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We have the required licenses to manufacture and
distribute our products in the Native American jurisdictions in
which we do business and to operate our wide-area progressive
systems.

International Regulation

Many foreign jurisdictions permit the
importation, sale and/or operation of gaming equipment in casino
and non-casino environments. Where importation is permitted,
some countries prohibit or restrict the payout feature of the
traditional slot machine or limit the operation of slot machines
to a controlled number of casinos or casino-like locations. Each
gaming machine must comply with the individual
jurisdictions regulations. Some jurisdictions require the
licensing of gaming machine operators and manufacturers. We
manufacture and supply gaming equipment to various international
markets including Asia, Australia, Canada, Europe, South America
and South Africa. We have the required licenses to manufacture
and distribute our products in the foreign jurisdictions in
which we do business.

Seasonality

Sales of our gaming machines to casinos are
generally strongest in the spring and slowest in the summer
months. In addition, quarterly revenues and net income may
increase when we receive a larger number of approvals for new
games from regulators than in other quarters, when a game or
platform that achieves significant player appeal is introduced
or if gaming is permitted in a significant new jurisdiction.

Employees

At August 27, 2004, we employed
approximately 1,121 persons domestically and
44 abroad. Approximately 246 of our employees were
represented by the International Brotherhood of Electrical
Workers (the IBEW) at that date. We have a
collective bargaining agreement with the IBEW related to our
Waukegan, Illinois manufacturing facility, which expires on
June 30, 2006. We believe that our relations with our
employees are satisfactory.

Risk Factors

The most significant factors that make an
investment in our common stock risky or speculative are
discussed below. These factors may cause our operating results
to vary from anticipated results or may adversely affect our
operating results or the value of our common stock.

Software and hardware anomalies and fraudulent
manipulation of our gaming machines and associated software
could reduce our revenue, increase our costs, burden our
engineering and marketing resources, involve us in litigation
and adversely affect our gaming licenses.

Our success depends on our ability to avoid,
detect, replicate and correct software and hardware anomalies
and fraudulent manipulation of our gaming machines and
associated software. Our gaming machines and software have
experienced anomalies and fraudulent manipulation in the past.
Gaming machines may be replaced by casinos and other operators
if they do not perform according to expectations or may be shut
down by regulators. In the event of such issues with our gaming
machines and software, substantial engineering and marketing
resources may be diverted from other projects to correct these
issues, which may delay our other projects. In addition,
regulators may not approve new games, which may substantially
reduce our revenues. Our games are generally subject to rigorous
testing, both internally and by various gaming jurisdictions. We
cannot assure you that we will be able to build and maintain
software-based gaming devices that are free from anomalies or
manipulations and satisfy these tests. Our gaming machines have
in the past and could in the future be susceptible to software
anomalies and manipulation after the gaming software has been
widely distributed.

In addition, the occurrence of anomalies in, or
fraudulent manipulation of, our gaming machines and software may
give rise to claims for lost revenues and related litigation by
our customers and may subject us to investigation or other
action by gaming regulatory authorities including suspension or
revocation of our gaming licenses, or disciplinary action.

19



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Our gaming machine business is heavily
regulated, and we must obtain and maintain our gaming licenses
and regulatory approvals to continue to operate our business and
sell our products.

The manufacture and distribution of gaming
machines is subject to extensive federal, state, local and
foreign regulations and taxes. The governments of the various
gaming jurisdictions amend these regulations from time to time.
Virtually all of these jurisdictions require licenses, permits,
documentation of qualification, including evidence of financial
stability, and other forms of approval for manufacturers and
distributors of gaming machines and for their officers,
directors, major security holders and key personnel. The gaming
authorities in some jurisdictions may investigate any individual
who has a material relationship with us and any security holder
to determine whether the individual or security holder is
acceptable to those gaming authorities. Any security holder
investigated by the gaming authorities must pay the costs of the
investigation. Each of our games and gaming machine hardware and
software must be approved in each jurisdiction in which it is
placed, and we cannot assure you that a particular game or
hardware or software will be approved in any jurisdiction.
Licenses, approvals or findings of suitability may be revoked,
suspended or conditioned. The revocation or denial of a license
in a particular jurisdiction means that we cannot sell our
products in that jurisdiction, and could adversely affect our
ability to obtain or maintain licenses in other jurisdictions.

If we fail to seek or do not receive a necessary
registration, license, approval or finding of suitability, we
may be prohibited from selling our games or gaming machines for
use in the jurisdiction. Some jurisdictions require gaming
manufacturers to obtain government approval before engaging in
some transactions, such as business combinations,
reorganizations, stock offerings and repurchases. Obtaining
licenses and approvals can be time consuming and costly. We
cannot assure you that we will be able to obtain all necessary
registrations, licenses, permits, approvals or findings of
suitability in a timely manner, or at all. Similarly, we cannot
assure you that our current registrations, licenses, approvals
or findings of suitability will not be revoked, suspended or
conditioned.

Our profitability depends heavily on recurring
revenue from gaming operations, the loss of which could have a
material adverse effect on our revenues and
profitability.

Approximately $84.3 million, or 36.6%, of
our revenues for fiscal 2004, and $93.0 million, or 52.0%,
of our revenues in fiscal 2003, were derived from gaming
operations. In addition, for fiscal 2004, our gross margin on
gaming operations was 81.9% while our gross margin on product
sales was 40.1%. For fiscal 2003, our gross margin on gaming
operations was 77.4%, while our gross margin on product sales
was 39.2%. Therefore, our level of revenue from gaming
operations has a significant effect on our profitability.
Participation games are replaced by casino operators if the
gaming machines do not meet and sustain revenue and net win
expectations. Therefore, these gaming machines are particularly
susceptible to pressure from competitors, declining popularity
and changes in economic conditions and increased taxation and
are at risk of replacement by the casinos, ending the recurring
revenues from these machines. We cannot assure you that our
participation games will continue to meet the casinos
revenue requirements.

Patent infringement claims could limit or
affect our ability to market some of our gaming machines and
subject us to liability.

Our competitors have been granted patents
covering numerous gaming machine features and bonusing
techniques. If our products use processes or other subject
matter that is claimed under these existing patents, or if other
companies obtain patents claiming subject matter that we use,
those companies may bring infringement actions against us. We
might then be forced to discontinue the affected products or be
required to obtain licenses from the company holding the patent,
if it is willing to give us a license, to develop, manufacture
or market our products. We also might then be limited in our
ability to market new products. We might also be found liable
for treble damage claims relating to past use of the patented
subject matter.

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If we do not obtain and retain licenses to use
intellectual properties and licensors approvals of new
products on a timely basis, our revenues will be adversely
affected.

Some of our most popular gaming machines,
including our MONOPOLY branded games, are based on
trademarks and other intellectual properties licensed from third
parties. Our future success may depend upon our ability to
obtain and retain licenses for additional popular intellectual
properties. There is competition for these licenses, and we
cannot assure you that we will be successful in acquiring or
retaining additional intellectual property rights with
significant commercial value on acceptable terms. These
intellectual properties are licensed for a fixed term and
generally provide for minimum guaranteed royalties and other
obligations. We cannot assure you that we will be able to
maintain or renew the intellectual properties that we currently
license. We cannot assure you that we will be able to create
games using the intellectual properties that will generate
enough revenues for us to cover the minimum guaranteed royalties
and other fixed costs. In the event that we cannot renew our
existing licenses, we may be required to discontinue the
participation games bearing the licensed marks.

Our intellectual property licenses generally
require that we submit new products developed under these
licenses to the licensor prior to release for approval of our
use of the licensed property at their sole discretion. Rejection
or delay in approval of a product design by a licensor could
have a material adverse effect on our revenues, operating
results and financial condition.

If we are unable to protect or retain our
intellectual property and proprietary rights, our revenues may
be adversely affected.

Our success may depend in part on our ability to
obtain trademark protection for the names or symbols under which
we market our products and to obtain copyright protection and
patent protection of our proprietary software and other game
innovations. We cannot assure you that we will be able to build
and maintain goodwill in our trademarks or obtain trademark or
patent protection, that any trademark, copyright or issued
patent will provide competitive advantages for us or that our
intellectual properties will not be successfully challenged or
circumvented by competitors.

We also rely on trade secrets and proprietary
know-how. We enter into confidentiality agreements with our
employees regarding our trade secrets and proprietary
information, but we cannot assure you that the obligation to
maintain the confidentiality of our trade secrets or proprietary
information will be honored. Despite various confidentiality
agreements and other trade secret protections, our trade secrets
and proprietary know-how could become known to, or independently
developed by, competitors.

If we do not continue to introduce new games
and gaming machines that achieve and maintain market acceptance,
our revenues and profitability will be adversely affected, and
we will not recover our development costs.

Our success depends on continually developing and
successfully marketing new games and gaming machines with strong
and sustained player appeal. A new game or gaming machine will
be accepted by casino operators only if we can show that it is
likely to produce more revenues to the operator than
competitors products. Gaming machines can be installed in
casinos on a trial basis, and only after a successful trial
period are the machines purchased by the casinos. If a new
product does not achieve significant market acceptance, we may
not recover our development and promotion costs. We cannot
assure you that the new products that we introduce will achieve
any significant degree of market acceptance or that the
acceptance will be sustained for any meaningful period. We
cannot assure you that we will be able to maintain our current
schedule of planned introductions.

In addition, if we are unable to successfully
re-market legacy equipment held in inventory and used in
participation gaming operations through secondary markets, we
may incur charges to earnings.

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If we do not continually adapt to the rapid
development of new technologies, we will not be able to
successfully compete in our industry.

The gaming machine business is characterized by
the rapid development of new technologies and the continuous
introduction of new products using such technologies. We must
continually adapt our products to incorporate new technologies.
We cannot assure you that we will be able to develop products
using these new technologies or that we will be able to license
such technologies if owned by others.

Some of our competitors have advantages over
us in their ability to finance technology development and in
obtaining favorable placement in casinos, which may limit our
revenues.

The gaming machine business is intensely
competitive. Some of our competitors are large companies with
greater financial, marketing and product development resources
than ours. In addition, new competitors may enter our key
markets. Obtaining space and favorable placement on casino
gaming floors is a competitive factor in our industry.
Competitors with a larger installed base of gaming machines than
ours have an advantage in retaining the most space and best
positions in casinos. These competitors may also have the
advantage of being able to convert their installed machines to
newer models in order to maintain their share of casino floor
space. In addition, some of our competitors have developed and
sell or otherwise provide to customers wide-area progressive
systems or centralized player tracking and accounting systems
which allow operators to accumulate accounting and performance
data about the operation of gaming devices. We have just begun
to offer a proprietary wide-area progressive system and do not
offer a centralized player tracking and accounting system.

The gaming industry is sensitive to declines
in the public acceptance of gaming that may lead to the passage
of laws to significantly increase gaming taxes or outlaw gaming
in affected jurisdictions.

The gaming industry can be affected by public
opinion of gaming. In the event that there is a decline in
public acceptance of gaming, either through unfavorable
legislation affecting the introduction of gaming into emerging
markets, or through legislative and regulatory changes,
including tax increases, in existing gaming markets, our ability
to continue to sell and lease our games in those markets and
jurisdictions would be adversely affected. Recent tax structure
changes and rate increases in two jurisdictions have made gaming
in general, and specifically participation games, less
profitable in those jurisdictions. We cannot assure you that
public opinion will continue to support legalized gaming.

If we do not effectively operate our
manufacturing processes, we may not be able to fulfill
customers orders and may incur charges to
earnings.

Our manufacturing process is impacted by our
ability to: (1) procure raw materials from our suppliers on
a timely basis; (2) effectively manage raw materials during
the manufacturing process; (3) accurately configure orders
for gaming devices to customers specifications;
(4) efficiently utilize our manufacturing capacity;
(5) manufacture a quality product with minimal defects and
warranty issues; and (6) deliver gaming devices to our
customers on time. We cannot assure you that we will be able to
fulfill customers orders timely or at the highest level of
quality, and as a result customers could cancel orders and we
may incur charges to earnings.

We face risks associated with doing business
in foreign markets related to political and economic instability
and related foreign currency fluctuations.

We seek to grow through increasing our presence
in foreign markets. Potential political and economic instability
in foreign markets may adversely affect our ability to enter
into or continue to do business in these markets. Unstable
governments and changes in current legislation may affect the
gaming market with respect to gaming regulation, taxation, and
the legality of gaming in some markets. In addition,
fluctuations in foreign exchange rates, tariffs and other
barriers may further impede our success in foreign markets. We
cannot assure you that foreign markets will remain politically
and economically stable enough to continue as a potential source
of revenues and profit to us.

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If we do not realize the value of licensed
technology commitments, we may incur charges to
earnings.

We have entered into several agreements to
license intellectual property related to alternative solutions
as part of our technology improvement plan that, as of
June 30, 2004, had a total potential commitment of
$11.4 million. If we determine that we may not realize the
value of any of the commitments, we would record an immediate
charge against earnings up to the full amount of these
commitments in the period in which such determination is made.

If we do not realize the value of licensed
intellectual property and royalty commitments, we may incur
charges to earnings.

We have entered into several agreements to
license intellectual property and royalties related to new game
development, including an individual license which generated
over 20% of our consolidated revenue in fiscal 2004. At
June 30, 2004, we had a total potential commitment of
$92.7 million, including $11.4 million of licensed
technology commitments. If we determine that we may not realize
the value of any of the commitments, we would record an
immediate charge against earnings up to the full amount of these
commitments in the period in which such determination is made.

We may have conflicts of interest with Midway
Games Inc.

Four of our ten directors, including Louis J.
Nicastro, our Chairman of the Board, are directors of Midway
Games Inc., our former subsidiary. Tax related agreements remain
in effect between Midway and WMS. In addition, Sumner Redstone
who owns 24% of our common stock and is our largest stockholder
also owns a controlling interest of approximately 75% of Midway.
As several of our directors have responsibilities to both
entities, conflicts between us and Midway may arise, the
resolution of which may be less than optimal for us.

Sumner Redstone owns or controls 24% of our
outstanding common stock, and he may dispose of all or a portion
of his stock at any time, which could cause our stock price to
decrease.

Sumner Redstone beneficially owns
7.5 million shares, or 24%, of our common stock, as
reported in a Form 4, filed by Mr. Redstone with the
SEC on August 26, 2004. During June and July of 2004,
Mr. Redstone reported that he entered into five forward
transactions under which he will sell 4.0 million shares of
our common stock in several traunches beginning in March 2005
and ending in October 2005. These transactions, if completed,
will reduce his ownership to 11.2% of our outstanding common
stock by October 2005. In August 2004, Mr. Redstone sold
1.3 million shares of our common stock in open market
transactions. Mr. Redstone could sell any or all of his
remaining shares at any time on the open market or to a person
who wishes to acquire control of WMS. Such a sale may require
prior regulatory approval. We cannot assure you that any such
person would agree with our strategy and business goals
described in this report. Sales by Mr. Redstone of a large
number of shares would likely have an adverse effect on the
market price of our common stock.

The use of our rights plan or blank check
preferred stock would inhibit the acquisition of WMS or have a
dilutive effect on our stock.

Rights plan.Under
our rights plan, each share of our common stock has an
accompanying right to purchase convertible preferred stock that
permits each holder to purchase shares of our common stock at
half price. The rights become exercisable if any person or
entity who at the time of the adoption of the rights plan did
not own 15% or more of our common stock subsequently acquires
beneficial ownership of 15% or more of our common stock without
approval of our board of directors. We can redeem the rights at
$.01 per right, subject to specified conditions, at any time.
The rights expire in April 2007. Our board of directors could
use this agreement as an anti-takeover device to discourage,
delay or prevent a change in control. The use of our rights plan
may dilute our common stock.

Blank check preferred stock.Our certificate of incorporation
authorizes the issuance of five million shares of preferred
stock with designations, rights and preferences that may be
determined from time to time

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by the board of directors. Accordingly, our board
has broad power, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting
or other rights that could adversely affect the voting power or
other rights of the holders of our common stock. Our board of
directors could use preferred stock to discourage, delay or
prevent a change in control. Our board has no current plans,
agreements or commitments to issue any shares of preferred
stock. The existence of the blank check preferred stock,
however, could adversely affect the market price of our common
stock.


The substantial number of shares of common
stock available for sale in the future could have an adverse
effect on the market price of our common stock.

We have 100 million authorized shares of
common stock. As of August 27, 2004, 32.4 million
shares were issued, including 2.0 million shares held in
treasury. On that date, we also had outstanding options to
purchase an aggregate of 4.1 million shares of our common
stock issuable at an average exercise price of $19.05 per share
and outstanding warrants to purchase 250,000 shares of our
common stock issuable at an exercise price of $35.04 per share.
If all of our issued and outstanding stock options and warrants
were exercised as of that date, 36.8 million shares of our
common stock would be outstanding. If the holders of our
convertible subordinated notes converted all of the notes,
5.8 million additional shares of our common stock would be
issued. If all of the notes were converted to common stock and
all of the outstanding options and warrants were exercised,
57.4 million shares would still be available for issuance.
Our board of directors has broad discretion to issue authorized
but unissued shares, including discretion to issue shares in
compensatory and acquisition transactions. In addition, if we
seek financing through the sale of our securities, our then
current stockholders may suffer dilution in their percentage
ownership of our common stock. The future issuance, or even the
potential issuance, of shares at a price below the then current
market price may have a depressive effect on the future market
price of our common stock.

Item 2.     Properties.

The following table sets forth our principal
properties, and their principal uses, approximate floor space
and the annual rental and lease expiration dates, where leased,
at August 27, 2004.

|                                                                                                          |  |                                      |  |             |         |             |  |            |         |     |  |  |         | 
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------ |  | ----------- | ------- | ----------- |  | ---------- | ------- | --- |  |  | ------- | 
|                                                                                                          |  |                                      |  |             |         | Owned/      |  | Lease     
|                                                                                                          |  | Principal                            |  | Approximate |         | Annual      |  | Expiration
|Location                                                                                                  |  | Use                                  |  | Square Feet |         | Rent ($)(1) |  | Date      
|                                                                                                          |  |                                      |  |             |         |             |  |           
|800 S. Northpoint Rd.
    Waukegan, IL                                                                    |  | Principal Office
    & Manufacturing |  |             | 236,000 |             |  |            | Owned   |     |  |  |        | 
|                                                                                                         
|3401 N. California Avenue
    Chicago, IL                                                                 |  | Office/R&D                           |  |             | 129,400 |             |  |            | Owned   |     |  |  |        | 
|                                                                                                         
|880 Lakeside Drive
    Gurnee, IL                                                                         |  | Warehouse                            |  |             | 27,981  |             |  |            | 160,373 |     |  |  | 6/14/05 | 
|                                                                                                         
|1385 Pama Lane
    Las Vegas, NV                                                                          |  | Office/ Warehouse                    |  |             | 40,476  |             |  |            | 442,239 |     |  |  | 8/31/05 | 
|                                                                                                         
|1125 Atlantic Avenue
    Atlantic City, NJ                                                                |  | Office                               |  |             | 1,912   |             |  |            | 36,328  |     |  |  | 9/30/09 | 
|                                                                                                         
|2225 Village Drive
    Henderson, NV                                                                      |  | Office                               |  |             | 3,066   |             |  |            | 2,940   |     |  |  | 9/30/09 | 
|                                                                                                         
|Cnr. Reedbuck Cresent &
    Bushbuck Close
    Corporate Park South
    Midrand
    Guateng, South Africa |  | Office/ Warehouse                    |  |             | 13,131  |             |  |            | 53,280  | (2) |  |  | 5/31/07 | 

24



---



##### 



|                                                                                                                       |  |                   |  |             |        |             |  |            |         |        |  |                 |          |    
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | ----------- | ------ | ----------- |  | ---------- | ------- | ------ |  | --------------- | -------- | ---
|                                                                                                                       |  |                   |  |             |        | Owned/      |  | Lease     
|                                                                                                                       |  | Principal         |  | Approximate |        | Annual      |  | Expiration
|Location                                                                                                               |  | Use               |  | Square Feet |        | Rent ($)(1) |  | Date      
|                                                                                                                       |  |                   |  |             |        |             |  |           
|Ronda de Can Fatjo, 7B
    Edificio E1
    Parque Technologico del Valles
    08290 Cerdanyola,
    Barcelona, Spain   |  | Office/ Warehouse |  |             | 15,509 |             |  |            | 216,243 | (3)    |  |                 | 4/01/09  |    
|                                                                                                                      
|350 Commerce Dr.
    Egg Harbor Township, NJ                                                                           |  | Office/ Warehouse |  |             | 16,500 |             |  |            | 101,178 |        |  |                 | 9/30/06  |    
|                                                                                                                      
|1760 N. Corrington Ave.
    Kansas City, MO                                                                            |  | Office/ Warehouse |  |             | 13,340 |             |  |            | 162,975 |        |  |                 | 3/31/06  |    
|                                                                                                                      
|25 East Glenwood Avenue
    Duck Creek Plaza
    Smynra, DE                                                            |  | Warehouse         |  |             | 1,000  |             |  |            | 7,500   |        |  |                 | 2/28/06  |    
|                                                                                                                      
|6620 Escondido Terrace
    Suite F
    Las Vegas, NV                                                                   |  | Warehouse         |  |             | 13,200 |             |  |            | 7,117   | (4)    |  | month- to-month
|                                                                                                                      
|6845 Escondido Street
    Suite 100-103 Las Vegas, NV                                                                  |  | Office            |  |             | 10,253 |             |  |            | 9,230   | (4)    |  |                 | 8/30/05  |    
|                                                                                                                      
|2500 Quantum Lakes Drive
    Suite 203
    Boynton Beach, FL                                                           |  | Office            |  |             | 120    |             |  |            | 700     | (4)    |  |                 | 7/31/05  |    
|                                                                                                                      
|5355 Capital Court
    Suites 110-111
    Reno, NV                                                                     |  | Office/ Warehouse |  |             | 19,200 |             |  |            | 172,236 |        |  |                 | 7/31/07  |    
|                                                                                                                      
|12450 Short Cut Rd.
    Biloxi, MS                                                                                     |  | Office/ Warehouse |  |             | 8,250  |             |  |            | 4,850   | (4)    |  |                 | 10/31/04 |    
|                                                                                                                      
|420 Corporate Circle
    Suite C
    Golden, CO.                                                                       |  | Office/ Warehouse |  |             | 1,500  |             |  |            | 1,909   | (4)    |  |                 | 2/15/05  |    
|                                                                                                                      
|616-620 Harris Street
    Level 5
    Ultimo, NSW Australia                                                            |  | Office/R&D        |  |             | 9,051  |             |  |            | 5,318   | (4)(5) |  |                 | 12/31/04 |    
|                                                                                                                      
|600 N. Pine Island Road
    Suites 444 and 450
    Plantation, FL                                                      |  | Office            |  |             | 200    |             |  |            | 2,636   | (4)    |  |                 | 8/31/04  |    
|                                                                                                                      
|Office # G15,
    1 Furzeground Way,
    Stockley Park East,
    Uxbridge, Middlesex,
    UB11 1BD,
    United Kingdom |  | Temporary Office  |  |             | 5,000  |             |  |            | 6,594   | (6)    |  |                 | 9/1/04   | (7)
|                                                                                                                      
|Riverchase Commons, Suite 7
    3444 Casino Way
    Robinsville, MS                                                    |  | Office            |  |             | 1,200  |             |  |            | 600     | (4)    |  |                 | 5/31/05  |    

25



---



##### 



|                                                                                                                                  |  |                                               |  |             |         |             |  |            |           |      |  |  |         |     
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- |  | ----------- | ------- | ----------- |  | ---------- | --------- | ---- |  |  | ------- | ----
|                                                                                                                                  |  |                                               |  |             |         | Owned/      |  | Lease     
|                                                                                                                                  |  | Principal                                     |  | Approximate |         | Annual      |  | Expiration
|Location                                                                                                                          |  | Use                                           |  | Square Feet |         | Rent ($)(1) |  | Date      
|                                                                                                                                  |  |                                               |  |             |         |             |  |           
|Part Second Floor,
    Capital Court,
    Theobalds Road
    Uxbridge, London
    WC1X 8RW,
    United Kingdom(8)                |  | Office                                        |  |             | 6,000   | (8)         |  |            | 255,056   | (9)  |  |  | 9/1/14  | (10)
|                                                                                                                                 
|10441 Corporate Drive
    Gulfport, MS                                                                                            |  | Office/Warehouse                              |  |             | 25,000  | (12)        |  |            | 200,400   |      |  |  | 10/1/14 |     
|                                                                                                                                 
|7.7 Acre lot at
    SE corner of Pilot Road and
    Airport Connector Underpass;
    Hughes Airport Center,
    Las Vegas, NV(11) |  | Office, warehouse, assembly, and distribution |  |             | 120,000 | (12)        |  |            | 1,341,876 | (13) |  |  | 7/31/15 | (14)




| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Under leases that contain renewal options,
    additional amounts may be payable for taxes, insurance,
    utilities and maintenance.                         
|
| | (2) | 360,000 South African Rand, excluding VAT.
    Converted, for your convenience, at an exchange rate of 6.7568
    Rand per U.S. Dollar on August 27, 2004     
|
| | (3) | 180,000 Euros. Converted, for your
    convenience, at an exchange rate of .8324 Euros per
    U.S. Dollar on August 27, 2004.                                
|
| | (4) | Monthly rent.                                                                                                                                                 
|
| | (5) | A$90,750 Australian Dollars. Converted, for your
    convenience, at an exchange rate of 1.4221 Australian Dollars
    per U.S. Dollar on August 27, 2004.    
|
| | (6) | £3,673 English Pounds. Converted for your
    convenience, at an exchange rate of .5587 English Pounds per
    U.S. Dollar on August 27, 2004.                
|
| | (7) | Lease for two months with month to month
    extensions.                                                                                                      
|
| | (8) | Estimated square footage, final determination
    subject to completion of build-out of lease space.                                                          
|
| | (9) | £23.75 English Pounds per square foot.
    Converted for your convenience, at an exchange rate of .5587
    English Pounds per U.S. Dollar on August 27, 2004.



|     |                                                                                                                                                                                                                                                                                           
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Estimated expiration date of lease term. Term of
    the lease shall run for ten years from the Term Commencement
    Date, being the date which is five business days after landlord
    completes agreed upon improvements to the lease premises, which
    improvements are in process.
|    
|(11) | Agreement and lease was executed as of
    July 1, 2004 providing for the leasing of land and a
    building to be built for WMSs exclusive use.
    August 1, 2005 is the estimated completion date of
    construction.                                                                
|    
|(12) | Estimated rentable square feet within
    improvements to be constructed.                                                                                                                                                                                                                 
|    
|(13) | Estimated annual rent as of August 27, 2004.
    The actual rental amount is subject to adjustment pursuant to
    the terms of the lease upon completion of construction of the
    improvements.                                                                                        
|    
|(14) | Estimated lease commencement date is
    August 1, 2005, with a ten-year lease term. WMS has right
    to extend the lease for one ten-year renewal term.                                                                                                                                 

We believe that the facilities listed in the
table above are adequate for our current needs. We own
substantially all of the machinery, equipment, tools and dies,
furnishings and fixtures used in our businesses, all of which
are adequate for the purposes intended.

Our Waukegan, Illinois facility was built in 1995
and expanded and improved in 1998. It is our sole manufacturing
facility and corporate headquarters and includes warehouse
space. We have plans to expand this facility beginning in fiscal
2005 to ensure it is adequate in capacity and condition to
satisfy our growing

26



---



##### 



requirements for the future. We also maintain
leased space in major gaming jurisdictions described above to
support sales efforts, product delivery and field service
operations in those areas.


Our facility in Chicago, Illinois has been
renovated into a research and development center to accommodate
the growth of our engineering and game development staff. We are
currently planning expansion of this facility and/or the
purchase and renovation of additional space in fiscal 2005.

Item 3.     Legal
Proceedings.

On October 2, 2003, La Societe
de Loteries du Quebec (Loto-Quebec) filed claims
against us and Video Lottery Consultants Inc., a subsidiary of
IGT (VLC) in the Superior Court of the Province of Quebec. The
pleadings allege that Loto-Quebec would be entitled to be
indemnified by the manufacturers of Loto-Quebecs VLTs,
specifically WMS and VLC, if the class action plaintiffs,
described below, are successful in the pending class action
lawsuit against Loto-Quebec. We are currently proceeding with
discovery, and we intend to vigorously defend ourselves against
the allegations. We are unable to predict the outcome of these
actions, or a reasonable estimate of the range of possible loss,
if any.

The class action lawsuit discussed in
Loto-Quebecs claim was brought on May 18, 2001
against Loto-Quebec in the Superior Court of the Province of
Quebec. It alleges that the members of the class developed a
pathological gambling addiction by using Loto-Quebecs VLTs
and that Loto-Quebec, as owner, operator and distributor of
VLTs, failed to warn players of the alleged dangers associated
with VLTs. Class status was granted by the Court on May 6,
2002, authorizing Jean Brochu to act as the representative
plaintiff. The class of 119,000 members is requesting damages
totaling almost $700 million Canadian dollars, plus
interest.

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

Not applicable.

27



---



##### 



PART II



|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and
    Related Stockholder Matters.

Our common stock, par value $0.50, trades
publicly on the New York Stock Exchange under the symbol
WMS. The following table shows the high and low sale
prices of our common stock for the two most recent fiscal years,
as reported on the NYSE:

|                                |                |          |  |         |  |  |  |       | 
|------------------------------- | -------------- | -------- |  | ------- |  |  |  | ----- | 
|                                |                | High ($) |  | Low ($)
|                                |                |          |  |        
|Fiscal Year Ended June 30, 2004 |                |          |  |         |  |  |  |      
|                                | First Quarter  |          |  | 26.08   |  |  |  | 15.38 | 
|                                | Second Quarter |          |  | 27.75   |  |  |  | 22.60 | 
|                                | Third Quarter  |          |  | 32.40   |  |  |  | 25.17 | 
|                                | Fourth Quarter |          |  | 32.95   |  |  |  | 25.35 | 
|Fiscal Year Ended June 30, 2003 |                |          |  |         |  |  |  |      
|                                | First Quarter  |          |  | 16.30   |  |  |  | 9.28  | 
|                                | Second Quarter |          |  | 18.10   |  |  |  | 11.96 | 
|                                | Third Quarter  |          |  | 15.82   |  |  |  | 10.50 | 
|                                | Fourth Quarter |          |  | 17.70   |  |  |  | 12.00 | 

On August 27, 2004, there were approximately
945 holders of record of our common stock.

