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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   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, 1997
 
                         COMMISSION FILE NUMBER 1-8300
 
                              WMS INDUSTRIES INC.
             (Exact name of registrant as specified in its charter)
 
                  DELAWARE                                    36-2814522
        (State or other jurisdiction                       (I.R.S. Employer
      of incorporation or organization)                 Identification Number)
         3401 NORTH CALIFORNIA AVE.,                             60618
              CHICAGO, ILLINOIS                               (Zip Code)
  (Address of principal executive offices)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 961-1111
                            ------------------------
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
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<CAPTION>
                                                                 NAME OF EACH EXCHANGE
              TITLE OF EACH CLASS                                 ON WHICH REGISTERED
              -------------------                                ---------------------
<S>                                                            <C>
          Common Stock, $.50 par value                          New York Stock Exchange
 5 3/4% Convertible Subordinated Debentures Due 2002            New York Stock Exchange
                       
</TABLE>
 
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 [X]          No [ ]
 
     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. [X]
 
     The aggregate market value of the 25,423,250 shares of Common Stock held by
non-affiliates of the registrant on September 22, 1997 was $762,697,500. On such
date, the closing price of the Common Stock on the New York Stock Exchange, Inc.
was $30.00 per share and the number of shares of Common Stock outstanding
(excluding 52,312 shares held as treasury shares) was 25,516,740 shares.
 
            DOCUMENTS INCORPORATED BY REFERENCE:                  PART
            ------------------------------------                  ----

Annual Report to Stockholders of Registrant for the fiscal
  year ended June 30, 1997..................................    I, II, IV
 
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                                     PART I
 
     This Annual Report on Form 10-K contains forward looking information and
describes the beliefs of WMS Industries Inc. (the "Company" or "WMS") concerning
future business conditions and the outlook for the Company based on currently
available information. Wherever possible, the Company has identified these
forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: financial
strength of the amusement games and gaming industries, the expansion of
legalized gaming into new markets, the ability of the Company to qualify for and
maintain licenses and approvals from the governing bodies having jurisdiction
over the Company's gaming machine business, the ability of the Company to
develop new technologies on a timely basis and to design, introduce and market
successful new game titles, the level of consumer spending for such games, the
success of planned advertising, marketing and promotional campaigns, the outcome
of certain legal proceedings to which the Company is a party, as well as the
items set forth under "Item 1. Business -- Factors Affecting Future
Performance." The Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise. Discussions containing such forward looking statements may be found
in the materials set forth under "Item 1. Business -- The Company," "-- Games
Operations" "-- The Distribution" and "-- Factors Affecting Future Performance"
and "Item 3. Legal Proceedings" contained herein and in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
Company's 1997 Annual Report to Stockholders (the "1997 Annual Report").
 
ITEM 1. BUSINESS.
 
                                  THE COMPANY
 
     WMS was incorporated in Delaware on November 20, 1974 under the name
Williams Electronics, Inc. The Company's principal executive offices are located
at 3401 North California Avenue, Chicago, Illinois 60618. During fiscal year
1997 the Company, through its subsidiaries and affiliates, designed,
manufactured, published and marketed interactive entertainment software played
in both the coin-operated and home video game markets ("Video Games") and was
engaged in the design, manufacture and sale of coin-operated pinball and novelty
games ("Pinball & Novelty Games") and video lottery terminals and slot/video
gaming machines ("Gaming Equipment") (the Video Games, Pinball & Novelty Games
and Gaming Equipment operations are collectively referred to herein as "Games
Operations").
 
     On October 29, 1996, Midway Games Inc. ("Midway"), the Company's subsidiary
engaged in the Video Games business, completed an initial public offering of
5,100,000 shares of Midway common stock for $20.00 per share (the "Offering").
As of September 22, 1997, Midway had 38,500,000 shares outstanding of which the
Company owned 33,400,000 shares, representing approximately 86.8% of the
outstanding shares of Midway common stock.
 
     On August 11, 1997, the Company announced that it would distribute on a pro
rata basis to its stockholders all of the Midway common stock which it owns. The
Company and Midway believe that the spin-off will, among other things, provide
greater liquidity for the Midway common stock, reduce regulatory burdens and
risks imposed on Midway arising from the gaming business of WMS Gaming Inc. (a
wholly-owned subsidiary of the Company) and enhance stockholder value by
permitting each company to develop its individual strengths and pursue
opportunities appropriate to its own future growth.
 
     The proposed spin-off is conditioned upon several requirements, including,
among other things, the receipt of a ruling from the Internal Revenue Service
that the transaction will be tax free to the Company and its stockholders. WMS
anticipates that the spin-off would be completed in early 1998. Pending
completion of the spin-off, WMS' financial statements will account for Midway as
a discontinued operation.
 
     On April 21, 1997, the Company distributed to its stockholders through a
dividend (the "Distribution") all of the outstanding shares of voting common
stock of WHG Resorts & Casinos Inc. ("WHG"), formerly a
 
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wholly-owned subsidiary of the Company. As of the date of the Distribution, WHG
owned and operated three of the leading hotels and casinos in Puerto Rico -- the
Condado Plaza Hotel & Casino, the El San Juan Hotel & Casino and the El
Conquistador Resort & Country Club. The Distribution provided Company
stockholders with one share of voting common stock of WHG for every four shares
of Company common stock held by such stockholders on the record date of March
31, 1997.
 
                 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     The Distribution split the Company into two independent public
corporations. Accordingly, the financial position, results of operations and
cash flows of the Company's hotel and casino business segment were reported as
discontinued operations in the Consolidated Financial Statements in the
Company's 1996 Annual Report to Stockholders and the 1997 Annual Report. The
Company's businesses has been reported in the following three industry segments:
Video Games, Pinball & Novelty Games and Gaming Equipment. Financial information
for the years ended June 30, 1997, 1996 and 1995 with respect to the Video Games
segment appears at Note 3 of the Notes to Consolidated Financial Statements in
the 1997 Annual Report which information is incorporated herein by reference.
Financial information for the years ended June 30, 1997, 1996 and 1995 with
respect to the Pinball & Novelty Games and Gaming Equipment segments appear at
Note 16 of the Notes to Consolidated Financial Statements in the 1997 Annual
Report which information is incorporated herein by reference.
 
                                GAMES OPERATIONS
 
                                    GENERAL
 
     During the fiscal year ended June 30, 1997, the Company was a designer,
manufacturer and marketer of Video Games, Pinball & Novelty Games and Gaming
Equipment. The Company conducts the Video Games business segment through its
subsidiary Midway which markets coin-operated video games under the Midway(R)
and Atari(R) trademarks and which has marketed home video games under the
Williams(R), Tradewest(R), Tengen(R) and Time Warner Interactive(R) trademarks.
Commencing with Midway's fall 1996 product line, all newly released home video
games are marketed under the Midway(R) trademark. The Company's Pinball &
Novelty Games business segment is conducted through its subsidiaries Williams
Electronics Games, Inc. ("Williams") and Fun House Games Inc. ("Fun House
Games") which market products under the Bally(R), FunHouse(R) and Williams(R)
trademarks. The Gaming Equipment business segment is conducted through the
Company's subsidiary WMS Gaming Inc. which markets its products under the
Williams(TM) and WMS Gaming(TM) trademarks. The Company also derives revenue
from licensing its products to others, including the merchandising of audio and
visual aspects of games for motion pictures, television and consumer products.
 
VIDEO GAMES
 
     Coin-Operated Games: Coin-operated video games utilize specialized
technology and hardware platforms that permit greater design flexibility than
dedicated home platforms, which are limited by design specifications of the
particular platform. Coin-operated video games are manufactured in
self-contained cabinetry containing large video screens that display the game.
Multiple players can play the same game simultaneously, and games are generally
designed to permit the players to play against each other, in addition to being
able to play against the game itself. Most coin-operated video games cost 50c to
play a game of approximately two minutes in duration. New technologies employed
in the manufacturing of coin-operated video games utilize advanced video
platforms in which digital images are mapped to computer generated polygons that
allow for the creation of three-dimensional graphic images.
 
     Midway is one of the leading developers and marketers of coin-operated
video games, having released since the late 1970s such titles as Mortal Kombat,
Cruis'n USA, Cruis'n World, NBA Jam, Terminator 2, Joust, Robotron:2084, Ms.
Pacman, Defender, Pacman and Space Invaders, and, through its recently acquired
Atari Games Corporation subsidiary ("Atari Games"), such titles as Area 51 and
Primal Rage. In fiscal 1997,
 
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Midway released seven new coin-operated video games: Maximum Force, The NHLPA &
NHL Present Wayne Gretzky's 3D Hockey, San Francisco Rush Extreme Racing,
Mace -- The Dark Age, Rampage World Tour, Cruis'n World and War Gods. During
fiscal 1996, five coin-operated video games were introduced under the Midway
name: Ultimate Mortal Kombat 3, NBA Hangtime, Killer Instinct 2, Wrestlemania
and Open Ice, and Atari Games released one coin-operated video game called Area
51. Also during fiscal 1996, the Company introduced TouchMaster, a touchscreen
countertop game containing multiple game options. An updated version of this
game is expected to be released in the first quarter of fiscal 1998.
 
     At the March 1997 Amusement Showcase International, Play Meter Magazine
named Cruis'n USA the Best Dedicated Video Game and Area 51 Best Video Kit. At
the March 1996 Amusement Operators Expo, Play Meter Magazine named Cruis'n USA
the Best Dedicated Video Game and Mortal Kombat 3 the Best Video Game Conversion
Kit. Additionally, in 1996 the Company received the American Amusement Machine
Association's ("AAMA") award for Manufacturer of the Year. Two of the Company's
coin-operated video games were awarded Silver and Gold Sales Achievement Awards
during fiscal 1997. Midway's Mortal Kombat 3 coin-operated video game conversion
kit was awarded the AAMA Diamond Sales Achievement Award -- the highest category
of award presented in any given year -- and several of the Company's other games
won Platinum and Gold sales awards in 1996. At the 1996 Amusement and Music
Operators Association ("AMOA") trade show, Cruis'n USA was named Most Innovative
Dedicated Video Game for the second year in a row, Area 51 was named Most
Innovative Conversion Kit and Cruis'n World received an award for Best New
Equipment among all forms of coin-operated amusement games. Midway coin-operated
video games have received three of five nominations for Most Played Video Game
(Dedicated) to be decided at the Fall 1997 AMOA trade show.
 
     Home Games: Like coin-operated video games, interactive software programs
for the home allow the consumer to participate actively in the outcome of the
game. The interactive software publishing business involves the creation or
acquisition of titles or intellectual property rights, the development of
interactive software products based on these titles or rights, and the
publication, marketing, merchandising, distribution and licensing of the
resulting software products. This process in general involves converting
software created for the coin-operated version of a game into software for use
on the multiple platforms on which home games are released, or creating original
games for release into the home market. The business is highly dependent on
consumer tastes and preferences and on the commercial success of the hardware
platforms for which the software is produced. The principal types of interactive
hardware platforms are dedicated game systems, such as those manufactured by
Nintendo, Sony and Sega, portable game systems and personal computers.
 
     Midway began publishing home video games based on its own coin-operated
video games in September 1995 with the introduction of Mortal Kombat 3, the best
selling home video game in the United States in 1995 according to TRSTS reports.
In April 1994, Midway acquired the operating assets and business of three
commonly-owned companies: Tradewest, Inc., Tradewest International, Inc. and The
Leland Corporation (collectively "Tradewest"), a home video game development and
distribution business, and in March 1996 Midway acquired Atari Games, a leading
designer, publisher and marketer of interactive entertainment software. Midway
also significantly increased its research and development expenditures to $32.5
million in fiscal 1996, up from $14.7 million in fiscal 1995. In fiscal 1997,
Midway expended $55.9 million on research and development. In fiscal 1997,
Midway's home game product line featured 15 titles, including Ultimate Mortal
Kombat 3, Mortal Kombat Trilogy, NBA Hangtime, Doom 64, Final Doom, War Gods,
Robotron X, The NHLPA & NHL Present Wayne Gretzky's 3D Hockey, Area 51, Return
Fire and two collections of arcade classics. During fiscal 1996, the Company
published ten video games for the home market, including Mortal Kombat 3 and two
games developed by Atari Games which were released after its acquisition by the
Company.
 
PINBALL & NOVELTY GAMES
 
     Pinball Games: Based on industry awards with respect to the Company's
coin-operated pinball games and the number of such games sold in comparison to
its competitors, the Company believes it is the world's leading manufacturer of
pinball games, producing pinball games under both the Williams and Bally trade
names. Coin-operated pinball games utilize electromechanical devices such as
flippers to propel steel balls on
 
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an intricately designed playing field. These games are generally designed by
members of the Company's internal design staff but may be designed by outside
consultants. During fiscal 1997, the Company introduced four new pinball game
models -- two for the Williams product line and two for the Bally product line.
In fiscal 1997, four of the Company's pinball games received AAMA Silver and
Gold Sales Achievement Awards. In addition, the AMOA named the Bally pinball
game Theatre of Magic the Most Innovative Pinball Game -- 1996 at its Fall 1996
trade show. Williams and Bally pinball games have received all five of the
nominations for Most Innovative Pinball Game to be decided at the Fall 1997
trade show.
 