No cash dividends were declared or paid on our
common stock during fiscal 2004 or 2003. The payment of future
cash dividends will depend upon, among other things, our
earnings, anticipated expansion and capital requirements and
financial condition. We do not expect to pay cash dividends in
the foreseeable future.

We have agreed to make additional payments of
interest on our convertible subordinated notes if we declare a
cash dividend on our common stock. The amount of the payments
will be equal to the cash dividends that would be payable to the
holders of the notes if the holders had converted their notes
into shares of our common stock on the record date for the
dividend. However, no such payment will be made if the dividend
that would otherwise trigger the payment causes an adjustment to
the note conversion rate.

Our loan agreement requires that we maintain a
minimum amount of tangible net worth and certain financial ratio
covenants which could limit our ability to declare dividends or
make any distribution to holders of any shares of capital stock,
or redeem or otherwise acquire such shares of the our Company.
As of June 30, 2004, approximately $29.4 million was
available for such distributions under the most restrictive of
these covenants.

On August 9, 2004, our Board of Directors
authorized the repurchase of up to $20 million of our
common stock over the next twelve months. The purchases may be
made from time to time in open market or privately negotiated
transactions. The timing and actual number of shares repurchased
will depend on market conditions.

28



---



##### 



Stock Option Plans

The following is a summary of the securities
authorized for issuance under our equity compensation plans as
of June 30, 2004:

|                                                           |       |                                      |     |                  |  |                         |       |       |  |  |     |     | 
|---------------------------------------------------------- | ----- | ------------------------------------ | --- | ---------------- |  | ----------------------- | ----- | ----- |  |  | --- | --- | 
|                                                           |       |                                      |     |                  |  | (c) Number of          
|                                                           |       |                                      |     | (b) Weighted-    |  | securities remaining   
|                                                           |       | (a) Number of                        |     | average exercise |  | available for future   
|                                                           |       | securities to be                     |     | price of         |  | issuance under         
|                                                           |       | issued upon exercise                 |     | outstanding      |  | equity compensation    
|                                                           |       | of outstanding                       |     | options,         |  | plans (excluding       
|                                                           |       | options, warrants                    |     | warrants and     |  | securities reflected in
|Plan category                                              |       | and rights                           |     | rights           |  | column (a))            
|                                                           |       |                                      |     |                  |  |                        
|                                                           |       |                                     
|                                                           |       | (in millions, except exercise price)
|Equity compensation plans approved by stockholders         |       |                                      | 2.1 |                  |  | $                       | 19.80 |       |  |  | 0.2 |    
|Equity compensation plans not approved by
    stockholders |       |                                      | 1.7 |                  |  |                         | 17.35 |       |  |  | 0.1 |    
|                                                           |       |                                      |     |                  |  |                         |       |       |  |  |     |    
|                                                           | Total |                                      |     | 3.8              |  |                         | $     | 18.72 |  |  |     | 0.3 | 
|                                                           |       |                                      |     |                  |  |                         |       |       |  |  |     |    

The average exercise price of outstanding
options, at August 27, 2004, was approximately
$19.05 per share. Of the 4.1 million options
outstanding on August 27, 2004, 1.7 million were held
by our officers and directors.

We have the following stock option plans in
effect: our 1991, 1994, 1998, 2000 and 2002 Stock Option Plans,
each of which was approved by our stockholders, and our 1998 and
2000 Non-Qualified Stock Option Plans, which were approved by
our Board of Directors. All of these plans are referred to
collectively below as the Plans. The Plans permit us
to grant options to purchase shares of our common stock. These
options may be granted as incentive stock options, designed to
meet the requirements of Section 422 of the Internal
Revenue Code, except for options granted under the 1998 and 2000
Non-Qualified Stock Option Plans, or they may be
non-qualified options that do not meet the
requirements of that section.

The purpose of each of the Plans is to encourage
our employees and, under some of the Plans, non-employee
directors, consultants and advisors to acquire an ownership
interest in our common stock and to enable these individuals to
realize benefits from an increase in the value of our common
stock. We believe that this benefit provides these individuals
with greater incentive to work to improve our business and
encourages their continued provision of services to us and,
generally, promotes our interests and those of our stockholders.
The Compensation Committee of the Board of Directors determines
which of the eligible directors, officers, employees,
consultants and advisors receive stock options, the terms,
including any vesting periods of the options, and the number of
shares for which options are granted. The option price per share
with respect to each option is determined by the Compensation
Committee and generally is not less than the fair market value
of our common stock on the date on which the option is granted.
The Plans each have a term of ten years, unless terminated
earlier, and the options granted under the Plans have terms up
to 10 years.

Treasury Share Bonus Plan and Restricted Stock
Grants

Our Treasury Share Bonus Plan for key employees
covers 64,312 shares of common stock held in the treasury, of
which none were available for grant on June 30, 2004. Upon
the recommendation of our Compensation Committee, we have, on
occasion, granted restricted stock to our employees, officers,
directors or consultants to motivate them to devote their full
energies to our success, to reward them for their services and
to align their interests with the interests of our stockholders.
In June 2003, 29,912 restricted shares were granted to officers
of the Company. The grant was made in consideration of their
time and efforts in the oversight of the implementation of our
technology improvement plan. The restricted shares vested on
June 11, 2004. On May 10, 2004, our Compensation
Committee approved the award of 52,312 shares of restricted
stock under our Treasury Share Bonus Plan with a weighted
average fair value at grant date of $28.73 per share or
$1.5 million in the aggregate, to certain of our executive
officers and other vice presidents in lieu of any cash bonuses
for fiscal 2004. See Issuance of Unregistered
Securities below.

29



---



##### 



Issuance of Unregistered Securities

In September 2003, the Board of Directors, as
part of the inducement to a licensor to extend its license
agreement with us, approved a grant of 250,000 common stock
purchase warrants. The warrants exercise price is $35.04
per share of our common stock, subject to adjustment. The
warrants vest with respect to 20% of the underlying shares in
each year commencing on January 1, 2007 until fully vested
on January 1, 2011, subject to earlier vesting under
specified circumstances. The warrants expire on
September 14, 2013. The grant was exempt from registration
under Section 5 of the Securities Act, since it was made
only to the licensor and did not involve any public offering
under Section 4(2) of the Securities Act.

Effective May 10, 2004, the Board of
Directors, upon the recommendation of the Compensation
Committee, approved a grant of restricted stock of 52,312 shares
of restricted stock in the aggregate to certain of our executive
officers and other vice presidents in lieu of any cash bonuses
for fiscal 2004. The grant was made in consideration of their
time and efforts in the oversight of the implementation of our
technology improvement plan and re-emergence efforts. The
restricted shares will vest on May 10, 2005, subject to the
individuals continued employment with WMS. The grant was
exempt from registration under Section 5 of the Securities
Act since it was made only to these officers and did not involve
any public offering, under Section 4(2) of the Securities
Act. We expect to register the resale of the underlying common
stock with the SEC prior to May 10, 2005.



|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |       |    
|---------------------------------------------------------------- | ---------------------------------------- | --------------------------------------- | ----- | ----- | - | ---- | ----- | ----- | ---- | ---- | ----- | ---- | --- | - | ----- | ---- | --- | - | ----- | ----- | ---
|                                                                 |                                          |                                        
|                                                                 |                                          | Fiscal Year Ended June 30,             
|                                                                 |                                          |                                        
|                                                                 |                                          | 2004                                    |       | 2003  |   | 2002 |       | 2001  |      | 2000
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |     
|                                                                 |                                          |                                        
|                                                                 |                                          | (In millions, except per share amounts)
|Statement of Operations Data:                                    |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Revenues                                                         |                                          | $                                       | 230.2 |       |   | $    | 178.7 |       |      | $    | 174.7 |      |     | $ | 263.8 |      |     | $ | 217.6 |      
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Operating income (loss)                                          |                                          |                                         | (1.8  | )     |   |      | (17.6 | )     |      |      | 12.6  |      |     |   | 44.2  |      |     |   | 68.0  |      
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Income (loss) from continuing operations before
    income taxes |                                          |                                         | (3.0  | )     |   |      | (18.9 | )     |      |      | 15.5  |      |     |   | 50.0  |      |     |   | 71.4  |      
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Provision (benefit) for income taxes                             |                                          |                                         | (2.1  | )     |   |      | (10.6 | )     |      |      | 5.6   |      |     |   | 18.1  |      |     |   | 27.0  |      
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Income (loss) from continuing operations                         |                                          |                                         | (0.9  | )     |   |      | (8.3  | )(1)  |      |      | 9.9   | (3)  |     |   | 31.9  | (4)  |     |   | 44.4  | (5)  
|Discontinued operations, net of applicable income
    taxes:     |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Pinball and cabinets segment             |                                         |       |      |   |      |       |      |      |      |       |     |     |   |       | 4.4  |     |   |       | (13.5 | )  
|                                                                 | Contract manufacturing segment           |                                         |       |      |   |      |       |      |      |      |       |     |     |   |       |     |     |   |       | (1.1  | )  
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Net income (loss)                                                |                                          | $                                       | (0.9  | )     |   | $    | (8.3  | )     |      | $    | 9.9   |      |     | $ | 36.3  |      |     | $ | 29.8  |      
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Basic earnings per share of common
    stock:                    |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Income (loss) from continuing operations |                                         | $     | (0.03 | ) |      | $     | (0.27 | )(1) |      | $     | 0.31 | (3) |   | $     | 1.01 | (4) |   | $     | 1.45  | (5)
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Net income (loss)                        |                                         | $     | (0.03 | ) |      | $     | (0.27 | )    |      | $     | 0.31 |     |   | $     | 1.15 |     |   | $     | 0.97  |    
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Basic shares outstanding                 |                                         |       | 29.7  |   |      |       | 30.4  |      |      |       | 32.1 |     |   |       | 31.6 |     |   |       | 30.6  |    
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|Diluted earnings per share of common
    stock:                  |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Income (loss) from continuing operations |                                         | $     | (0.03 | ) |      | $     | (0.27 | )(1) |      | $     | 0.30 | (3) |   | $     | 1.00 | (4) |   | $     | 1.42  | (5)
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Net income (loss)                        |                                         | $     | (0.03 | ) |      | $     | (0.27 | )    |      | $     | 0.30 |     |   | $     | 1.13 |     |   | $     | 0.95  |    
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      
|                                                                 | Diluted shares outstanding               |                                         |       | 29.7  |   |      |       | 30.4  |      |      |       | 32.5 |     |   |       | 32.0 |     |   |       | 31.3  |    
|                                                                 |                                          |                                         |       |       |   |      |       |       |      |      |       |      |     |   |       |      |     |   |       |      

30



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##### 



|                    |                           |                            |   |       |     |      |   |       |     |      |   |       |  |  |   |       |  |  |   |       | 
|------------------- | ------------------------- | -------------------------- | - | ----- | --- | ---- | - | ----- | --- | ---- | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |                           |                           
|                    |                           | Fiscal Year Ended June 30,
|                    |                           |                           
|                    |                           | 2004                       |   | 2003  |     | 2002 |   | 2001  |     | 2000
|                    |                           |                            |   |       |     |      |   |       |     |     
|                    |                           |                           
|                    |                           | (in millions)             
|Balance Sheet Data: |                           |                            |   |       |     |      |   |       |     |      |   |       |  |  |   |       |  |  |   |      
|                    | Cash and cash equivalents |                            | $ | 59.9  | (2) |      | $ | 99.6  | (2) |      | $ | 31.4  |  |  | $ | 15.0  |  |  | $ | 19.9  | 
|                    | Short-term investments    |                            |   | 55.8  |     |      |   | 58.4  |     |      |   | 72.9  |  |  |   | 71.5  |  |  |   | 60.8  | 
|                    | Working capital           |                            |   | 237.5 |     |      |   | 220.9 |     |      |   | 171.0 |  |  |   | 173.1 |  |  |   | 146.3 | 
|                    | Total assets              |                            |   | 395.0 |     |      |   | 351.0 |     |      |   | 281.2 |  |  |   | 278.5 |  |  |   | 239.0 | 
|                    | Long-term debt            |                            |   | 115.0 | (2) |      |   | 100.0 | (2) |      |   |      |  |  |   |      |  |  |   |      | 
|                    | Stockholders equity      |                            |   | 239.5 |     |      |   | 221.2 |     |      |   | 259.5 |  |  |   | 256.4 |  |  |   | 205.4 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss from continuing operations for fiscal 2003
    includes: (i) an after-tax charge of $1.7 million to
    write-off a technology license agreement obligation that we no
    longer intend to implement as an alternative operating system,
    (ii) an after-tax charge of $1.0 million related to an
    estimated impairment of the SURVIVOR intellectual
    property license and related inventory, (iii) an after-tax
    charge of $2.2 million related to the purchase of rights to
    restricted stock at a discount from market value, (iv) an
    after-tax charge of $2.1 million to write-off inventory and
    distribution rights for RAPID ROULETTETM,
    (v) an after-tax benefit of $0.7 million in the
    quarter ended March 31, 2003 and an after-tax benefit of
    $3.4 million in the quarter ended June 30, 2003, for
    tax adjustments resulting from finalizing prior year tax
    returns; and (vi) a $4.0 million pre-tax and after-tax
    charge related to tax settlement agreements with Midway.
|   
|(2) | Reflects the receipt of the net proceeds from our
    June 2003 issuance and sale of $100 million of 2.75%
    convertible subordinated notes due July 15, 2010. On
    July 3, 2003, we issued an additional $15 million of
    these notes upon exercise of the over allotment option in the
    note purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(3) | Income from continuing operations for fiscal 2002
    includes an after-tax charge of $0.8 million for employee
    separation costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(4) | Income from continuing operations for fiscal 2001
    includes an after-tax charge of $13.0 million related to an
    executive buyout agreement, and an after-tax charge of
    $2.3 million for the costs of relocating our manufacturing
    and executive offices to Waukegan, Illinois during the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(5) | Income from continuing operations for fiscal 2000
    includes an after-tax reversal of an excess accrual of
    $9.7 million related to patent litigation, and an after-tax
    charge of $1.2 million from our 1998 spin-off of Midway
    related to the adjustment of compensatory stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations.

As used in this report on Form 10-K, the
terms we, us, our, and
WMS mean WMS Industries Inc., a Delaware
corporation, and its subsidiaries. Gaming
operations, as used throughout this report, includes the
gaming machines that we lease based upon any of the following
payment methods: (1) a percentage of the net win of the
gaming machines, (2) fixed daily fees, or (3) in the
case of wide-area progressive gaming machines, a percentage of
the amount wagered, called coin-in.

Overview

Our historical product sales strength has been in
the multi-line, multi-coin video product line, which, together
with our VLT product, accounted for substantially all of our new
product sales for the past three fiscal years. An element of our
strategy is to become a full service gaming device provider to
casinos by developing and obtaining regulatory approval for
three additional product lines:



| |   |                                             
| | - | --------------------------------------------
| |  | mechanical reel games;                      
|
| |  | video poker games; and                      
|
| |  | wide-area progressive (WAP) jackpot systems.

31



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We believe these new product lines account for
approximately 75% of the typical casino slot floor and represent
a significant market share growth opportunity for us.

As a result of software anomalies that were
present in our legacy operating system that ran our gaming
devices, in January 2002, we began to execute a technology
improvement plan to first stabilize and then modernize our
operating system software. Customers were apprised of this
technology improvement plan and our intention to introduce our
new Bluebird gaming cabinet and new CPU-NXT
computer circuit board and operating system that would provide
features and functionality that our earlier products lacked. As
a result, since January 2002, our product sales revenues have
declined from levels experienced in fiscal 2001. As we have
received regulatory approvals throughout fiscal 2004 for our new
CPU-NXT computer circuit board and operating system, new
Bluebird cabinet and new games from each of the six North
American gaming labs, our product sales revenues have increased,
and we expect that they will continue to grow as we receive
additional approvals and ship our new games to more
jurisdictions.

The most significant accomplishment for us in
fiscal 2004 was the receipt of necessary regulatory approvals
from the six North American gaming labs for our new video and
mechanical reel platform, which positioned us to launch our new
products and re-launch the Company. Heading into fiscal 2004, we
had dramatically changed the manner in which we dealt with the
regulatory agencies. Through this new focus we were able to
garner, on schedule, substantially all of the approvals, which
included gaming lab and field trial requirements for the new
operating systems and gaming cabinets for both our video and
mechanical reel products, alternative peripheral equipment
approvals and ticket-in ticket-out cashless gaming system
approvals. With these approvals now in hand, we expect fiscal
2005, 2006 and 2007 will mark a period during which we expand
our market share on casino floors due to the launch of our new
video, WAP and poker products and the impending shipment of our
first mechanical reel products.



| |                            
| | ---------------------------
| | Technology Improvement Plan

In the first phase of our three-part technology
improvement plan, we improved the stability of our operating
system by introducing two software upgrades, version 2.57 for
hopper-based games which pay out in coins and version 2.59 for
printer-based games which pay out in printed tickets. Version
2.57 has been approved by all six of the North American gaming
labs, and we were required to and completed an upgrade of our
hopper game operating system to version 2.57 in four
jurisdictions. Gaming Laboratories International, Inc. (GLI) has
recently required us to complete an upgrade of hopper-based
games to version 2.57 by December 2004 for all the jurisdictions
that it covers. The GLI lab tests product for all of the Native
American casinos and the Midwest riverboat casinos, among
others, where in the aggregate we believe about 50% of our
existing gaming devices are deployed. Other jurisdictions may
require upgrades in the future. Version 2.57 is available in
other jurisdictions as an optional upgrade. GLI approved version
2.59, our printer upgrade version, in March 2003. The Nevada
gaming authorities approved version 2.59 in September 2003. We
have installed version 2.59 in several riverboat and Native
American casinos, which use GLI, and will be upgrading all of
our printer gaming machines installed in casinos in Nevada and
GLI to version 2.59. Nevada and GLI are currently the only
jurisdictions requiring all printer games be upgraded to version
2.59. Other jurisdictions may require upgrades in the future,
and version 2.59 is available in other approved jurisdictions as
an optional upgrade.

The second phase of our technology improvement
plan consisted of the development, approval and introduction of
our new CPU-NXT computer circuit board and operating
system. The commercial version of CPU-NXT was approved by
GLI in September 2003 when we also received GLI approval for
nine game themes on this new system. We subsequently received
regulatory approvals from the other five North American gaming
labs. We also have received ticket-in ticket-out approvals and
alternative peripheral equipment approvals from most North
American gaming labs.

We are evaluating specifications and requirements
and acquiring intellectual property rights for an even more
advanced gaming system that will be developed during the third
phase of the technology improvement plan. We continue to refine
the design and specifications to incorporate additional features
we desire for this platform and continue to allocate resources
to this longer-term effort.

32



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##### 





| |                                           
| | ------------------------------------------
| | Bluebird and CPU-NXT
    Commercialization

Our focus in the near term is to refresh our
existing installed base of more than 50,000 video gaming devices
in casinos through either replacement with new Bluebird
video gaming devices or through CPU-NXT upgrade kits. We
received the first approval from GLI for the marketable version
of the Bluebirdvideo cabinet at the end of November
2003. We have now received approvals from the other five North
American gaming labs. Each gaming lab approval of the
CPU-NXT operating system also allows us to submit new
games designed for use with that system to the regulators for
approval, which enables us to sell and ship additional
Bluebird video gaming devices and CPU-NXT upgrade
kits. By September 30, 2004 we expect to have the approvals
for all hardware peripheral options, such as alternative coin
handling, printing and bill accepting equipment.

Customer acceptance of Bluebird video
gaming devices and our new game themes continues to be very
favorable. Since we started selling Bluebird video gaming
devices in September 2003, we have executed corporate agreements
or issued sales orders for 22,285 Bluebird video gaming
devices and CPU-NXT kits, addressing roughly 45% of the
50,000 plus WMS legacy video gaming devices in casinos. Through
June 30, 2004, 8,591 of these orders had been shipped, or
approximately 17% of the 50,000 WMS legacy gaming devices. These
corporate agreements are with multi-jurisdictional casino
operators such as Harrahs, Argosy, Ameristar, Boyd,
Caesars, Stations, Majestic Star, Pinnacle, Aztar,
Mandalay Bay and Isle of Capri, along with a number of tribal
and individual casino properties. We expect order levels to
continue at a strong pace now that the first Bluebird
video gaming devices and new game themes are generating strong
performance data, and we have all necessary regulatory
approvals. We also expect strength in game conversion revenues
over the next several quarters, as operators see the value and
performance benefits of our CPU-NXT upgrade kits and
printer upgrades.



| |                            
| | ---------------------------
| | Product Line Expansion Plan

In January 2004, we received Nevada regulatory
approval for our new mechanical reel product and three new game
themes, including two wide area progressive system game themes
and one for sale game theme. We received GLI
approval for our mechanical reel product and three new game
themes in March 2004. We have now received regulatory approvals
for the mechanical reel operating system and the modifications
for the Bluebird gaming cabinet in all six of the North
American gaming labs. After receiving customer feedback,
however, we delayed the launch of this product line until
September 2004 in order to be able to offer six initial game
themes at once. We believe it is prudent for us to cluster six
new titles together to successfully launch this important new
product line. In Nevada, we expect to complete field trials and
receive approvals of the ticket-in-ticket-out systems on the
mechanical reel-spinning product in time for this important
product launch.

For our new poker products, our first poker game,
3 WAY-ACTION, was approved by GLI in June 2004, and we
shipped our first game to customers in GLI territories in July
2004. We expect to receive approvals from the other five gaming
labs in the September 2004 quarter.

In May 2004, we received Nevada Gaming Control
Board approval and Nevada Gaming Commission approvals for our
WAP. We launched the product in Nevada in late May 2004, one
month earlier than our original expectation. We received GLI
approval for our new progressive jackpot system also in May 2004
and launched the product in two Native American casinos in June
2004.



| |               
| | --------------
| | Brand Licenses

During the September 2003 quarter, we extended
our agreement with Hasbro, Inc. for the use of their
MONOPOLY brand through calendar year 2011. As a result of
the extension, we intend to continue to devote development
efforts and intellectual property to the MONOPOLY brand
in the coming years. We launched five new MONOPOLY themed
participation games in fiscal 2004 including our first
proprietary WAP system featuring the MONOPOLY Money
progressive jackpot.

33



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##### 



In the March 2004 quarter, we launched the fifth
game in the HOLLYWOOD SQUARES themed series of
participation games called Tour of Stars, and in July
2004, we launched the sixth game in the series, Prize
Spin.

In September 2003, we announced our agreement
with Sony Pictures Consumer Products to develop, market and
distribute MEN IN BLACK branded games. We introduced this
new series of participation games in our new Bluebird
cabinet in June 2004.

We launched MATCH GAMETM as a
hybrid game in our new Bluebird cabinet in July 2004.
MATCH GAME will be the first game in our new Classic
TV Game Show series of hybrid games.

In October 2003, we entered into an exclusive
agreement to develop, market and distribute games using the
lottery brand POWERBALL® that we are developing as a
wide-area progressive game for launch in the fall of 2005.



| |                
| | ---------------
| | Class II Gaming

Effective April 1, 2004, we executed an
agreement with Multimedia to expand and extend our relationship
to address opportunities in Class II, Charitable Gaming and
Tribal Instant Lottery Gaming markets. Through this new two-year
agreement, Multimedia will license additional WMS game themes,
and we will serve as Multimedias primary original
equipment manufacturer of gaming cabinets.

The expanded relationship will address the Native
American Class II, emerging Charitable Gaming markets and
certain compacted markets (including Washington State and
Oklahoma, if legislation permitting gaming is enacted)
throughout North America as well as California Tribal Instant
Lottery Game (C-TILG) opportunities. Additionally, the companies
will jointly pursue central determinant-based video lottery
markets outside of North America. This expanded relationship
combines Multimedias leadership in central determination
gaming technology with our game content strengths and gaming
cabinet manufacturing expertise to fully leverage
Multimedias industry-leading market share in Class II
gaming markets.

Pursuant to the terms of the agreement, we will
license to Multimedia our extensive game content library,
including branded participation games, for exclusive placement
(subject to our existing commitments) in Multimedias
central determination system-based venues offering
Class II, Washington State Class III, Charity, and
C-TILG products. Multimedia has agreed to purchase a specified
minimum number of game licenses annually during the two-year
term of the agreement. Additionally, Multimedia will purchase
minimum quantities of our new gaming cabinets for placement in
the above noted markets in the form of either legacy cabinets or
our Bluebird gaming cabinet, including slim-line versions
of both cabinet styles.

Critical Accounting Policies



| |                    
| | -------------------
| | Revenue Recognition

The application of revenue recognition policies
is critical due to the nature of product sales contracts entered
into during fiscal 2004. We record revenue on product sales, net
of rebates, discounts and allowances, when persuasive evidence
of an agreement exists, the sales price is fixed or
determinable, the product is delivered and collectibility is
reasonably assured. When multiple product deliverables are
included under a sales contract, we allocate revenue to each
product based upon their respective fair values against the
total contract value and defer revenue recognition on those
deliverables where we have not met all requirements of revenue
recognition.

Gaming operations revenues under operating type
lease agreements are estimated and recognized as earned when
collectibility is reasonably assured. Lease agreements are based
on either a pre-determined percentage of the daily net win of
each gaming machine or a fixed daily rental fee. WAP revenues
are recognized based upon a percentage of amounts wagered,
called coin-in, on each gaming machine and are recognized as
earned when collectibility is reasonably assured.

Under agreements with licensees who are generally
located in geographic areas or operate in markets where we are
not active, we are paid royalties based upon our licensees
purchase or placement of gaming

34



---



##### 



devices with our licensed themes, artwork and
other intellectual property. Royalties are recorded as earned
when collectibility is reasonably assured.


The application of this policy affects the level
of our sales revenue, cost of product sold, accounts receivable,
deferred revenue and accrued expenses. In fiscal 2004, 2003 and
2002, we had no material changes in the critical accounting
estimates arising from the application of this policy.



| |                      
| | ---------------------
| | Income Tax Accounting

We account for income taxes using the asset and
liability method. Under this method, income taxes are provided
for amounts currently payable and for amounts deferred as tax
assets and liabilities based upon differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. Deferred income taxes are
measured using the enacted tax rates that are assumed will be in
effect when the differences reverse.

At June 30, 2004, we had $1.9 million
of research and development tax credit carry-forwards expiring
from 2021 through 2024, $1.8 million of foreign tax credit
carry-forwards expiring from 2006 through 2009,
$38.2 million of state net operating loss carry-forwards
expiring from 2008 through 2019, $19.9 million of federal
net operating loss carry-forwards expiring in 2023 and 2024 and
$1.0 million of foreign net operating loss with unlimited
carry-forward.

At June 30, 2004, we believe it is more
likely than not that we will realize substantially all of the
benefit of these net deferred tax assets, including the net
operating loss carry-forwards and research and development tax
credit carry-forwards. Accordingly, we only provided a minimal
valuation allowance against these deferred tax assets. In
determining the level of required valuation allowance, we
considered the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in
making this assessment. However, additional valuation allowances
could be recorded against these deferred tax assets and charged
against income in future periods if our future estimates of
amounts realizable are reduced or if the timing of such
realization extends beyond our current expectations.

The application of this policy affects the level
of our tax expense, current income tax receivables and
liabilities, and current and non-current deferred tax assets and
liabilities. In fiscal 2004, 2003 and 2002, we had no material
changes in the critical accounting estimates arising from the
application of this policy.



| |                       
| | ----------------------
| | Inventory Obsolescence

We value inventory based on estimates of
potentially excess and obsolete inventory after considering
forecasted demand and forecasted average selling prices.
However, forecasts are subject to revisions, cancellations and
rescheduling. In fiscal 2004, we introduced a new gaming
platform, and it is reasonably possible that this will
accelerate the obsolescence of existing product lines. In
addition, demand for parts inventory is subject to technical
obsolescence. Inventory on hand in excess of forecasted demand
is written down to net realizable value. Actual demand may
differ from anticipated demand, and such differences may have a
material effect on our financial statements.

The application of this policy affects the level
of our inventory and cost of product sales. In fiscal 2004, 2003
and 2002 we had no material changes in the critical accounting
estimates arising from the application of this policy.



| |                                              
| | ---------------------------------------------
| | Participation Gaming Machine
    Depreciation

Historically, we depreciated our legacy
participation gaming machines and top boxes over a two-year
useful life to a small salvage value. We introduced our new
Bluebird cabinet participation games in June 2004. We are
depreciating the Bluebird gaming devices over three years
with a small salvage value, and the top box over one year. A
material adverse impact could occur if the actual useful life of
the participation games or top boxes is less than what was used
in estimating depreciation expense, or if actual salvage value
is less than the anticipated salvage value.

35



---



##### 



The application of this policy affects the level
of our gaming operations machines, accumulated depreciation on
gaming operations machines and depreciation expense. In fiscal
2004, 2003 and 2002, we had no material changes in the critical
accounting estimates arising from the application of this
policy, and the depreciable life for the Bluebird product
will not have a material impact on our financial statements in
fiscal 2005.



| |                                
| | -------------------------------
| | Intellectual Property Valuation

We license intellectual property from third
parties that we use in some of our games and gaming machines. In
addition, we have licensed technologies from third parties. As
part of our contracts with the licensors, we typically provide a
guaranteed minimum and prepayment of royalties and license fees,
usually at the time the contract is signed, even though the
product may not be introduced until months or years later. We
capitalize the prepaid royalty and license fees as other assets.
At June 30, 2004, the minimum guaranteed royalty payments
totaled $90.0 million, including $10.1 million of
minimum commitments for licensed technology, of which
$36.2 million has been paid and the balance is payable over
various periods up to five years. In addition, the contracts
provide for an additional $2.7 million of contingent
royalty payments based upon future events occurring. Total
prepaid royalties at June 30, 2004 were $27.5 million
of which $4.7 million is in other current assets and
$22.8 million is in other assets.

When the products using the licensed intellectual
property or technology begin to generate revenue, we begin
amortization of the amount advanced. In cases where the advance
represents a paid up license, the advance is amortized based on
the estimated life of the asset. In those cases where the
license agreement provides for a royalty to be earned by the
licensor for each gaming device sold or placed on a lease, the
advance is amortized based on the royalty rates provided in the
license agreement. In both cases the amortization of the
advances are included in cost of product sales if related to a
product sale or cost of gaming operations if related to
placement or lease of gaming operations. To the extent that we
determine that the products developed would not fully recover
the guaranteed minimum amounts, we would record an immediate
charge against earnings at the time of such determination.

The application of this policy affects the level
of our current assets, non-current assets, cost of products
sales and cost of gaming operations. In fiscal 2003, we expensed
$0.4 million pre-tax related to an estimated impairment of
the SURVIVOR intellectual property license, and we
recorded a pre-tax write down of approximately
$1.1 million, to reduce the carrying value of
SURVIVOR inventory to net realizable value.

In addition, in fiscal 2003, we announced that we
would allow our agreement, with Stargames Corporation Pty Ltd.
for exclusive North American distributorship rights to their
RAPID ROULETTE table gaming product, to expire. We
encountered several significant obstacles in bringing this
product to market, including regulatory, technical, and customer
acceptance issues. As a result of the expiration of the
agreement, we recorded a non-cash pre-tax charge of
$3.4 million, or $2.1 million after tax in fiscal 2003
to write down RAPID ROULETTE inventory to net realizable
value and write-off distribution rights assets.

In fiscal 2004 and 2002, we had no material
changes in the critical accounting estimates arising from the
application of this policy.



| |                              
| | -----------------------------
| | Licensed Technology Valuation

As part of our technology improvement plan, as
discussed above, we have pursued alternative strategies for each
phase of our plan, including licensing technologies from third
parties. At June 30, 2004, our minimum guaranteed payments
related to technology alternatives totaled $10.4 million,
which had been paid as advances, and $0.3 million has been
expensed, with an additional $1.3 million of contingent
royalty payments subject to future events. If we determine that
we will not realize the value of the guaranteed commitment for a
particular licensed technology alternative, we will record an
immediate charge against earnings, at the time of our
determination, of up to $11.4 million if all of the
alternatives were to have no further value to us.

The application of this policy affects the level
of our non-current assets, research and development expense and
selling and general expense. As part of our technology
improvement plan, we have pursued

36



---



##### 



alternative strategies for each phase of the
plan, including licensing technologies from third parties. As a
result of our successful implementation of upgrades to our
legacy platform in 2003, we determined that we no longer
intended to use an alternative operating system, which was
originally licensed, among other uses, to serve as a back up
during the short-term phase of the plan. Accordingly, in fiscal
2003, we recorded a pre-tax charge of $2.8 million, or
$1.7 million after-tax to write off this license agreement
obligation.


In fiscal 2004 and 2002, we had no material
changes in the critical accounting estimates arising from the
application of this policy.



| |                    
| | -------------------
| | Accrued Liabilities

We accrue expenses related to employee benefits,
software anomalies, litigation and other contingencies based
upon our best estimates of the costs that are probable of
occurrence and reasonably estimable. These estimates are updated
monthly based on current information. However, changes in
estimates or actual expenses may exceed accrued amounts.

The application of this policy affects the level
of our current liabilities, research and development expense and
selling and general expense. In fiscal 2004, 2003 and 2002, we
had no material changes in the critical accounting estimates
arising from the application of this policy.

Recently Issued Accounting Standards

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 affects the classification, measurement and
disclosure requirements of the following three types of
freestanding financial instruments; 1) mandatory redeemable
shares, which the issuing company is obligated to buy back with
cash or other assets; 2) instruments that do or may require
the issuer to buy back some of its shares in exchange for cash
or other assets, which includes put options and forward purchase
contracts; and 3) obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or
predominately to a variable such as a market index, or varies
inversely with the value of the issuers shares. In
general, SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS
No. 150 did not have an impact on our consolidated
financial position, results of operations, cash flows or related
disclosures.

In December 2003, the FASB issued a revision to
SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This statement
revises the requirements for employers disclosures about
pension and other postretirement benefit plans. The statement is
effective for fiscal years beginning after December 15,
2003. We have two frozen defined benefit pension plans related
to former businesses that we have previously accounted for as
discontinued operations. We adopted SFAS No. 132 effective
January 1, 2004 and such adoption did not have an impact on
our disclosures as the provisions of SFAS No. 132 indicate
it should not be applied to immaterial amounts.

In March 2004, the FASB published an Exposure
Draft, Share-Based Payment, an Amendment of FASB
Statement 123 and 95. This proposed standard would
impact the accounting for stock-based payments. The standard,
which is proposed to be effective for fiscal years beginning
after December 15, 2004, would require that we recognize an
expense for our stock-based payment programs, including stock
options. We are currently evaluating the provisions of this
proposed standard to determine its impact on our future
financial statements if adopted.

Off Balance Sheet Arrangements and Contractual
Obligations

We are not dependent on off-balance sheet
financing arrangements to fund our operations. We utilize
financing arrangements for operating leases of equipment and
facilities, none of which are in excess of our current needs. We
also have minimum guaranteed royalty payments for intellectual
property used in our gaming machines that are not recorded on
our balance sheet. Typically, we are obligated to make minimum
guaranteed royalty payments over the term of our license and to
advance payment against those guarantees.

37



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##### 



The licensor typically has the right to inspect
and approve any use of the licensed property. In addition, each
license typically provides that the licensor retains the right
to exploit the licensed property for all other purposes,
including the right to license the property for use with any
products not related to gaming machines. Our obligations under
these arrangements and under our convertible subordinated notes,
at June 30, 2004, were as follows:


|                                                                  |  |                                     |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |       | 
|----------------------------------------------------------------- |  | ----------------------------------- | ----- | --------- |  | --------- | ---- | --------- |  | ------- | ---- |  |  | - | ---- |  |  | - | ----- | 
|                                                                  |  |                                    
|                                                                  |  | Payment Due by Period (in millions)
|                                                                  |  |                                    
|                                                                  |  |                                     |       | Less than |  |           |      | More than
|Contractual Obligations                                           |  | Total                               |       | 1 Year    |  | 1-3 Years |      | 3-5 Years |  | 5 Years
|                                                                  |  |                                     |       |           |  |           |      |           |  |        
|Operating Leases                                                  |  | $                                   | 19.7  |           |  | $         | 2.1  |           |  | $       | 4.4  |  |  | $ | 3.8  |  |  | $ | 9.4   | 
|Royalty Payments, excluding contingent payments                   |  |                                     | 53.8  |           |  |           | 10.0 |           |  |         | 19.8 |  |  |   | 13.8 |  |  |   | 10.2  | 
|Convertible Subordinated Notes                                    |  |                                     | 115.0 |           |  |           |     |           |  |         |     |  |  |   |     |  |  |   | 115.0 | 
|Other, Including Guaranteed Minimums in
    Employment Agreements |  |                                     | 9.0   |           |  |           | 5.3  |           |  |         | 3.7  |  |  |   |     |  |  |   |      | 
|                                                                  |  |                                     |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |       | 
|Total                                                             |  | $                                   | 197.5 |           |  | $         | 17.4 |           |  | $       | 27.9 |  |  | $ | 17.6 |  |  | $ | 134.6 | 
|                                                                  |  |                                     |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |       | 

The total potential royalty commitments,
including payments already made and those contingent upon future
events, increased from $13.0 million at June 30, 2003
to $56.5 million at June 30, 2004 due to new and
amended brand licensing agreements. Potential royalty
commitments could continue to increase in the future as we enter
into new brand licensing agreements.

We do not have any special purpose entities for
investment or the conduct of our operations. We have not entered
into any derivative financial instruments, although we have
granted stock options and restricted stock to our employees,
officers, directors and consultants and warrants to a licensor,
and we have issued convertible subordinated notes. We do not
currently have any significant firm purchase commitments for raw
material inventory.

Liquidity and Capital Resources



| |          
| | ---------
| | Liquidity

|                                                            |  |               |       |          |  |            |       |  |  |   |       |  
|----------------------------------------------------------- |  | ------------- | ----- | -------- |  | ---------- | ----- |  |  | - | ----- | -
|                                                            |  |               |       |         
|                                                            |  | As of         |       |         
|                                                            |  |               |       |         
|                                                            |  | June 30,      |       | June 30, |  | Increase  
|                                                            |  | 2004          |       | 2003     |  | (Decrease)
|                                                            |  |               |       |          |  |           
|                                                            |  |              
|                                                            |  | (in millions)
|Total cash, cash equivalents and short-term
    investments |  | $             | 116.2 |          |  | $          | 160.3 |  |  | $ | (44.1 | )
|Total current assets                                        |  |               | 278.0 |          |  |            | 250.7 |  |  |   | 27.3  |  
|Total assets                                                |  |               | 395.0 |          |  |            | 351.0 |  |  |   | 44.0  |  
|Total current liabilities                                   |  |               | 40.5  |          |  |            | 29.8  |  |  |   | 10.7  |  
|Long-term debt                                              |  |               | 115.0 |          |  |            | 100.0 |  |  |   | 15.0  |  
|Stockholders equity                                        |  |               | 239.5 |          |  |            | 221.2 |  |  |   | 18.3  |  
|Net working capital                                         |  |               | 237.5 |          |  |            | 220.9 |  |  |   | 16.6  |  

Our sources of liquidity for the year ended
June 30, 2004 were:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | Existing cash, cash equivalents and short-term
    investments,                                                 
|
| |  | $15 million cash received from the issuance
    of additional 2.75% convertible subordinated notes in July 2003,
|
| |  | Non-cash expenses of $26.2 million more than
    offsetting our net loss of $0.9 million, and                   
|
| |  | Proceeds from stock option exercises of
    $12.9 million, excluding related tax benefits.                      

We believe that cash and cash equivalents and
short-term investments of $116.2 million at June 30,
2004, inclusive of $0.5 million of restricted cash, will be
adequate to fund our anticipated level of expenses, capital

38



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##### 



expenditures, cash to be invested in gaming
operations machines, and the levels of inventories and
receivables required in the operation of our business. For the
next twelve months, we do not expect to be dependent on cash
flow from operations and we do not expect to borrow any money
under our revolving credit line. In fiscal 2005, 2006 and 2007,
we expect cash flow from operations to increase significantly as
we seek to increase our market share in our new product lines:
mechanical reel, poker and wide area progressive systems. We do
not believe we will need to raise additional capital in the
short-term or long-term, however we will assess market
opportunities as they arise.


We renegotiated our unused line of credit for
$50.0 million under a revolving credit agreement for a new
one-year term to May 21, 2005. We did not borrow any
amounts on our line of credit during fiscal 2004 or 2003.

Our short-term investments primarily consist of
Auction Market Preferred Stocks stated at cost, which
approximates market value. These investments generally have no
fixed maturity date but most have dividend-reset dates every
49 days or longer. These investments can be liquidated
under an auction process on the dividend-reset dates subject to
a sufficient number of bids being submitted. Our policy is to
invest cash with issuers that have high credit ratings and to
limit the amount of credit exposure to any one issuer.

During fiscal 2004, our net working capital
increased primarily due to proceeds received from the issuance
of $15.0 million of additional convertible subordinated
notes in July 2003. Accounts and notes receivable, net,
increased by $33.4 million due to higher new unit sales
levels during fiscal 2004. Inventory at June 30, 2004
increased by $35.4 million due to higher levels of raw
materials as we prepared for an increasing volume of business
and growth in the installed base of gaming operations machines.
Royalty advances increased by $14.3 million due to new
technology and brand license agreements we entered into or
amended during fiscal 2004. Income tax receivables decreased by
$5.5 million primarily due to receipt of prior year tax
refunds. Current liabilities increased by $10.6 million due
to higher accounts payable reflecting higher inventory levels,
partially offset by our payment to Midway Games Inc. (Midway) of
a $4.0 million advance. We have not experienced significant
bad debt expense in any of the periods presented. We expect to
continue to invest in working capital through fiscal 2005 and
2006 albeit at a slower growth rate than we experienced in
fiscal 2004.

Due to our operating losses in fiscal 2004 and
2003, we have recorded $2.2 million and $7.7 million
of current income tax receivables on our balance sheets as of
June 30, 2004 and June 30, 2003, respectively. This
tax receivable is based on our ability to receive tax refunds
from applying our fiscal 2004 and 2003 tax losses against prior
years income and for refunds of tax payments made in
fiscal 2004 and 2003.

We also have $18.7 million of deferred tax
assets on our balance sheet as of June 30, 2004, an
increase of $9.5 million from June 30, 2003. These
represent taxable temporary differences expected to reverse in
future years, and tax credits and tax operating losses generated
in fiscal 2004 and 2003 that can be claimed on future income tax
returns to reduce current tax due in those years. We believe it
is more likely than not that we will realize the benefits of
these deferred tax assets. We made this determination primarily
based on our projection of future taxable income which we
believe will be sufficient to allow us to realize these deferred
tax assets. On this basis, we have provided a minimal valuation
allowance related to realizability of such assets as of
June 30, 2004. However, additional valuation allowances
could be recorded against these deferred tax assets and charged
against income in future periods if our future estimates of
amounts realizable are reduced or if the timing of such
realization extends beyond our current expectations.

We have no material commitments for capital
expenditures at June 30, 2004. We utilize financing
arrangements for operating leases of regional office facilities
and for some equipment. We have royalty commitments for brand
and technology licenses that are not recorded in our balance
sheet. Our total potential royalty commitments, including
payments of $2.7 million contingent upon future events,
increased from $29.6 million at June 30, 2003 to
$92.7 million at June 30, 2004, of which
$36.2 million has been paid. Please refer to the table
under Off-Balance Sheet Arrangements and Contractual
Obligations above and Note 13 to our consolidated
financial statements.

39



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##### 



In June 2003, we issued $100 million of
convertible subordinated notes bearing interest at 2.75%
maturing on July 15, 2010. In July 2003, we issued an
additional $15 million of convertible subordinated notes
under identical terms to cover an over-allotment option granted
to the initial purchasers of the notes. The notes are
convertible at any time into an aggregate of 5.8 million
shares of our common stock at a conversion price of $19.78 per
share, subject to adjustment. The notes are not callable. We pay
interest on the notes semi-annually on January 15 and
July 15 of each year aggregating $3.2 million
annually, which commenced on January 15, 2004. Conversion
of the 2.75% convertible subordinated notes into shares of
common stock would reduce our annual interest expense. The
conversion of the 2.75% convertible subordinated notes to common
stock is dependent on individual holders choices to
convert, which is dependent on the spread of the market price of
our stock above the conversion strike price of $19.78 per share.
None of the holders have converted any of their convertible
subordinated notes into our common stock.



| |                  
| | -----------------
| | Capital Resources

The following table summarizes our sources and
uses of cash for the periods shown (in millions of dollars):

|                                                 |  |                     |       |          |  |            |       |   |  |   |        |  
|------------------------------------------------ |  | ------------------- | ----- | -------- |  | ---------- | ----- | - |  | - | ------ | -
|                                                 |  |                     |       |         
|                                                 |  | For the Fiscal Year |       |         
|                                                 |  | Ended June 30,      |       |         
|                                                 |  |                     |       | Increase
|                                                 |  | 2004                |       | 2003     |  | (Decrease)
|                                                 |  |                     |       |          |  |           
|Cash provided (used) by:                         |  |                     |       |          |  |            |       |   |  |   |        |  
|Operating activities                             |  | $                   | (36.3 | )        |  | $          | 19.9  |   |  | $ | (56.2  | )
|Investing activities                             |  |                     | (25.3 | )        |  |            | (20.7 | ) |  |   | (4.6   | )
|Financing activities                             |  |                     | 22.0  |          |  |            | 68.1  |   |  |   | (46.1  | )
|Effect of exchange rates on cash                 |  |                     | (0.1  | )        |  |            | 0.9   |   |  |   | (1.0   | )
|                                                 |  |                     |       |          |  |            |       |   |  |   |        |  
|Increase (decrease) in cash and cash equivalents |  | $                   | (39.7 | )        |  | $          | 68.2  |   |  | $ | (107.9 | )
|                                                 |  |                     |       |          |  |            |       |   |  |   |        |  

Cash used by operating activities was
$36.3 million for fiscal 2004, as compared to cash provided
of $19.9 million for fiscal 2003. The current years
decrease relative to the comparable prior year was due to an
increase of $68.3 million of cash invested in operating
assets and liabilities due to growth of our business, compared
to a decrease of $1.5 million of cash invested in operating
assets and liabilities in fiscal 2003. Depreciation expense
totalled $26.9 million for fiscal 2004, as compared to
$26.7 million for fiscal 2003. We anticipate cash to be
provided by operations over the next twelve months, due to
anticipated higher revenues from increased new unit sales,
partially offset by higher research and development expenses
related to the ongoing execution of our technology improvement
plan, product approval costs, product line expansion costs and
increased game offerings, as well as higher selling and
administrative costs due to the execution of the re-emergence
plan. In addition, we expect in fiscal 2005 and fiscal 2006 that
our cash invested in operating assets and liabilities will not
continue to increase at the rate experienced in fiscal 2004.

40



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##### 



Components of the $68.3 million increase and
$1.5 million decrease in net investment in operating assets
and liabilities for fiscal 2004 and 2003, respectively, are as
follows (in millions of dollars):

|                                                                |                     |                    |       |          |  |            |       |     |  |   |       |     | 
|--------------------------------------------------------------- | ------------------- | ------------------ | ----- | -------- |  | ---------- | ----- | --- |  | - | ----- | --- | 
|                                                                |                     |                    |       |         
|                                                                |                     | For the Year Ended |       |         
|                                                                |                     | June 30,           |       |         
|                                                                |                     |                    |       | Increase
|                                                                |                     | 2004               |       | 2003     |  | (Decrease)
|                                                                |                     |                    |       |          |  |           
|Changes in Operating Assets and Liabilities:                    |                     |                    |       |          |  |            |       |     |  |   |       |    
|Decrease (increase) in operating assets:                        |                     |                    |       |          |  |            |       |     |  |   |       |    
|Restricted cash                                                 |                     | $                  | 1.8   |          |  | $          | (1.1  | )   |  | $ | 2.9   |    
|Accounts and notes receivable                                   |                     |                    | (33.4 | )        |  |            | (0.7  | )   |  |   | (32.7 | )  
|Income tax receivable                                           |                     |                    | 5.5   |          |  |            | 1.8   |     |  |   | 3.7   |    
|Raw material and finished goods inventories                     |                     |                    | (35.4 | )        |  |            | 2.2   |     |  |   | (37.6 | )  
|Other current assets                                            |                     |                    | (5.3  | )        |  |            | 1.1   |     |  |   | (6.4  | )  
|All other operating assets                                      |                     |                    | (12.1 | )        |  |            | (10.1 | )   |  |   | (2.0  | )  
|Increase in operating liabilities:                              |                     |                    |       |          |  |            |       |     |  |   |       |    
|                                                                | Current liabilities |                    |       | 10.6     |  |            |       | 8.3 |  |   |       | 2.3 | 
|                                                                |                     |                    |       |          |  |            |       |     |  |   |       |    
|Net decrease (increase) in operating assets and
    liabilities |                     | $                  | (68.3 | )        |  | $          | 1.5   |     |  | $ | (69.8 | )  
|                                                                |                     |                    |       |          |  |            |       |     |  |   |       |    

For fiscal 2004, the $33.4 million increase
in accounts and notes receivable reflects an increasing trend in
new unit sales, and slightly extended payment terms, while
inventories increased $35.4 million as we prepared for an
increased volume of business and growth in the installed base of
gaming operations machines. The decrease in income tax
receivable was primarily due to receipt of prior year tax
refunds. The increase in other current assets is primarily due
to $2.2 million of the current portion of royalty advances
for new technology and brand license agreements entered into or
amended during fiscal 2004 and $3.1 million of additional
current deferred tax assets. The $12.1 million increase in
all other operating assets was due to increases in non-current
deferred tax assets and increases in non-current royalty
advances for new technology and brand license agreements entered
into or amended during fiscal 2004. The increase of current
liabilities is due to higher accounts payable reflecting higher
inventory levels, partially offset by our payment to Midway of a
$4.0 million tax advance.

For fiscal 2003, the decrease in income taxes
receivable was due to receipt of prior years refunds. The
decrease in inventories reflects lower sales levels and activity
during the period. The cash invested in all other operating
assets was primarily due to a $5.6 million increase in
long-term royalty advances due to new and amended technology and
brand license agreements entered into during fiscal 2003. The
increase of current liabilities was due to the Midway tax
advance, partially offset by a slightly lower level of business.

Cash used by investing activities was
$25.3 million and $20.7 million for fiscal 2004 and
2003, respectively. Cash used for the purchase of property,
plant and equipment for fiscal 2004 was $10.5 million
compared with $13.7 million for the comparable prior year.
We are currently planning an expansion of our technology campus
or the purchase and renovation of additional space in fiscal
2005 and an expansion of our Waukegan manufacturing facility
that will begin in fiscal 2005. However, on an overall
expenditure basis, we do not anticipate any significant changes
in the general trend of our capital expenditures for property,
plant and equipment in fiscal 2005, 2006 or 2007. Cash used for
additions to gaming operation machines was $17.4 million
and $21.6 million for fiscal 2004 and 2003, respectively.
The current period investment in gaming operation machines is
lower because we have delayed investment until we received
regulatory approval for new participation games installed in our
new Bluebird cabinet. We expect this investment to
increase in fiscal 2005, 2006 and 2007 as we roll out new
participation games installed in our Bluebird cabinet.
Net cash of $2.6 million was provided by the net redemption
of short-term investments for fiscal 2004, compared to
$14.6 million provided by the redemption of such
investments in the comparable prior year. Presently, we do not
anticipate any significant changes in the general trend of the
redemption of investments during fiscal 2005, 2006 and 2007.

41



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##### 



Cash provided by financing activities was
$22.0 million for fiscal 2004 compared with cash provided
of $68.1 million for the prior year. We received net cash
of $14.1 million in July 2003 from the exercise of the
over-allotment option relating to our convertible subordinated
notes. In June of 2003, we received net cash of
$96.5 million from the offering of our 2.75% convertible
subordinated notes. We also received $12.9 million and
$0.5 million from the exercise of stock options in fiscal
2004 and 2003, respectively. The amount we receive from the
exercise of stock options is dependent on individuals
choices to exercise options, which are dependent on the spread
of the market price of our stock above the strike price of
vested options.

During fiscal 2003, we repurchased
2.3 million shares of our common stock for treasury for
$28.9 million. In fiscal 2004, we repurchased
0.3 million shares of our common stock for an aggregate
price of $5.0 million, all of which was purchased in the
quarter ended September 30, 2003. Since the inception of
our common stock repurchase programs in January 2002 through
June 30, 2004, we purchased 3.2 million or 9.9% of our
previously outstanding shares for an aggregate price of
$42.5 million, or $13.31 per share. A $25 million
share buyback program approved by our Board of Directors in
April 2003 and expanded in June 2003, expired in April 2004.
Effective August 9, 2004, our Board of Directors approved a
new $20.0 million buyback program for a one year-term. See
Note 11 to our consolidated financial statements included
in this report.

Results of Operations



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Fiscal Year Ended June 30, 2004 Compared
    with Fiscal Year Ended June 30, 2003

Revenues, Gross Margins and Key Performance
Indicators (in millions of dollars, except unit and gross margin
data):

|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |       |      | 
|------------------ | ---------------------------------------------- | --------------------------- | ----- | -------- | ----- | ---------- | ----- | -------- | ---- | - | ---- | ------ | ---- |  | ---- | ----- | ---- | 
|                   |                                                |                             |       |          |       |           
|                   |                                                | Fiscal Year Ended           |       |          |       |           
|                   |                                                | June 30,                    |       |          |       |           
|                   |                                                |                             |       | Increase |       |           
|                   |                                                | 2004                        |       | 2003     |       | (Decrease) |       | % Change
|                   |                                                |                             |       |          |       |            |       |         
|Product Sales:     |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|                   | New unit sales revenue                         |                             | $     | 111.5    |       |            | $     | 57.1     |      |   | $    | 54.4   |      |  |      | 95.3  | %   
|                   | Parts, used games, conversions and OEM revenue |                             |       | 34.4     |       |            |       | 28.6     |      |   |      | 5.8    |      |  |      | 20.3  |     
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|                   |                                                | Total product sales revenue |       | $        | 145.9 |            |       | $        | 85.7 |   |      | $      | 60.2 |  |      |       | 70.2 | 
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|                   | Total new units sold                           |                             |       | 12,661   |       |            |       | 6,867    |      |   |      | 5,794  |      |  |      | 84.4  |     
|                   | Average sales price per new unit               |                             | $     | 8,813    |       |            | $     | 8,318    |      |   | $    | 495    |      |  |      | 6.0   |     
|                   | Total OEM units sold                           |                             |       | 2,000    |       |            |       | 1,000    |      |   |      | 1,000  |      |  |      | 100.0 |     
|                   | Gross profit on product sales revenue          |                             | $     | 58.5     |       |            | $     | 33.6     |      |   | $    | 24.9   |      |  |      | 74.1  |     
|                   | Gross margin on product sales revenue          |                             |       | 40.1     | %     |            |       | 39.2     | %    |   |      | 0.9    | %    |  |      | 2.3   |     
|Gaming Operations: |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|                   | Participation revenue                          |                             | $     | 64.3     |       |            | $     | 78.8     |      |   | $    | (14.5  | )    |  |      | (18.4 | )   
|                   | Royalty, VLT and other lease revenue           |                             |       | 20.0     |       |            |       | 14.2     |      |   |      | 5.8    |      |  |      | 40.8  |     
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|                   | Total gaming operations revenue                |                             | $     | 84.3     |       |            | $     | 93.0     |      |   | $    | (8.7   | )    |  |      | (9.4  | )   
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|                   | Average installed base                         |                             |       | 4,430    |       |            |       | 5,509    |      |   |      | (1,079 | )    |  |      | (19.6 | )   
|                   | Installed base at period end                   |                             |       | 4,240    |       |            |       | 5,086    |      |   |      | (846   | )    |  |      | (16.6 | )   
|                   | Net revenue per day per machine                |                             | $     | 39.60    |       |            | $     | 39.19    |      |   | $    | 0.41   |      |  |      | 1.0   |     
|                   | Gross profit on gaming operations revenue      |                             | $     | 69.0     |       |            | $     | 72.0     |      |   | $    | (3.0   | )    |  |      | (4.2  | )   
|                   | Gross margin on gaming operations revenue      |                             |       | 81.9     | %     |            |       | 77.4     | %    |   |      | 4.5    | %    |  |      | 5.8   |     
|Total Revenues     |                                                | $                           | 230.2 |          |       | $          | 178.7 |          |      | $ | 51.5 |        |      |  | 28.8 |      
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|Total Gross Profit |                                                | $                           | 127.5 |          |       | $          | 105.6 |          |      | $ | 21.9 |        |      |  | 20.7 |      
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      
|Total Gross Margin |                                                |                             | 55.4  | %        |       |            | 59.1  | %        |      |   | (3.7 | )%     |      |  | (6.3 | )%   
|                   |                                                |                             |       |          |       |            |       |          |      |   |      |        |      |  |      |      

42



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##### 



The increase in total revenues in fiscal 2004
compared to fiscal 2003 was due to $54.4 million in
increased new gaming machine sales, $5.8 million in greater
parts, used games, conversion and OEM revenues, and
$5.8 million in higher royalty, VLT and other lease
revenue, partially offset by a $14.5 million decrease in
participation operations revenues.

New unit sales increased by 84.4% to
12,661 units, as we shipped our new Bluebird video
gaming devices after receiving regulatory approvals and as we
offered a higher number of new game themes. In fiscal 2004,
revenues from parts, used games, conversions and OEM revenues
increased 20.3% compared to the prior fiscal year due to an
increase of 1,000 units sold under OEM agreements in the
current fiscal year, and higher levels of game conversion
revenues as we received approvals to sell our new games and
conversion kits with the CPU-NXT operating system over
the last six months of fiscal 2004. The average sales price per
new unit increased 6.0% as higher priced Bluebird units
more than offset lower priced video lottery terminal sales
during fiscal 2004. The average selling price of Bluebird
units was $10,037 in fiscal 2004. We expect continued growth in
the average selling price over the next two quarters, as the
percentage of Bluebird units sold becomes a higher
percentage of our overall sales mix.

The average installed base of participation
gaming devices decreased to 4,430 units in fiscal 2004 from
5,509 units in fiscal 2003, while the net revenue per day
increased by $0.41 per day from the prior fiscal year to $39.60
per day as we continued to refresh the installed base with our
new games. The installed base declined from fiscal 2003 due to
the fact that our legacy operating system does not support key
features and functionality that casino operators demanded such
as cashless gaming options, multi-denomination and tokenization,
and the performance of certain of our older participation series
has decreased. In January 2004, the last SURVIVOR themed
wide area progressive jackpot was terminated. We expect growth
in our installed base of participation games as we continue to
install a new participation series, complete with cashless
technology   MEN IN BLACK  on our
new Bluebird cabinet coupled with the launch of our first
wide area progressive games in Nevada and Native American
casinos. Gaming operations revenues benefited from a 40.8%
increase in royalty, VLTs and other lease revenues in fiscal
2004 from fiscal 2003, due to our licensees increased
purchases or placement of WMS games.

Total gross profit increased to
$127.5 million for fiscal 2004 from $105.6 million in
fiscal 2003 while total gross margin was 55.4% in fiscal 2004
compared to 59.1% in fiscal 2003. Higher margin gaming
operations revenues were only 36.6% of total revenues in fiscal
2004, compared to 52.0% of total revenues in fiscal 2003 due to
the increase of new unit sales and an overall decline of gaming
operations revenues in the current year. The gross margin on
product sales was 40.1% for fiscal 2004, up from 39.2% in the
prior year, reflecting higher margin on the mix of products
sold. We expect that the gross margin on the Bluebird
gaming devices will improve as production volume increases,
because we should be able to obtain larger volume discounts from
our suppliers, and we anticipate that the cost of electrical
components will decrease over time. The gross profit margin on
gaming operations increased to 81.9% in fiscal 2004 compared to
77.4% in the prior fiscal year, as an increase in the average
net revenue per day and higher royalties received from licensees
was only partly offset by higher royalty rates payable to
licensors. Fiscal 2003 operating results for gaming operations
also included $2.0 million of charges due to inventory
write-downs.