     Shuffle-Alley and Novelty Games: Shuffle-alley games offer a simulation of
bowling with varied scoring options. During fiscal 1996, the Company produced
League Champs, its newest version of shuffle alley. Coin-operated novelty
redemption games dispense tickets when a certain level of skill is achieved.
Such games comprise a large proportion of games located in family entertainment
centers. Tickets won may be redeemed by the player for merchandise of nominal
value. In fiscal 1997, the Company introduced Aaahh!! Real Monsters based on the
popular children's cartoon. During fiscal 1996, the Company established Fun
House Games to develop and market novelty games and sold Wheel of Fortune, based
on one of the most successful TV game shows of all time. Additional novelty
games introduced in fiscal 1996 were Safecracker and Ticket-Tac-Toe.
 
     Due to an industry wide decline in demand for pinball games, the Company
determined to downsize its Pinball & Novelty Games segment operations in fiscal
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the 1997 Annual Report.
 
GAMING EQUIPMENT
 
     Video Lottery Terminals: The Company's subsidiary WMS Gaming Inc. markets
video lottery terminals ("VLT" or "VLTs") under the Williams(TM) and WMS
Gaming(TM) trademarks. VLTs, purchased, leased or operated on a revenue sharing
basis by state lottery agencies to increase lottery revenues, offer a wide
selection of exciting, menu-driven games, including poker, keno, blackjack and
video slot games. The Williams VLTs feature enhanced viewing through
high-resolution 19" or 17" monitors which vividly display digitized images in up
to 256 colors simultaneously as well as compact-disc quality digitally produced
sound effects and music. Game selection and play are initiated by lightly
touching a touch screen which is bonded to the monitor for a clearer picture and
reduced risk of damage. VLTs accept both coins and bills in varying
denominations via an electronic coin validator or high-security bill validator
to insure a high-level of fraud protection. All money handling and storage
compartments, as well as the long-life, programmable printer, are secured with
heavy duty, multiple barrel locks which are accessed separately. A heavy gauge
steel cabinet and innovative drip system protect internal components. Williams
VLTs are equipped with built-in, self diagnostic software to identify problem
areas and to electronically record all aspects of machine operation, including
game play, wagering/payout data and physical breaches such as opening doors,
removing currency, accessing the central processor and disconnecting the power
source. Extensive information storage capacity allows for periodic telephone
polling by the central computer or on-line, real time monitoring. Williams VLTs
communicate with mainframe central site computers and retail validation
terminals through internal modems, master/slave configurations and fiber optic
connections. VLTs are designed for low-stakes entertainment in age-controlled
establishments such as restaurants serving alcoholic beverages and bars.
 
     The Williams Multi-Pay Multi-Magic VLTs, successors to the popular Midas
Touch VLT, are available in three different model configurations -- one of which
provides unique player comfort through a combination of a slant-top playing
surface and built-in seating. VLTs represent a source of revenue for
jurisdictions in addition to taxes and may be operated as stand-alone units or
may interface with central monitoring computers operated by governmental
agencies. To date, VLT operations are conducted or planned in the United States
in Delaware, Louisiana, Montana, Oregon, Rhode Island, South Carolina, South
Dakota and West Virginia and in Australia, as well as all Provinces of Canada.
WMS Gaming Inc. has been approved as a manufacturer in each of these
jurisdictions. The Company intends to sell, lease or operate on a
revenue-sharing basis VLTs in all legalized jurisdictions subject to receipt of
necessary licensing approvals.
 
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     Slot/Video Gaming Machines: The Company has designed, developed and
manufactured a series of gaming machines for casinos located in established
gaming jurisdictions, including jurisdictions permitting casino gaming on
riverboats and in casinos owned by Native American nations. The Company's newest
generation of slot machines integrates video or dotmatrix animation with
traditional games to create a "game within a game" for longer, more exciting
play. As they play the primary slot game and achieve certain milestones, players
move on to play a secondary game for additional bonus credits. The secondary
game gives players a sense of "investment" in the game which contributes to
player interest and extended play. The Company's newest reel machines include
Magic Lamp and Mermaid's Gold. Both games feature engaging and entertaining
themes. With the special Dotmation dotmatrix animation feature, a player's game
experience is enhanced with animated sequences of mermaids diving into the ocean
or genies emerging from magic lamps to present the top awards. Like all Williams
games, these reel slots feature high-end sound, utilizing the Company's
proprietary Digital Compression System ("DCS"), and exciting glass designs and
visuals. At the October 1997 World Gaming Congress, the Company expects to
release at least five new reel spinning games -- all with new themes and
graphics.
 
     In the video category, the Company's latest multi-game, touch-screen games
Multi-Pay Plus and Reel 'Em In are designed to attract players with greater
visual excitement through state-of-the art graphics and bigger monitors,
high-end DCS sound and engaging game themes. With Multi-Pay Plus, the Company
premiered an innovative cabinet design that accommodates a bigger,
high-resolution monitor in the same footprint of games with smaller, low
resolution monitors. Both the upright 17" and slant-top 19" versions of the game
incorporate this new cabinet design. Multi-Pay Plus offers the player a varied
menu of games on a single machine, including video poker, keno, blackjack and
video reel games. Reel 'Em In utilizes the same superior cabinet design with a
clever recreational fishing theme.
 
     The Company is authorized to sell its gaming machines in Arizona, Colorado,
Connecticut, Illinois, Indiana, Iowa, Missouri, Minnesota, Mississippi, Nevada,
New Jersey, South Carolina, South Dakota and Wisconsin, as well as to cruise
ships operating in international waters. The Company is also authorized to sell
its gaming machines directly or through distributors in several international
jurisdictions and to several Native American nations.
 
     See "Item 3. Legal Proceedings" with respect to certain patent litigation
between the Company and International Game Technology involving reel-type slot
machines.
 
                               BUSINESS STRATEGY
 
     General: The Company's overall business strategy is to expand and diversify
its Games Operations through forming strategic relationships to promote, and by
investing in businesses which complement, existing product lines in order to
provide substantial growth opportunities in future years as well as to produce
games that are the most fun and exciting to play through the utilization of the
creative talents of its experienced game designers. The Company currently
employs approximately 360 game design personnel organized in teams comprised of
programmers, artists, mechanical and electrical engineers, musicians and actors.
The game design teams operate in a studio environment that encourages
creativity, productivity and cooperation among design teams. The Company
believes that this environment, together with a compensation structure that
rewards design teams for the success of their games and a policy of providing
design teams substantial independence and flexibility, enables the Company to
attract and retain the best game designers in the industry. The designers are
supported by state-of-the-art design technology that allows for the creation of
cutting-edge, three-dimensional graphics and advanced audio effects. The Company
has developed and maintains a substantial library of proprietary software and
development tools, including animation and digitally texture mapped polygon
images that are used primarily in game products. The Company has also created
proprietary tools to facilitate the development of new products, the transfer of
game features from one product to another and the transfer of existing products
to additional hardware platforms. The Company believes its proprietary hardware
and software have helped it to achieve and sustain a reputation for developing
high quality products and to position itself for involvement in evolving
technologies.
 
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     Video Games: The Company's business strategy for Video Games is based upon
the following:
 
     - CREATE PORTFOLIO OF EXCITING GAMES -- The key to success in the video
       game business is to produce games that are fun and exciting to play,
       which requires the creative talents of experienced game designers. Midway
       employs over 300 game design personnel organized in teams comprised of
       programmers, artists, mechanical and electrical engineers, musicians and
       actors. The design teams are supported by state-of-the-art design
       technology that allows for the creation of cutting-edge, three-
       dimensional graphics and advanced audio effects. Midway produces games in
       the action, simulation, adventure and sports categories.
 
     - EXPLOIT COIN-OPERATED PROVING GROUND -- Midway generally develops its
       video games for initial release in the coin-operated market. To be
       successful, a coin-operated video game must be action packed and fun, and
       provide enough excitement to encourage players to play such game
       repeatedly. Midway considers coin-operated games that sell at least 5,000
       units and home games that sell at least 100,000 units per dedicated
       platform to be successful games. Midway's experience has been that a
       successful coin-operated video game is almost always a success in the
       home market. Each of the coin-operated video games released by Midway in
       the past four years which has sold at least 5,000 units has then sold at
       least 100,000 units for each major dedicated platform on which it was
       released in the home market. The significant benefits realized by Midway
       from this strategic approach are that (i) the results achieved in the
       initial coin-operated release are a meaningful indicator of the success
       the game might realize in the home market and help to determine the
       strategy which Midway will follow in releasing the game in the home
       market, (ii) the knowledge that a particular coin-operated video game is
       popular with consumers allows Midway to maximize profitability through
       simultaneous publication across multiple home platforms thereby spreading
       developmental, advertising and promotional costs over a greater number of
       units and (iii) a successful coin-operated game promotes sales for the
       subsequent home version of the game among the players exposed to the game
       in arcades and other coin-operated venues.
 
     - MAINTAIN PLATFORM INDEPENDENCE -- Midway develops games for all major
       dedicated home platforms (Nintendo, Sony and Sega) as well as for the
       personal computer. Midway is a leading developer of video games for the
       32- and 64-bit game platforms which are currently being marketed by
       hardware manufacturers. In fiscal 1997, Midway released more games on the
       new Nintendo 64 platform than any developer other than Nintendo itself.
       Because it produces video games for multiple platforms, Midway is not
       dependent on any particular game platform. Midway believes it is well
       positioned for the rapid technological evolution that characterizes the
       home video game market.
 
     - EXPLOIT FRANCHISE AND LIBRARY VALUE -- Midway seeks to exploit its
       franchise properties such as Mortal Kombat. Midway has released four
       different coin-operated games under the Mortal Kombat title and published
       or licensed home versions of each of those games. Midway has also
       licensed two film adaptations of Mortal Kombat and granted merchandising
       licenses in the toy, clothing, comic book, strategy guide and other
       product lines. In fiscal 1997, Midway released two additional Mortal
       Kombat home games, Ultimate Mortal Kombat 3 and Mortal Kombat Trilogy. An
       animated television series based on Mortal Kombat began airing in the
       fall of 1996, and a sequel to the movie version of Mortal Kombat is
       scheduled to be released in the fall of 1997. Midway also seeks to
       utilize its large library of video games to release "arcade classics" and
       updated versions of such classics. For the home market in fiscal 1997,
       Midway released two collections of arcade classic games and Robotron X, a
       new version of a classic arcade game.
 
     - DEVELOP MULTI-SITE GAME PLAYING NETWORK -- Midway is testing its own
       proprietary multi-player interactive video game playing network
       technology known as Wavenet, allowing players to play against others
       located at remote coin-operated locations. This technology has
       consistently resulted in greater player utilization and profitability of
       games. As new on-line interactive formats develop for game playing, such
       as over the Internet or other networks, Midway intends to create a
       competitive advantage by exploiting its developing multi-player network
       technology.
 
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     - INVEST IN ADVANCED TECHNOLOGY -- Midway has developed its own proprietary
       hardware and software for creating digitally texture mapped polygon
       images, which enable it to produce games with state-of-the-art visual
       simulations at cost levels that are attractive to Midway's customers.
       Midway has also created proprietary tools to facilitate the development
       of new products, the transfer of game features from one product to
       another and the transfer of existing products to additional hardware
       platforms. Midway believes its proprietary hardware and software have
       helped it to achieve and sustain a reputation for developing high quality
       products and to position itself for involvement in evolving technologies.
 
     Pinball & Novelty Games: At the close of the 1996 fiscal year the Company
began a downsizing of its pinball design and manufacturing operations as a
result of the industry-wide decline in demand for pinball games. Notwithstanding
this market contraction, the Company believes it will be able to maintain its
share of the worldwide pinball games market as a result of its leadership in
design and engineering which is evidenced by the continued annual achievement
awards bestowed by the AMOA and AAMA. Such leadership enables the Company to
offer its distributors a broad variety of innovative pinball games which result
in greater operator profit through increased player interest, mechanical
reliability and serviceability. The Company's design and engineering staff has
been the industry leader in innovations such as music and other sound effects,
multi-level playing fields, multi-ball releases and in reliability improvements
such as solid state technology and sophisticated diagnostic testing to quickly
locate any malfunction. Many of the Company's pinball and novelty games use
common parts, creating manufacturing efficiencies and assisting customers in
servicing machines and controlling parts inventory costs. In the past, the
Company has generally introduced eight new pinball machines per year in order to
sustain player interest while spreading research, development and manufacturing
expenses to maintain competitive pricing. However, as a result of the Company's
decision to downsize the Pinball & Novelty Games segment, the Company introduced
four models during fiscal 1997 and plans to introduce five games in fiscal 1998.
 