Operating Expenses (in millions of dollars):

|                              |  |                            |       |         |  |   |      |         |  |            |       |          |  |  |      |   |  |   |     |  |  |  |      |  
|----------------------------- |  | -------------------------- | ----- | ------- |  | - | ---- | ------- |  | ---------- | ----- | -------- |  |  | ---- | - |  | - | --- |  |  |  | ---- | -
|                              |  |                            |       |         |  |  
|                              |  | Fiscal Year Ended June 30, |       |         |  |  
|                              |  |                            |       |         |  |  
|                              |  |                            |       |         |  |   |      |        
|                              |  | 2004                       |       | 2003    |  |   |      |        
|                              |  |                            |       |         |  |   |      |        
|                              |  |                            |       | As % of |  |   |      | As % of |  | Increase   |       |         
|                              |  | $                          |       | Revenue |  | $ |      | Revenue |  | (Decrease) |       | % Change
|                              |  |                            |       |         |  |   |      |         |  |            |       |         
|Research and development      |  | $                          | 44.8  |         |  |   | 19.5 | %       |  | $          | 40.3  |          |  |  | 22.6 | % |  | $ | 4.5 |  |  |  | 11.2 | %
|Selling and administrative    |  |                            | 57.6  |         |  |   | 25.0 |         |  |            | 56.2  |          |  |  | 31.4 |   |  |   | 1.4 |  |  |  | 2.5  |  
|Depreciation and amortization |  |                            | 26.9  |         |  |   | 11.7 |         |  |            | 26.7  |          |  |  | 14.9 |   |  |   | 0.2 |  |  |  | 0.7  |  
|                              |  |                            |       |         |  |   |      |         |  |            |       |          |  |  |      |   |  |   |     |  |  |  |      |  
|                              |  | $                          | 129.3 |         |  |   | 56.2 | %       |  | $          | 123.2 |          |  |  | 68.9 | % |  | $ | 6.1 |  |  |  | 5.0  | %
|                              |  |                            |       |         |  |   |      |         |  |            |       |          |  |  |      |   |  |   |     |  |  |  |      |  

Research and development expenses increased
$4.5 million, or 11.2% to $44.8 million in fiscal 2004
compared to $40.3 million in the prior fiscal year, due to
ongoing execution of our technology improvement

43



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plan, product approval costs, product line
expansion costs and increased game offerings. With higher
regulatory approval costs and a greater number of product lines
and game theme offerings planned throughout fiscal 2005, we
expect quarterly research and development expenses to continue
to exceed levels in the comparable prior year quarters. During
fiscal 2004, we introduced 18 new games for sale and 8 new
participation games, and in fiscal 2003 we introduced 4 new
games for sale and 6 new participation games.


Selling and administrative expenses increased
$1.4 million, or 2.5%, to $57.6 million in fiscal 2004
compared to $56.2 million in fiscal 2003, due to the
ongoing execution of our re-emergence plan and the
implementation of an Oracle Resource Planning system. Selling
and administrative expense in fiscal 2003 included a
$3.5 million charge for the purchase of rights to
restricted stock at a discount from market value and a
$2.5 million write-off of RAPID ROULETTE
distribution rights. We expect that selling and administration
expenses will increase as we continue to commercialize the
CPU-NXT operating system and Bluebird cabinet, and
continue our product line expansion efforts.

Depreciation and amortization expense increased
by $0.2 million, due to additional property, plant and
equipment additions, partially offset by the level of investment
in gaming devices for gaming operations which was lower than in
prior fiscal years as we awaited regulatory approvals for new
games on Bluebird cabinets. We expect such investment to
increase in fiscal 2005 as we roll out new participation games
installed in our new Bluebird cabinet, including our
wide-area progressive jackpot games.

We incurred an operating loss of
$1.8 million in fiscal 2004, compared to an operating loss
of $17.6 million in fiscal 2003. The improved operating
performance in fiscal 2004 resulted from the $21.9 million
increase in gross profit, partially offset by a
$4.5 million increase in research and development expenses
and $1.4 million increase in selling and administrative
expenses.

We incurred interest expense of $3.8 million
in fiscal 2004 related to our 2.75% convertible subordinated
notes issued in June and July of 2003. This was partially offset
by $2.6 million of other income, primarily interest and
investment income earned on cash, cash equivalents and
short-term investments, which at June 30, 2004 amounted to
$116.2 million.

Our 2003 consolidated statement of operations for
fiscal 2003 reflected a write off of a $3.9 million tax
advance to Midway. We have reclassified this amount from income
tax expense to interest and other income and expense in this
years presentation of our 2003 consolidated statement of
operations. The write off was due to the uncertainty of the
payback period from Midway of the amount advanced.

The benefit for income taxes, which includes both
current and deferred taxes, was at an effective tax rate of
70.9%, largely due to a lower net loss and higher research and
development, foreign tax credits, export sales, dividend
investment income and foreign income in fiscal 2004. The
effective income tax rate for fiscal 2003 was 56.1% reflecting a
benefit of $0.7 million from a reduction in prior year
taxes, which were less than amounts previously provided and the
beneficial tax treatment of increased export sales, dividend
investment income and increased research and development tax
credits, offset by the impact of the 2003 non-deductible advance
to Midway pursuant to tax sharing and separation agreements.

Our net loss was $0.9 million or $0.03 per
diluted share for the current fiscal year compared to net loss
of $8.3 million, or $0.27 per diluted share, for the prior
fiscal year.

44



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Fiscal
Year Ended June 30, 2003 Compared with Fiscal Year Ended
June 30, 2002

Revenues, Gross Margins and Key Performance
Indicators (in millions of dollars, except unit and gross margin
data):

|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |       |      | 
|------------------ | ----------------------------------------------- | --------------------------- | ----- | -------- | ---- | ---------- | ----- | -------- | ---- | - | ---- | ------ | ---- |  | ---- | ----- | ---- | 
|                   |                                                 |                             |       |          |      |           
|                   |                                                 | Fiscal Year Ended           |       |          |      |           
|                   |                                                 | June 30,                    |       |          |      |           
|                   |                                                 |                             |       | Increase |      |           
|                   |                                                 | 2003                        |       | 2002     |      | (Decrease) |       | % Change
|                   |                                                 |                             |       |          |      |            |       |         
|Product Sales:     |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|                   | New unit sales revenue                          |                             | $     | 57.1     |      |            | $     | 58.3     |      |   | $    | (1.2   | )    |  |      | (2.1  | )%  
|                   | Parts, used games, conversions, and OEM revenue |                             |       | 28.6     |      |            |       | 17.3     |      |   |      | 11.3   |      |  |      | 65.3  |     
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|                   |                                                 | Total product sales revenue |       | $        | 85.7 |            |       | $        | 75.6 |   |      | $      | 10.1 |  |      |       | 13.4 | 
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|                   | Total new units sold                            |                             |       | 6,867    |      |            |       | 6,916    |      |   |      | (49    | )    |  |      | (0.7  | )   
|                   | Average sales price per new unit                |                             | $     | 8,318    |      |            | $     | 8,419    |      |   | $    | (101   | )    |  |      | (1.2  | )   
|                   | Total OEM units sold                            |                             |       | 1,000    |      |            |       |         |      |   |      | 1,000  |      |  |      | NA    |     
|                   | Gross profit on product sales revenue           |                             | $     | 33.6     |      |            | $     | 25.6     |      |   | $    | 8.0    |      |  |      | 31.3  |     
|                   | Gross margin on product sales revenue           |                             |       | 39.2     | %    |            |       | 33.9     | %    |   |      | 5.3    | %    |  |      | 15.6  |     
|Gaming Operations: |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|                   | Participation revenue                           |                             | $     | 78.8     |      |            | $     | 84.6     |      |   | $    | (5.8   | )    |  |      | (6.9  | )   
|                   | Royalty, VLT and other lease revenue            |                             |       | 14.2     |      |            |       | 14.5     |      |   |      | (0.3   | )    |  |      | (2.1  | )   
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|                   | Total gaming operations revenues                |                             | $     | 93.0     |      |            | $     | 99.1     |      |   | $    | (6.1   | )    |  |      | (6.2  | )   
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|                   | Average installed base                          |                             |       | 5,509    |      |            |       | 5,790    |      |   |      | (281   | )    |  |      | (4.9  | )   
|                   | Installed base at period end                    |                             |       | 5,086    |      |            |       | 6,162    |      |   |      | (1,076 | )    |  |      | (17.5 | )   
|                   | Net revenue per day per machine                 |                             | $     | 39.19    |      |            | $     | 40.05    |      |   | $    | (0.86  | )    |  |      | (2.1  | )   
|                   | Royalty, VLT lease and hybrid revenue           |                             | $     | 14.2     |      |            | $     | 14.5     |      |   | $    | (0.3   | )    |  |      | (2.3  | )   
|                   | Gross profit on gaming operations revenue       |                             | $     | 72.0     |      |            | $     | 84.0     |      |   | $    | (12.0  | )    |  |      | (14.3 | )   
|                   | Gross margin on gaming operations revenue       |                             |       | 77.4     | %    |            |       | 84.8     | %    |   |      | (7.4   | )%   |  |      | (8.7  | )   
|Total Revenues     |                                                 | $                           | 178.7 |          |      | $          | 174.7 |          |      | $ | 4.0  |        |      |  | 2.3  |      
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|Total Gross Profit |                                                 | $                           | 105.6 |          |      | $          | 109.6 |          |      | $ | (4.0 | )      |      |  | (3.6 | )    
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      
|Total Gross Margin |                                                 |                             | 59.1  | %        |      |            | 62.7  | %        |      |   | (3.6 | )%     |      |  | (5.7 | )%   
|                   |                                                 |                             |       |          |      |            |       |          |      |   |      |        |      |  |      |      

Total revenues increased $4.0 million due to
$11.3 million in higher parts sales and OEM revenue,
partially offset by a $6.1 million reduction in gaming
operations revenue and a $1.2 million reduction in new unit
sales revenue.

We shipped 6,867 video and mechanical
reel-spinning games in fiscal 2003, resulting in product sales
revenues of $57.1 million versus 6,916 gaming devices
shipped and $58.3 million of product sales revenues in
fiscal 2002. Gaming device sales were flat as higher sales to
customers outside North America were offset by lower domestic
sales, as we believe some customers delayed purchases until we
introduced our new game platform and cabinet in fiscal 2004. The
average sales price decreased from $8,419 in fiscal 2002 to
$8,318 in fiscal 2003, primarily due to a change in our mix of
products sold. Parts, used games, OEM and game conversion
revenues, which are included in product sales revenues,
increased 65.3% in fiscal 2003 to $28.6 million, compared
to $17.3 million in fiscal 2002, due to higher parts sales
and 1,000 OEM units sold compared to none in fiscal 2002.

The decrease in gaming operations revenue was due
to a decrease in the average installed base of participation
games to a total of 5,509 units in fiscal 2003, compared to
5,790 units installed in fiscal 2002, while the actual installed
base declined from 6,162 units at June 30, 2002 to 5,086
units at June 30, 2003. We

45



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believe the decline in the installed base
resulted from three factors. First, in the first half of fiscal
2003, the average net win of our participation games decreased
and casino operators removed games as we were unable to obtain
approvals for new games as gaming regulators reviewed upgrades
to our legacy operating system. Second, we removed participation
games from locations that had low net revenue per day. Third,
the decline in the installed base resulted from our existing
gaming platform not supporting key features and functionality
that casino operators demanded, such as some cashless gaming
options, multi-denomination and tokenization, as well as an
increasingly competitive environment. For fiscal 2003, the net
revenue per day decreased 2.1% to $39.19 from $40.05.


Total gross profit decreased by $4.0 million
to $105.6 million for fiscal 2003 from $109.6 million
in fiscal 2002 while total gross margin was 59.1% in fiscal 2003
compared to 62.7% in fiscal 2002. Higher margin gaming
operations revenues were only 52.0% of total revenues in fiscal
2003, compared to 56.7% in fiscal 2002. The gross margin on
product sales increased from 33.9% in fiscal 2002 to 39.2% in
fiscal 2003 due to higher production volumes and higher margin
products representing a greater percentage of product sales
revenue, partially offset by a decrease in the average sales
price per unit. The gross profit margin on gaming operations
revenues decreased from 84.8% in fiscal 2002 to 77.4% in fiscal
2003 due to a $1.1 million write down of SURVIVOR
inventory, a $0.9 million write down of RAPID
ROULETTE inventory upon the expiration of the distribution
agreement, higher royalty rates payable to licensors and the
decrease in the average net revenue per day for participation
games.

Operating Expenses (in millions of dollars):

|                              |  |                            |       |         |  |   |      |         |  |            |      |          |  |  |      |   |  |   |      |  |  |  |      |  
|----------------------------- |  | -------------------------- | ----- | ------- |  | - | ---- | ------- |  | ---------- | ---- | -------- |  |  | ---- | - |  | - | ---- |  |  |  | ---- | -
|                              |  |                            |       |         |  |  
|                              |  | Fiscal Year Ended June 30, |       |         |  |  
|                              |  |                            |       |         |  |  
|                              |  |                            |       |         |  |   |      |        
|                              |  | 2003                       |       | 2002    |  |   |      |        
|                              |  |                            |       |         |  |   |      |        
|                              |  |                            |       | As % of |  |   |      | As % of |  | Increase   |      |         
|                              |  | $                          |       | Revenue |  | $ |      | Revenue |  | (Decrease) |      | % Change
|                              |  |                            |       |         |  |   |      |         |  |            |      |         
|Research and development      |  | $                          | 40.3  |         |  |   | 22.6 | %       |  | $          | 26.0 |          |  |  | 14.8 | % |  | $ | 14.3 |  |  |  | 55.0 | %
|Selling and administrative    |  |                            | 56.2  |         |  |   | 31.4 |         |  |            | 47.1 |          |  |  | 27.0 |   |  |   | 9.1  |  |  |  | 19.3 |  
|Depreciation and amortization |  |                            | 26.7  |         |  |   | 14.9 |         |  |            | 23.9 |          |  |  | 13.7 |   |  |   | 2.8  |  |  |  | 11.7 |  
|                              |  |                            |       |         |  |   |      |         |  |            |      |          |  |  |      |   |  |   |      |  |  |  |      |  
|                              |  | $                          | 123.2 |         |  |   | 68.9 | %       |  | $          | 97.0 |          |  |  | 55.5 | % |  | $ | 26.2 |  |  |  | 27.0 |  
|                              |  |                            |       |         |  |   |      |         |  |            |      |          |  |  |      |   |  |   |      |  |  |  |      |  

Research and development expenses increased
$14.3 million, or 55.0%, in fiscal 2003 to
$40.3 million from $26.0 million in fiscal 2002 due to
the ongoing execution of our technology improvement plan, while
we prepared to expand our product offerings and increase the
number of games we offered our customers. The increase was due
to increased headcount and higher engineering project and
prototype expenditures, and included costs to adapt our games
for distribution to international markets. During fiscal 2003,
we introduced four new games for sale and six new participation
games. During fiscal 2002, we introduced 5 new games for sale
and 4 new participation games.

Selling and administrative expenses increased
19.3% from $47.1 million in fiscal 2002 to
$56.2 million in fiscal 2003. The fiscal 2003 amount
includes a $3.5 million pre-tax charge for the purchase of
rights to restricted stock at a discount from market value, a
$2.5 million write-off of the RAPID ROULETTEdistribution rights and higher costs incurred related to our
re-emergence and the implementation of a new enterprise resource
planning information system.

Depreciation and amortization increased during
fiscal 2003 to $26.7 million from $23.9 million in the
prior fiscal year. The 11.7% increase in depreciation expense
reflects higher depreciation on our recently renovated Chicago
technology campus, higher equipment cost per participation game
unit, and increased depreciation on video lottery terminals
under contract with state lotteries, partially offset by the
4.9% decrease in the average installed base of participation
games.

Operating loss was $17.6 million in fiscal
2003, compared to operating income of $12.6 million in the
prior fiscal year. The financial results of the current fiscal
year reflect lower gross profit of $4.0 million, including
a $1.1 million write down of SURVIVOR inventory and
a $0.9 million write down of RAPID ROULETTE
inventory upon the expiration of the distribution agreement,
$14.3 million increase in research

46



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and development spending, and a $9.1 million
increase in selling and administrative expense, including a
$3.5 million charge from the costs associated with the
purchase of rights to restricted stock at a discount from market
and a $2.5 million write-off of the RAPID ROULETTEdistribution rights. The operating income for fiscal 2002
reflects $1.3 million of employee separation costs.


Our 2003 consolidated statement of operations for
fiscal 2003 reflects a $3.9 million tax advance to Midway.
We have reclassified this amount from income tax expense to
interest and other income and expense in this years
presentation of our 2003 consolidated statement of operations.
The write off was due to the uncertainty of the payback period
from Midway of the amount advanced.

The benefit for income taxes was
$10.6 million in fiscal 2003, in contrast to a provision
for income taxes of $5.6 million in the prior fiscal year.
The benefit was due to the pre-tax loss and a benefit of
$0.7 million from a reduction in fiscal 2002 taxes as
compared to amounts previously provided, partially offset by a
$0.6 million provision stemming from the settlement of
prior year income tax returns with the Internal Revenue Service.
The effective tax rate was 56.1% in fiscal 2003, compared to
36.1% in fiscal 2002. This effective tax rate reflects the
beneficial tax treatment of increased export sales, dividend
investment income and increased research and development tax
credits offset by the impact of the non-deductible advance to
Midway pursuant to tax sharing and separation agreements.

Our net loss was $8.3 million, or $0.27 per
diluted share, in fiscal 2003, compared to net income of
$9.9 million, or $0.30 per diluted share, in the prior
fiscal year. Diluted shares outstanding decreased by 6.5%, due
to our repurchase of common stock outstanding.

Impact of Inflation

During the past three years, the general level of
inflation affecting us has been relatively low. Our ability to
pass on future cost increases in the form of higher sales prices
will depend on the prevailing competitive environment and the
acceptance of our products in the marketplace.

Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk.

We are subject to market risks in the ordinary
course of our business, primarily associated with interest rate
and foreign currency fluctuations. We do not currently hedge
either of these risks, or utilize financial instruments for
trading or other speculative purposes.

Interest
Rate Risk

We have exposure to interest rate risk from our
convertible subordinated notes and short-term line of credit.
The notes are at a fixed rate and the short-term line of credit
is at a variable rate.

As of June 30, 2004, we had
$115.0 million of convertible fixed-rate debt with an
interest rate of 2.75% and a fair value of $151.0 million.
Using a discounted cash flow model, and assuming no change in
the market price of our common stock into which the debt is
convertible, we currently estimate that a 50 basis point change
in the prevailing market interest rates would impact the fair
value of our fixed rate debt by approximately $3.7 million,
but would not be material to our cash flows or future results of
operations. However, the fair value of our convertible fixed
rate debt is more significantly dependent on the market price of
our common stock into which it can be converted.

In May 2004, we renewed a $50.0 million
364-day revolving line of credit to provide us with additional
liquidity to meet our short-term financing needs. Borrowings
under this facility bear interest at a certain percentage above
the agents prime rate. There were no outstanding
borrowings under this facility as of June 30, 2004.



| |                      
| | ---------------------
| | Foreign Currency Risk

We have subsidiaries in Spain, Canada, South
Africa, United Kingdom and Australia for distribution and
development operations. These subsidiaries transact business in
their respective foreign currencies and are

47



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exposed to risks resulting from fluctuations in
foreign currency exchange rates. We estimate that a hypothetical
10% strengthening (or weakening) of the U.S. dollar for
fiscal 2004 would have resulted in a pretax loss (or gain) of
about $0.2 million.


The net assets of these subsidiaries are exposed
to foreign currency translation gains and losses, which are
included as a component of accumulated other comprehensive loss
in stockholders equity. Such translation resulted in
unrealized gains (losses) of $(0.1) million and
$0.9 million for fiscal 2004 and 2003, respectively.

In addition, foreign governments could impose
restrictions on currency movements that might make it costly or
impossible to repatriate earnings to the U.S.

Item 8.     Financial
Statements and Supplementary Data.

Our Consolidated Financial Statements are
included in this report immediately following Part IV.

Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

Item 9A.     Controls
and Procedures.

As of the end of the period covered by this
report, our Chief Executive Officer and our Chief Financial
Officer carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures,
as required by Rule 13a-15 under the Securities Exchange
Act of 1934. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring
that material information about us and our subsidiaries,
including the material information required to be disclosed in
our filings under the Exchange Act is recorded, processed,
summarized and communicated to them as appropriate to allow
timely decisions regarding required disclosure.

As a part of the ongoing implementation of an
Oracle ERP system, we have updated our internal controls over
financial reporting as necessary to accommodate any
modifications to our business processes or accounting
procedures. There have not been any other changes in our
internal controls over financial reporting or in other factors
that materially affected, or are reasonably likely to materially
affect internal controls over financial reporting as of the end
of the period covered by this report.

Item 9B.     Other
Information.

Not Applicable.

48



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PART III

Item 10.     Directors
and Executive Officers of the Registrant.

The information required by this item is
incorporated by reference from our definitive proxy statement to
be filed on or about October 28, 2004 with the SEC.

Item 11.     Executive
Compensation.

The information required by this item is
incorporated by reference from our definitive proxy statement to
be filed on or about October 28, 2004 with the SEC.



|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters.

The information required by this item is
incorporated by reference from our definitive proxy statement to
be filed on or about October 28, 2004 with the SEC.

Item 13.     Certain
Relationships and Related Transactions.

The information required by this item is
incorporated by reference from our definitive proxy statement to
be filed on or about October 28, 2004 with the SEC.

Item 14.     Principal
Accountant Fees and Services.

The information required by this item is
incorporated by reference from our definitive proxy statement to
be filed on or about October 28, 2004 with the SEC.

49



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##### 



PART IV

Item 15.     Exhibits
and Financial Statement Schedules.

(a) (1) Financial Statements. See
Index to Financial Information on page F-1.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | (2) Financial Statement Schedule. See
    Index to Financial Information on page F-1.
|
| | (3) Exhibits.                                                                          

|        |       |             |  |                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Certificate of Incorporation
    of WMS dated February 17, 1987; Certificate of Amendment
    dated January 28, 1993; and Certificate of Correction dated
    May 4, 1994, incorporated by reference to WMSs Annual
    Report on Form 10-K for the year ended June 30, 1994
    (the 1994 10-K).
|        | 3.2   |             |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation of WMS, as filed with the
    Secretary of State of the State of Delaware on February 25,
    1998, incorporated by reference to WMSs Quarterly Report
    on Form 10-Q for the quarter ended March 31, 1998.                     
|        | 3.3   |             |  | Form of Certificate of Designations of
    Series A Preferred Stock incorporated by reference to
    Exhibit A to the Rights Agreement filed as Exhibit 1
    to WMSs Registration Statement on Form 8-A (File
    No. 1-8300) filed March 25, 1998 (the
    Form 8-A).                                               
|        | 3.4   |             |  | By-Laws of WMS, as amended and restated through
    March 10, 2004, incorporated by reference to WMSs
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2004.                                                                                                                                       
|        | 4     |             |  | Rights Agreement dated as of March 5, 1998
    between WMS and The Bank of New York, as Rights Agent,
    incorporated by reference to the Form 8-A.                                                                                                                                                                     
|        | 10.1  |             |  | 1991 Stock Option Plan, as amended, incorporated
    by reference to the 1994 10-K.                                                                                                                                                                                                                                      
|        | 10.2  |             |  | 1993 Stock Option Plan, incorporated by reference
    to the 1994 10-K.                                                                                                                                                                                                                                                  
|        | 10.3  |             |  | 1994 Stock Option Plan, incorporated by reference
    to Appendix A to WMSs Definitive Proxy Statement
    dated December 12, 1994.                                                                                                                                                                                     
|        | 10.4  |             |  | Form of Indemnity Agreement authorized to be
    entered into between WMS and each officer and director approved
    by the Board of Directors, incorporated by reference to the 1994
    10-K.                                                                                                                          
|        | 10.5  |             |  | WMS Industries Inc. Treasury Share Bonus Plan
    adopted April 19, 1993, incorporated by reference to
    WMSs Annual Report on Form 10-K for the fiscal year
    ended June 30, 1993.                                                                                                                                 
|        | 10.6  |             |  | Voting Proxy Agreement dated September 21,
    1995 among Louis J. Nicastro, Neil D. Nicastro, WMS, Sumner M.
    Redstone and National Amusements, Inc., incorporated by
    reference to WMSs Annual Report on Form 10-K for the
    fiscal year ended June 30, 1995.                                                 
|        | 10.7  |             |  | Tax Sharing Agreement dated as of July 1,
    1996 among WMS, Midway, Atari Games Corporation and others,
    incorporated by reference to Midways Registration
    Statement on Form S-1 (File No. 333-11919).                                                                                                         
|        | 10.8  |             |  | Amendment to Article III, Section 3
    (Option Adjustments) of 1991 Stock Option Plan, incorporated by
    reference to Proposal No. 2 to WMSs definitive proxy
    statement filed with the Commission on December 11, 1996
    (the 1996 Proxy Statement).                                                         
|        | 10.9  |             |  | Amendment to Article III, Section 3
    (Option Adjustments) of 1993 Stock Option Plan, incorporated by
    reference to Proposal No. 2 to the 1996 Proxy Statement.                                                                                                                                                     
|        | 10.10 |             |  | Amendment to Article III, Section 3
    (Option Adjustments) of 1994 Stock Option Plan, incorporated by
    reference to Proposal No. 2 to the 1996 Proxy Statement.                                                                                                                                                     
|        | 10.11 |             |  | 1998 Non-Qualified Stock Option Plan,
    incorporated by reference to WMSs Registration Statement
    No. 333-57585 on Form S-8 filed with the Commission on
    June 24, 1998.                                                                                                                                        
|        | 10.12 |             |  | Consulting Agreement dated as of April 6,
    1998 between WMS and Neil D. Nicastro, incorporated by reference
    to WMS Current Report on Form 8-K filed
    April 17, 1998.                                                                                                                                          
|        | 10.13 |             |  | Tax Separation Agreement dated as of
    April 6, 1998 between WMS and Midway, incorporated by
    reference to the Midway 1998 Annual Report on Form 10-K.                                                                                                                                                              

50



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.14 |             |  | Tax Indemnification Agreement dated as of
    April 6, 1998 between WMS and Midway, incorporated by
    reference to the Midway 1998 10-K.                                                                                                                                                                                                                                                                                                                                                   
|        | 10.15 |             |  | Worldwide Merchandising Agreement/ License
    Agreement Summary and License Agreement between WMS Gaming Inc.,
    Hasbro, Inc. and Hasbro International, Inc. dated
    September 1, 1997, incorporated by reference to WMSs
    Registration Statement No. 333-83021 on Form S-3 filed
    with the Commission on July 16, 1999 (the 1999
    S-3). Portions of this exhibit have been omitted under a
    request for confidential treatment filed separately with the
    Commission.
|        | 10.16 |             |  | Amendment dated 1998 to License Agreement between
    WMS Gaming Inc., Hasbro, Inc. and Hasbro International, Inc.
    dated September 1, 1997, incorporated by reference to the
    1999 S-3. Portions of this exhibit have been omitted under a
    request for confidential treatment filed separately with the
    Commission.                                                                                                                                                           
|        | 10.17 |             |  | 2000 Non-Qualified Stock Option Plan,
    incorporated by reference to WMS Annual Report on
    Form 10-K for the fiscal year ended June 30, 2000 (the
    2000 10-K).                                                                                                                                                                                                                                                                                                                    
|        | 10.18 |             |  | Employment Agreement between Scott D.
    Schweinfurth and WMS dated May 19, 2000, incorporated by
    reference to the 2000 10-K.                                                                                                                                                                                                                                                                                                                                                           
|        | 10.19 |             |  | Employment Agreement between Orrin J. Edidin and
    WMS dated May 8, 2000, incorporated by reference to the
    2000 10-K.                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.20 |             |  | Employment Agreement between Robert R. Rogowski
    and WMS dated May 1, 2000, incorporated by reference to
    WMS Quarterly Report on the Form 10-Q for quarter
    ended September 30, 2000.                                                                                                                                                                                                                                                                                             
|        | 10.21 |             |  | 2000 Stock Option Plan, incorporated by reference
    to Appendix B to WMS Proxy Statement for its 2001
    Annual Meeting filed with the Commission on December 8,
    2000.                                                                                                                                                                                                                                                                                                               
|        | 10.22 |             |  | Amendment 1 to Employment Agreement between
    Scott D. Schweinfurth and WMS dated June 4, 2001,
    incorporated by reference to WMS Annual Report on
    Form 10-K for the fiscal year ended June 30, 2001 (the
    2001 10-K).                                                                                                                                                                                                                                                        
|        | 10.23 |             |  | Amendment 1 to Employment Agreement between
    Orrin J. Edidin and WMS dated June 4, 2001, incorporated by
    reference to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                                  
|        | 10.24 |             |  | Letter of Termination of Employment Agreement
    between Louis J. Nicastro and WMS dated June 14, 2001,
    incorporated by reference to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                     
|        | 10.25 |             |  | Employment Agreement between Brian R. Gamache and
    WMS dated as of June 15, 2001, incorporated by reference to
    the 2001 10-K.                                                                                                                                                                                                                                                                                                                                                         
|        | 10.26 |             |  | Amended and Restated Employment Agreement between
    Seamus M. McGill and WMS dated as of February 1, 2001,
    incorporated by reference to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                 
|        | 10.27 |             |  | Letter Amendment to Tax Separation Agreement
    dated September 24, 2001, incorporated by reference to the
    2001 10-K.                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.28 |             |  | Amendment 2 to Employment Agreement between
    Scott D. Schweinfurth and WMS dated November 15, 2001
    incorporated by reference to WMS Quarterly Report on the
    Form 10-Q for quarter ended December 31, 2001 (the
    2001 2Q 10-Q).                                                                                                                                                                                                                                              
|        | 10.29 |             |  | Amendment 2 to Employment Agreement between
    Orrin J. Edidin and WMS dated November 15, 2001
    incorporated by reference to the 2001 2Q 10-Q.                                                                                                                                                                                                                                                                                                                                           
|        | 10.30 |             |  | Amendment 1 to Amended and Restated
    Employment Agreement between Seamus M. McGill and WMS dated
    November 15, 2001 incorporated by reference to the 2001 2Q
    10-Q.                                                                                                                                                                                                                                                                                                                 
|        | 10.31 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Louis J. Nicastro dated March 1, 2002,
    incorporated by reference to our Registration Statement on
    Form S-8 (File No. 333-87676) filed with the
    Commission on May 6, 2002.                                                                                                                                                                                                                                         
|        | 10.32 |             |  | 2002 Stock Option Plan, incorporated by reference
    to Appendix B to WMS Proxy statement for its 2003 Annual
    Meeting, filed with the Commission on September 25, 2002.                                                                                                                                                                                                                                                                                                                 
|        | 10.33 |             |  | Voting Proxy Agreement dated November 8,
    2003 among Louis J. Nicastro, Neil D. Nicastro, WMS
    and Phyllis G. Redstone, incorporated by reference to
    WMS Current Report on Form 8-K filed
    November 12, 2002.                                                                                                                                                                                                                                                                  

51



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.34 |             |  | Employment offer letter dated November 22,
    2002, to Kathleen J. McJohn, Vice President, General
    Counsel and Secretary, incorporated by reference to WMS
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2003 (the 2003 3Q 10-Q).                                                                                                                                                   
|        | 10.35 |             |  | Relocation compensation letter dated
    March 6, 2003 between our wholly owned subsidiary, WMS
    Gaming Inc. and Seamus McGill, Executive Vice President of Sales
    and Marketing of WMS Gaming Inc., incorporated by reference to
    the 2003 3Q 10-Q.                                                                                                                                                       
|        | 10.36 |             |  | Purchase and Settlement Agreement between WMS
    Industries Inc. and Louis J. Nicastro dated May 7,
    2003, incorporated by reference to the 2003 3Q 10-Q.                                                                                                                                                                                                                                                       
|        | 10.37 |             |  | Relocation compensation letter dated May 12,
    2003 between WMS and Kathleen J. McJohn, Vice President,
    General Counsel and Secretary, incorporated by reference to the
    2003 3Q 10-Q.                                                                                                                                                                                                                     
|        | 10.38 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Brian R. Gamache dated June 12, 2003, incorporated
    by reference to WMS Annual Report on Form 10-K for
    the year ended June 30, 2003 (the
    2003 10-K).                                                                                                                                                                                   
|        | 10.39 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Scott D. Schweinfurth dated June 12, 2003,
    incorporated by reference to the 2003 10-K.                                                                                                                                                                                                                                                           
|        | 10.40 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Orrin J. Edidin dated June 12, 2003, incorporated
    by reference to the 2003 10-K.                                                                                                                                                                                                                                                                 
|        | 10.41 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Seamus McGill dated June 12, 2003, incorporated by
    reference to the 2003 10-K.                                                                                                                                                                                                                                                                   
|        | 10.42 |             |  | Indenture dated June 25, 2003 between WMS
    Industries Inc. and BNY Midwest Trust Company, incorporated by
    reference to WMS Current Report on Form 8-K filed
    June 25, 2003 (the 2003 8-K).                                                                                                                                                                                                             
|        | 10.43 |             |  | Form of Note (contained in and incorporated by
    reference to Exhibit A to the Indenture filed as
    Exhibit 4.1 to the 2003 8-K).                                                                                                                                                                                                                                                                               
|        | 10.44 |             |  | Registration Rights Agreement dated June 25,
    2003 between WMS Industries Inc. and BNY Midwest Trust Company,
    incorporated by reference to the 2003 8-K.                                                                                                                                                                                                                                                     
|        | 10.45 |             |  | Warrant to purchase common stock of the
    Registrant, issued to Hasbro, Inc., incorporated by reference to
    WMS Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003 (the 2003
    1Q 10-Q).                                                                                                                                                                                          
|        | 10.46 |             |  | Amendment No. 3, dated December 16,
    2002 to the License Agreement dated September 1, 1997 among
    WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc.,
    incorporated by reference to the 2003 1Q 10-Q. Portions of
    this exhibit have been omitted under a request for confidential
    treatment filed separately with the commission.                                                         
|        | 10.47 |             |  | Amendment No. 4, dated September 15,
    2003 to the License Agreement dated September 1, 1997 among
    WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc.,
    incorporated by reference to the 2003 1Q 10-Q. Portions of
    this exhibit have been omitted under a request for confidential
    treatment filed separately with the commission.                                                        
|        | 10.48 |             |  | License and Development Agreement between WMS
    Gaming Inc. (WGI) and Sierra Design Group
    (SDG), dated as of April 24, 2002, incorporated
    by reference to WMS Quarterly Report on Form 10-Q for
    the quarter ended December 31, 2003 (the 2003
    2Q 10-Q). Portions of this exhibit have been omitted
    under a request for confidential treatment filed separately with
    the commission.
|        | 10.49 |             |  | First Amendment to License and Development
    Agreement between WGI and SDG, dated June 12, 2003,
    incorporated by reference to the 2003 2Q 10-Q the quarter
    ended December 31, 2004. Portions of this exhibit have been
    omitted under a request for confidential treatment filed
    separately with the commission.                                                                                   
|        | 10.50 |             |  | Second Amendment to License and Development
    Agreement between WGI and SDG, dated July 15, 2003,
    incorporated by reference to the 2003 2Q 10-Q.                                                                                                                                                                                                                                                              
|        | 10.51 |             |  | Third Amendment to License and Development
    Agreement between WGI and SDG, dated November 7, 2003,
    incorporated by reference to the 2003 2Q 10-Q. Portions of
    this exhibit have been omitted under a request for confidential
    treatment filed separately with the commission.                                                                                                                        

52



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.52 |             |  | Amended and Restated Employment Agreement between
    WMS and Seamus McGill dated February 24, 2004, incorporated
    by reference to the WMS Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2004.                                                                                       
|        | 10.53 |             |  | License Agreement dated September 18, 2000
    between our wholly owned subsidiary, WMS Gaming Inc., and
    International Game Technology as successor to Anchor Gaming.
    Portions of this exhibit have been omitted under a request for
    confidential treatment filed separately with the commission.
|        | 10.54 |             |  | Letter Amendment to License and Development
    Agreement between WGI and SDG, dated February 3, 2004.
    Portions of this exhibit have been omitted under a request for
    confidential treatment filed separately with the commission.                                                                   
|        | 10.55 |             |  | Form of Restricted Stock Agreement between WMS
    Industries Inc. and each of Brian R. Gamache, Orrin J.
    Edidin, Scott D. Schweinfurth, Seamus McGill,
    Kathleen J. McJohn and Robert R. Rogowski, dated
    May 10, 2004.                                                                           
|        | 10.56 |             |  | Revolving Note between WMS Industries Inc. and
    LaSalle Bank National Association dated May 21, 2004.                                                                                                                                                                                                     
|        | 10.57 |             |  | Letter of Amendment to Employment Agreement
    between Brian R. Gamache and WMS dated as of
    August 11, 2004.                                                                                                                                                                                            
|        | 21    |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                              
|        | 23    |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                
|        | 31    |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 13(a)-14(a) of
    the Securities Exchange Act of 1934 (Section 302 of the
    Sarbanes-Oxley Act of 2002).                                                                                                    
|        | 32    |             |  | Certification of the Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350 (Section 906 of the Sarbanes-Oxley Act of
    2002).                                                                                                                                     

53



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##### 



WMS INDUSTRIES INC.

INDEX TO FINANCIAL INFORMATION


|                                                                                                                                  |  |          |      | 
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---- | 
|                                                                                                                                  |  | Page No.
|                                                                                                                                  |  |         
|Financial Statements and Financial Statement
    Schedule                                                                         |  |          |      | 
|Report of independent registered public
    accounting firm                                                                       |  |          | F-2  | 
|Consolidated balance sheets at June 30, 2004
    and June 30, 2003                                                                |  |          | F-3  | 
|Consolidated statements of operations for the
    years ended June 30, 2004, 2003 and 2002                                        |  |          | F-4  | 
|Consolidated statements of stockholders
    equity and comprehensive income for the years ended
    June 30, 2004, 2003 and 2002 |  |          | F-5  | 
|Consolidated statements of cash flows for the
    years ended June 30, 2004, 2003 and 2002                                        |  |          | F-6  | 
|Notes to consolidated financial statements                                                                                        |  |          | F-7  | 
|Financial statement schedule II 
    Valuation and Qualifying Accounts for the years ended
    June 30, 2004, 2003 and 2002      |  |          | F-28 | 

All other schedules are omitted since the
required information is not present in amounts sufficient to
require submission of the schedule or because the information
required is included in the consolidated financial statements
and notes thereto.

F-1



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Stockholders and Board of Directors

WMS Industries Inc.


We have audited the accompanying consolidated
balance sheets of WMS Industries Inc. and subsidiaries as of
June 30, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity and
comprehensive income and cash flows for each of the three years
in the period ended June 30, 2004. Our audits also included
the financial statement schedule listed in the Index on
page F-1. These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and related schedule are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes 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 consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of WMS Industries
Inc. and subsidiaries at June 30, 2004 and 2003, and the
consolidated results of their operations and cash flows for each
of the three years in the period ended June 30, 2004, in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                      
| | ---------------------
| | /S/ ERNST & YOUNG LLP

Chicago, Illinois


August 9, 2004


F-2



---



##### 



WMS INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)


|                                            |                                                                                          |                                    |                                            |       |      |       |       |       |      |       | 
|------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------- | ------------------------------------------ | ----- | ---- | ----- | ----- | ----- | ---- | ----- | 
|                                            |                                                                                          |                                   
|                                            |                                                                                          | June 30,                          
|                                            |                                                                                          |                                   
|                                            |                                                                                          | 2004                               |                                            | 2003 
|                                            |                                                                                          |                                    |                                            |      
|ASSETS                                      |                                                                                          |                                    |                                            |       |      |       |       |      
|Current assets:                             |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            | Cash and cash equivalents                                                                |                                    | $                                          | 59.9  |      |       | $     | 99.6  |     
|                                            | Restricted cash                                                                          |                                    |                                            | 0.5   |      |       |       | 2.3   |     
|                                            | Short-term investments                                                                   |                                    |                                            | 55.8  |      |       |       | 58.4  |     
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | 116.2                                      |       |      |       | 160.3 |      
|                                            | Receivables, net of allowances of $2.6 in 2004
    and $2.4 in 2003                      |                                    |                                            | 52.5  |      |       |       | 25.1  |     
|                                            | Notes receivable, current portion                                                        |                                    |                                            | 17.8  |      |       |       | 12.0  |     
|                                            | Inventories:                                                                             |                                    |                                            |       |      |       |       |       |     
|                                            |                                                                                          | Raw materials and work in progress |                                            |       | 47.3 |       |       |       | 13.9 |      
|                                            |                                                                                          | Finished goods                     |                                            |       | 18.1 |       |       |       | 15.9 |      
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | 65.4                                       |       |      |       | 29.8  |      
|                                            | Other current assets                                                                     |                                    |                                            | 26.1  |      |       |       | 23.5  |     
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | Total current assets                       |       |      | 278.0 |       |       |      | 250.7 | 
|Gaming operations machines, net             |                                                                                          |                                    | 24.9                                       |       |      |       | 27.6  |      
|Property, plant and equipment, net          |                                                                                          |                                    | 53.7                                       |       |      |       | 50.2  |      
|Other assets                                |                                                                                          |                                    | 38.4                                       |       |      |       | 22.5  |      
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | Total assets                               |       | $    | 395.0 |       |       | $    | 351.0 | 
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|LIABILITIES AND STOCKHOLDERS EQUITY        |                                                                                          |                                    |                                            |       |      |       |       |      
|Current liabilities:                        |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            | Accounts payable                                                                         |                                    | $                                          | 17.1  |      |       | $     | 10.7  |     
|                                            | Accrued compensation and related benefits                                                |                                    |                                            | 4.4   |      |       |       | 3.1   |     
|                                            | Other accrued liabilities                                                                |                                    |                                            | 19.0  |      |       |       | 16.0  |     
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | Total current liabilities                  |       |      | 40.5  |       |       |      | 29.8  | 
|Convertible subordinated notes              |                                                                                          |                                    | 115.0                                      |       |      |       | 100.0 |      
|Commitments and contingencies (see Note 13) |                                                                                          |                                    |                                            |       |      |       |       |      
|Stockholders equity:                       |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            | Preferred stock (5,000,000 shares authorized,
    none issued)                           |                                    |                                            |      |      |       |       |      |     
|                                            | Common stock (32,365,203 shares issued in 2004
    and 32,358,315 shares issued in 2003) |                                    |                                            | 16.2  |      |       |       | 16.2  |     
|                                            | Additional paid-in capital                                                               |                                    |                                            | 206.7 |      |       |       | 197.0 |     
|                                            | Retained earnings                                                                        |                                    |                                            | 43.1  |      |       |       | 44.0  |     
|                                            | Accumulated other comprehensive income                                                   |                                    |                                            | 1.0   |      |       |       | 1.1   |     
|                                            | Unearned restricted stock (52,312 shares in 2004
    and 29,912 shares in 2003)          |                                    |                                            | (1.3  | )    |       |       | (0.3  | )   
|                                            | Treasury stock, at cost (1,998,905 shares in 2004
    and 2,882,995 shares in 2003)      |                                    |                                            | (26.2 | )    |       |       | (36.8 | )   
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | Total stockholders equity                 |       |      | 239.5 |       |       |      | 221.2 | 
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      
|                                            |                                                                                          |                                    | Total liabilities and stockholders equity |       | $    | 395.0 |       |       | $    | 351.0 | 
|                                            |                                                                                          |                                    |                                            |       |      |       |       |      

See notes to consolidated financial statements.

F-3



---



##### 



WMS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In millions, except per share
amounts)


|                                             |                               |                          |      |       |       |      |       |       |       |   |      |      |       | 
|-------------------------------------------- | ----------------------------- | ------------------------ | ---- | ----- | ----- | ---- | ----- | ----- | ----- | - | ---- | ---- | ----- | 
|                                             |                               |                         
|                                             |                               | Years ended June 30,    
|                                             |                               |                         
|                                             |                               | 2004                     |      | 2003  |       | 2002
|                                             |                               |                          |      |       |       |     
|Revenues:                                    |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             | Product sales                 |                          | $    | 145.9 |       |      | $     | 85.7  |       |   | $    | 75.6 |      
|                                             | Gaming operations             |                          |      | 84.3  |       |      |       | 93.0  |       |   |      | 99.1 |      
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             |                               | Total revenues           |      |       | 230.2 |      |       |       | 178.7 |   |      |      | 174.7 | 
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|Costs and expenses:                          |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             | Cost of product sales         |                          |      | 87.4  |       |      |       | 52.1  |       |   |      | 50.0 |      
|                                             | Cost of gaming operations     |                          |      | 15.3  |       |      |       | 21.0  |       |   |      | 15.1 |      
|                                             | Research and development      |                          |      | 44.8  |       |      |       | 40.3  |       |   |      | 26.0 |      
|                                             | Selling and administrative    |                          |      | 57.6  |       |      |       | 56.2  |       |   |      | 47.1 |      
|                                             | Depreciation and amortization |                          |      | 26.9  |       |      |       | 26.7  |       |   |      | 23.9 |      
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             |                               | Total costs and expenses |      |       | 232.0 |      |       |       | 196.3 |   |      |      | 162.1 | 
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|Operating income (loss)                      |                               |                          | (1.8 | )     |       |      | (17.6 | )     |       |   | 12.6 |     
|Interest expense                             |                               |                          | (3.8 | )     |       |      |      |       |       |   |     |     
|Interest and other income (expense)          |                               |                          | 2.6  |       |       |      | (1.3  | )     |       |   | 2.9  |     
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|Income (loss) before income taxes            |                               |                          | (3.0 | )     |       |      | (18.9 | )     |       |   | 15.5 |     
|Provision (benefit) for income taxes         |                               |                          | (2.1 | )     |       |      | (10.6 | )     |       |   | 5.6  |     
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|Net income (loss)                            |                               | $                        | (0.9 | )     |       | $    | (8.3  | )     |       | $ | 9.9  |     
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|Net income (loss) per share of common stock: |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             | Basic                         |                          | $    | (0.03 | )     |      | $     | (0.27 | )     |   | $    | 0.31 |      
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             | Diluted                       |                          | $    | (0.03 | )     |      | $     | (0.27 | )     |   | $    | 0.30 |      
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|Average number of shares outstanding:        |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             | Basic                         |                          |      | 29.7  |       |      |       | 30.4  |       |   |      | 32.1 |      
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     
|                                             | Diluted                       |                          |      | 29.7  |       |      |       | 30.4  |       |   |      | 32.5 |      
|                                             |                               |                          |      |       |       |      |       |       |       |   |      |     

See notes to consolidated financial statements.

F-4



---



##### 



WMS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND

COMPREHENSIVE INCOME


(In millions, except share amounts)


|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|---------------------------------------------------------------- |  | ------ | ---- | ---------- |  | -------- | ----- | ------------- |  | ---------- | ---- | -------- |  | ------------- | ---- | ------------- |  | - | ---- | - |  | - | ----- | - |  | - | ----- | - |  | - | ---- | -
|                                                                 |  |        |      |            |  |          |       | Accumulated   |  |            |      |          |  |               |      |              
|                                                                 |  |        |      | Additional |  |          |       | other         |  | Unearned   |      | Treasury |  | Total         |      |              
|                                                                 |  | Common |      | paid-in    |  | Retained |       | comprehensive |  | restricted |      | stock,   |  | stockholders |      | Comprehensive
|                                                                 |  | stock  |      | capital    |  | Earnings |       | income        |  | stock      |      | at cost  |  | equity        |      | Income (loss)
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |              
|Balance, June 30, 2001                                           |  |        | 16.1 |            |  |          | 198.3 |               |  |            | 42.4 |          |  |               |     |               |  |   |     |   |  |   | (0.4  | ) |  |   | 256.4 |   |  |   |      |  
|Net income                                                       |  |        |     |            |  |          |      |               |  |            | 9.9  |          |  |               |     |               |  |   |     |   |  |   |      |   |  |   | 9.9   |   |  | $ | 9.9  |  
|Exercise of stock options and related tax benefits               |  |        | 0.1  |            |  |          | 1.5   |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   |      |   |  |   | 1.6   |   |  |   |      |  
|Issuance of options to consultants                               |  |        |     |            |  |          | 0.2   |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   |      |   |  |   | 0.2   |   |  |   |      |  
|Issuance of 250,000 restricted shares from
    treasury          |  |        |     |            |  |          | (1.7  | )             |  |            |     |          |  |               |     |               |  |   | (2.0 | ) |  |   | 3.7   |   |  |   |      |   |  |   |      |  
|Purchase of 545,500 treasury shares                              |  |        |     |            |  |          |      |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   | (8.6  | ) |  |   | (8.6  | ) |  |   |      |  
|Minimum pension liability                                        |  |        |     |            |  |          |      |               |  |            |     |          |  |               | (0.2 | )             |  |   |     |   |  |   |      |   |  |   | (0.2  | ) |  |   | (0.2 | )
|Foreign currency translation adjustment                          |  |        |     |            |  |          |      |               |  |            |     |          |  |               | 0.2  |               |  |   |     |   |  |   |      |   |  |   | 0.2   |   |  |   | 0.2  |  
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|Balance, June 30, 2002                                           |  |        | 16.2 |            |  |          | 198.3 |               |  |            | 52.3 |          |  |               | 0.0  |               |  |   | (2.0 | ) |  |   | (5.3  | ) |  |   | 259.5 |   |  | $ | 9.9  |  
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|Net loss                                                         |  |        |     |            |  |          |      |               |  |            | (8.3 | )        |  |               |     |               |  |   |     |   |  |   |      |   |  |   | (8.3  | ) |  | $ | (8.3 | )
|Exercise of stock options and related tax benefits               |  |        |     |            |  |          |      |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   | 0.7   |   |  |   | 0.7   |   |  |   |      |  
|Issuance of 29,912 restricted shares from treasury               |  |        |     |            |  |          |      |               |  |            |     |          |  |               |     |               |  |   | (0.3 | ) |  |   | 0.4   |   |  |   | 0.1   |   |  |   |      |  
|Return of 250,000 restricted shares to treasury                  |  |        |     |            |  |          | 1.7   |               |  |            |     |          |  |               |     |               |  |   | 2.0  |   |  |   | (3.7  | ) |  |   |      |   |  |   |      |  
|Purchase of 2,348,900 treasury shares                            |  |        |     |            |  |          |      |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   | (28.9 | ) |  |   | (28.9 | ) |  |   |      |  
|Reversal of previously recorded Midway stock
    option benefits |  |        |     |            |  |          | (3.0  | )             |  |            |     |          |  |               |     |               |  |   |     |   |  |   |      |   |  |   | (3.0  | ) |  |   |      |  
|Minimum pension liability                                        |  |        |     |            |  |          |      |               |  |            |     |          |  |               | 0.2  |               |  |   |     |   |  |   |      |   |  |   | 0.2   |   |  |   | 0.2  |  
|Foreign currency translation adjustment                          |  |        |     |            |  |          |      |               |  |            |     |          |  |               | 0.9  |               |  |   |     |   |  |   |      |   |  |   | 0.9   |   |  |   | 0.9  |  
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|Balance, June 30, 2003                                           |  |        | 16.2 |            |  |          | 197.0 |               |  |            | 44.0 |          |  |               | 1.1  |               |  |   | (0.3 | ) |  |   | (36.8 | ) |  |   | 221.2 |   |  | $ | (7.2 | )
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|Net loss                                                         |  |        |     |            |  |          |      |               |  |            | (0.9 | )        |  |               |     |               |  |   |     |   |  |   |      |   |  |   | (0.9  | ) |  | $ | (0.9 | )
|Issuance of 250,000 warrants                                     |  |        |     |            |  |          | 3.9   |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   |      |   |  |   | 3.9   |   |  |   |      |  
|Exercise of stock options and related tax benefits               |  |        |     |            |  |          | 4.7   |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   | 14.9  |   |  |   | 19.6  |   |  |   |      |  
|Issuance of 52,312 restricted shares from treasury               |  |        |     |            |  |          | 1.1   |               |  |            |     |          |  |               |     |               |  |   | (1.0 | ) |  |   | 0.7   |   |  |   | 0.8   |   |  |   |      |  
|Purchase of 299,100 treasury shares                              |  |        |     |            |  |          |      |               |  |            |     |          |  |               |     |               |  |   |     |   |  |   | (5.0  | ) |  |   | (5.0  | ) |  |   |      |  
|Foreign currency translation adjustment                          |  |        |     |            |  |          |      |               |  |            |     |          |  |               | (0.1 | )             |  |   |     |   |  |   |      |   |  |   | (0.1  | ) |  |   | (0.1 | )
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  
|Balance June 30, 2004                                            |  | $      | 16.2 |            |  | $        | 206.7 |               |  | $          | 43.1 |          |  | $             | 1.0  |               |  | $ | (1.3 | ) |  | $ | (26.2 | ) |  | $ | 239.5 |   |  | $ | (1.0 | )
|                                                                 |  |        |      |            |  |          |       |               |  |            |      |          |  |               |      |               |  |   |      |   |  |   |       |   |  |   |       |   |  |   |      |  

See notes to consolidated financial statements.

F-5



---



##### 



WMS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In millions)


|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |      |      |  
|--------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------------------------------------- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | - | ----- | ---- | ---- | -
|                                                                                                    |                                                                                     |                                         
|                                                                                                    |                                                                                     | Years ended June 30,                    
|                                                                                                    |                                                                                     |                                         
|                                                                                                    |                                                                                     | 2004                                     |       | 2003 |       | 2002
|                                                                                                    |                                                                                     |                                          |       |      |       |     
|Cash Flows From Operating Activities                                                                |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Net income (loss)                                                                                   |                                                                                     | $                                        | (0.9  | )    |       | $    | (8.3  | )    |       | $ | 9.9   |     
|Adjustments to reconcile net income (loss) to net
    cash (used) provided by operating activities: |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|                                                                                                    | Depreciation and amortization                                                       |                                          |       | 26.9 |       |      |       | 26.7 |       |   |       | 23.9 |     
|                                                                                                    | Provision for bad debts                                                             |                                          |       | 0.3  |       |      |       |     |       |   |       |     |     
|                                                                                                    | Non-cash write-off of licensed technology                                           |                                          |       |     |       |      |       | 1.7  |       |   |       |     |     
|                                                                                                    | Non-cash losses and expenses                                                        |                                          |       | 1.8  |       |      |       | 1.6  |       |   |       | 0.3  |     
|                                                                                                    | Deferred income taxes                                                               |                                          |       | (2.8 | )     |      |       | (3.5 | )     |   |       | (0.2 | )   
|                                                                                                    | Tax benefit from exercise of common stock options                                   |                                          |       | 6.7  |       |      |       | 0.2  |       |   |       | 0.4  |     
|                                                                                                    | Increase (decrease) resulting from changes in
    operating assets and liabilities: |                                          |       |      |       |      |       |      |       |   |       |      |     
|                                                                                                    |                                                                                     | Restricted cash                          |       |      | 1.8   |      |       |      | (1.1  | ) |       |      | (1.3 | )
|                                                                                                    |                                                                                     | Receivables                              |       |      | (33.4 | )    |       |      | (0.7  | ) |       |      | 23.7 |  
|                                                                                                    |                                                                                     | Income taxes                             |       |      | 5.5   |      |       |      | 1.8   |   |       |      | 3.5  |  
|                                                                                                    |                                                                                     | Inventories                              |       |      | (35.4 | )    |       |      | 2.2   |   |       |      | 3.2  |  
|                                                                                                    |                                                                                     | Other current assets                     |       |      | (5.3  | )    |       |      | 1.1   |   |       |      | (7.4 | )
|                                                                                                    |                                                                                     | Other assets                             |       |      | (12.1 | )    |       |      | (10.1 | ) |       |      | 4.8  |  
|                                                                                                    |                                                                                     | Accounts payable and accrued liabilities |       |      | 10.6  |      |       |      | 8.3   |   |       |      | (0.7 | )
|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Net cash (used) provided by operating activities                                                    |                                                                                     |                                          | (36.3 | )    |       |      | 19.9  |      |       |   | 60.1  |     
|Cash Flows From Investing Activities                                                                |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Purchase of property, plant and equipment                                                           |                                                                                     |                                          | (10.5 | )    |       |      | (13.7 | )    |       |   | (16.3 | )   
|Additions to gaming operations machines                                                             |                                                                                     |                                          | (17.4 | )    |       |      | (21.6 | )    |       |   | (18.5 | )   
|Acquisition, net of cash acquired                                                                   |                                                                                     |                                          |      |      |       |      |      |      |       |   | (2.5  | )   
|Proceeds from asset disposal                                                                        |                                                                                     |                                          |      |      |       |      |      |      |       |   | 2.3   |     
|Purchase of short-term investments                                                                  |                                                                                     |                                          |      |      |       |      | (7.8  | )    |       |   | (1.4  | )   
|Proceeds from short-term investments                                                                |                                                                                     |                                          | 2.6   |      |       |      | 22.4  |      |       |   |      |     
|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Net cash used by investing activities                                                               |                                                                                     |                                          | (25.3 | )    |       |      | (20.7 | )    |       |   | (36.4 | )   
|Cash Flows From Financing Activities                                                                |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Cash received on exercise of stock options                                                          |                                                                                     |                                          | 12.9  |      |       |      | 0.5   |      |       |   | 1.2   |     
|Gross proceeds from issuance of convertible notes                                                   |                                                                                     |                                          | 15.0  |      |       |      | 100.0 |      |       |   |      |     
|Debt issuance costs                                                                                 |                                                                                     |                                          | (0.9  | )    |       |      | (3.5  | )    |       |   |      |     
|Purchase of treasury stock                                                                          |                                                                                     |                                          | (5.0  | )    |       |      | (28.9 | )    |       |   | (8.6  | )   
|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Net cash provided (used) by financing activities                                                    |                                                                                     |                                          | 22.0  |      |       |      | 68.1  |      |       |   | (7.4  | )   
|Effect of Exchange Rates on Cash                                                                    |                                                                                     |                                          | (0.1  | )    |       |      | 0.9   |      |       |   | 0.2   |     
|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Increase (decrease) in cash and cash equivalents                                                    |                                                                                     |                                          | (39.7 | )    |       |      | 68.2  |      |       |   | 16.5  |     
|Cash and cash equivalents at beginning of year                                                      |                                                                                     |                                          | 99.6  |      |       |      | 31.4  |      |       |   | 14.9  |     
|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     
|Cash and cash equivalents at end of year                                                            |                                                                                     | $                                        | 59.9  |      |       | $    | 99.6  |      |       | $ | 31.4  |     
|                                                                                                    |                                                                                     |                                          |       |      |       |      |       |      |       |   |       |     

See notes to consolidated financial statements.

F-6



---



##### 



WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1: Business Overview

We are engaged in one business segment: the
design, manufacture, and marketing of slot machines (video and
mechanical reel type) and video lottery terminals
(VLTs)and gaming operations consisting of
placement of participation games and wide-area progressive
systems (WAP) in gaming venues and licensing of our
games to third parties. We serve the gaming industry worldwide.
Although our production remains exclusively in the United
States, development and distribution offices are located in the
United States, Australia, Spain, the United Kingdom and South
Africa. International business activities have become
increasingly important to us. See Note 4.

We market our gaming machines in two principal
ways. First, we sell gaming machines, VLTs, conversion
kits, parts, used equipment and equipment manufactured under
original equipment manufacturing agreements to casinos and other
licensed gaming machine operators. Second, we license our games
to third parties for distribution and we lease gaming machines
and VLTs to casinos and other licensed gaming machine
operators for payments based upon (1) a percentage of the
net win of the gaming machines, (2) fixed daily fees or
(3) in the case of games on a WAP system, a percentage of
the amount wagered. WAP systems are electronically linked
systems of gaming devices that communicate with a central
computer, which allows the system to build a progressive jackpot
with every wager made on the system. Through January 2004, the
WAP systems were operated under an agreement with a WAP system
provider whereby the profits of the games on the WAP system were
shared equally. Beginning in May 2004, we began to operate our
own proprietary WAP system where we earn all of the profits. We
refer to games leased under any of these arrangements as
participation games and when combined with royalties
we receive under license agreements with third parties to
distribute our games, we refer to this business as our
gaming operations.