     Gaming Equipment: The Company continues to provide VLTs to most of the
jurisdictions which have authorized such gaming. The Company believes its
success in designing, manufacturing and selling VLTs will enhance its position
in the casino gaming machine market. The Company is confident that by combining
its expertise in VLT design with innovative new gaming machine product concepts
being developed by its designers and by increasing its employee base to include
experienced casino/gaming machine personnel, it will continue its expansion in
the casino gaming machine market as well as continue its strong presence in the
VLT market as new jurisdictions authorize such gaming. The Williams slot machine
line offers casinos a variety of game themes, all with original soundtracks, art
and varying paytables. Like amusement games, gaming machines for casinos
emphasize innovation, reliability, price and player appeal all of which are
expected to translate into substantial earnings for casino owners. The Company's
new gaming machines have more advanced technological features than its existing
machines which are expected to elevate excitement for end-users.
 
                           MARKETING AND DISTRIBUTION
 
VIDEO GAMES
 
     Coin-Operated Games: Coin-operated video games are sold under the Midway
and Atari trademarks. Coin-operated video games are marketed primarily through
approximately 63 independent distributors worldwide. Distributors sell these
products to operators who own and operate the machines and place them in
amusement arcades, restaurants, taverns, convenience stores and movie theaters.
Distributors are primarily responsible for the sale and distribution of these
products in designated territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. It is
customary for distributors of the Company's coin-operated video games also to
distribute games produced by other manufacturers.
 
     Coin-operated video games are marketed through trade shows, promotional
videotapes and advertising in trade publications. Midway maintains separate
sales and marketing teams for its Midway and Atari product lines.
 
                                        7
<PAGE>   9
 
     Home Games: Prior to fall 1996, the Company's home video games had been
marketed under the Williams and Tradewest trademarks and Atari Games home video
games had been marketed under the Tengen and Time Warner Interactive trademarks.
Commencing with Midway's fall 1996 product line, all newly released home video
games are marketed under the Midway trademark.
 
     The Company began to publish home video games based on its own
coin-operated video games in September 1995 with the introduction of Mortal
Kombat 3, the best selling home video game in the United States in 1995. Prior
to that time, the Company had granted Acclaim Entertainment the right to publish
home video game versions of most coin-operated video games released by the
Company. In fiscal 1997, Midway released 15 home video games.
 
     Home games are marketed in the United States through the Company's internal
sales staff and through independent sales representatives to approximately
15,000 stores domestically, including mass merchandisers, national and regional
retailers, discount store chains, video rental retailers and entertainment
software distributors. The Company's marketing activities include television and
print advertising, retail store promotions, direct mailings and user support
programs. The Company also utilizes a store-oriented marketing approach which
includes point-of-purchase promotions, use of display cards and other forms of
merchandise displays. The Company's sales literature, which features advance
information on new products, encourages potential users to purchase the
Company's products at their local retail outlets, creating retail demand for new
products before their release. The Company provides technical support for its
home products through its customer support department, which is staffed by
personnel trained to respond to customer inquiries.
 
     Midway's principal customers for its home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Best Buy. Sales to Toys-R-Us in
fiscal 1997 represented 18.5% of total home video game revenues of Midway
compared to 20.1% of total home video game revenues of Midway in fiscal 1996. It
is customary for the sales representatives and the distributors of Midway's home
games who are assigned specific territories to also distribute games produced by
other manufacturers. Midway exploits the worldwide markets for these games
through direct distribution channels and market licensing agreements.
 
     The Company also entered into strategic relationships for the distribution
of home games. In December 1994, the Company appointed GT Interactive as
distributor of certain of its games as adapted for personal computers worldwide.
In March 1995, the Company also appointed GT Interactive as an international
distributor (excluding the U.S., Canada and Mexico) of certain of the Company's
domestically distributed home video games on several of the next generation
platforms, such as Sega Saturn, Nintendo 64 and Sony PlayStation. The Company's
personal computer and platform game distribution agreements with GT Interactive
expire in March 2000 and June 2001, respectively, subject to various conditions
under which each agreement may be extended if licensing fees remain unrecouped.
Games optioned under these agreements are licensed for varying terms. In March
1996, the Company entered into agreements with GT Interactive with respect to
games developed by Atari Games, which agreements contain similar expiration and
renewal provisions as the other agreements. Licensing fees under the Atari Games
agreements are recoupable in certain circumstances from royalties payable under
the other agreements.
 
     In March 1994, the Company formed a joint venture with Nintendo to develop
video games on certain platforms being developed by Nintendo. The joint venture
is owned 50% by each of Midway and Nintendo. In connection with the formation of
the joint venture, the Company also entered into arrangements with Nintendo for
the development of a version of Cruis'n USA for Nintendo 64. The joint venture
has the right to distribute home versions of any coin-operated sequels of
Cruis'n USA developed by Midway and the right of first negotiation with respect
to distribution of home versions of any coin-operated video games developed by
Midway on a new coin-operated platform developed by Nintendo. To date, no home
video games have been released through this joint venture.
 
PINBALL & NOVELTY GAMES
 
     Coin-operated pinball and novelty games are sold under the Williams, Bally
and Fun House trademarks. Pinball and novelty games are marketed through
approximately 53 independent distributors worldwide. Distributors sell these
products to operators who own and operate the machines and place them in
amusement
 
                                        8
<PAGE>   10
 
arcades, restaurants, taverns, convenience stores and movie theaters.
Distributors are primarily responsible for the sale and distribution of these
products in designated territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. It is
customary for distributors of the Company's novelty games also to distribute
games produced by other manufacturers, however, the appointment of distributors
of the Company's pinball games are generally made on an exclusive basis pursuant
to which the distributors are required to commit to minimum pinball game
purchases. Pinball and novelty games are marketed through trade shows,
promotional videotapes and advertising in trade publications.
 
GAMING EQUIPMENT
 
     Video Lottery Terminals: The VLT market is different from both the casino
market and the traditional lottery market. Most VLTs are located in places where
gaming is not the principal attraction and the stakes and payoffs are relatively
low. In certain jurisdictions, VLTs are privately owned either by the owners of
the establishments in which the terminals are placed or by route operators or
distributors who contract with establishment owners to install, service and
maintain the terminals. In other jurisdictions, VLTs may be owned by or leased
to the government or its appointed agent or may be provided by the Company to
the governmental agency on a revenue-sharing basis.
 
     Slot/Video Gaming Machines: The slot/video machine market is composed of
casinos located in hotels and other establishments and on cruise ships,
riverboats and in Native American nations. Casinos feature gaming as their
primary attraction. Gaming machines designed for the casino market are normally
sold directly to the casino and on occasion they may be sold to or through
casino management companies or through specialized gaming machine distributors.
Sales may be made in return for full payment or financed through machine revenue
as well as provided on a revenue-sharing basis. The Company employs 12 sales
personnel in offices in several United States locations, retains two
sales/service consultants for the Canadian market and has appointed distributors
for sales to Native American nation casinos and to casinos in Europe, Africa and
the Middle East.
 
GENERAL
 
     Export sales of all Games Operations, primarily to Western Europe, were
approximately $104,098,000 (22.4% of total revenues) for the fiscal year ended
June 30, 1997 compared with $76,337,000 (22.5% of total revenues) for the fiscal
year ended June 30, 1996 and $138,530,000 (44% of total revenues) for the fiscal
year ended June 30, 1995. Substantially all foreign sales are made in United
States dollars and, therefore, the Company is not generally subject to the risk
of fluctuation of the value of foreign currencies in relation to the dollar. In
the fiscal years ended June 30, 1997 and 1996, no one customer accounted for
greater than 10% of net sales (before adjustment for discontinued operations),
however, Nova Games Import-Export GmbH & Co. KG and affiliates accounted for
approximately 17% ($52,343,000) of the Company's total revenues (before
adjustment for discontinued operations) for the fiscal year ended June 30, 1995.
In the opinion of the Company, while the loss of a single distributor could
temporarily affect the distribution of a particular model, it would not have a
material adverse effect on the business of the Company. In any such event, the
Company believes it could make arrangements with alternate distributors for the
distribution of the Company's products.
 
                                 MANUFACTURING
 
COIN-OPERATED VIDEO GAMES, PINBALL & NOVELTY GAMES AND GAMING EQUIPMENT
 
     The Company's coin-operated video games, Pinball & Novelty Games and Gaming
Equipment are manufactured in its factories in Illinois. Effective as of July 1,
1996 and in connection with the Offering, Midway and the Company entered into a
Manufacturing and Services Agreement dated as of July 1, 1996 (the
"Manufacturing and Services Agreement") pursuant to which, among other things,
the Company continues to manufacture Midway's coin-operated video games. The
Company believes its facilities are adequate for its current and planned
production needs. Production is generally based on advance purchase orders from
distributors with respect to coin-operated games and from governmental agencies
and casinos with respect to Gaming Equipment. As a result of the patent
litigation, the Company was enjoined from
 
                                        9
<PAGE>   11
 
manufacturing or selling certain models of its reel-type slot machines.
Consequently, the Company has a significant inventory of potentially excess and
unusable slot machines of such particular models that are written down to the
cost of salvageable parts therein. See "Item 3. Litigation" and Note 13:
Litigation contained in the Company's Consolidated Financial Statements in the
1997 Annual Report.
 
     The Company believes it is not meaningful to compare backlog orders at the
end of fiscal years since the amount of backlog orders varies from the beginning
to the end of a normal two- to three-month production process of a coin-operated
game and during the on-going production process for certain models of Gaming
Equipment which can extend over a period of years.
 
     Coin-operated video games are warranted for 60 days; most pinball and
novelty games are warranted for a period of 60 to 90 days; slot machines are
warranted for a period of 90 days; and VLTs are warranted for a period of up to
one year. No substantial costs have been incurred by the Company in connection
with such warranties.
 
     The raw materials used in manufacturing coin-operated video, pinball and
novelty games and Gaming Equipment include various metals, plastics, wood and
glass obtained from numerous sources of supply. In addition, numerous component
parts, including electronic subassemblies and video monitors, are purchased from
suppliers. Wood cabinets for amusement games are manufactured by the Company's
subsidiary Lenc-Smith Inc., as well as by outside suppliers. The Company
believes that the sources of supply of component parts and raw materials are
adequate and that substitute sources of materials are available.
 
     The Company has a long cycle from purchase of inventory to collection of
cash on the sale of its gaming machines which is typical in the industry.
Component parts are purchased and assembled into finished goods which are
inventoried in order to be able to quickly fulfill customer orders. Finished
gaming machines are often installed in casinos on a "trial" basis and, only
after a successful trial period, the machines are sold to the casinos. The sale
may have extended payment terms if competitive forces so require.
 
HOME VIDEO GAMES
 
     Software Products for Home Games: Manufacturing of home games is usually
performed for Midway by the developer of the game platform (i.e., Nintendo, Sony
or Sega) as required by the applicable platform license. Midway is one of only a
limited number of software publishers who have been granted the right by
Nintendo and Sega to self-manufacture cartridges for their 16-bit platforms. For
such platforms, Midway generally employs contract manufacturing sources in
Mexico. At the time a product is approved for manufacturing, Midway must provide
certain of the platform manufacturers with a purchase order for that product and
an irrevocable letter of credit for 100% of the purchase price. Home games
traditionally have no backlog of orders.
 
     CD-ROM Based Software Products for Personal Computers: Under Midway's
arrangements with GT Interactive, Midway and GT Interactive share equally the
cost to develop personal computer CD-ROM versions of those of Midway's
coin-operated video games that GT Interactive elects to release to the home
market. Once GT Interactive so elects, it is responsible for and bears the cost
of the manufacture of the CD-ROMs as well as all other costs related to the sale
of these CD-ROMs.
 
     Platform Licenses: Under non-exclusive license arrangements with Nintendo,
Sony and Sega, Midway has the right to develop and market software products for
(i) Nintendo's Super Nintendo Entertainment System and Nintendo 64 platforms,
(ii) Sony's PlayStation, and (iii) Sega's Genesis and Saturn platforms.
Generally, no specific hardware license is required for the development and
marketing of personal computer software.
 
INTELLECTUAL PROPERTY LICENSES
 
     While the Company primarily seeks to develop original proprietary games,
certain of the Company's games are based on properties licensed from third
parties, such as the National Basketball Association, National Football League
and National Hockey League or their respective players' associations. Typically,
the Company is obligated to make certain minimum guaranteed royalty payments
over the term of the license and
 
                                       10
<PAGE>   12
 
to advance payment against such guarantees. License agreements generally extend
for a term of two to three years, are terminable in the event of material breach
(including failure to pay any amounts owing to the licensor in a timely manner)
by the Company and certain other events, and, in some cases, are renewable upon
payment of certain minimum guarantees or the attainment of specified sales
levels during the term of the license. Certain licenses are limited to specific
territories or platforms. 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 other products and, in
some cases, software for other interactive hardware platforms for home games.
 
PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
 
     Each video game software title, pinball and novelty game title and
slot/video gaming machine may embody a number of separately-protected
intellectual property rights, including trademarks, copyrights and patents. See
"Item 3. Legal Proceedings" with respect to certain patent litigation between
the Company and International Game Technology involving reel-type slot machines.
 
     Each dedicated home game includes patents, copyrights and trademarks
licensed from the platform manufacturer. Elements of certain of Midway's titles
are owned by third parties and licensed to Midway. Midway relies on such third
parties for protection of such intellectual property rights. Their failure to
adequately protect such rights could have a material adverse effect on Midway.
 
     The dedicated platform manufacturers have procured patents for certain of
the technology utilized in connection with their respective home game systems.
The dedicated platform manufacturers incorporate security devices in their
cartridges, CD-ROMs and platforms which seek to prevent unlicensed software
products from being played on their platforms. Midway does not own the
trademarks, copyrights or patents, if any, covering the proprietary information
and technology utilized in the dedicated platform manufacturer's cartridges or
CD-ROMs. Accordingly, Midway relies upon each dedicated platform manufacturer
for protection of such intellectual property from infringement and bears the
risk of claims of infringement brought by third parties arising from the sale of
software with respect to intellectual property supplied by third party
developers and embodied in the Midway's software products. Midway's agreements
with these outside developers generally require the developers to indemnify
Midway for costs and damages incurred in connection with such claims. No
assurance can be given, however, that such software developers will have
sufficient resources to indemnify Midway fully in respect of any such claims
that may arise.
 
                             GOVERNMENT REGULATION
 
     The manufacture and distribution of Gaming Equipment is subject to
extensive Federal, state, local and foreign regulation. Although the laws and
regulations of the various jurisdictions in which the Company operates vary in
their technical requirements and are subject to amendment 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 companies engaged in the manufacture and distribution of gaming
devices as well as for the officers, directors, major stockholders and key
personnel of such companies.
 
NEVADA REGULATIONS
 
     The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada are subject to the Nevada Gaming
Control Act and the regulations promulgated thereunder (collectively, the
"Nevada Act"). The Company's manufacturing and distribution of gaming devices
are subject to licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission") and the Nevada State Gaming Control Board (the "Nevada
Board"). The Nevada Commission and the Nevada Board are collectively referred to
as the "Nevada Gaming Authorities."
 
     The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity;
 
                                       11
<PAGE>   13
 
(ii) the establishment and maintenance of responsible accounting practices and
procedures; (iii) the maintenance of effective controls over the financial
practices of licensees, including the establishment of minimum procedures for
internal fiscal affairs, and the safeguarding of assets and revenues, providing
reliable record keeping and requiring the filing of periodic reports with the
Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent
practices; and (v) providing a source of state and local revenues through
taxation and licensing fees. A change in such laws, regulations and procedures
could have an adverse effect on the Company's future Nevada operations.
 
     Certain of the Company's subsidiaries (each a "Gaming Subsidiary" and
collectively the "Gaming Subsidiaries"), which manufacture and distribute gaming
devices or which hold stock of a Company subsidiary which does so, are required
to be licensed or registered by the Nevada Gaming Authorities. The licenses
require periodic payments of fees and taxes and are not transferable. No person
may become a stockholder of, or receive any percentage of profits from, the
Gaming Subsidiaries without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company is registered by the Nevada Commission as
a publicly traded corporation ("Registered Corporation") and as such, it is
required periodically to submit detailed financial and operating reports to the
Nevada Commission and to furnish any other information which the Nevada
Commission may require. On August 21, 1997, the Nevada Commission approved the
Company's application for an amendment to its Order of Registration by removing
the limitation which, if not removed, would have caused the Order of
Registration to expire in August 1997. Also on that date, the Gaming
Subsidiaries and Mr. Louis J. Nicastro, Mr. Neil D. Nicastro and Mr. Harold H.
Bach, Jr. were registered, licensed or found suitable by the Nevada Commission,
as applicable, as a Registered Corporation, as registered holding companies, for
licensure as a manufacturer and distributor of gaming devices, as an operator of
a slot machine route and as directors, officers and stockholders of such
entities. On June 26, 1996, Mr. Louis J. Nicastro resigned from his position
with WMS Gaming Inc. and certain other amusement game subsidiaries of the
Company in order to assume, at the request of the Board of Directors of the
Company, the position of Chief Executive Officer of WHG in contemplation of the
Distribution. There can be no assurance that such registrations, findings of
suitability and licenses will not be revoked, suspended, limited or conditioned
or that such persons will continue to be found suitable as licensees.
 
     All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval process
for gaming devices includes rigorous testing by the Nevada Board, a field trial
and a determination as to whether the gaming device meets strict technical
standards that are set forth in the regulations of the Nevada Commission.
Associated equipment must be administratively approved by the Chairman of the
Nevada Board before it is distributed for use in Nevada.
 
     The Nevada Commission may investigate any individual who has a material
relationship to, or material involvement with, the Company or the Gaming
Subsidiaries in order to determine whether such individual is suitable or should
be licensed as a business associate of a licensee. Officers, directors and
certain key employees of the Gaming Subsidiaries must file license applications
with the Nevada Gaming Authorities. Officers, directors and key employees of the
Company which are actively and directly involved in activities of the Gaming
Subsidiaries may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation to be found suitable.
The applicant for licensing or a finding of suitability must pay all the costs
of the investigation. Changes in licensed positions must be reported to the
Nevada Gaming Authorities and, in addition to their authority to deny an
application for a finding of suitability or license, the Nevada Commission has
jurisdiction to disapprove a change in a corporate position.
 
     If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Gaming Subsidiaries, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or any of the Gaming Subsidiaries to
terminate the employment of any
 
                                       12
<PAGE>   14
 
person who refuses to file appropriate applications. Determinations of
suitability or of questions pertaining to licensing are not subject to judicial
review in Nevada.
 
     The Company and the Gaming Subsidiaries are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by the Gaming Subsidiaries must be reported to, and approved by, the Nevada
Commission.
 
     If it were determined that the Nevada Act was violated by the Gaming
Subsidiaries, the licenses they hold could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Gaming Subsidiaries, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. The limitation, conditioning or
suspension of any gaming license or the appointment of a supervisor could and
the revocation of any license would materially adversely affect the Company's
future operations in Nevada.
 
     Any beneficial holder of the voting securities of the Company, regardless
of the number of shares owned, may be required to file applications, be
investigated and have his, her or its suitability as a beneficial holder of the
Company's voting securities determined if the Nevada Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
 
     The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of the Company's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10% but not more than 15% of the Company's voting securities may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the Board of Directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations, or those of any
of its gaming affiliates, or any other action which the Nevada Commission finds
to be inconsistent with holding the Company's voting securities for investment
purposes only. Activities which are not deemed to be inconsistent with holding
voting securities for investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management policies or operations; and
(iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
 
     Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request by the Nevada
Commission or the Chairman of the Nevada Board, fails to identify the beneficial
owner. Any stockholder found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the common stock of a Registered Corporation beyond
such period of time as may be prescribed by the Nevada Commission may be guilty
of a criminal offense. The Company is subject to disciplinary action if, after
it receives notice that a person is unsuitable to be a stockholder or to have
any other relationship with the Company or the Gaming Subsidiaries, the Company:
(i) pays that unsuitable person any dividend or interest upon voting securities
of the Company; (ii) allows that person to exercise, directly or indirectly, any
voting rights conferred through securities held by
 
                                       13
<PAGE>   15
 
that person; (iii) pays remuneration in any form to that person for services
rendered or otherwise; or (iv) fails to pursue all lawful efforts to require the
unsuitable person to relinquish voting securities including, if necessary, the
immediate repurchase of such voting securities for cash at fair market value.
 
     The Nevada Commission may in its discretion, require holders of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including with the loss of its approvals, if, without the prior approval of the
Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest
or any distribution whatsoever; (ii) recognizes any voting right by such
unsuitable person in connection with such securities; (iii) pays the unsuitable
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation or
similar transaction.
 
     The Company is required to maintain a current stock ledger in the State of
Nevada which may be examined by the Nevada Gaming Authorities at any time. If
any securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require that the Company's stock certificates bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
 
     The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
 
     Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and the Nevada Commission
in a variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
 
     The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate licensees and their affiliates; (ii) preserve
the beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada Commission
before the Company can make exceptional repurchases of voting securities above
the current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by the Company's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purpose of acquiring control of the Registered Corporation.
 
     License fees and taxes computed in various ways depending on the type of
gaming or activity involved are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective
 
                                       14
<PAGE>   16
 
operations are conducted. Depending upon the particular fee or tax involved,
these fees and taxes are payable either quarterly or annually. Annual fees are
also payable to the State of Nevada for renewal of licenses as a manufacturer
and distributor.
 
     Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming operations. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. The Nevada Board may require a
Licensee to file an application for a finding of suitability to be made by the
Nevada Commission concerning an actual or intended activity or association of
the Licensee in a foreign gaming operation. A Licensee is also subject to
disciplinary action by the Nevada Commission if any such licensee knowingly
violates any laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations, engages
in activities that are harmful to the State of Nevada or its ability to collect
gaming taxes and fees, or employs a person in the foreign operation who has been
denied a license or finding of suitability in Nevada on the ground of personal
unsuitability.
 
NEW JERSEY REGULATION
 
     The manufacture, distribution, and operation of gaming machines in New
Jersey are regulated by the New Jersey Casino Control Commission (the "New
Jersey Commission") pursuant to the New Jersey Casino Control Act and the
regulations of the New Jersey Commission promulgated thereunder (collectively,
the "New Jersey Act"). Under the New Jersey Act, a company must be licensed as a
gaming related casino service industry ("CSI"), or fulfill other requirements,
in order to manufacture or distribute gaming machines. In order for a CSI
license to be issued or maintained, certain directors, officers, key employees,
and owners of a company must be found by the New Jersey Commission to possess by
clear and convincing evidence good character, honesty and integrity, and
financial stability, integrity and responsibility.
 
     On May 29, 1996, WMS Gaming Inc. was issued a CSI license by the New Jersey
Commission. This license was issued for a two-year period and, upon proper
application and satisfaction of the same requirements for the initial issuance
of a license, may be renewed for four-year periods. However, the New Jersey
Commission has the discretion to suspend, revoke, or refuse to renew a license
if a licensee fails to continue to satisfy the requirements for licensure or
violates the New Jersey Act.
 
     In addition, all gaming machines used in New Jersey casinos must be
approved by the New Jersey Commission. In determining whether to approve gaming
machines, the New Jersey Commission will consider various factors, including
design, integrity, fairness, and honesty and may require a field test of the
machine.
 
MISSISSIPPI
 
     The manufacture, sale and distribution of gaming devises for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). Such
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission (collectively referred to as the "Mississippi Gaming
Authorities"). Although not identical, the Mississippi Act is similar to the
Nevada Act.
 
     The Company and the Gaming Subsidiaries have received the various
registrations, approvals, permits and licenses in order to engage in
manufacturing and distribution of gaming equipment in Mississippi. The license
to manufacture and distribute gaming equipment in Mississippi is not
transferable, is issued for a two-year period and must be renewed every two
years thereafter.
 
                                       15
<PAGE>   17
 
     Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Gaming Subsidiaries, including, but not
limited to, record or beneficial holders of any of the voting securities of the
Company or the Gaming Subsidiaries and any other person whom the Mississippi
Commission determines exercises a significant influence upon the management or
affairs of the Company. The Company and the Gaming Subsidiaries are required to
maintain a current stock ledger in Mississippi which may be examined by the
Mississippi Commission at any time. The Company believes that all required
findings of suitability currently required have been applied for or obtained.
Any applicant for a finding of suitability must pay all investigative fees and
costs of the Mississippi Commission in connection with such an investigation.
 
     The Mississippi Act requires any person who acquires beneficial ownership
of more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Mississippi
Commission for a finding of suitability. The Mississippi Commission exercises
its discretion to require a finding of suitability of any beneficial owner of
more than 5% of a Registered Corporation's common stock. Under certain
circumstances, an "institutional investor," which acquires more than 5%, but not
more than 10%, of the Registered Corporation's voting securities may apply to
the Mississippi Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only
and otherwise meets the regulatory requirements of the institutional investor
waiver provisions.
 
     The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes. All
loans by the Company must be reported to the Mississippi Commission and certain
loans and other stock transactions must be approved in advance.
 
     If it were determined that the Mississippi Act was violated by the Company
or the Gaming Subsidiaries, the licenses they hold could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures, which action, if taken, could materially adversely
affect the Company's manufacturing and distribution of gaming devices.
 