Data for product sales and gaming operations is
only maintained on a consolidated basis as presented in our
consolidated financial statements, with no additional separate
data maintained for product sales and gaming operations (other
than the revenue and costs of revenues information included in
the consolidated statement of operations and cost of gaming
machines and related accumulated depreciation included in the
consolidated balance sheet).

Note 2: Principal Accounting
Policies



| |                     
| | --------------------
| | Consolidation Policy

Our consolidated financial statements include the
accounts of WMS and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated. We account for our joint operating agreement with
International Game Technology or IGT for WAP systems for which
no legal entity existed, in our consolidated financial
statements by recording our proportionate share of revenues and
expenses from operating activities and the full value of all of
the assets we owned and liabilities we owed related to this
agreement. The purpose of the joint operating agreement was to
combine our licensing rights and game design expertise with the
proprietary WAP computer system of IGT. We designed and marketed
the games manufactured by IGT who placed such games in casinos
on its WAP system. In January 2004, the remaining
SURVIVOR WAP themed system was shut down. The total
assets, total liabilities, total revenues and total expenses
related to the joint operating agreement were not material to
our consolidated financial statements for the periods presented.

Certain prior year balances have been
reclassified to conform with the current year presentation. See
Note 3.



| |                 
| | ----------------
| | Use of Estimates

Our consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles. Such preparation requires management to make
estimates and assumptions that affect

F-7



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.



| |                                                   
| | --------------------------------------------------
| | Cash and Cash Equivalents, and Restricted
    Cash

All highly liquid investments with maturities of
three months or less when purchased are considered to be cash
equivalents. Restricted cash of $0.5 million and
$2.3 million at June 30, 2004 and 2003, respectively,
is required for funding WAP systems jackpot payments.



| |                       
| | ----------------------
| | Short-Term Investments

All investments are recorded at cost, which
approximates market value. Short-term investments consist
principally of Auction Market Preferred Stocks that generally
have no fixed maturity dates but have dividend reset dates
generally every 49 days or more.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Accounts Receivable, Notes Receivable and
    Allowance for Doubtful Accounts

We carry our accounts and notes receivable at
face amounts less an allowance for doubtful accounts. On a
periodic basis, we evaluate our receivables and establish the
allowance for doubtful accounts based on a combination of
specific customer circumstances, credit conditions and our
history of write-offs and collections. Our policy is to
generally not charge interest on trade receivables after the
invoice becomes past due. A receivable is considered past due if
payments have not been received within agreed upon invoice
terms. With regard to notes receivable, interest income is
recognized ratably over the life of the note receivable and any
related fees or costs to establish the notes are charged to
expense as incurred, as they are considered to be insignificant.



| |            
| | -----------
| | Inventories

Inventories are valued at the lower of cost
(determined by the first-in, first-out method) or market.



| |                              
| | -----------------------------
| | Freight and Warehousing Costs

Freight-out and warehousing costs are included in
costs of product sales in the statement of operations.
Freight-out costs for gaming operations machines are capitalized
and depreciated over the useful life of the related asset.



| |                           
| | --------------------------
| | Software Development Costs

As a result of the gaming license requirements
and regulatory approvals necessary to commercialize products in
our business, our products reach technological feasibility
shortly before products are released to manufacturing.
Accordingly, internal research and development costs are
expensed as incurred, including software development costs. We
do not incur any material software development costs after we
receive regulatory approval for our products.

We account for amounts paid to third parties for
purchased or licensed software related to our technology
improvement plan under Statement of Financial Accounting
Standards No. 86,  Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed. Under these arrangements, we have alternative
future uses for purchased software related to our technology
improvement plan and we generally have the right to sub-license
this software to other third parties. See Note 13 of the
notes to Consolidated Financial Statements.

The implementation costs of our Oracle ERP system
incurred during the preliminary project stage were expensed;
costs incurred during the application development stages were
capitalized and costs incurred during

F-8



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the post-implementation /operation stage were
expensed. Due to the extensive use of external consultants to
minimize the burden on our internal staffing, internal resources
used during the application development phases were limited, and
we have not capitalized internal costs.



| |                  
| | -----------------
| | Long-Lived Assets

Property, plant and equipment and gaming
operations machines are stated at cost and depreciated using the
straight-line method over their estimated useful lives.
Significant replacements and improvements are capitalized. Other
maintenance and repairs are expensed. The annual provision for
depreciation has been computed in accordance with the following
ranges of asset lives: buildings and improvements 10 to
30 years; leasehold improvements over the lease term;
machinery and equipment three to eight years, gaming operations
machines two to three years, and furniture and fixtures
10 years.

We review the carrying amount of long-lived
assets whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated future cash
flows expected to result from the use of the asset and its
eventual disposition are less than its carrying amount. When an
impairment loss is to be recognized for an asset, it is measured
by comparing the carrying value to the fair value. Fair value is
generally measured as the present value of estimated future cash
flows.

Goodwill and indefinite lived intangible assets
are not amortized but are reviewed annually, or more frequently
if an event occurs or circumstances change, for indications that
the asset might be impaired. Any impairment loss is charged to
expense in the period in which such loss is determined.
Identified intangible assets with finite lives, including
licensed technology and patents, are amortized using the
straight-line method over their estimated useful lives. We
continually evaluate the reasonableness of the useful lives of
these assets, and any change in the lives assigned to
amortizable assets will impact results of operations.

Other assets include royalty and licensing
advances made in connection with licensing agreements we have
for the use of third party intellectual property. When the
products using the licensed intellectual property or technology
begin to generate revenue, we begin amortization of the amount
advanced. In cases where the advance represents a paid up
license, the advance is amortized based on the estimated life of
the asset. In those cases where the license agreement provides
for a royalty to be earned by the licensor for each gaming
device sold or placed on a lease, the advance is amortized based
on the royalty rates provided in the license agreement. In both
cases the amortization of the advances are included in cost of
sales if related to a product sale or cost of gaming operations
if related to placement or lease of gaming operations. To the
extent we determine that the products developed would not fully
recover the guaranteed minimum amounts, we would record an
immediate charge against earnings at the time of such
determination.



| |                    
| | -------------------
| | Revenue Recognition

We record revenue on product sales, net of
rebates, discounts and allowances, when persuasive evidence of
an agreement exists, the sales price is fixed or determinable,
the product is delivered and collectibility is reasonably
assured. When multiple product deliverables are included under a
sales contract, we allocate revenue to each product based upon
their respective fair values against the total contract value
and defer revenue recognition on those deliverables where we
have not met all requirements of revenue recognition.

Gaming operations revenues under operating type
lease agreements are estimated and recognized as earned when
collectibility is reasonably assured. Lease agreements are based
on either a pre-determined percentage of the daily net win of
each gaming machine or a fixed daily rental fee. WAP revenues
are recognized based upon a percentage of amounts wagered,
called coin-in, on each gaming machine and are recognized as
earned when collectibility is reasonably assured.

F-9



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under agreements with licensees who are generally
located in geographic or other markets where we are not active,
we are paid royalties based upon our licensees purchase or
placement of gaming devices with our licensed themes, artwork
and other intellectual property. Royalties are recorded as
earned when collectibility is reasonably assured.



| |                    
| | -------------------
| | Advertising Expense

The cost of advertising is charged to expense as
incurred. The cost of advertising for fiscal 2004, 2003 and 2002
was $0.6 million, $0.7 million and $0.8 million,
respectively.



| |                               
| | ------------------------------
| | Research and Development Costs

As a result of the gaming license requirements
and regulatory approvals necessary to commercialize products in
our business, our products reach technological feasibility
shortly before products are released to manufacturing.
Accordingly, internal research and development expenditures
relating to the development of new products, including
improvements to existing products, are expensed as incurred.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The local currency is the functional currency
(primary currency in which business is conducted) for our
operations in Canada, Spain, Australia, the United Kingdom and
South Africa. Adjustments resulting from translating foreign
functional currency assets and liabilities into
U.S. dollars are recorded in a separate component of
stockholders equity. Gains or losses resulting from
transactions in other than the functional currency are reflected
in net income.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

We account for income taxes using the asset and
liability method. Under this method, income taxes are provided
for amounts currently payable and for amounts deferred as tax
assets and liabilities based upon differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. Deferred income taxes are
measured using the enacted tax rates that are assumed will be in
effect when the differences reverse.



| |                          
| | -------------------------
| | Earnings (loss) per share

The reconciliation of the numerators and
denominators of the basic and diluted earning (loss) per share
was:

|                                |                     |                                |      |           |  |        |      |   |  |   |       |   | 
|------------------------------- | ------------------- | ------------------------------ | ---- | --------- |  | ------ | ---- | - |  | - | ----- | - | 
|                                |                     |                               
|                                |                     | Year Ended June 30, 2004      
|                                |                     |                               
|                                |                     |                                |      | Per Share
|                                |                     | Loss                           |      | Shares    |  | Amount
|                                |                     |                                |      |           |  |       
|                                |                     |                               
|                                |                     | (in millions, except per share
|                                |                     | amounts)                      
|Basic EPS                       |                     |                                |      |           |  |        |      |   |  |   |       |  
|Loss applicable to common stock |                     | $                              | (0.9 | )         |  |        | 29.7 |   |  | $ | (0.03 | )
|Effect of dilutive securities:  |                     |                                |      |           |  |        |      |   |  |   |       |  
|                                |  options           |                                |      |          |  |        |      |  |  |   |       |  | 
|                                |  warrants          |                                |      |          |  |        |      |  |  |   |       |  | 
|                                |  convertible notes |                                |      |          |  |        |      |  |  |   |       |  | 
|                                |                     |                                |      |           |  |        |      |   |  |   |       |  
|Diluted EPS                     |                     |                                |      |           |  |        |      |   |  |   |       |  
|Loss applicable to common stock |                     | $                              | (0.9 | )         |  |        | 29.7 |   |  | $ | (0.03 | )
|                                |                     |                                |      |           |  |        |      |   |  |   |       |  

F-10



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                |                     |                                |      |           |  |        |      |   |  |   |       |   | 
|------------------------------- | ------------------- | ------------------------------ | ---- | --------- |  | ------ | ---- | - |  | - | ----- | - | 
|                                |                     |                               
|                                |                     | Year Ended June 30, 2003      
|                                |                     |                               
|                                |                     |                                |      | Per Share
|                                |                     | Loss                           |      | Shares    |  | Amount
|                                |                     |                                |      |           |  |       
|                                |                     |                               
|                                |                     | (in millions, except per share
|                                |                     | amounts)                      
|Basic EPS                       |                     |                                |      |           |  |        |      |   |  |   |       |  
|Loss applicable to common stock |                     | $                              | (8.3 | )         |  |        | 30.4 |   |  | $ | (0.27 | )
|Effect of dilutive securities   |                     |                                |      |           |  |        |      |   |  |   |       |  
|                                |  options           |                                |      |          |  |        |      |  |  |   |       |  | 
|                                |  convertible notes |                                |      |          |  |        |      |  |  |   |       |  | 
|                                |                     |                                |      |           |  |        |      |   |  |   |       |  
|Diluted EPS                     |                     |                                |      |           |  |        |      |   |  |   |       |  
|Loss applicable to common stock |                     | $                              | (8.3 | )         |  |        | 30.4 |   |  | $ | (0.27 | )
|                                |                     |                                |      |           |  |        |      |   |  |   |       |  

|                                        |  |                                |     |           |  |        |      |  |  |   |       |  
|--------------------------------------- |  | ------------------------------ | --- | --------- |  | ------ | ---- |  |  | - | ----- | -
|                                        |  |                               
|                                        |  | Year Ended June 30, 2002      
|                                        |  |                               
|                                        |  |                                |     | Per Share
|                                        |  | Income                         |     | Shares    |  | Amount
|                                        |  |                                |     |           |  |       
|                                        |  |                               
|                                        |  | (in millions, except per share
|                                        |  | amounts)                      
|Basic EPS                               |  |                                |     |           |  |        |      |  |  |   |       |  
|Income applicable to common stock       |  | $                              | 9.9 |           |  |        | 32.1 |  |  | $ | 0.31  |  
|Effect of dilutive securities  options |  |                                |    |           |  |        | 0.4  |  |  |   | (0.01 | )
|                                        |  |                                |     |           |  |        |      |  |  |   |       |  
|Diluted EPS                             |  |                                |     |           |  |        |      |  |  |   |       |  
|Income applicable to common stock       |  | $                              | 9.9 |           |  |        | 32.5 |  |  | $ | 0.30  |  
|                                        |  |                                |     |           |  |        |      |  |  |   |       |  

|                                                                                                                                                           |                            |                     |     |      |  |      |     |     |  |  |               |     | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------- | --- | ---- |  | ---- | --- | --- |  |  | ------------- | --- | 
|                                                                                                                                                           |                            |                    
|                                                                                                                                                           |                            | Year Ended June 30,
|                                                                                                                                                           |                            |                    
|                                                                                                                                                           |                            | 2004                |     | 2003 |  | 2002
|                                                                                                                                                           |                            |                     |     |      |  |     
|If WMS had recognized income:                                                                                                                              |                            |                     |     |      |  |      |     |     |  |  |               |    
|Impact of incremental stock options and warrants
    that would have resulted in additional diluted shares
    outstanding under the treasury stock method |                            |                     | 1.4 |      |  |      | 0.4 |     |  |  | NotApplicable |    
|If WMS had recognized income in excess of
    $0.40 per share:                                                                                             |                            |                     |     |      |  |      |     |     |  |  |               |    
|Common stock issued upon conversion of the 2.75%
    convertible subordinated notes                                                                        |                            |                     | 5.8 |      |  |      | 0.1 |     |  |  |              |    
|Excluded anti-dilutive common stock equivalents
    due to the option grant price exceeding the market price for WMS
    common stock:                     |                            |                     |     |      |  |      |     |     |  |  |               |    
|                                                                                                                                                           | Stock options and warrants |                     |     | 0.3  |  |      |     | 2.5 |  |  |               | 0.9 | 

Shares of common stock underlying options and our
$115.0 million of convertible subordinated notes were not
included in the computation of diluted earnings per share
because the effect of their conversion would have been
anti-dilutive.

The 52,312 shares of unearned restricted stock
granted in May 2004 were not included in the computation of
diluted loss per share in fiscal 2004. In addition, the 29,912
shares of unearned restricted stock granted in June 2003 were
also not included in the computation of diluted loss per share
in fiscal 2004 or 2003. The 250,000 shares of unearned
restricted stock granted in 2002 were not included in the
computation of diluted loss per share in fiscal 2003 or 2002.
See Note 11.

F-11



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Stock-Based Employee Compensation

We have elected to continue to follow the
intrinsic value based method prescribed by APB Opinion
No. 25 to account for stock options granted to employees
and directors, as allowed by SFAS No. 123. Under APB
No. 25, we do not recognize compensation expense upon the
issuance of stock options because the option terms are fixed and
the exercise price equals the market price of the underlying
stock on the grant date.

The following table presents a comparison of the
reported net income (loss), earnings (loss) per share and
compensation cost of options granted to employees to the pro
forma amounts that would have been reported if stock option
compensation expense had been determined using the fair value
method allowed by SFAS No. 123 for the three years ended
June 30, 2004:

|                                                                                                                                                    |                            |                                |      |      |       |      |       |      |       |   |     |     |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------ | ---- | ---- | ----- | ---- | ----- | ---- | ----- | - | --- | --- | ---- | 
|                                                                                                                                                    |                            | 2004                           |      | 2003 |       | 2002
|                                                                                                                                                    |                            |                                |      |      |       |     
|                                                                                                                                                    |                            |                               
|                                                                                                                                                    |                            | (In millions, except per share
|                                                                                                                                                    |                            | amounts)                      
|As reported:                                                                                                                                        |                            |                                |      |      |       |      |       |      |       |   |     |    
|                                                                                                                                                    | Net income (loss)          |                                | $    | (0.9 | )     |      | $     | (8.3 | )     |   | $   | 9.9 |     
|                                                                                                                                                    |                            |                                |      |      |       |      |       |      |       |   |     |    
|                                                                                                                                                    | Earnings (loss) per share: |                                |      |      |       |      |       |      |       |   |     |     |     
|                                                                                                                                                    |                            | Basic                          |      | $    | (0.03 | )    |       | $    | (0.27 | ) |     | $   | 0.31 | 
|                                                                                                                                                    |                            | Diluted                        |      | $    | (0.03 | )    |       | $    | (0.27 | ) |     | $   | 0.30 | 
|Stock based employee compensation cost, net of
    related tax effects, included in the determination of net income
    (loss)                      |                            | $                              | 0.4  |      |       | $    |      |      |       | $ |    |    
|                                                                                                                                                    |                            |                                |      |      |       |      |       |      |       |   |     |    
|Pro forma amounts if the fair value method had
    been applied to all stock compensations awards:                                                  |                            |                                |      |      |       |      |       |      |       |   |     |    
|Pro forma net income (loss)                                                                                                                         |                            | $                              | (8.9 | )    |       | $    | (15.2 | )    |       | $ | 3.3 |    
|                                                                                                                                                    |                            |                                |      |      |       |      |       |      |       |   |     |    
|Pro forma earnings (loss) per share:                                                                                                                |                            |                                |      |      |       |      |       |      |       |   |     |    
|                                                                                                                                                    |                            | Basic                          |      | $    | (0.30 | )    |       | $    | (0.50 | ) |     | $   | 0.10 | 
|                                                                                                                                                    |                            | Diluted                        |      | $    | (0.30 | )    |       | $    | (0.50 | ) |     | $   | 0.10 | 
|Stock based employee compensation cost, net of
    related tax effects, that would have been included in the
    determination of net income (loss) |                            | $                              | 8.4  |      |       | $    | 6.9   |      |       | $ | 6.6 |    
|                                                                                                                                                    |                            |                                |      |      |       |      |       |      |       |   |     |    

The pro forma fair value of each option grant is
estimated on the date of grant or modification using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in fiscal 2004, 2003 and
2002: dividend yield 0% for all three years; expected volatility
of 0.36 in fiscal 2004, 0.46 in fiscal 2003 and 0.44 in fiscal
2002; risk-free interest rates of 4.00% in 2004, 3.56% in 2003,
and 4.00% in 2002; and expected life of the options of six years
for all three years. The weighted average pro forma fair value,
using the Black-Scholes assumptions noted above, of the options
granted during fiscal 2004, 2003, and 2002 was $12.13, $6.52 and
$8.04, respectively.



| |                                     
| | ------------------------------------
| | Recently Issued Accounting Standards

In May 2003, the FASB issued Statement
No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity.
Statement No. 150 affects the classification, measurement
and disclosure requirements of the following three types of
freestanding financial instruments; 1) mandatory redeemable
shares, which the issuing company is obligated to buy back with
cash or other assets; 2) instruments that do or may require
the issuer to buy back some of its shares in exchange for cash
or other assets, which includes put options and forward purchase
contracts; and 3) obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or
predominately to a variable such as a market index,

F-12



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

or varies inversely with the value of the
issuers shares. In general, Statement No. 150 is
effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. The adoption of Statement No. 150 did
not have an impact on our consolidated financial position,
results of operations, cash flows or related disclosures.

In December 2003, the FASB issued a revision to
SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This statement
revises the requirements for employers disclosures about
pension and other postretirement benefit plans. The statement is
effective for fiscal years beginning after December 15,
2003. We have two frozen defined benefit pension plans related
to former businesses that we have previously accounted for as
discontinued operations. We adopted SFAS No. 132 effective
January 1, 2004 and such adoption did not have an impact on
our disclosures as the provisions of SFAS No. 132 indicate
it should not be applied to immaterial amounts.

In March 2004, the FASB published an Exposure
Draft, Share-Based Payment, an Amendment of FASB
Statement 123 and 95. This proposed standard would
impact the accounting for stock-based payments. The standard,
which is proposed to be effective for fiscal years beginning
after December 15, 2004, would require that we recognize an
expense for our stock-based payment programs, including stock
options. We are currently evaluating the provisions of this
proposed standard to determine its impact on our future
financial statements, if adopted.

Note 3: Reclassification of Tax
Advance to Midway Games Inc.

Our 2003 Consolidated Statement of Operations for
the year ended June 30, 2003 reflected the write-off of a
$3.9 million tax advance to Midway Games Inc. (Midway) as
current federal tax expense. We have reclassified this amount
from income tax expense to interest and other income and expense
in this years presentation of our 2003 Consolidated
Statement of Operations.

The tax advance receivable from Midway under tax
sharing and separation agreements represents a cash advance
accrued in June 2003 to this former subsidiary that was spun-off
from WMS in 1998. The payment was made in July 2003 because WMS
net operating loss carry-backs for pre-spin off years prevented
Midway from realizing tax benefits of carrying back its post
spin-off net operating losses to pre-spin-off years. The payment
represents an adjustment to the spin-off value of Midway, which
was treated as a tax-free dividend to WMS stockholders at the
spin-off date. The amount is repayable by Midway under the
agreements, upon a change of control of Midway or on its return
to profitability for tax purposes, which would enable Midway to
realize the tax benefit on its tax returns. The write off was
due to the uncertainty of the payback period from Midway of the
amount advanced.

Note 4: Information on Geographic
Areas

Product sales and gaming operations revenues from
customers in Europe, Canada, Latin America and Asia amounted to
approximately $59.9 million or 26.0%, $48.4 million or
27.1%, $30.7 million or 17.6% of total revenues for fiscal
2004, 2003, and 2002 respectively. Substantially all of our
revenues from customers

F-13



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outside the United States are denominated in
U.S. dollars. At June 30, 2004, 2003 and 2002, 18.1%,
19.7% and 19.2% respectively, of trade accounts receivable are
from customers located outside of the United States.

|                              |  |                    |       |      |  |      |       |  |  |   |       | 
|----------------------------- |  | ------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                              |  |                   
|                              |  | Year Ended June 30
|                              |  |                   
|                              |  | 2004               |       | 2003 |  | 2002
|                              |  |                    |       |      |  |     
|                              |  |                   
|                              |  | (in millions)     
|Revenues:                     |  |                    |       |      |  |      |       |  |  |   |       | 
|United States                 |  | $                  | 170.3 |      |  | $    | 130.3 |  |  | $ | 144.0 | 
|Russia                        |  |                    | 19.5  |      |  |      | 16.3  |  |  |   | 3.7   | 
|Canada                        |  |                    | 10.8  |      |  |      | 9.7   |  |  |   | 11.8  | 
|All others, less than 3% each |  |                    | 29.6  |      |  |      | 22.4  |  |  |   | 15.2  | 
|                              |  |                    |       |      |  |      |       |  |  |   |       | 
|Total                         |  | $                  | 230.2 |      |  | $    | 178.7 |  |  | $ | 174.7 | 
|                              |  |                    |       |      |  |      |       |  |  |   |       | 
|Long-lived assets:            |  |                    |       |      |  |      |       |  |  |   |       | 
|United States                 |  | $                  | 77.6  |      |  | $    | 75.7  |  |  | $ | 71.2  | 
|Canada                        |  |                    | 0.5   |      |  |      | 1.0   |  |  |   | 1.3   | 
|All others, less than 1% each |  |                    | 0.5   |      |  |      | 1.1   |  |  |   | .6    | 
|                              |  |                    |       |      |  |      |       |  |  |   |       | 
|Total                         |  | $                  | 78.6  |      |  | $    | 77.8  |  |  | $ | 73.1  | 
|                              |  |                    |       |      |  |      |       |  |  |   |       | 

The geographic sales information is by country of
destination. Our operations outside the United States include
participation games located in Canada, Europe and South Africa,
sales offices in Spain and South Africa and a game development
studio in Australia and the United Kingdom.

Note 5: Property, Plant and
Equipment and Gaming Operations Machines

At June 30, net property, plant and
equipment were:

|                                  |  |               |       |      |  |   |       |  
|--------------------------------- |  | ------------- | ----- | ---- |  | - | ----- | -
|                                  |  | 2004          |       | 2003
|                                  |  |               |       |     
|                                  |  |              
|                                  |  | (in millions)
|Land                              |  | $             | 2.6   |      |  | $ | 2.6   |  
|Buildings and improvements        |  |               | 36.4  |      |  |   | 35.2  |  
|Machinery and equipment           |  |               | 37.7  |      |  |   | 28.7  |  
|Furniture and fixtures            |  |               | 6.8   |      |  |   | 6.5   |  
|                                  |  |               |       |      |  |   |       |  
|                                  |  |               | 83.5  |      |  |   | 73.0  |  
|Less accumulated depreciation     |  |               | (29.8 | )    |  |   | (22.8 | )
|                                  |  |               |       |      |  |   |       |  
|Net property, plant and equipment |  | $             | 53.7  |      |  | $ | 50.2  |  
|                                  |  |               |       |      |  |   |       |  

At June 30, net gaming operations machines
were:

|                               |  |               |       |      |  |   |       |  
|------------------------------ |  | ------------- | ----- | ---- |  | - | ----- | -
|                               |  | 2004          |       | 2003
|                               |  |               |       |     
|                               |  |              
|                               |  | (in millions)
|Gaming machines                |  | $             | 80.4  |      |  | $ | 76.3  |  
|Less accumulated depreciation  |  |               | (55.5 | )    |  |   | (48.7 | )
|                               |  |               |       |      |  |   |       |  
|Net gaming operations machines |  | $             | 24.9  |      |  | $ | 27.6  |  
|                               |  |               |       |      |  |   |       |  

We reclassified $0.2 million and
$2.3 million net book value of gaming operations machines
to inventory during fiscal 2004 and 2003, respectively.

F-14



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6: Other Assets

At June 30, other assets were:

|                                         |  |               |      |      |  |   |      | 
|---------------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | 
|                                         |  | 2004          |      | 2003
|                                         |  |               |      |     
|                                         |  |              
|                                         |  | (in millions)
|Prepaid royalties and licensing advances |  | $             | 22.8 |      |  | $ | 11.1 | 
|Deferred tax assets  non-current, net   |  |               | 5.5  |      |  |   | 1.9  | 
|Notes receivable                         |  |               | 0.8  |      |  |   | 2.0  | 
|Goodwill                                 |  |               | 2.3  |      |  |   | 1.6  | 
|Debt issuance costs, net                 |  |               | 3.8  |      |  |   | 3.5  | 
|Other                                    |  |               | 3.2  |      |  |   | 2.4  | 
|                                         |  |               |      |      |  |   |      | 
|Total other assets                       |  | $             | 38.4 |      |  | $ | 22.5 | 
|                                         |  |               |      |      |  |   |      | 

Note 7: Intangible Assets

At June 30, intangibles assets were:

|                                         |  |               |      |      |  |   |      |  
|---------------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | -
|                                         |  | 2004          |      | 2003
|                                         |  |               |      |     
|                                         |  |              
|                                         |  | (in millions)
|Prepaid royalties and licensing advances |  | $             | 37.2 |      |  | $ | 17.7 |  
|Accumulated amortization                 |  |               | (9.7 | )    |  |   | (4.5 | )
|                                         |  |               |      |      |  |   |      |  
|                                         |  | $             | 27.5 |      |  | $ | 13.2 |  
|                                         |  |               |      |      |  |   |      |  
|Goodwill                                 |  | $             | 2.3  |      |  | $ | 1.6  |  
|                                         |  |               |      |      |  |   |      |  
|Patents application costs                |  | $             | 1.9  |      |  | $ | 0.5  |  
|                                         |  |               |      |      |  |   |      |  

At June 30, 2004 and 2003 both goodwill and
patents application costs have no accumulated amortization. Once
issued, patents will be amortized over four to seventeen years.

Prepaid royalties and licensing advances at
June 30, 2004 and 2003 include both current and non-current
asset balances. Amortization expense for prepaid royalties and
licensing advances, which is charged to cost of products sales
and costs of gaming operations, was $5.2 million,
$3.5 million and $1.0 million for fiscal 2004, 2003
and 2002, respectively.

The estimated aggregate amortization expense as
of June 30, 2004 for each of the next five years is as
follows:

|     |  |               |      | 
|---- |  | ------------- | ---- | 
|     |  | (in millions)
|     |  |              
|2005 |  | $             | 4.7  | 
|2006 |  |               | 10.0 | 
|2007 |  |               | 8.8  | 
|2008 |  |               | 3.4  | 
|2009 |  |               | 1.4  | 

The estimated aggregate future intangible
amortization as of June 30, 2004 does not reflect the
significant commitments we have for future payments for
royalties and licenses. See Note 13.