FEDERAL REGISTRATION
 
     Any subsidiaries of the Company that are involved in gaming activities are
required to file documents annually with the United States Department of
Justice, Criminal Division, in connection with the sale, distribution or
operation of Gaming Equipment. The Federal Gambling Devices Act of 1962 (the
"Federal Act") makes it unlawful, in general, for a person to manufacture,
deliver or receive gaming machines, gaming machine type devices and components
across state lines or to operate gaming machines unless that person has first
registered with the Attorney General of the United States. The Company is
required to register and renew its registration annually. The Company has
complied with such registration requirements. In addition, various record
keeping equipment identification requirements are imposed by the Federal Act.
Violation of the Federal Act may result in seizure and forfeiture of the
equipment, as well as other penalties.
 
REGULATION IN FOREIGN JURISDICTIONS
 
     Certain foreign countries permit the importation, sale and/or operation of
Gaming Equipment. 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. Certain jurisdictions in which the Company operates require the
licensing of gaming devices, gaming device operators and manufacturers. The
Company and its gaming machines have been properly licensed and approved or have
applied for licensure and approval in all jurisdictions where the Company's
operations require such licensure and approval.
 
                                       16
<PAGE>   18
 
NATIVE AMERICAN GAMING REGULATION
 
     Numerous Native American Indian tribes have become engaged in or have
licensed gaming activities on Indian lands as a means of generating tribal
governmental revenue. The Company manufactures and supplies Gaming Equipment for
Native American Indian tribes. 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, the Indian Gaming Regulatory Act of 1988
("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Secretary of the U.S. Department of the Interior (the
"Secretary"), and also may be subject to the provisions of certain statutes
relating to contracts with Native American tribes, which are administered by the
Secretary. As a precondition to gaming involving gaming machines, IGRA requires
that the tribe and the state enter into a written agreement (a "tribal-state
compact") that specifically authorizes such gaming, and that has been approved
by the Secretary, with notice of such 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 and shareholders of gaming equipment suppliers. Under IGRA,
tribes are required to regulate all commercial gaming under ordinances approved
by the NIGC. Such ordinances may impose standards and technical requirements on
main hardware and software and may impose registration, licensing and background
check requirements on gaming equipment suppliers and their officers, directors
and shareholders.
 
REGULATORY CHANGES AND LICENSE STATUS
 
     The laws and regulations of the numerous jurisdictions, foreign and
domestic, in which the Company and its subsidiaries do business are subject to
change from time to time. In addition, the license status of the Company and its
subsidiaries with respect to these jurisdictions is subject to change. The
information set forth in this document represents the most current available at
the time of filing. Thus far the Company has never been denied any such
necessary governmental licenses, permits or approvals. No assurances, however,
can be given that such required licenses, permits or approvals will be given or
renewed in the future.
 
                                  COMPETITION
 
     The Video Games, Pinball & Novelty Games and Gaming Equipment businesses
are intensely competitive and are characterized by the continuous introduction
of new titles and the development of new technologies. The ability of the
Company to compete successfully in these markets is based, in large part, upon
its ability to select and develop new products, to identify and obtain rights to
commercially marketable intellectual properties and to adapt its products for
use with new technologies. In addition, successful competition is also based
upon price, access to retail shelf space in the case of home video games,
product enhancements, new product introductions, marketing support and
distribution systems. The Company's competitors vary in size from very small
companies with limited resources to very large corporations with greater
financial, marketing and product development than those of the Company.
 
     The Company believes that it is the world's leading manufacturer of
coin-operated pinball games and a leading manufacturer of coin-operated video
games and VLTs. In the coin-operated pinball game market, the Company competes
with Sega. In the coin-operated video game market, the Company competes
principally with foreign manufacturers such as Capcom, Konami, Namco, Sega and
Taito and in the home video game market, the Company competes with Nintendo,
Sony and Sega, the largest publishers of software for their respective systems
and numerous companies licensed by them. Due to their dominant position in the
home video game industry as primary manufacturers of dedicated platform hardware
and software, Nintendo, Sony and Sega have a competitive advantage with respect
to retail pricing, acquiring intellectual property licenses and securing shelf
space. Additionally, the Company's games which are sold for use on personal
computers compete with entertainment software sold by companies such as
Broderbund Software, CUC International, Electronic Arts, GT Interactive,
Microsoft and Spectrum Holobyte, among others.
 
                                       17
<PAGE>   19
 
     In the Gaming Equipment market the Company competes with International Game
Technology, G-Tech and Video Lottery Consultants, Inc., each based in the United
States, and Spielo, based in Canada with respect to VLTs, and with International
Game Technology, Alliance Gaming Corp., Sigma Game, Inc. and Universal
Distributing of Nevada Inc. with respect to slot machines. See "Item 3. Legal
Proceedings" with respect to certain patent litigation between the Company and
International Game Technology involving reel-type slot machines.
 
                    DESIGN, RESEARCH AND PRODUCT DEVELOPMENT
 
     The coin-operated video, pinball and novelty games and gaming equipment
which are sold by the Company may be designed by members of its internal design
staff or by independent designers under contract to the Company. The Company
also evaluates coin-operated games designed by others with a view toward
obtaining licenses authorizing it to manufacture and sell such games as well as
for purposes of performing the contract manufacture of such games for sale under
the tradename of others. Home Games designed by or for Midway for the 32- and
64-bit platforms are manufactured by others for sale by Midway. Midway is one of
a limited number of software publishers who have been granted the right by
Nintendo and Sega to self-manufacture cartridges for their 16-bit platforms. For
such platforms, Midway generally employs contract manufacturing sources in
Mexico . The Company currently employs approximately 414 persons in its research
and product development departments. During the fiscal years ended June 30,
1997, 1996, and 1995, approximately $12,882,000, $13,436,000 and $12,418,000,
respectively, were expended on research and development with respect to the
Company's Pinball & Novelty Games and Gaming Equipment businesses. During the
fiscal years ended June 30, 1997, 1996 and 1995, Midway expended approximately
$55,941,000, $32,495,000 and $14,661,000, respectively, on research and
development with respect to its Video Games business.
 
                                  SEASONALITY
 
     The home video game business is highly seasonal and historically has
resulted in higher revenues and net income in the first and second quarters of
the June 30 fiscal year due to customer purchases preceding the year-end retail
holiday selling season. The coin-operated video game, pinball and novelty game
and gaming equipment businesses have not historically been seasonal but,
quarterly revenues and net income usually increase when a coin-operated video
game, pinball game, novelty game or gaming machine that achieves significant
player appeal is introduced.
 
                                   EMPLOYEES
 
     At June 30, 1997, the Company employed approximately 1,047 persons in its
Games Operations. Approximately 525 of such employees were represented by the
International Brotherhood of Electrical Workers (the "IBEW") and approximately
164 of such employees were represented by the United Furniture Workers union
(the "UFW"). None of the employees engaged in the home video games business is
represented by a union. Collective bargaining agreements with the IBEW relating
to the Chicago and Waukegan, Illinois manufacturing facilities expire June 30,
2000 and March 31, 1998, respectively. The collective bargaining agreement with
the UFW relating to the Cicero, Illinois manufacturing facility expires June 30,
1998. The Company's relations with its union employees are satisfactory.
 
                                THE DISTRIBUTION
 
     In addition to the Games Operations, the Company previously, through its
subsidiaries and affiliates, owned and operated three of the leading hotels and
casinos in Puerto Rico -- the Condado Plaza Hotel & Casino, the El San Juan
Hotel & Casino and the El Conquistador Resort & Country Club. The Company owned
100% of the Condado Plaza, 50% of the El San Juan and 23.3% of the El
Conquistador. Additionally, the Company owned 62% of Williams Hospitality Group
Inc., which manages all three of the aforementioned hotels and casinos. On April
21, 1997, the Company distributed to its stockholders through a dividend all of
 
                                       18
<PAGE>   20
 
the outstanding shares of voting common stock of WHG, formerly a wholly-owned
subsidiary of the Company. As of the date of the Distribution, WHG owned and
operated the three hotels and casinos discussed above. The Distribution provided
Company stockholders with one share of voting common stock of WHG for every four
shares of Company common stock held by such stockholders on the record date of
March 31, 1997.
 
     The Distribution was designed to relieve the Company and WHG from certain
of the regulatory burdens and risks which existed as a result of the combined
ownership by the Company of the Gaming Equipment business and a Puerto Rico
casino business and to enhance WHG's ability to attract and maintain skilled
employees through stock related compensation of WHG.
 
     On June 27, 1996 the Company first announced its intentions to complete the
Distribution. The financial position, results of operations and cash flows of
this business segment have been reported as discontinued operations in the
Consolidated Financial Statements in the Company's 1996 Annual Report to
Stockholders and the 1997 Annual Report.
 
                      FACTORS AFFECTING FUTURE PERFORMANCE
 
     Future operating results of the Company depend upon many factors and are
subject to various risks and uncertainties. Some of the risks and uncertainties
which may cause the Company's operating results to vary from anticipated results
or which may materially and adversely affect its operating results are as
follows:
 
VIDEO GAMES
 
     Dependence on New Product Introductions; Product Delays. Midway's success
depends on generating revenue from new products and enhancements of existing
products. The process of developing software products such as those offered by
Midway is extremely complex and is expected to become more complex and expensive
in the future as new platforms and technologies are introduced. In addition,
consumer preferences for video games are difficult to predict, and few video
game products achieve sustained market acceptance. There can be no assurance
that new products introduced by Midway will achieve any significant degree of
market acceptance, or that such acceptance will be sustained for any meaningful
period. A significant delay in the introduction of one or more new products or
enhancements or the failure of new products to achieve or sustain market
acceptance would have a material adverse effect on Midway's business, operating
results and financial condition.
 
     Technological Change. The video game market, both in the coin-operated and
home segments, is characterized by rapidly changing technology. Midway must
continually anticipate and adapt its products to emerging technologies,
including new hardware platforms. When Midway chooses to incorporate a new
technology in its products or to publish or develop a product for a new
platform, it may be required to make a substantial development investment one to
two years in advance of initial shipment of such products. There can be no
assurance that Midway will be able to identify accurately which emerging
technologies will gain widespread acceptance. If Midway invests in the
development of a video game that does not achieve significant commercial
success, Midway's revenues from that product will be adversely affected and it
may not recover its development costs. If Midway does not choose to pursue the
development of products incorporating new technology or for new platforms that
achieve significant commercial success, Midway's revenue growth may be adversely
affected. In addition, consumers may defer purchasing software for use on
existing platforms following the announcement of an introduction date for
hardware platforms incorporating new technologies. Accordingly, sales of
Midway's existing software products could be adversely affected by such
announcements. There can be no assurance that Midway will be able to develop or
acquire the expertise necessary to enable it to develop or market products for
emerging technologies.
 
     Reliance on Mortal Kombat Products. Revenues from Mortal Kombat products
accounted for approximately 22.0%, 34.9% and 17.1% of Midway's total revenues
during fiscal 1997, 1996 and 1995, respectively. If Mortal Kombat products fail
to continue to sell or if Midway fails to replace the Mortal Kombat products
with additional products generating significant revenues, Midway's business,
operating results and financial condition could be materially and adversely
affected.
 
                                       19
<PAGE>   21
 
     Fluctuations in Operating Results; Seasonality. Midway has experienced and
expects to continue to experience significant quarterly fluctuations in net
sales and operating results due to a variety of factors, including fluctuations
in the mix of products with varying profit margins sold by Midway, the size and
rate of growth of the consumer software market, market acceptance of Midway's
products and those of its competitors and dedicated platform manufacturers,
development and promotional expenses relating to the introduction of new
products or enhancements of existing products, the timing and success of product
introductions, changes in pricing policies by Midway and its competitors, the
accuracy of Midway's and retailers' forecasts of consumer demand, the timing of
orders from major customers, order cancellations and delays in shipment.
Midway's expense levels are based, in part, on its expectations regarding future
sales and, as a result, operating results would be adversely affected by a
decrease in sales or a failure to meet Midway's sales expectations.
 
     While the coin-operated game business is not generally seasonal in nature,
the home video game business is highly seasonal. Sales of home video games are
typically significantly higher during the September and December quarters due to
the year-end holiday buying season. Sales in other quarters are generally lower
and vary significantly as a result of new product introductions and other
factors. There can be no assurance that Midway will achieve consistent
profitability on a quarterly or annual basis.
 
     Competition. The video game business is intensely competitive and is
characterized by the continuous introduction of new titles and the development
of new technologies. The ability of Midway to compete successfully in this
market is based, in large part, upon its ability to select and develop popular
titles, to identify and obtain rights to commercially marketable intellectual
properties and to adapt its products for use with new technologies. In addition,
successful competition is also based upon price, access to retail shelf space in
the case of home games, product enhancements, new product introductions,
marketing support and distribution channels. Midway's competitors vary in size
from very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of
Midway.
 
     In the coin-operated market, Midway competes principally with foreign
manufacturers such as Capcom, Konami, Namco, Sega and Taito.
 
     In the home market, Midway competes with Nintendo, Sony and Sega, the
largest publishers of software for their respective systems. Due to their
dominant position in the industry as primary manufacturers of dedicated platform
hardware and software, Nintendo, Sony and Sega have a competitive advantage with
respect to retail pricing, acquiring intellectual property licenses and securing
shelf space. There can be no assurance that Nintendo, Sony or Sega will not
increase their own software development efforts. Midway also currently competes
in the United States and Canada with numerous companies licensed by Nintendo,
Sony and Sega to develop software products for use with their respective
hardware systems. These competitors include Acclaim, Activision, Capcom, Disney
Interactive, Electronic Arts, Konami, Lucas Arts, Namco and Viacom New Media.
Additionally, Midway's games which are sold for use on personal computers
compete with entertainment software sold by companies such as Broderbund
Software, CUC International, Electronic Arts, GT Interactive, Microsoft and
Spectrum Holobyte, among others. The entry and participation of new industries
and companies, including diversified entertainment companies, in markets in
which Midway competes may adversely affect Midway's performance in such markets.
 
     Midway believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, are increasing their focus on the interactive entertainment market,
which will result in greater competition for Midway. In particular, many of
Midway's competitors are developing on-line interactive games and interactive
networks that will be competitive with Midway's interactive products. There can
be no assurance that Midway will be able to compete successfully against current
or future competitors or that competitive pressures faced by Midway will not
materially and adversely affect its business, operating results and financial
condition.
 
     Product Returns and Price Adjustments. In its home video game business,
Midway accepts product returns for defective products and sometimes provides
markdowns or other credits on varying terms in the event that the customer holds
slow-moving inventory of Midway's home games. At the time of product
 
                                       20
<PAGE>   22
 
shipment, Midway establishes reserves, including reserves under Midway's
policies for price protection and returns of defective products, which estimate
the potential for future returns of products based on historical return rates,
seasonality of sales, retailer inventories of Midway's products and other
factors. Product returns, markdowns and credits that exceed Midway's reserves
could have a material adverse effect on Midway's business, operating results and
financial condition. Although Midway maintains reserves which it believes to be
adequate with respect to product returns and price reductions, there can be no
assurance that the reserves established will not be exceeded.
 
     Dependence on Dedicated Platform Manufacturers. In fiscal 1997, 60% of
Midway's unit sales of software products were for use on the next generation 32-
and 64-bit game platforms (Nintendo 64, the Sony PlayStation and the Sega
Saturn). The balance of Midway's home video game unit sales were primarily for
the 16-bit Super Nintendo Entertainment System and Sega Genesis platforms, as
well as for portable game systems. Midway expects a significant and increasing
portion of its revenues in the coming years will be comprised of games for the
next generation game platforms. If the popularity of home video games on
dedicated hardware platforms materially declines, or if Midway were to lose its
license to publish software from any of the major platform manufacturers, namely
Nintendo, Sony and Sega, Midway's business would be materially and adversely
affected.
 
     Midway is generally obligated to submit new games to the dedicated platform
manufacturers for approval prior to development and/or manufacturing. Rejection
or substantial delay in approval of a product by a dedicated platform
manufacturer could have a material adverse effect on Midway's financial
condition and results of operations. Midway has not experienced any significant
delays in the approval process for any of its games in the past. However, there
can be no assurance that Midway will not experience such delays in the future.
The dedicated platform manufacturers may also limit the number of titles that
Midway can release in any year, which may limit any future growth in sales.
 
     Midway depends on Nintendo, Sony and Sega for the protection of the
intellectual property rights to their respective hardware platforms and
technology, their ability to control the proliferation of new titles by
licensees and others and their ability to discourage unauthorized persons from
producing software for the Nintendo, Sony and Sega platforms. Midway also relies
upon the dedicated platform manufacturers for the manufacturing of software
cartridges and CD-ROMs for the next generation platforms.
 
     Manufacturing Risks. The manufacturing of Midway's 16-bit home games is
performed for Midway by third parties in accordance with Midway's
specifications. While Midway has not to date experienced any material delays or
interruptions in the manufacture of Midway's products, there can be no assurance
that such delays or interruptions will not occur or, if any do occur, that they
could be remedied without further delay and without materially and adversely
affecting Midway's business, operating results or financial condition.
Unanticipated delays in receipt of shipments or price increases from any of
Midway's contract manufacturing sources could adversely affect Midway's
business.
 
     Intellectual Property Licenses and Approvals. While Midway primarily seeks
to develop original proprietary games, certain of Midway's games are based on
properties or trademarks owned by third parties, such as the National Basketball
Association, National Football League, National Hockey League or their
respective players' associations. Midway's future success may also be dependent
upon its ability to procure licenses for additional popular intellectual
properties. There is competition for such licenses, and there can be no
assurance that Midway will be successful in acquiring additional intellectual
property rights with significant commercial value.
 
     Midway's intellectual property licenses generally require that new products
developed under such licenses be submitted to the licensor for approval prior to
release. Such approval is generally discretionary. Rejection or delay in
approval of a product by a licensor could have a material adverse effect on
Midway's business, operating results and financial condition. While Midway has
not experienced any significant delays in obtaining new product approvals from
its licensors in the past, there can be no assurance that Midway will not
experience delays in the future. The owners of intellectual property licensed by
Midway generally reserve the right to protect such intellectual property against
infringement.
 
                                       21
<PAGE>   23
 
     Dependence on Key Personnel. The success of Midway depends to a significant
extent upon the performance of senior management and on its ability to continue
to attract, motivate and retain highly qualified software developers. The loss
of services of senior management, highly-qualified software developers or other
key personnel could have a material adverse effect on Midway. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that Midway will be successful in attracting and retaining such
personnel. Specifically, Midway may experience increased costs in order to
attract and retain skilled employees.
 
GAMING EQUIPMENT
 
     Patent Litigation. WMS Gaming Inc., a wholly-owned subsidiary of the
Company, is party to certain patent litigation between WMS Gaming Inc. and
International Game Technology with respect to reel-type slot machines. In the
event that it is ultimately determined in these actions that the Company's slot
machines infringe on International Game Technology's patent and if the Company
is unable to develop or acquire non-infringing alternative devices or obtain
licenses to use the patent, the development of the Company's reel-type slot
machine business is likely to be adversely affected. For a description of the
patent litigation, see "Item 3. Legal Proceedings" contained herein.
 
     Ability to Maintain Regulatory Approvals. The manufacture and distribution
of Gaming Equipment is subject to extensive Federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates vary in their technical requirements and are subject
to amendment 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 companies engaged in the
manufacture and distribution of gaming devices as well as for the officers,
directors, major stockholders and key personnel of such companies. The Company
is authorized to sell its gaming machines in Arizona, Colorado, Connecticut,
Illinois, Indiana, Iowa, Missouri, Minnesota, Mississippi, Nevada, New Jersey,
South Carolina, South Dakota and Wisconsin, as well as to cruise ships operating
in international waters. The Company is also authorized to sell its gaming
machines directly or through distributors in several international jurisdictions
and to several Native American nations. Thus far the Company has never been
denied any such necessary governmental licenses, permits or approvals. No
assurances, however, can be given that such required licenses, permits or
approvals will be given or renewed in the future.
 
     Application of Future or Additional Regulatory Requirements. In the future
the Company intends to seek the necessary registrations, licenses, approvals and
findings of suitability for the Company, its products and its personnel in other
U.S. and foreign jurisdictions in which the Company identifies significant sales
potential for its products. However, there can be no assurance that such
registrations, licenses, approvals or findings of suitability will be obtained
and will not be revoked, suspended or conditioned or that the Company will be
able to obtain the necessary approvals for its future products as they are
developed in a timely manner, or at all. If a registration, license, approval or
finding of suitability is required by a regulatory authority and the Company
fails to seek or does not receive the necessary registration, license, approval
or finding of suitability, the Company may be prohibited from selling its
products for use in the respective jurisdiction or may be required to sell its
products through other licensed entities at a reduced profit to the Company.
 
CONFLICTS OF INTEREST WITH MIDWAY
 
     Certain of WMS' officers and directors are also officers, directors and
stockholders of Midway, and may be subject to various conflicts of interest
including, among others, the performance by the two companies under their
existing agreements as well as the negotiation of any agreements required to be
entered into in the future between these two parties. Additionally, WMS may be
subject to various conflicts of interest arising from the relationship among it
and Midway and their respective affiliates.
 
     Mr. Neil D. Nicastro, the President, Chief Executive Officer, Chief
Operating Officer and a Director of WMS is also the Chairman of the Board,
President, Chief Executive Officer and Chief Operating Officer of Midway. Mr.
Harold H. Bach, Jr., Mr. Kenneth J. Fedesna and Mr. Orrin J. Edidin, officers
and full-time
 
                                       22
<PAGE>   24
 
employees of WMS and various of its affiliates, are also officers of Midway. Mr.
Bach and Mr. Fedesna are also Directors of Midway. Each of these key employees
will devote such time to the business and affairs of Midway as the Board of
Directors deems appropriate. However, each such person has other duties and
responsibilities with Midway that may conflict with time which might otherwise
be devoted to his duties with WMS.
 
ITEM 2. PROPERTIES.
 
     The following table and the footnotes which follow set forth the Company's
principal properties, principal use, approximate floor space and the annual
rental and lease expiration date, where leased by the Company, at June 30, 1997.
 
                                   PROPERTIES
 
<TABLE>
<CAPTION>
                                                              APPROXIMATE
                                          PRINCIPAL             SQUARE        ANNUAL RENT       LEASE EXP.
           LOCATION                          USE                 FEET             ($)            DATE(1)
           --------                       ---------           -----------     -----------       ----------
<S>                               <C>                         <C>           <C>               <C>
 
HEADQUARTERS
3401 N. California Ave.........   Principal Office              129,400          100% Owned               --
Chicago, IL                       & Gaming Mfg.                                 by Williams
PINBALL & NOVELTY
GAMES/VIDEO GAMES
800 S. North Point Rd. ........   Pinball, Novelty &            186,000          100% Owned               --
Waukegan, IL                      Video Games Mfg.                              by Williams
4616 W. 19th St................   Games Mfg.                    105,000       100% Owned by               --
Cicero, IL                                                                  Lenc-Smith Inc.
675 Sycamore Dr................   Video Game Design &            84,501             593,196         07/31/05
Milpitas, CA                      Dev., Sales & Mktg.
2727 W. Roscoe St. ............   Video Game Design &            47,500             136,000         06/30/01
Chicago, IL                       Dev.
2820 Merrell Rd................   Video Warehouse                28,234              84,702         07/31/99
Dallas, TX
10110 Mesa Rim Rd..............   Video Game Design &            27,512             250,644         06/01/02
San Diego, CA                     Dev.
1949 Swanson Ct................   Warehouse                      14,400              82,080         03/31/98
Gurnee, IL
1800 S. Business 45............   Video Game Accounting           6,000              38,400   month-to-month
Corsicana, TX                     & Operations Office
2400 S. Business 45............   Video Office/Warehouse          5,000              30,000         05/01/98
Corsicana, TX
GAMING EQUIPMENT
13820 West Business............   Gaming Warehouse               54,107             221,838         07/31/00
Center Drive
Green Oaks, IL
6590 S. Bermuda Rd.............   Gaming Warehouse               30,000               5,000   month-to-month
Las Vegas, NV
2704 W. Roscoe St. ............   Gaming Office & R&D            28,500          100% Owned               --
Chicago, IL                                                                     by Williams
4170 W. Harmon Ave.............   Gaming Office & Warehouse      26,809             135,120         01/31/99
Las Vegas, NV
350 Commerce Dr................   Gaming Office & Warehouse      16,500              82,500         09/30/99
Pleasantville, NJ
</TABLE>
 
                                       23
<PAGE>   25
 
<TABLE>
<CAPTION>
                                                                   APPROXIMATE
                                              PRINCIPAL              SQUARE       ANNUAL RENT        LEASE EXP.
             LOCATION                            USE                  FEET            ($)             DATE(1)
-----------------------------------  ----------------------------  -----------  ----------------  ----------------
<S>                                  <C>                           <C>          <C>               <C>
12450 Short Cut Rd. ...............  Gaming Office & Warehouse          5,750             24,000          07/31/02
Biloxi, MS
4750 Longley Ln. ..................  Gaming Office & Warehouse          4,960             34,784          07/31/99
Reno, NV
615 N.W. Business Park Ln..........  Gaming Office & Warehouse          2,000             12,384          04/30/98
Riverside, MO
</TABLE>
 
-------------------------
(1) Under such leases which contain renewal options, additional rentals may be
    payable for taxes, insurance, utilities and maintenance.
 
     Management believes that all of the facilities listed in the foregoing
table are in good repair and are adequate for their respective purposes. The
manufacturing facilities used in the coin-operated Video Games, Pinball &
Novelty Games and Gaming Equipment businesses are suitable and adequate for the
design and production of the Company's products. The Home Games business
operates year-round. Except during the July vacation shutdown, the facilities of
the coin-operated Video Games, Pinball & Novelty Games and Gaming Equipment
businesses are generally operated on a one-shift basis; however, during periods
of increased production, certain portions of the facilities are operated on
multiple shifts. The production levels can be increased or decreased on a
periodic basis to match the level of incoming customer orders.
 