F-15



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8: Other Accrued
Liabilities

At June 30, other accrued liabilities were:

|                                |  |               |      |      |  |   |      | 
|------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | 
|                                |  | 2004          |      | 2003
|                                |  |               |      |     
|                                |  |              
|                                |  | (in millions)
|Accrued property taxes          |  | $             | 1.2  |      |  | $ | 1.1  | 
|Midway tax separation liability |  |               |     |      |  |   | 4.0  | 
|Royalties payable               |  |               | 9.9  |      |  |   | 4.9  | 
|Software anomaly reserves       |  |               | 0.4  |      |  |   | 1.7  | 
|Sales taxes payable             |  |               | 1.6  |      |  |   | 1.0  | 
|Deferred revenue                |  |               | 3.0  |      |  |   | 1.0  | 
|Accrued interest                |  |               | 1.5  |      |  |   |     | 
|Other accrued liabilities       |  |               | 1.4  |      |  |   | 2.3  | 
|                                |  |               |      |      |  |   |      | 
|Total other accrued liabilities |  | $             | 19.0 |      |  | $ | 16.0 | 
|                                |  |               |      |      |  |   |      | 

Note 9: Income Taxes

The following is a summary of income (loss)
before income taxes of U.S. and international operations
for the three years ended June 30, 2004:

|              |  |               |      |      |  |      |       |   |  |   |      | 
|------------- |  | ------------- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | 
|              |  | 2004          |      | 2003 |  | 2002
|              |  |               |      |      |  |     
|              |  |              
|              |  | (in millions)
|United States |  | $             | (4.0 | )    |  | $    | (20.0 | ) |  | $ | 14.9 | 
|International |  |               | 1.0  |      |  |      | 1.1   |   |  |   | 0.6  | 
|              |  |               |      |      |  |      |       |   |  |   |      | 
|Total         |  | $             | (3.0 | )    |  | $    | (18.9 | ) |  | $ | 15.5 | 
|              |  |               |      |      |  |      |       |   |  |   |      | 

Significant components of the provision (benefit)
for income taxes for the three years ended June 30, 2004
were:

|                                         |         |               |      |      |   |      |       |      |   |   |      |      |  
|---------------------------------------- | ------- | ------------- | ---- | ---- | - | ---- | ----- | ---- | - | - | ---- | ---- | -
|                                         |         | 2004          |      | 2003 |   | 2002
|                                         |         |               |      |      |   |     
|                                         |         |              
|                                         |         | (in millions)
|Current                                  |         |               |      |      |   |      |       |      |   |   |      |     
|                                         | Federal |               | $    |     |   |      | $     | (7.8 | ) |   | $    | 4.5  |  
|                                         | State   |               |      |     |   |      |       |     |   |   |      | 0.6  |  
|                                         | Foreign |               |      | 0.7  |   |      |       | 0.5  |   |   |      | 0.3  |  
|                                         |         |               |      |      |   |      |       |      |   |   |      |     
|Total current                            |         |               | 0.7  |      |   |      | (7.3  | )    |   |   | 5.4  |     
|Deferred                                 |         |               |      |      |   |      |       |      |   |   |      |     
|                                         | Federal |               |      | (8.5 | ) |      |       | (2.6 | ) |   |      | (0.1 | )
|                                         | State   |               |      | (1.0 | ) |      |       | (1.0 | ) |   |      |     |  
|                                         | Foreign |               |      |     |   |      |       | 0.1  |   |   |      | (0.1 | )
|                                         |         |               |      |      |   |      |       |      |   |   |      |     
|Total deferred                           |         |               | (9.5 | )    |   |      | (3.5  | )    |   |   | (0.2 | )   
|Tax benefit resulting from stock options |         |               | 6.7  |      |   |      | 0.2   |      |   |   | 0.4  |     
|                                         |         |               |      |      |   |      |       |      |   |   |      |     
|Income tax provision (benefit), net      |         | $             | (2.1 | )    |   | $    | (10.6 | )    |   | $ | 5.6  |     
|                                         |         |               |      |      |   |      |       |      |   |   |      |     

F-16



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes reflect the net tax effects
of temporary differences between the amount of assets and
liabilities for financial reporting purposes and the amounts
used for income taxes. Significant components of our deferred
tax assets and liabilities at June 30 were:

|                                         |                                                   |                                                            |      |      |      |   |     |     |     | 
|---------------------------------------- | ------------------------------------------------- | ---------------------------------------------------------- | ---- | ---- | ---- | - | --- | --- | --- | 
|                                         |                                                   | 2004                                                       |      | 2003
|                                         |                                                   |                                                            |      |     
|                                         |                                                   |                                                           
|                                         |                                                   | (in millions)                                             
|Deferred tax assets resulting from:      |                                                   |                                                            |      |      |      |   |     |    
|Current:                                 |                                                   |                                                            |      |      |      |   |     |    
|                                         | Net operating loss carry-forward (NOL)            |                                                            | $    | 8.5  |      |   | $   | 2.3 |    
|                                         | Research and development tax credit carry-forward |                                                            |      | 1.9  |      |   |     | 1.2 |    
|                                         | Receivables valuation                             |                                                            |      | 1.1  |      |   |     | 1.0 |    
|                                         | Inventory valuation                               |                                                            |      | 2.0  |      |   |     | 1.6 |    
|                                         | Accrued items not currently deductible            |                                                            |      | 1.1  |      |   |     | 1.5 |    
|                                         |                                                   |                                                            |      |      |      |   |     |    
|                                         |                                                   | Total Current                                              |      |      | 14.6 |   |     |     | 7.6 | 
|                                         |                                                   |                                                            |      |      |      |   |     |    
|Non-current:                             |                                                   |                                                            |      |      |      |   |     |    
|                                         | Foreign tax credit carry-forward (FTC)            |                                                            |      | 1.8  |      |   |     | 1.2 |    
|                                         | Book over tax depreciation                        |                                                            |      | 3.5  |      |   |     | 0.5 |    
|                                         | Other non-current                                 |                                                            |      | 0.6  |      |   |     | 0.2 |    
|                                         |                                                   |                                                            |      |      |      |   |     |    
|                                         | Total non-current deferred tax assets             |                                                            |      | 5.9  |      |   |     | 1.9 |    
|                                         |                                                   |                                                            |      |      |      |   |     |    
|                                         |                                                   | Valuation allowance, relating to foreign
    NOLs and FTC |      |      | (1.8 | ) |     |     |    | 
|                                         |                                                   |                                                            |      |      |      |   |     |    
|                                         | Net deferred tax assets                           |                                                            |      | 18.7 |      |   |     | 9.5 |    
|Deferred tax liabilities resulting from: |                                                   |                                                            |      |      |      |   |     |    
|                                         | Other                                             |                                                            |      | 0.0  |      |   |     | 0.3 |    
|                                         |                                                   |                                                            |      |      |      |   |     |    
|Net deferred tax assets                  |                                                   | $                                                          | 18.7 |      |      | $ | 9.2 |    
|                                         |                                                   |                                                            |      |      |      |   |     |    

No deferred tax provision has been made for
United States taxes related to approximately $2.7 million
of undistributed earnings of foreign subsidiaries, which are
considered to be permanently reinvested. Determination of the
deferred income tax liability on these unremitted earnings is
not practicable because such liability, if any, is dependent on
circumstances existing if and when the remittance occurs.

At June 30, 2004, we had $1.9 million
of research and development tax credit carry-forwards expiring
from 2021 through 2024, $1.8 million of foreign tax credit
carry-forwards expiring from 2006 through 2009,
$38.2 million of state net operating loss carry-forwards
expiring from 2008 through 2019, $19.9 million of net
federal operating loss carry-forwards expiring in 2023 and 2024
and $1.0 million of foreign net operating loss with
unlimited carry-forward.

At June 30, 2004, we believe it is more
likely than not that we will realize substantially all of the
benefit of these net deferred tax assets, including the net
operating loss carry-forwards and research and development tax
credit carry-forwards. Accordingly, we have only provided a
minimal valuation allowance against these deferred tax assets.
In determining the level of required valuation allowance, we
consider the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in
making this assessment. However, additional valuation allowances
could be recorded against these deferred tax assets and charged
against income in future periods if our future estimates of
amounts realizable are reduced or if the timing of such
realization extends beyond our current expectations.

F-17



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision (benefit) for income taxes differs
from the amount computed using the statutory federal income tax
rate for fiscal 2004, 2003 and 2002 as follows:

|                                                 |  |      |       |      |  |      |       |    |  |  |      |  
|------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ---- | -
|                                                 |  | 2004 |       | 2003 |  | 2002
|                                                 |  |      |       |      |  |     
|Statutory federal income tax rate                |  |      | (35.0 | )%   |  |      | (35.0 | )% |  |  | 35.0 | %
|State income taxes, net of federal benefit       |  |      | (4.0  | )    |  |      | (2.9  | )  |  |  | 2.9  |  
|Dividend received deduction on investment income |  |      | (4.6  | )    |  |      | (2.0  | )  |  |  | (2.6 | )
|Research tax credits                             |  |      | (15.7 | )    |  |      | (3.0  | )  |  |  | (1.8 | )
|Permanent items                                  |  |      | 3.2   |      |  |      | 0.7   |    |  |  | 1.4  |  
|Foreign rate differential                        |  |      | (11.2 | )    |  |      | 1.6   |    |  |  |     |  
|Change of prior years taxes                     |  |      | 1.4   |      |  |      | (12.5 | )  |  |  |     |  
|Export sales benefit                             |  |      | (13.8 | )    |  |      | (2.2  | )  |  |  | (0.4 | )
|Alternative minimum tax credit                   |  |      |      |      |  |      | (8.4  | )  |  |  |     |  
|South African losses without current tax benefit |  |      | 8.6   |      |  |      |      |    |  |  |     |  
|Other, net                                       |  |      | 0.2   |      |  |      | 7.6   |    |  |  | 1.6  |  
|                                                 |  |      |       |      |  |      |       |    |  |  |      |  
|Effective tax rate                               |  |      | (70.9 | )%   |  |      | (56.1 | )% |  |  | 36.1 | %
|                                                 |  |      |       |      |  |      |       |    |  |  |      |  

Other, net in our fiscal 2003 provision reflects
a 7.8% or $3.9 million non-deductible pre-tax write off
related to the tax impact of fully reserving our tax advance
receivables from Midway, a former subsidiary, under terms of tax
sharing and separation agreements entered into prior to the
spin-off date due to the uncertainty of the payback period.

Note 10: Line of Credit and
Convertible Subordinated Notes

We renewed an unused line of credit for
$50.0 million under a revolving credit agreement for a
one-year term to May 21, 2005, which contains usual credit
terms for a bank line. No borrowing occurred on the line in
fiscal 2004 and 2003.

In June 2003, we issued $100.0 million of
convertible subordinated notes bearing interest at 2.75%
maturing on July 15, 2010. On July 3, 2003, we issued
an additional $15 million of convertible subordinated notes
under identical terms to cover an over allotment option granted
to the initial purchaser of the notes. The notes are
exchangeable at any time into an aggregate of 5.8 million
shares of our common stock at a conversion price of $19.78 per
share, subject to adjustment. The notes are subordinated in
right of payment to all existing and future senior debt and will
be effectively subordinated to all of the indebtedness and
liabilities of our subsidiaries. The notes are not callable. We
pay interest on the notes semi-annually on January 15 and
July 15 of each year, which commenced on January 15,
2004. None of the holders have converted any of their
convertible subordinated notes into our common stock.

We have no maturities of debt or sinking fund
requirements through June 30, 2010.

Our loan agreement requires that we maintain a
minimum amount of tangible net worth and certain financial ratio
covenants which could limit our ability to declare dividends or
make any distribution to holders of any shares of capital stock,
or redeem or otherwise acquire such shares of our Company. At
June 30, 2004, approximately $29.4 million is
available for such distributions under the most restrictive of
these covenants.

Note 11: Stockholders Equity
and Common Stock Plans

Our authorized common stock consists of
100.0 million shares of $.50 par value. Additionally, there
are 5,000,000 shares of $.50 par value preferred stock
authorized. The preferred stock is issuable in series, and the

F-18



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

relative rights and preferences and the number of
shares in each series are to be established by our Board of
Directors.

On April 6, 1998, the WMS Rights Agreement
became effective. Under the Rights Agreement, each share of our
common stock has an accompanying right to purchase, under
certain conditions, one one-hundredth of a share of our
Series A Preferred Stock at an exercise price of $100,
permitting each holder to receive $200 worth of our common stock
valued at the then current market price. The rights become
exercisable if any person or entity that did not, before the
Plan was adopted, own 15% or more of our common stock acquires
beneficial ownership of 15% or more of our common stock. The
rights are redeemable by us at $.01 per right, subject to
certain conditions, at any time and expire in 2007.

We utilize the Black-Scholes pricing model to
determine the fair value of equity instruments issued in
exchange for goods or services. During fiscal 2004 we issued
warrants to a licensor. In valuing the warrants, we used the
Black-Scholes model and incorporated the following assumptions:
risk free rate 4.15%; expected volatility 0.54; expected life
10 years; and expected dividend-zero. The risk-free rate is
determined based on the interest rate of U.S. Government
treasury obligations with a maturity date comparable to the life
of the warrants issued. Other assumptions, relating to the
warrants life, strike price and our common stock price,
were determined at the date the warrants were issued. We will
recognize expense based on the terms of the underlying license
agreement. No such instruments were issued in fiscal 2003.
During fiscal 2002, we issued options to consultants and we
incorporated the following assumptions into the model: risk free
rate 4.00%; expected volatility 0.44; expected life
6 years; and expected dividend-zero. The risk-free rate is
determined based on the interest rate of U.S. Government
treasury obligations with a maturity date comparable to the life
of the option issued. Other assumptions, relating to option
life, strike price and stock price, are determined at the date
the option is issued. The expense recognized is based on the
vesting schedule of the options granted to consultants.

During fiscal 2004, 2003 and 2002, we expensed
$0.1 million, $0.1 million and $0.3 million,
respectively, for the value of common stock options issued for
services from consultants.



| |                                
| | -------------------------------
| | Common stock repurchase program

In January 2002, our Board of Directors
authorized a $20 million common stock repurchase plan to
repurchase our common stock from time to time in open market or
privately negotiated transactions. By August 2, 2002, this
repurchase program was completed. In September 2002, our Board
of Directors authorized a twelve-month plan to repurchase an
additional $10 million of our common stock from time to
time in open market or privately negotiated transactions. As of
March 31, 2003, this repurchase program was completed. In
April 2003, our Board of Directors authorized a new twelve-month
plan to repurchase up to an additional $10.0 million of our
common stock from time to time in open market or privately
negotiated transactions. In June 2003, in conjunction with the
completion of our private placement of convertible subordinated
notes due 2010 to qualified institutional buyers, our Board of
Directors authorized the expansion of this repurchase plan to
$25.0 million. The June 2003 $25.0 million plan has
now expired. Since the inception of the first common stock
repurchase program in January 2002 through September 30,
2003, we have repurchased 3.2 million or 9.9% of our
previously outstanding shares for an aggregate price of
$42.5 million at an average price of $13.31 per share.

F-19



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following tables summarizes our stock
repurchase activity in fiscal 2004, 2003 and 2002.

|                                                  |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |       | 
|------------------------------------------------- | ----------------------------------- | -------------------------------------- | ---- | --------- |  | --------- | --- | ------- |  | - | ---- | ---- |  | - | ----- | ----- | 
|                                                  |                                     |                                        |      |           |  |           |     | Average
|                                                  |                                     | Amount of                              |      |           |  | Cost of   |     | Price  
|                                                  |                                     | Plan                                   |      | Shares    |  | Shares    |     | per    
|Date of Board Stock Repurchase Plan Authorization |                                     | Authorization                          |      | Purchased |  | Purchased |     | Share  
|                                                  |                                     |                                        |      |           |  |           |     |        
|                                                  |                                     |                                       
|                                                  |                                     | (in millions except per share amounts)
|Repurchases in fiscal 2002:                       |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|January 2002 Plan                                 |                                     | $                                      | 20.0 |           |  |           | 0.5 |         |  | $ | 8.6  |      |  | $ | 15.82 |      
|                                                  |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|                                                  | Total fiscal 2002 purchase activity |                                        |      |           |  |           |     | 0.5     |  |   |      | 8.6  |  |   |       | 15.82 | 
|Repurchases in fiscal 2003:                       |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|January 2002 Plan                                 |                                     |                                        |      |           |  |           | 1.1 |         |  |   | 11.4 |      |  |   | 10.36 |      
|September 2002 Plan                               |                                     |                                        | 10.0 |           |  |           | 0.8 |         |  |   | 10.0 |      |  |   | 12.00 |      
|April 2003/June 2003 Plan                         |                                     |                                        | 25.0 |           |  |           | 0.5 |         |  |   | 7.5  |      |  |   | 15.22 |      
|                                                  |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|                                                  | Total fiscal 2003 purchase activity |                                        |      |           |  |           |     | 2.4     |  |   |      | 28.9 |  |   |       | 12.29 | 
|Repurchases in fiscal 2004:                       |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|April 2003/June 2003 Plan                         |                                     |                                        |      |           |  |           | 0.3 |         |  |   | 5.0  |      |  |   | 16.75 |      
|                                                  |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|                                                  | Total fiscal 2004 purchase activity |                                        |      |           |  |           |     | 0.3     |  |   |      | 5.0  |  |   |       | 16.75 | 
|                                                  |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      
|Grand total all plans, fiscal 2002-2004 activity  |                                     |                                        |      |           |  |           | 3.2 |         |  | $ | 42.5 |      |  | $ | 13.31 |      
|                                                  |                                     |                                        |      |           |  |           |     |         |  |   |      |      |  |   |       |      

On August 9, 2004 our Board of Directors
authorized the repurchase of up to $20.0 million of the our
common stock over the next twelve months. The purchases will be
made from time to time in open market or privately negotiated
transactions. The timing and actual number of shares repurchased
will depend on market conditions.



| |                                          
| | -----------------------------------------
| | Stock Option and Treasury Bonus
    Plans

At June 30, 2004, 4.1 million shares of
common stock were reserved for possible issuance under stock
option plans. We have stock option and treasury share bonus
plans, as well as a policy of granting restricted stock, under
which certain employees, officers, directors and consultants are
participants. Under the stock option plans, we may grant
nonqualified options on shares of common stock through the year
2012 and under certain plans, we may grant incentive stock
options. Options may be granted to employees and under certain
plans to officers, non-employee directors and consultants. The
stock option committee has the authority to fix the terms and
conditions upon which each option is granted, but in no event
shall the term exceed ten years or the strike price generally be
granted at less than 100% of the fair market value of the stock
on the date of grant.

Under Delaware law and our certificate of
incorporation, authorized but unissued shares of our common
stock may be granted as restricted stock from time to time as
determined by our Board of Directors, except as limited by NYSE
rules. Upon issuance of stock, unearned compensation equivalent
to the market value of the shares granted on the grant date is
charged to stockholders equity and is subsequently
amortized to expense over the vesting period. In fiscal 2002,
250,000 restricted shares were granted with a weighted average
fair value at grant date of $4.2 million, which were
subsequently repurchased in fiscal 2003. In fiscal 2003,
29,912 shares with a weighted average fair value at grant
date of $0.5 million were granted to four of our officers
in lieu of any cash bonuses for fiscal 2003. In fiscal 2004,
52,312 shares with a weighted average fair value at grant date
of $1.5 million were granted to certain of our executive
officers and to vice presidents in lieu of any cash bonuses for
fiscal 2004. Under both of these restricted grants, grantees are
entitled to any cash dividends and to vote their shares, but may
not sell or transfer their shares during the one-year vesting
period.

F-20



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Our Treasury Share Bonus Plan for key employees
covers 64,312 shares of common stock of which none were
available for grant on June 30, 2004. The vesting and terms
of the awards are determined at the discretion of management.
Awards of 52,312 shares of treasury stock were outstanding
under this plan at June 30, 2004; none were outstanding at
June 30, 2003 or 2002.

A summary of the status of our stock option plans
for the three years ended June 30, 2004 is as follows:

|                             |  |               |      |                |  |   |       | 
|---------------------------- |  | ------------- | ---- | -------------- |  | - | ----- | 
|                             |  |               |      | Weighted      
|                             |  | Options       |      | Average       
|                             |  | (in millions) |      | Exercise Price
|                             |  |               |      |               
|Outstanding at June 30, 2001 |  |               | 2.3  |                |  | $ | 13.03 | 
|Granted                      |  |               | 1.3  |                |  |   | 16.70 | 
|Exercised                    |  |               | (0.1 | )              |  |   | 10.61 | 
|Forfeited                    |  |               | (0.1 | )              |  |   | 7.62  | 
|                             |  |               |      |                |  |   |       | 
|Outstanding at June 30, 2002 |  |               | 3.4  |                |  |   | 14.74 | 
|Granted                      |  |               | 0.8  |                |  |   | 13.43 | 
|Exercised                    |  |               | (0.1 | )              |  |   | 6.56  | 
|Forfeited                    |  |               | (0.1 | )              |  |   | 17.99 | 
|                             |  |               |      |                |  |   |       | 
|Outstanding at June 30, 2003 |  |               | 4.0  |                |  |   | 14.57 | 
|Granted                      |  |               | 1.0  |                |  |   | 27.16 | 
|Exercised                    |  |               | (1.1 | )              |  |   | 11.41 | 
|Forfeited                    |  |               | (0.1 | )              |  |   | 15.25 | 
|                             |  |               |      |                |  |   |       | 
|Outstanding at June 30, 2004 |  |               | 3.8  |                |  | $ | 18.72 | 
|                             |  |               |      |                |  |   |       | 

The following table summarizes information about
stock options outstanding at June 30, 2004:

|                         |  |                     |     |                     |  |                |     |               |  |                |       |  |  |  |     |  |  |   |       | 
|------------------------ |  | ------------------- | --- | ------------------- |  | -------------- | --- | ------------- |  | -------------- | ----- |  |  |  | --- |  |  | - | ----- | 
|                         |  |                     |     |                    
|                         |  | Options outstanding |     | Options exercisable
|                         |  |                     |     |                    
|                         |  |                     |     | Weighted Average    |  |                |     |              
|                         |  | Number              |     | Remaining           |  | Weighted       |     | Number        |  | Weighted      
|                         |  | Outstanding         |     | Contractual Life    |  | Average        |     | Outstanding   |  | Average       
|Range of Exercise Prices |  | (in millions)       |     | in Years            |  | Exercise Price |     | (in millions) |  | Exercise Price
|                         |  |                     |     |                     |  |                |     |               |  |               
|$ 2.69  $ 5.25          |  |                     | 0.1 |                     |  |                | 3.5 |               |  | $              | 4.10  |  |  |  | 0.1 |  |  | $ | 4.10  | 
|7.13   10.50            |  |                     | 0.3 |                     |  |                | 5.5 |               |  |                | 8.86  |  |  |  | 0.2 |  |  |   | 8.84  | 
|10.75   16.04           |  |                     | 1.1 |                     |  |                | 7.9 |               |  |                | 13.98 |  |  |  | 0.7 |  |  |   | 13.60 | 
|16.88   22.88           |  |                     | 1.4 |                     |  |                | 6.8 |               |  |                | 19.06 |  |  |  | 0.9 |  |  |   | 19.07 | 
|24.83   32.17           |  |                     | 0.9 |                     |  |                | 9.5 |               |  |                | 27.18 |  |  |  | 0.3 |  |  |   | 24.89 | 
|                         |  |                     |     |                     |  |                |     |               |  |                |       |  |  |  |     |  |  |   |       | 
|$ 2.69  $32.17          |  |                     | 3.8 |                     |  |                | 7.7 |               |  | $              | 18.72 |  |  |  | 2.2 |  |  | $ | 16.81 | 
|                         |  |                     |     |                     |  |                |     |               |  |                |       |  |  |  |     |  |  |   |       | 

At June 30, 2003, 2.2 million options
with a weighted average exercise price of $13.94 per share were
exercisable. At June 30, 2002, 1.5 million options
with a weighted average exercise price of $13.27 per share were
exercisable.



| |              
| | -------------
| | Warrant Grant

In September 2003, our Board of Directors, as
part of the inducement to a licensor to extend their license
agreement with us, approved a grant of 250,000 common stock
purchase warrants valued at $3.9 million. The
warrants exercise price is $35.04 per share of our common
stock, subject to adjustment. The warrants are non-cancelable
and vest with respect to 20% of the underlying shares in each
year commencing on January 1, 2007 until fully vested on
January 1, 2011, subject to earlier vesting under specified
circumstances. The warrants

F-21



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expire on September 14, 2013. The grant was
exempt from registration under Section 5 of the Securities
Act since it was made only to the licensor and did not involve
any public offering under Section 4(2) of the Securities
Act.



| |                          
| | -------------------------
| | Repurchase of Stock Grant

Effective March 1, 2002, we issued a
restricted stock grant of 250,000 shares of common stock held in
treasury to Mr. Louis J. Nicastro, Chairman of our Board of
Directors and a non-employee director. This grant was issued in
consideration for his service as Chairman of the Technology
Committee of the Board of Directors, which was established to
provide enhanced oversight of the timely completion of the first
phase of our technology improvement plan. On May 7, 2003,
we purchased Mr. Nicastros rights to the 250,000
restricted shares for a purchase price of $14.00 per share. This
share price reflects a discount of $0.50 per share from the
closing market price on May 6, 2003. We recorded a pretax
charge to our statement of operations of $3.5 million,
$2.2 million after tax, in the June 2003 quarter to reflect
this transaction, and the shares were returned to us and placed
in treasury.

Note 12: Concentration of Credit and
Market Risk and Fair Value Disclosures of Financial
Instruments

Financial instruments, which potentially subject
us to concentrations of credit and market risk, consist
primarily of cash equivalents, short-term investments and trade
notes and accounts receivable. By policy, we place our cash
equivalents and short-term investments only in high credit
quality securities and limit the amounts invested in any one
security. However, our overnight cash balances are held by our
main commercial bank. The accounts and notes receivable from the
sale of gaming devices are generally from a large number of
customers with no significant concentration other than in Nevada
and Russia. No customers accounted for more than 10% of
consolidated revenues in fiscal 2004, 2003 and 2002.

The carrying amounts of cash, investments,
accounts receivable, accounts payable, and accrued liabilities
approximates fair value due to the short-term maturities of
these assets and liabilities. The fair value of notes receivable
is estimated by discounting expected future cash flows using
current interest rates at which similar loans would be made to
borrowers with similar credit ratings and remaining maturities.
As of June 30, 2004 and 2003, the fair value of the notes
receivable approximated the carrying value.

As of June 30, 2004, we had
$115.0 million of convertible fixed-rate debt with an
interest rate of 2.75% and a fair value of $151.0 million.
The fair value of our convertible fixed rate debt is
significantly dependent on the market price of our common stock
into which it can be converted.

Note 13: Commitments and
Contingencies

We lease certain office facilities and equipment
under non-cancelable operating leases with net future lease
commitments for minimum rentals at June 30, 2004 as follows:

|           |  |               |      | 
|---------- |  | ------------- | ---- | 
|           |  | (in millions)
|           |  |              
|2005       |  | $             | 2.1  | 
|2006       |  |               | 2.3  | 
|2007       |  |               | 2.1  | 
|2008       |  |               | 2.0  | 
|2009       |  |               | 1.8  | 
|Thereafter |  |               | 9.4  | 
|           |  |               |      | 
|           |  | $             | 19.7 | 
|           |  |               |      | 

Rent expense for fiscal 2004, 2003 and 2002 was
$2.1 million, $2.0 million, and $1.8 million,
respectively.

F-22



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

We routinely enter into license agreements with
others for the use of intellectual properties in our products.
These agreements generally provide for royalty and license
advances when the agreements are signed, and provide for minimum
guarantees as well as additional contingent payments based on
future events. The total potential commitments at June 30,
2004 was $92.7 million, a significant increase from the
amount at June 30, 2003 of $29.6 million. At
June 30, 2004, we had total potential royalty and license
commitments, advances and payments made, and potential future
payments as follows:

|                                      |  |               |       |            |  |                 |      |   |  |   |       |  
|------------------------------------- |  | ------------- | ----- | ---------- |  | --------------- | ---- | - |  | - | ----- | -
|                                      |  |              
|                                      |  | June 30, 2004
|                                      |  |              
|                                      |  | Guaranteed    |       | Contingent |  | Total Potential
|                                      |  | Minimums      |       | Payments   |  | Payments       
|                                      |  |               |       |            |  |                
|                                      |  |              
|                                      |  | (in millions)
|Total royalty and license commitments |  | $             | 90.0  |            |  | $               | 2.7  |   |  | $ | 92.7  |  
|Advances and payments made            |  |               | (36.2 | )          |  |                 | (0.0 | ) |  |   | (36.2 | )
|                                      |  |               |       |            |  |                 |      |   |  |   |       |  
|Potential future payments             |  | $             | 53.8  |            |  | $               | 2.7  |   |  | $ | 56.5  |  
|                                      |  |               |       |            |  |                 |      |   |  |   |       |  

Of the $36.2 million total advances and
payments made through June 30, 2004, $8.7 million has
been charged to expense and the remaining $27.5 million is
included in the June 30, 2004 balance sheet;
$4.7 million in other current assets and $22.8 million
in other assets.

As of June 30, 2004, we have potential
royalty and license payments as follows:

|           |  |                     |      |            |  |                 |     |  |  |   |      | 
|---------- |  | ------------------- | ---- | ---------- |  | --------------- | --- |  |  | - | ---- | 
|           |  |                    
|           |  | Year Ended June 30,
|           |  |                    
|           |  | Guaranteed          |      | Contingent |  | Total Potential
|           |  | Minimums            |      | Payments   |  | Payments       
|           |  |                     |      |            |  |                
|           |  |                    
|           |  | (in millions)      
|2005       |  | $                   | 10.0 |            |  | $               | 2.2 |  |  | $ | 12.2 | 
|2006       |  |                     | 10.5 |            |  |                 | 0.5 |  |  |   | 11.0 | 
|2007       |  |                     | 9.3  |            |  |                 |    |  |  |   | 9.3  | 
|2008       |  |                     | 8.9  |            |  |                 |    |  |  |   | 8.9  | 
|2009       |  |                     | 4.9  |            |  |                 |    |  |  |   | 4.9  | 
|Thereafter |  |                     | 10.2 |            |  |                 |    |  |  |   | 10.2 | 
|           |  |                     |      |            |  |                 |     |  |  |   |      | 
|Total      |  | $                   | 53.8 |            |  | $               | 2.7 |  |  | $ | 56.5 | 
|           |  |                     |      |            |  |                 |     |  |  |   |      | 

In January 2002, we announced a three-part
technology improvement plan to stabilize the operating system
software in our gaming devices. As part of this technology
improvement plan, we have pursued alternative strategies for
each phase of the plan, including licensing technologies from
third parties. For the short-term phase of the plan, our
internally developed version of the operating system continues
to successfully operate in casinos in jurisdictions where is has
been installed. As a result, we no longer intend to use an
alternative operating system, which was originally licensed,
among other uses, to serve as a back up during the short-term
phase of the plan. In fiscal 2003, we recorded a pre-tax charge
of $2.8 million, or $1.7 million after-tax to write
off this license agreement obligation. At June 30, 2004, we
had guaranteed minimum payments related to technology
alternatives aggregating $10.4 million, all of which had
been paid as advances and $0.3 million had been recognized
as expense. An additional $1.3 million of contingent
payments may become payable based on future events. These
amounts are included in the table above. If we determine that we
will not realize the value of a particular licensed technology
alternative, we will record an immediate charge against earnings
at the time of such determination of up to $11.4 million if
all of the alternatives were to have no further value to us.

We had an agreement with IGT for the operation of
SURVIVOR branded games on its wide-area progressive
system. Under this agreement we recorded our 50% proportionate
share of revenues and costs from operating activities and all of
the assets we owned and liabilities we incurred in connection
with the operating

F-23



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

activities in our consolidated financial
statements under this agreement. In fiscal 2003, we expensed
$0.4 million pre-tax related to an estimated impairment of
the SURVIVOR intellectual property license and we
recorded a pre-tax write down of approximately
$1.1 million, to reduce the carrying value of
SURVIVOR inventory to net realizable value. At
June 30, 2004 and 2003, the net remaining book value of
SURVIVOR related inventory and intellectual property
assets and commitments for both companies was approximately
$0.0 million and $2.6 million, respectively. In
January 2004, the remaining SURVIVOR WAP themed system
was shut down.