     The Company owns substantially all of the machinery, equipment, tools and
dies, furnishings, goods and fixtures used in its businesses, all of which are
well maintained and satisfactory for the purposes intended.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     The action which was commenced on or about July 25, 1995 by Alliance Gaming
Corp. ("Alliance") in the Delaware Court of Chancery against Bally Gaming
International, Inc. ("BGII"), its directors and the Company (the "Alliance
Action") was dismissed by order dated October 24, 1995, upon the motion of
Alliance, as against all defendants, other than the Company. On March 19, 1997,
the Delaware Court of Chancery summarily dismissed the Alliance Action as
against the Company. Since that date, no further proceedings have occurred in
this action. The Alliance Action alleged that in their preferential treatment of
the Company regarding the Merger Agreement dated as of June 21, 1995, between
the Company and BGII (the "Merger Agreement"), the members of the BGII Board of
Directors, aided and abetted by the Company, had violated their fiduciary duties
of care, loyalty and candor. The complaint sought damages and an order requiring
that BGII hold an annual meeting, requiring the directors to give Alliance a
fair and equal opportunity to acquire BGII, setting aside the Merger Agreement
and its termination fee and enjoining sales of assets (including BGII's German
operations) out of the ordinary course of business and actions impeding the
operation of market forces in an open bidding contest for the acquisition of
BGII. The Company answered the complaint, denied the material allegations
thereof and asserted affirmative defenses. On October 18, 1995, BGII terminated
the Merger Agreement with the Company and entered into a merger agreement with
Alliance.
 
     The action commenced on or about September 6, 1995, by the Company in the
United States District Court, Southern District of New York (the "WMS Action")
was dismissed without prejudice upon stipulation of the parties on November 16,
1995, after BGII's termination of the Merger Agreement and its entry into a
merger agreement with Alliance. The WMS Action which had been transferred to the
United States District Court for the District of Delaware for the purpose of
consolidation sought to enjoin the tender offer of Alliance for BGII common
stock and to prevent continuing and threatened violations by Alliance of the
federal securities laws and other violations.
 
     On October 23, 1995, the Company commenced an action in New York Supreme
Court, New York County against BGII seeking $4,800,000 as a contractual
termination fee, plus interest and attorneys' fees as a result of BGII having
served written notice of termination of the Merger Agreement on October 18, 1995
and on the same day it entered into a merger agreement with Alliance. The
Company asserted that BGII's
 
                                       24
<PAGE>   26
 
termination of the Merger Agreement was pursuant to the specific provisions of
the Merger Agreement which triggered BGII's duty to pay the Company the
$4,800,000 termination fee. Defendant BGII answered the Company's complaint and
asserted two counterclaims both alleging that the Company breached the Merger
Agreement. On March 4, 1997, the New York Supreme Court granted the Company's
motion for summary judgment and dismissed BGII's counterclaims. A judgment in
favor of the Company and against BGII was entered on March 12, 1997. The
judgment was subsequently settled and satisfied by payment of $4.5 million to
the Company by BGII on April 4, 1997.
 
     In May 1994, WMS Gaming Inc. ("WGI"), a wholly-owned subsidiary of the
Company, instituted a declaratory judgment action (the "Model 400 Action")
against International Game Technology ("IGT"), in the United States District
Court for the Northern District of Illinois. The action sought a declaration
that a certain patent issued in 1984 and owned by IGT (the "Telnaes Patent") was
invalid, and that certain reel-type slot machines made by WGI did not infringe
the Telnaes Patent. IGT counterclaimed alleging that the Telnaes Patent was
infringed by WGI's reel-type slot machines. The Telnaes Patent relates to a
particular method of assigning the probability of selecting particular reel stop
positions in a computer-controlled reel-type gaming machine, which increases or
decreases the probabilities of winning by means of the computer's software, not
the mechanical reels themselves.
 
     On September 19, 1996, the trial court rendered a decision in favor of IGT,
finding the Telnaes Patent valid, finding WGI's Model 400 slot machine to
infringe the Telnaes Patent, and enjoining WGI, upon entry of judgment, from
further infringement of the Telnaes Patent. Such injunction was subsequently
entered. On February 28, 1997, after a hearing on IGT's alleged damages, the
Court awarded judgment in favor of IGT and against WGI in the amount of
$32,845,189. Subsequently, the Court granted WGI's motion for a stay of
proceedings to enforce the money judgment pending disposition of WGI's motion
for a new trial and a similar stay pending appeal. On March 14, 1997, WGI filed
a motion seeking a new trial based on newly discovered evidence. A hearing on
the motion and the newly discovered evidence was concluded on September 18, 1997
and the Court has taken the matter under advisement.
 
     On November 26, 1996, IGT commenced an action against WGI in the United
States District Court for the Northern District of Illinois (the "Model 401
Action"). In this action, IGT seeks a judgment declaring that WGI's Model 401
slot machine also infringes the Telnaes Patent. The complaint seeks a
preliminary and permanent injunction and treble damages. On December 18, 1996,
the Court granted IGT's motion for a preliminary injunction and enjoined WGI
from the manufacture, use and sale of the Model 401 slot machine. On April 10,
1997, WGI filed a motion to vacate the previously entered preliminary injunction
based upon the newly discovered evidence, which is the subject of the motion for
a new trial in the Model 400 Action. This motion has been entered and continued,
without hearing, pending a determination of the motion for a new trial in the
Model 400 Action.
 
     In the event that it is ultimately determined in the Model 400 Action and
in the Model 401 Action that such slot machines infringe upon the Telnaes Patent
and if WGI is unable to develop or acquire non-infringing alternative devices or
obtain a license to use the Telnaes Patent, the development of WGI's reel-type
slot machine business is likely to be adversely affected. The Telnaes Patent
does not relate to non-reel spinning machines such as VLTs and video poker
machines.
 
     Other than set forth above, the Company currently and from time to time is
involved in litigation incidental to the conduct of its business. The Company is
not currently a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material adverse effect on the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     Not applicable.
 
                                       25
<PAGE>   27
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     Reference is made to "Market for the Company's Common Stock and Related
Security-Holder Matters" set forth in the 1997 Annual Report, which information
is incorporated by reference herein.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     Reference is made to "Selected Five-Year Financial Data" set forth in the
1997 Annual Report, which information is incorporated by reference herein.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
     Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the 1997 Annual Report, which
information is incorporated by reference herein.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
     Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     Reference is made to the Consolidated Financial Statements and Notes
thereto and Report of Independent Auditors set forth in the 1997 Annual Report,
which information is incorporated by reference herein.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
     Not applicable.
 
                                       26
<PAGE>   28
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
     (a) Identification of Directors. The directors listed in the following
table were elected at the January 1997 Annual Meeting of Stockholders to serve
until the 1998 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualify. All are present directors of the
Company. Mr. George R. Baker, who was also elected as a director of the Company
at the January 1997 Annual Meeting of Stockholders, resigned as a director on
April 14, 1997, prior to which time he became Vice Chairman and a Director of
WHG. Mr. Neil D. Nicastro is the son of Mr. Louis J. Nicastro; otherwise, there
is no family relationship between any of the directors or executive officers of
the Company.
 
                          IDENTIFICATION OF DIRECTORS
 
<TABLE>
<CAPTION>
                                                                                 SHARES OF COMMON
                                                                 DIRECTOR OR     STOCK DEEMED TO    PERCENTAGE OF
                                       POSITION WITH              EXECUTIVE      BE BENEFICIALLY     OUTSTANDING
                                   COMPANY AND PRINCIPAL        OFFICER OF THE        OWNED            COMMON
       DIRECTOR (AGE)            OCCUPATION AS OF 09/05/97      COMPANY SINCE      09/05/97(1)        STOCK(2)
       --------------            -------------------------      --------------   ----------------   -------------
<S>                           <C>                               <C>              <C>                <C>
 
Louis J. Nicastro (69)......  Chairman of the Board of               1974            7,551,886(3)       30.4%
                              Directors of the Company and
                              Chairman of the Board and Chief
                              Executive Officer of WHG
Neil D. Nicastro (40).......  President, Chief Executive             1986            7,986,986(4)       31.7%
                              Officer, Chief Operating Officer
                              and Director of the Company and
                              Chairman of the Board of
                              Directors, President, Chief
                              Executive Officer and Chief
                              Operating Officer of Midway
Kenneth J. Fedesna (47).....  Vice President and General             1993              163,742(5)          *
                              Manager of Williams, Executive
                              Vice President -- Coin-Op Video
                              of Midway and Director of the
                              Company
Norman J. Menell (65).......  Vice Chairman of the Board of          1980               65,171(6)          *
                              Directors of the Company
William C. Bartholomay
  (69)......................  Director of the Company and            1981               81,755(6)          *
                              President of Near North National
                              Group
William E. McKenna (78).....  Director of the Company and            1981               65,549(6)          *
                              General Partner, MCK Investment
                              Company
Harvey Reich (68)...........  Director of the Company and            1983               64,145(6)          *
                              Attorney, Robinson Brog Leinwand
                              Greene Genovese & Gluck, P.C.
Ira S. Sheinfeld (59).......  Director of the Company and            1993               93,173(7)          *
                              Attorney, Squadron, Ellenoff,
                              Plesent & Sheinfeld LLP
</TABLE>
 
-------------------------
 *  Less than 1% of the number of outstanding shares of Common Stock on
September 5, 1997.
 
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
    amended, shares underlying options are deemed to be beneficially owned if
    the holder of the option has the right to acquire beneficial ownership of
    such shares within 60 days. Certain of such options as reported herein also
    required that the Company's Common Stock attain a market price of $21.34 per
    share prior to exercise. The Company's Common Stock has attained the $21.34
    market price and all such shares are now exercisable.
 
(2) For purposes of calculating the percentage of outstanding Common Stock owned
    by each director, shares issuable upon the exercise of options exercisable
    within 60 days have been deemed to be outstanding.
 
                                       27
<PAGE>   29
 
(3) The number of shares reported as beneficially owned includes 6,917,700
    shares owned by Sumner M. Redstone and National Amusements, Inc. for which
    the reporting person has shared voting power but no dispositive power.
    Additionally, the number of shares reported as beneficially owned includes
    634,186 shares for which the reporting person has sole voting and sole
    dispositive power, 629,554 of which may be acquired upon the exercise of
    options. For a discussion concerning the shared voting power with respect to
    the 6,917,700 shares of Common Stock referred to above, see "Voting Proxy
    Agreement" set forth in Item 12.
 
(4) The number of shares reported as beneficially owned includes 6,917,700
    shares owned by Sumner M. Redstone and National Amusements, Inc. for which
    the reporting person has shared voting power but no dispositive power.
    Additionally, the number of shares reported as beneficially owned includes
    1,069,286 shares for which the reporting person has sole voting and sole
    dispositive power, 1,007,286 of which may be acquired pursuant to stock
    options. For a discussion concerning the shared voting power with respect to
    the 6,917,700 shares of Common Stock referred to above, see "Voting Proxy
    Agreement" set forth in Item 12.
 
(5) Includes 163,684 shares of Common Stock which Mr. Fedesna has the right to
    acquire upon the exercise of stock options.
 
(6) Includes 62,955 shares of Common Stock which such person has the right to
    acquire upon the exercise of stock options.
 
(7) Includes 93,173 shares of Common Stock which Mr. Sheinfeld has the right to
    acquire upon the exercise of stock options.
 
     LOUIS J. NICASTRO has been the Chairman of the Board and Chief Executive
Officer of WHG and its predecessors since 1983. Mr. Nicastro has served as
Chairman of the Board of Directors of the Company since its incorporation in
1974. He served as Co-Chief Executive Officer of the Company from 1994 until
June 26, 1996, having served as Chief Executive Officer (1974-1994), President
(1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986). Mr. Nicastro
is also a director of Midway.
 
     NEIL D. NICASTRO, is the President, Chief Executive Officer, Chief
Operating Officer and a Director of the Company. Mr. Nicastro became a director
of the Company in 1986 and was elected President of the Company June 18, 1991,
sole Chief Executive Officer June 26, 1996, Co-Chief Executive Officer August
29, 1994 and Chief Operating Officer September 30, 1990. He served as Treasurer
(1986-1994), Executive Vice President (1988-1991), Senior Vice President
(1987-1988), Vice President (1986-1987) and Director of Stockholder Relations
(1981-1986). Mr. Nicastro is also Chairman of the Board, President, Chief
Executive Officer and Chief Operating Officer of Midway. Mr. Nicastro has held
various other executive positions for Midway since 1988.
 
     KENNETH J. FEDESNA became a director of the Company on August 23, 1993. He
has served as Vice President and General Manager of Williams and Midway,
subsidiaries of the Company, for in excess of five years. On August 30, 1996,
Mr. Fedesna was elected Executive Vice President -- Coin-Op Video of Midway. Mr.
Fedesna is also a director of Midway.
 