On June 17, 2003, we announced that we would
allow our agreement with Stargames Corporation Pty Ltd., for
exclusive North American distributorship rights to their
RAPID ROULETTE table gaming product, to expire on
June 30, 2003. We encountered several significant obstacles
in bringing this product to market, including regulatory,
technical, and customer acceptance issues. As a result of the
expiration of the agreement, we recorded a non-cash pre-tax
charge of $3.4 million in fiscal 2003 to write down
RAPID ROULETTE inventory to net realizable value and
write-off distribution rights assets.

Note 14: Litigation

On October 2, 2003, La Societe
de Loteries du Quebec (Loto-Quebec) filed claims
against us and Video Lottery Consultants Inc., a subsidiary of
IGT (VLC) in the Superior Court of the Province of Quebec. The
pleadings allege that Loto-Quebec would be entitled to be
indemnified by the manufacturers of Loto-Quebecs VLTs,
specifically WMS and VLC, if the class action plaintiffs,
described below, are successful in the pending class action
lawsuit against Loto-Quebec. We are currently proceeding with
discovery, and we intend to vigorously defend ourselves against
the allegations. We are unable to predict the outcome of these
actions, or a reasonable estimate of the range of possible loss,
if any.

The class action lawsuit discussed in
Loto-Quebecs claim was brought on May 18, 2001
against Loto-Quebec in the Superior Court of the Province of
Quebec. It alleges that the members of the class developed a
pathological gambling addiction by using Loto-Quebecs VLTs
and that Loto-Quebec, as owner, operator and distributor of
VLTs, failed to warn players of the alleged dangers associated
with VLTs. Class status was granted by the Court on May 6,
2002, authorizing Jean Brochu to act as the representative
plaintiff. The class of 119,000 members is requesting
damages totaling almost $700 million Canadian dollars, plus
interest.

Note 15: Retirement Plans

We sponsor 401(k) defined contribution plans
within the United States. The plans cover full-time employees
and provide for our contributions of up to 4.5 percent of
covered employees compensation as defined in the plan. Our
expense for the defined contribution plans totaled
$1.6 million, $1.0 million, and $0.6 million in
fiscal 2004, 2003 and 2002, respectively.

We have two frozen defined benefit pension plans
related to discontinued operations. Pension expense for these
plans was not significant in the aggregate.

F-24



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                                                                                                                    
|-------- | -------------------------------------------------------------------------------------------------------------------
|Note 16: | Supplemental Disclosure Of Cash Flow
    Information and Summary of Non-cash Investing and Financing
    Activities

|                                                 |                                                                                                   |                     |   |      |  |      |   |     |  |  |   |      | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ------------------- | - | ---- |  | ---- | - | --- |  |  | - | ---- | 
|                                                 |                                                                                                   |                    
|                                                 |                                                                                                   | Year Ended June 30,
|                                                 |                                                                                                   |                    
|                                                 |                                                                                                   | 2004                |   | 2003 |  | 2002
|                                                 |                                                                                                   |                     |   |      |  |     
|                                                 |                                                                                                   |                    
|                                                 |                                                                                                   | (in millions)      
|Supplemental Disclosure of Cash Flow Information |                                                                                                   |                     |   |      |  |      |   |     |  |  |   |     
|                                                 | Income taxes paid                                                                                 |                     | $ | 1.0  |  |      | $ | .3  |  |  | $ | 11.5 | 
|                                                 | Income tax refunds received                                                                       |                     | $ | 6.6  |  |      | $ | 9.6 |  |  | $ | 10.4 | 
|                                                 | Investment income received                                                                        |                     | $ | 2.6  |  |      | $ | 2.1 |  |  | $ | 2.7  | 
|                                                 | Interest paid                                                                                     |                     | $ | 1.8  |  |      | $ |    |  |  | $ |     | 
|Schedule of Non-cash Investing Activities        |                                                                                                   |                     |   |      |  |      |   |     |  |  |   |     
|                                                 | Gaming operations machines transferred to
    inventory                                           |                     | $ | 0.2  |  |      | $ | 2.3 |  |  | $ |     | 
|                                                 | Issuance of 250,000 stock warrants to licensor                                                    |                     | $ | 3.9  |  |      | $ |    |  |  | $ |     | 
|Schedule of Non-cash Financing Activities        |                                                                                                   |                     |   |      |  |      |   |     |  |  |   |     
|                                                 | Write down of tax advance receivables from Midway
    under tax sharing and separation agreements |                     | $ |     |  |      | $ | 4.0 |  |  | $ |     | 
|                                                 | Reversal of stock option benefits from Midway
    under tax sharing and separation agreements     |                     | $ |     |  |      | $ | 3.0 |  |  | $ |     | 

The tax advance receivable from Midway under tax
sharing and separation agreements represents a cash advance
accrued in June 2003 to this former subsidiary that was spun-off
from WMS in 1998. The payment was made in July 2003 because WMS
net operating loss carry-backs for pre-spin off years prevented
Midway from realizing tax benefits of carrying back its post
spin-off net operating losses to pre-spin-off years. The payment
represents an adjustment to the spin-off value of Midway, which
was treated as a tax-free dividend to WMS stockholders at the
spin-off date. The amount is repayable by Midway under the
agreements, upon a change of control of Midway or on its return
to profitability for tax purposes, which would enable Midway to
realize the tax benefit on its tax returns. The write off was
due to the uncertainty of the payback period from Midway of the
amount advanced.

The reversal of stock option benefits relates to
the exercise of WMS stock options by Midway employees in fiscal
2000 and 1999 subsequent to the Midway spin-off. Under the terms
of the tax sharing agreement, due to Midway not receiving the
full tax benefit of its post spin-off net operating losses
caused by the provision in lieu benefits from the stock option
exercises, the $3 million was paid by WMS to Midway in
fiscal 2000. This amount is repayable by Midway under the
agreements, upon a change of control of Midway or on its return
to profitability for tax purposes, which would enable Midway to
realize the tax benefit on its tax returns. The reversal of the
stock option benefit was due to the uncertainty of the payback
period from Midway of the amount advanced.

F-25



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 17: Quarterly Financial
Information (unaudited)

Summarized quarterly financial information for
fiscal 2004 and 2003 is as follows:

|                           |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |      | 
|-------------------------- | ----------------- | --------------------------------------- | ---- | ------- | - | ------- | ---- | ------- | - | - | ---- | ---- |  | - | ---- | ---- | 
|                           |                   | Sept. 30                                |      | Dec. 31 |   | Mar. 31 |      | June 30
|                           |                   | 2003                                    |      | 2003    |   | 2004    |      | 2004   
|                           |                   |                                         |      |         |   |         |      |        
|                           |                   |                                        
|                           |                   | (in millions, except per share amounts)
|Fiscal 2004 Quarters       |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|Revenues                   |                   | $                                       | 46.7 |         |   | $       | 51.5 |         |   | $ | 63.8 |      |  | $ | 68.2 |     
|Gross profit               |                   |                                         | 27.4 |         |   |         | 29.3 |         |   |   | 34.6 |      |  |   | 36.2 |     
|Net income (loss)          |                   |                                         | (1.9 | )       |   |         | (0.4 | )       |   |   | 0.5  |      |  |   | 0.9  |     
|Per share of common stock: |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|Basic:                     |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|                           | Net income (loss) |                                         | $    | (0.06   | ) |         | $    | (0.01   | ) |   | $    | 0.02 |  |   | $    | 0.03 | 
|                           |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|                           | Shares used       |                                         |      | 29.3    |   |         |      | 29.5    |   |   |      | 29.9 |  |   |      | 30.1 | 
|                           |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|Diluted:                   |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|                           | Net income (loss) |                                         | $    | (0.06   | ) |         | $    | (0.01   | ) |   | $    | 0.02 |  |   | $    | 0.03 | 
|                           |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     
|                           | Shares used       |                                         |      | 29.3    |   |         |      | 29.5    |   |   |      | 30.8 |  |   |      | 31.2 | 
|                           |                   |                                         |      |         |   |         |      |         |   |   |      |      |  |   |      |     

|                           |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |       |  
|-------------------------- | ----------------- | --------------------------------------- | ---- | ------- |  | ------- | ---- | ------- | - | - | ---- | ----- | - | - | ---- | ----- | -
|                           |                   | Sept. 30                                |      | Dec. 31 |  | Mar. 31 |      | June 30
|                           |                   | 2002                                    |      | 2002    |  | 2003    |      | 2003   
|                           |                   |                                         |      |         |  |         |      |        
|                           |                   |                                        
|                           |                   | (in millions, except per share amounts)
|Fiscal 2003 Quarters       |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|Revenues                   |                   | $                                       | 42.4 |         |  | $       | 43.6 |         |   | $ | 41.8 |       |   | $ | 50.9 |      
|Gross profit               |                   |                                         | 26.4 |         |  |         | 27.7 |         |   |   | 24.4 |       |   |   | 27.1 |      
|Net income (loss)          |                   |                                         | 0.7  |         |  |         | (1.8 | )       |   |   | (2.0 | )     |   |   | (5.2 | )    
|Per share of common stock: |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|Basic:                     |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|                           | Net income (loss) |                                         | $    | 0.02    |  |         | $    | (0.06   | ) |   | $    | (0.06 | ) |   | $    | (0.17 | )
|                           |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|                           | Shares used       |                                         |      | 30.9    |  |         |      | 30.6    |   |   |      | 30.3  |   |   |      | 29.8  |  
|                           |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|Diluted:                   |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|                           | Net income (loss) |                                         | $    | 0.02    |  |         | $    | (0.06   | ) |   | $    | (0.06 | ) |   | $    | (0.17 | )
|                           |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      
|                           | Shares used       |                                         |      | 31.2    |  |         |      | 30.6    |   |   |      | 30.3  |   |   |      | 29.8  |  
|                           |                   |                                         |      |         |  |         |      |         |   |   |      |       |   |   |      |      

The December 2002 quarter includes an after tax
charge of $1.7 million, to write off a license agreement
obligation associated with an alternate operating system to
serve as a back up to our version 2.57 operating system.

The March 2003 quarter includes an after tax
charge of $0.3 million, related to an estimated impairment
of the SURVIVOR intellectual property license, and an
after-tax benefit of $0.7 million resulting from truing up
the prior year tax return.

The June 2003 quarter includes an after tax
charge of $2.2 million, related to the purchase of rights
to restricted stock at a discount from market value, an after
tax charge of $2.1 million to write off inventory and
distribution rights for RAPID ROULETTE, an after tax
charge of $0.7 million, related to the estimated impairment
of SURVIVOR related inventory, and an after-tax credit of
$3.4 million, for tax adjustments

F-26



---



##### 



WMS INDUSTRIES INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

resulting from finalizing prior year tax returns
and a $4.0 million pre-tax and after-tax charge pursuant to
tax sharing and separation agreements with Midway.

The June 2004 quarter includes an after tax
benefit of $1.1 million, to adjust our effective tax rate
for fiscal 2004 given our overall pre-tax loss and greater tax
credits than originally anticipated.

F-27



---



##### 



SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Years Ended June 30, 2004, 2003 and
2002


|                           |      |            |   |           |  |          |   |             |  |         |   |   |  |  |   |           |  |  |   |           | 
|-------------------------- | ---- | ---------- | - | --------- |  | -------- | - | ----------- |  | ------- | - | - |  |  | - | --------- |  |  | - | --------- | 
|                           |      |            |   |           |  |          |   |            
|Column A                   |      | Column B   |   | Column C  |  | Column D |   | Column E   
|                           |      |            |   |           |  |          |   |            
|                           |      |            |   | Additions |  |          |   |            
|                           |      |            |   |           |  |          |   |            
|                           |      |            |   | Charged   |  | Charged  |   | Deductions  |  | Balance
|                           |      | Balance at |   | to        |  | to       |   | for         |  | at     
|                           |      | Beginning  |   | Costs and |  | Other    |   | Amounts     |  | End of 
|Description                |      | of Period  |   | Expenses  |  | Accounts |   | Written Off |  | Period 
|                           |      |            |   |           |  |          |   |             |  |        
|Allowance for receivables: |      |            |   |           |  |          |   |             |  |         |   |   |  |  |   |           |  |  |   |          
|                           | 2004 |            | $ | 2,354,000 |  |          | $ | 266,000     |  |         | $ |  |  |  | $ |          |  |  | $ | 2,620,000 | 
|                           | 2003 |            | $ | 2,642,000 |  |          | $ |            |  |         | $ |  |  |  | $ | 288,000   |  |  | $ | 2,354,000 | 
|                           | 2002 |            | $ | 3,931,000 |  |          | $ |            |  |         | $ |  |  |  | $ | 1,289,000 |  |  | $ | 2,642,000 | 

F-28



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the
2nd day of September, 2004.



| |                    
| | -------------------
| | WMS INDUSTRIES INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ BRIAN R. GAMACHE

| |                                        
| | ---------------------------------------
| |                                        
| | Brian R. Gamache                       
| | President & Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, this report has been duly
signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                                 |  |                                                                                                                        |  |                   |  | 
|------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|                                                 |  |                                                                                                                        |  |                  
|Signature                                        |  | Positions                                                                                                              |  | Date             
|                                                 |  |                                                                                                                        |  |                  
|                                                
|/s/ BRIAN R. GAMACHEBrian R. Gamache             |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                                      |  | September 2, 2004
|                                                
|/s/ SCOTT D. SCHWEINFURTHScott D. Schweinfurth   |  | Executive Vice President, Chief Financial Officer
    and Treasurer (Principal Financial and Chief Accounting Officer) |  | September 2, 2004
|                                                
|/s/ LOUIS J. NICASTROLouis J. Nicastro           |  | Chairman of the Board                                                                                                  |  | September 2, 2004
|                                                
|/s/ NORMAN J. MENELLNorman J. Menell             |  | Vice Chairman of the Board                                                                                             |  | September 2, 2004
|                                                
|/s/ Harold H. Bach Jr.Harold H. Bach Jr.         |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ WILLIAM C. BARTHOLOMAYWilliam C. Bartholomay |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ WILLIAM E. MCKENNAWilliam E. Mckenna         |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ DONNA B. MOREDonna B. More                   |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ NEIL D. NICASTRONeil D. Nicastro             |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ HARVEY REICHHarvey Reich                     |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ David M. Satz, Jr.David M. Satz, Jr.         |  | Director                                                                                                               |  | September 2, 2004
|                                                
|/s/ IRA S. SHEINFELDIra S. Sheinfeld             |  | Director                                                                                                               |  | September 2, 2004



---



##### 



Exhibit Index

|        |       |             |  |                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 3.1   |             |  | Amended and Restated Certificate of Incorporation
    of WMS dated February 17, 1987; Certificate of Amendment
    dated January 28, 1993; and Certificate of Correction dated
    May 4, 1994, incorporated by reference to WMSs Annual
    Report on Form 10-K for the year ended June 30, 1994
    (the 1994 10-K).
|        | 3.2   |             |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation of WMS, as filed with the
    Secretary of State of the State of Delaware on February 25,
    1998, incorporated by reference to WMSs Quarterly Report
    on Form 10-Q for the quarter ended March 31, 1998.                     
|        | 3.3   |             |  | Form of Certificate of Designations of
    Series A Preferred Stock incorporated by reference to
    Exhibit A to the Rights Agreement filed as Exhibit 1
    to WMSs Registration Statement on Form 8-A (File
    No. 1-8300) filed March 25, 1998 (the
    Form 8-A).                                               
|        | 3.4   |             |  | By-Laws of WMS, as amended and restated through
    March 10, 2004, incorporated by reference to WMSs
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2004.                                                                                                                                       
|        | 4     |             |  | Rights Agreement dated as of March 5, 1998
    between WMS and The Bank of New York, as Rights Agent,
    incorporated by reference to the Form 8-A.                                                                                                                                                                     
|        | 10.1  |             |  | 1991 Stock Option Plan, as amended, incorporated
    by reference to the 1994 10-K.                                                                                                                                                                                                                                      
|        | 10.2  |             |  | 1993 Stock Option Plan, incorporated by reference
    to the 1994 10-K.                                                                                                                                                                                                                                                  
|        | 10.3  |             |  | 1994 Stock Option Plan, incorporated by reference
    to Appendix A to WMSs Definitive Proxy Statement
    dated December 12, 1994.                                                                                                                                                                                     
|        | 10.4  |             |  | Form of Indemnity Agreement authorized to be
    entered into between WMS and each officer and director approved
    by the Board of Directors, incorporated by reference to the 1994
    10-K.                                                                                                                          
|        | 10.5  |             |  | WMS Industries Inc. Treasury Share Bonus Plan
    adopted April 19, 1993, incorporated by reference to
    WMSs Annual Report on Form 10-K for the fiscal year
    ended June 30, 1993.                                                                                                                                 
|        | 10.6  |             |  | Voting Proxy Agreement dated September 21,
    1995 among Louis J. Nicastro, Neil D. Nicastro, WMS, Sumner M.
    Redstone and National Amusements, Inc., incorporated by
    reference to WMSs Annual Report on Form 10-K for the
    fiscal year ended June 30, 1995.                                                 
|        | 10.7  |             |  | Tax Sharing Agreement dated as of July 1,
    1996 among WMS, Midway, Atari Games Corporation and others,
    incorporated by reference to Midways Registration
    Statement on Form S-1 (File No. 333-11919).                                                                                                         
|        | 10.8  |             |  | Amendment to Article III, Section 3
    (Option Adjustments) of 1991 Stock Option Plan, incorporated by
    reference to Proposal No. 2 to WMSs definitive proxy
    statement filed with the Commission on December 11, 1996
    (the 1996 Proxy Statement).                                                         
|        | 10.9  |             |  | Amendment to Article III, Section 3
    (Option Adjustments) of 1993 Stock Option Plan, incorporated by
    reference to Proposal No. 2 to the 1996 Proxy Statement.                                                                                                                                                     
|        | 10.10 |             |  | Amendment to Article III, Section 3
    (Option Adjustments) of 1994 Stock Option Plan, incorporated by
    reference to Proposal No. 2 to the 1996 Proxy Statement.                                                                                                                                                     
|        | 10.11 |             |  | 1998 Non-Qualified Stock Option Plan,
    incorporated by reference to WMSs Registration Statement
    No. 333-57585 on Form S-8 filed with the Commission on
    June 24, 1998.                                                                                                                                        
|        | 10.12 |             |  | Consulting Agreement dated as of April 6,
    1998 between WMS and Neil D. Nicastro, incorporated by reference
    to WMS Current Report on Form 8-K filed
    April 17, 1998.                                                                                                                                          
|        | 10.13 |             |  | Tax Separation Agreement dated as of
    April 6, 1998 between WMS and Midway, incorporated by
    reference to the Midway 1998 Annual Report on Form 10-K.                                                                                                                                                              





---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.14 |             |  | Tax Indemnification Agreement dated as of
    April 6, 1998 between WMS and Midway, incorporated by
    reference to the Midway 1998 10-K.                                                                                                                                                                                                                                                                                                                                                   
|        | 10.15 |             |  | Worldwide Merchandising Agreement/ License
    Agreement Summary and License Agreement between WMS Gaming Inc.,
    Hasbro, Inc. and Hasbro International, Inc. dated
    September 1, 1997, incorporated by reference to WMSs
    Registration Statement No. 333-83021 on Form S-3 filed
    with the Commission on July 16, 1999 (the 1999
    S-3). Portions of this exhibit have been omitted under a
    request for confidential treatment filed separately with the
    Commission.
|        | 10.16 |             |  | Amendment dated 1998 to License Agreement between
    WMS Gaming Inc., Hasbro, Inc. and Hasbro International, Inc.
    dated September 1, 1997, incorporated by reference to the
    1999 S-3. Portions of this exhibit have been omitted under a
    request for confidential treatment filed separately with the
    Commission.                                                                                                                                                           
|        | 10.17 |             |  | 2000 Non-Qualified Stock Option Plan,
    incorporated by reference to WMS Annual Report on
    Form 10-K for the fiscal year ended June 30, 2000 (the
    2000 10-K).                                                                                                                                                                                                                                                                                                                    
|        | 10.18 |             |  | Employment Agreement between Scott D.
    Schweinfurth and WMS dated May 19, 2000, incorporated by
    reference to the 2000 10-K.                                                                                                                                                                                                                                                                                                                                                           
|        | 10.19 |             |  | Employment Agreement between Orrin J. Edidin and
    WMS dated May 8, 2000, incorporated by reference to the
    2000 10-K.                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.20 |             |  | Employment Agreement between Robert R. Rogowski
    and WMS dated May 1, 2000, incorporated by reference to
    WMS Quarterly Report on the Form 10-Q for quarter
    ended September 30, 2000.                                                                                                                                                                                                                                                                                             
|        | 10.21 |             |  | 2000 Stock Option Plan, incorporated by reference
    to Appendix B to WMS Proxy Statement for its 2001
    Annual Meeting filed with the Commission on December 8,
    2000.                                                                                                                                                                                                                                                                                                               
|        | 10.22 |             |  | Amendment 1 to Employment Agreement between
    Scott D. Schweinfurth and WMS dated June 4, 2001,
    incorporated by reference to WMS Annual Report on
    Form 10-K for the fiscal year ended June 30, 2001 (the
    2001 10-K).                                                                                                                                                                                                                                                        
|        | 10.23 |             |  | Amendment 1 to Employment Agreement between
    Orrin J. Edidin and WMS dated June 4, 2001, incorporated by
    reference to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                                  
|        | 10.24 |             |  | Letter of Termination of Employment Agreement
    between Louis J. Nicastro and WMS dated June 14, 2001,
    incorporated by reference to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                     
|        | 10.25 |             |  | Employment Agreement between Brian R. Gamache and
    WMS dated as of June 15, 2001, incorporated by reference to
    the 2001 10-K.                                                                                                                                                                                                                                                                                                                                                         
|        | 10.26 |             |  | Amended and Restated Employment Agreement between
    Seamus M. McGill and WMS dated as of February 1, 2001,
    incorporated by reference to the 2001 10-K.                                                                                                                                                                                                                                                                                                                                 
|        | 10.27 |             |  | Letter Amendment to Tax Separation Agreement
    dated September 24, 2001, incorporated by reference to the
    2001 10-K.                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.28 |             |  | Amendment 2 to Employment Agreement between
    Scott D. Schweinfurth and WMS dated November 15, 2001
    incorporated by reference to WMS Quarterly Report on the
    Form 10-Q for quarter ended December 31, 2001 (the
    2001 2Q 10-Q).                                                                                                                                                                                                                                              
|        | 10.29 |             |  | Amendment 2 to Employment Agreement between
    Orrin J. Edidin and WMS dated November 15, 2001
    incorporated by reference to the 2001 2Q 10-Q.                                                                                                                                                                                                                                                                                                                                           
|        | 10.30 |             |  | Amendment 1 to Amended and Restated
    Employment Agreement between Seamus M. McGill and WMS dated
    November 15, 2001 incorporated by reference to the 2001 2Q
    10-Q.                                                                                                                                                                                                                                                                                                                 
|        | 10.31 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Louis J. Nicastro dated March 1, 2002,
    incorporated by reference to our Registration Statement on
    Form S-8 (File No. 333-87676) filed with the
    Commission on May 6, 2002.                                                                                                                                                                                                                                         
|        | 10.32 |             |  | 2002 Stock Option Plan, incorporated by reference
    to Appendix B to WMS Proxy statement for its 2003 Annual
    Meeting, filed with the Commission on September 25, 2002.                                                                                                                                                                                                                                                                                                                 
|        | 10.33 |             |  | Voting Proxy Agreement dated November 8,
    2003 among Louis J. Nicastro, Neil D. Nicastro, WMS
    and Phyllis G. Redstone, incorporated by reference to
    WMS Current Report on Form 8-K filed
    November 12, 2002.                                                                                                                                                                                                                                                                  





---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.34 |             |  | Employment offer letter dated November 22,
    2002, to Kathleen J. McJohn, Vice President, General
    Counsel and Secretary, incorporated by reference to WMS
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2003 (the 2003 3Q 10-Q).                                                                                                                                                   
|        | 10.35 |             |  | Relocation compensation letter dated
    March 6, 2003 between our wholly owned subsidiary, WMS
    Gaming Inc. and Seamus McGill, Executive Vice President of Sales
    and Marketing of WMS Gaming Inc., incorporated by reference to
    the 2003 3Q 10-Q.                                                                                                                                                       
|        | 10.36 |             |  | Purchase and Settlement Agreement between WMS
    Industries Inc. and Louis J. Nicastro dated May 7,
    2003, incorporated by reference to the 2003 3Q 10-Q.                                                                                                                                                                                                                                                       
|        | 10.37 |             |  | Relocation compensation letter dated May 12,
    2003 between WMS and Kathleen J. McJohn, Vice President,
    General Counsel and Secretary, incorporated by reference to the
    2003 3Q 10-Q.                                                                                                                                                                                                                     
|        | 10.38 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Brian R. Gamache dated June 12, 2003, incorporated
    by reference to WMS Annual Report on Form 10-K for
    the year ended June 30, 2003 (the
    2003 10-K).                                                                                                                                                                                   
|        | 10.39 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Scott D. Schweinfurth dated June 12, 2003,
    incorporated by reference to the 2003 10-K.                                                                                                                                                                                                                                                           
|        | 10.40 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Orrin J. Edidin dated June 12, 2003, incorporated
    by reference to the 2003 10-K.                                                                                                                                                                                                                                                                 
|        | 10.41 |             |  | Restricted Stock Agreement between WMS Industries
    Inc. and Seamus McGill dated June 12, 2003, incorporated by
    reference to the 2003 10-K.                                                                                                                                                                                                                                                                   
|        | 10.42 |             |  | Indenture dated June 25, 2003 between WMS
    Industries Inc. and BNY Midwest Trust Company, incorporated by
    reference to WMS Current Report on Form 8-K filed
    June 25, 2003 (the 2003 8-K).                                                                                                                                                                                                             
|        | 10.43 |             |  | Form of Note (contained in and incorporated by
    reference to Exhibit A to the Indenture filed as
    Exhibit 4.1 to the 2003 8-K).                                                                                                                                                                                                                                                                               
|        | 10.44 |             |  | Registration Rights Agreement dated June 25,
    2003 between WMS Industries Inc. and BNY Midwest Trust Company,
    incorporated by reference to the 2003 8-K.                                                                                                                                                                                                                                                     
|        | 10.45 |             |  | Warrant to purchase common stock of the
    Registrant, issued to Hasbro, Inc., incorporated by reference to
    WMS Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003 (the 2003
    1Q 10-Q).                                                                                                                                                                                          
|        | 10.46 |             |  | Amendment No. 3, dated December 16,
    2002 to the License Agreement dated September 1, 1997 among
    WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc.,
    incorporated by reference to the 2003 1Q 10-Q. Portions of
    this exhibit have been omitted under a request for confidential
    treatment filed separately with the commission.                                                         
|        | 10.47 |             |  | Amendment No. 4, dated September 15,
    2003 to the License Agreement dated September 1, 1997 among
    WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc.,
    incorporated by reference to the 2003 1Q 10-Q. Portions of
    this exhibit have been omitted under a request for confidential
    treatment filed separately with the commission.                                                        
|        | 10.48 |             |  | License and Development Agreement between WMS
    Gaming Inc. (WGI) and Sierra Design Group
    (SDG), dated as of April 24, 2002, incorporated
    by reference to WMS Quarterly Report on Form 10-Q for
    the quarter ended December 31, 2003 (the 2003
    2Q 10-Q). Portions of this exhibit have been omitted
    under a request for confidential treatment filed separately with
    the commission.
|        | 10.49 |             |  | First Amendment to License and Development
    Agreement between WGI and SDG, dated June 12, 2003,
    incorporated by reference to the 2003 2Q 10-Q the quarter
    ended December 31, 2004. Portions of this exhibit have been
    omitted under a request for confidential treatment filed
    separately with the commission.                                                                                   
|        | 10.50 |             |  | Second Amendment to License and Development
    Agreement between WGI and SDG, dated July 15, 2003,
    incorporated by reference to the 2003 2Q 10-Q.                                                                                                                                                                                                                                                              
|        | 10.51 |             |  | Third Amendment to License and Development
    Agreement between WGI and SDG, dated November 7, 2003,
    incorporated by reference to the 2003 2Q 10-Q. Portions of
    this exhibit have been omitted under a request for confidential
    treatment filed separately with the commission.                                                                                                                        





---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.52 |             |  | Amended and Restated Employment Agreement between
    WMS and Seamus McGill dated February 24, 2004, incorporated
    by reference to the WMS Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2004.                                                                                       
|        | 10.53 |             |  | License Agreement dated September 18, 2000
    between our wholly owned subsidiary, WMS Gaming Inc., and
    International Game Technology as successor to Anchor Gaming.
    Portions of this exhibit have been omitted under a request for
    confidential treatment filed separately with the commission.
|        | 10.54 |             |  | Letter Amendment to License and Development
    Agreement between WGI and SDG, dated February 3, 2004.
    Portions of this exhibit have been omitted under a request for
    confidential treatment filed separately with the commission.                                                                   
|        | 10.55 |             |  | Form of Restricted Stock Agreement between WMS
    Industries Inc. and each of Brian R. Gamache, Orrin J.
    Edidin, Scott D. Schweinfurth, Seamus McGill,
    Kathleen J. McJohn and Robert R. Rogowski, dated
    May 10, 2004.                                                                           
|        | 10.56 |             |  | Revolving Note between WMS Industries Inc. and
    LaSalle Bank National Association dated May 21, 2004.                                                                                                                                                                                                     
|        | 10.57 |             |  | Letter of Amendment to Employment Agreement
    between Brian R. Gamache and WMS dated as of
    August 11, 2004.                                                                                                                                                                                            
|        | 21    |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                              
|        | 23    |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                
|        | 31    |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to Section 13(a)-14(a) of
    the Securities Exchange Act of 1934 (Section 302 of the
    Sarbanes-Oxley Act of 2002).                                                                                                    
|        | 32    |             |  | Certification of the Chief Executive Officer and
    Chief Financial Officer Pursuant to 18 U.S.C.
    Section 1350 (Section 906 of the Sarbanes-Oxley Act of
    2002).