     NORMAN J. MENELL became Vice Chairman of the Board of Directors effective
September 30, 1990. He served as President (1988-1990), Chief Operating Officer
(1986-1990) and Executive Vice President (1981-1988) of the Company. Mr. Menell
is also a director of Midway.
 
     WILLIAM C. BARTHOLOMAY is President of Near North National Group, Chicago,
Illinois (insurance brokers) and Chairman of the Board of the Atlanta Braves
(National League Baseball). He has served as Vice Chairman of Turner
Broadcasting System, Inc., a division of Time Warner Inc., since April 1994
having also held that office during the period 1976-1992 and having served as a
director (1976-1994). He also served as Vice Chairman of the Board of Directors
of Frank B. Hall & Co. Inc. (1974-1990). Mr. Bartholomay is also a director of
Midway.
 
     WILLIAM E. MCKENNA has served as a General Partner of MCK Investment
Company, Beverly Hills, California for in excess of five years. He also is a
director of Midway, California Amplifier, Inc., Calprop Corporation, Drexler
Technology Corporation and Safeguard Health Enterprises, Inc.
 
                                       28
<PAGE>   30
 
     HARVEY REICH has been a member of the law firm of Robinson Brog Leinwand
Greene Genovese & Gluck, P.C., New York, New York and its predecessor firms for
in excess of five years. Mr. Reich is also a director of Midway.
 
     IRA S. SHEINFELD became a director of the Company on August 23, 1993. He
has been a member of the law firm of Squadron, Ellenoff, Plesent & Sheinfeld
LLP, New York, New York, for in excess of five years. Mr. Sheinfeld is also a
director of Midway.
 
     (b) Identification of Executive Officers. Unless otherwise indicated below,
the following officers were elected to serve during fiscal 1997 and until the
1998 Annual Meeting of the Board of Directors and until their respective
successors are duly elected and qualify.
 
<TABLE>
<CAPTION>
                NAME                     AGE                            POSITION
                ----                     ---                            --------
<S>                                      <C>    <C>
Neil D. Nicastro.....................    40     President, Chief Executive Officer and Chief Operating
                                                Officer
Harold H. Bach, Jr...................    65     Vice President -- Finance, Treasurer, Chief Financial
                                                and Chief Accounting Officer
Orrin J. Edidin......................    36     Vice President, Secretary and General Counsel
</TABLE>
 
     The current principal occupation or employment of Mr. Neil D. Nicastro
during the last five years is set forth in Item 10(a) above. See also "Item
11. Executive Compensation -- Employment Contracts" with respect to the term of
Mr. Nicastro's employment with the Company.
 
     Mr. Bach served as Secretary of the Company from July 5, 1990 to June 15,
1992. He assumed the positions of Treasurer effective September 13, 1994 and
Vice President-Finance, Chief Financial and Chief Accounting Officer effective
September 30, 1990. Additionally, Mr. Bach has served as Executive Vice
President -- Finance, Chief Financial Officer and a director of Midway since
August 30, 1996. Previously, he served as Senior Vice President -- Finance and
Chief Financial Officer of Midway from September 17, 1990 to August 30, 1996,
and he has served as Treasurer of Midway continuously since December 1, 1994.
Prior to joining the Company, Mr. Bach was a partner in the accounting firms of
Ernst & Young (1989-1990) and Arthur Young & Company (1967-1989).
 
     Mr. Edidin has served as Vice President, Secretary and General Counsel of
the Company since May 30, 1997. Mr. Edidin served as Associate General Counsel
of Fruit of the Loom, Inc. from August 1992 until May 1997. Mr. Edidin has also
served as Vice President, Secretary and General Counsel of Midway since June 30,
1997.
 
                                       29
<PAGE>   31
 
ITEM 11. EXECUTIVE COMPENSATION.
 
     The Summary Compensation Table below sets forth the cash compensation paid
by the Company (or in the case of Mr. Nicastro, for the period from the date of
the Offering, by the Company and Midway) for service in all capacities during
the fiscal years ended June 30, 1997, 1996 and 1995 to each of the Company's
executive officers who served during such periods and whose compensation
exceeded $100,000. Pursuant to the Manufacturing and Services Agreement, after
the Offering the compensation paid by the Company to the executive officers of
the Company (other than Mr. Nicastro) is allocated to Midway based upon
estimates by management of the Company. Management of the Company believes that
such executive officers devoted at least 50% of their time to Midway. Mr. Orrin
J. Edidin, Vice President, Secretary and General Counsel of the Company,
commenced his employment with the Company on May 19, 1997 and, therefore, is not
included in the Summary Compensation Table set forth below.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                          LONG TERM
                                                                        COMPENSATION
                                                                           AWARDS
                                                                        -------------
                                             ANNUAL COMPENSATION         SECURITIES
                                        -----------------------------    UNDERLYING        ALL OTHER
     NAME AND PRINCIPAL POSITION        YEAR   SALARY ($)   BONUS ($)    OPTIONS (#)    COMPENSATION ($)
     ---------------------------        ----   ----------   ---------    -----------    ----------------
<S>                                     <C>    <C>          <C>        <C>               <C>
Neil D. Nicastro......................  1997..  600,000      969,160    1,007,286(1)      54,632(3)
  President, Chief Executive Officer    1996    532,500      267,600        --            35,791(3)
  and Chief Operating Officer           1995    532,500      489,100        --            35,762(3)
Harold H. Bach, Jr. ..................  1997..  300,000      175,000       94,433(1)         --
  Vice President -- Finance,            1996    262,000       67,800        --               --
  Treasurer, Chief Financial Officer    1995    250,000       67,800        --               --
  and Chief Accounting Officer
Barbara M. Norman(4)..................  1997..  168,270       50,000       94,433(1)(2)      --
  Vice President, Secretary and         1996    157,500       27,200        --               --
  General Counsel                       1995    150,000       27,200        --               --
</TABLE>
 
-------------------------
 
(1) The number of options set forth herein reflect an adjustment to options
    previously granted by the Company, which number of options and the exercise
    price thereof were adjusted to reflect the disposition of WHG by reason of
    the Distribution. The number of options set forth herein does not include
    options granted by Midway.
 
(2) These options were issued in exchange for options previously issued to Ms.
    Norman which terminated upon termination of her employment with the Company.
    Ms. Norman currently is Vice President, Secretary and General Counsel of WHG
    and is a consultant to the Company.
 
(3) Amount shown includes for fiscal 1997, 1996 and 1995 life insurance premiums
    of $1,467, $691 and $662, respectively, and $53,165, $35,100 and $35,100
    each for fiscal 1997, 1996 and 1995, respectively, accrual for contractual
    retirement benefits.
 
(4) Ms. Barbara M. Norman served as Vice President, Secretary and General
    Counsel to the Company from June 15, 1992 until May 30, 1997.
 
                                       30
<PAGE>   32
 
     The following table sets forth certain information with respect to options
to purchase Common Stock granted under the Company's 1994 Stock Option Plan to
persons who served as executive officers of the Company during fiscal year 1997.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                                POTENTIAL REALIZABLE
                                                                                                  VALUE AT ASSUMED
                                                                                               ANNUAL RATES OF STOCK
                                                                                               PRICE APPRECIATION FOR
                                            INDIVIDUAL GRANTS                                      OPTION TERM(1)
                             ------------------------------------------------                  ----------------------
                             NUMBER OF
                             SECURITIES    PERCENT OF TOTAL
                             UNDERLYING    OPTIONS GRANTED
                              OPTIONS      TO EMPLOYEES IN     EXERCISE PRICE    EXPIRATION
          NAME               GRANTED(#)     FISCAL YEAR(%)       ($/SHARE)          DATE        5%($)        10%($)
          ----               ----------    ----------------    --------------    ----------     -----        ------
<S>                          <C>           <C>                 <C>               <C>           <C>         <C>
Orrin J. Edidin..........     25,000(2)           7.8              20.25          05/19/07      318,378       806,832
Barbara M. Norman........     94,433(3)          29.3              21.34          09/30/03      752,875     1,733,353
</TABLE>
 
-------------------------
(1) The assumed appreciation rates are set pursuant to the rules and regulations
    promulgated under the Securities Exchange Act of 1934, as amended, and are
    not derived from the historical or projected prices of the Company's Common
    Stock or results of operations or financial conditions and they should not
    be viewed as a prediction of possible prices for the Common Stock in the
    future. Total potential stock price appreciation from May 19, 1997 to May
    19, 2007 for all stockholders based on the price of $20.25 per share of
    Common Stock on May 19, 1997 and a total of 24,217,854 shares of Common
    Stock outstanding would be $308,417,276 and $781,589,583 at assumed rates of
    stock appreciation of 5% and 10%, respectively.
 
(2) These options become exercisable up to 10%, 30%, 60% and 100% of the total
    number of options granted upon the first, second, third and fourth
    anniversaries, respectively, of the date of the grant.
 
(3) These options were granted to Ms. Norman in exchange for options which
    terminated upon termination of her employment with the Company. However, Ms.
    Norman currently is a consultant to the Company.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL-YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                                              NUMBER OF
                                                                              SECURITIES           VALUE OF
                                                                              UNDERLYING         UNEXERCISED
                                                                             UNEXERCISED         IN-THE-MONEY
                                                                              OPTIONS AT          OPTIONS AT
                                              SHARES                          6/30/97(#)        6/30/97($)(1)
                                             ACQUIRED          VALUE        EXERCISABLE(E)      EXERCISABLE(E)
                 NAME                     ON EXERCISE(#)    REALIZED($)    UNEXERCISABLE(U)    UNEXERCISABLE(U)
                 ----                     --------------    -----------    ----------------    ----------------
<S>                                       <C>               <C>            <C>                 <C>
Neil D. Nicastro......................          --              --           1,007,286(E)        6,401,929(E)
Harold H. Bach, Jr....................          --              --              94,433(E)          351,149(E)
Barbara M. Norman(2)..................          --              --              94,433(E)          351,149(E)
Orrin J. Edidin(3)....................          --              --              25,000(U)          120,312(U)
</TABLE>
 
-------------------------
(1) Based on the closing price of Common Stock on the New York Stock Exchange on
    June 30, 1997, which was $25.0625.
 
(2) Ms. Norman served as Vice President, Secretary and General Counsel of the
    Company until May 30, 1997. However, Ms. Norman is a consultant to the
    Company and the options previously issued to her remain outstanding.
 
(3) Mr. Edidin became Vice President, Secretary and General Counsel of the
    Company on May 30, 1997.
 
                                       31
<PAGE>   33
 
COMPENSATION OF DIRECTORS
 
     The Company pays a fee of $40,000 per annum to each director who is not
also an employee of the Company or its subsidiaries. Each such director who
serves as the chairman of any committee of the Board of Directors receives a
further fee of $5,000 per annum for his services in such capacity and each
member of the Company's Audit and Ethics Committee receives an additional fee of
$5,000 per annum.
 
     During the 1997 fiscal year and prior to the Distribution, each
non-employee director of the Company's then 95%-owned subsidiary Posadas de
Puerto Rico (which included Messrs. Bartholomay, Menell and Reich) also received
a fee of $10,000 per annum for services as a director and, for those
non-employee directors who served as a member of the Audit, Ethics and
Compensation Committee of such subsidiary's Board of Directors (which included
Messrs. Bartholomay and Reich), a further fee of $12,500 per annum was paid.
During the 1997 fiscal year and prior to the Distribution, each non-employee
director of the Company's then 62%-owned subsidiary Williams Hospitality Group
Inc. (which included Messrs. Baker, McKenna and Menell) also received an annual
fee of $22,500 per annum for services as a director.
 
     The Company's 1991 and 1993 Stock Option Plans (the "Option Plans") provide
for the issuance of shares of Common Stock of the Company pursuant to stock
options which may be granted to non-employee directors of the Company at not
less than 100% of the fair market value of such shares on the date of grant.
Under the terms of the Option Plans, non-qualified stock options may be granted
to non-employee directors pursuant to the following formula -- upon the date of
adoption of the Plan by the Board of Directors and on each anniversary thereof,
each non-employee director of the Company is entitled to receive a non-qualified
option to purchase, at 100% of the fair market value of the Company's Common
Stock on such date, such shares of the Company's Common Stock as shall be
determined by multiplying (a) in the case of the 1991 Stock Option Plan, 5,036
(adjusted for the Distribution) times the number of years he or she has served
on the Board of Directors (subject to a maximum of 37,773 shares (adjusted for
the Distribution); and (b) in the case of the 1993 Stock Option Plan, 12,591
(adjusted for the Distribution) times the number of years he or she has served
on the Board of Directors or as a consultant or adviser (subject to a maximum of
62,954 shares (adjusted for the Distribution). Upon adoption of the 1991 Stock
Option Plan, the following non-employee directors became entitled to and were
granted non-qualified stock options to purchase 37,773 shares (adjusted for the
Distribution) each of the Company's Common Stock at a purchase price of $7.31 --
Messrs. Baker, Bartholomay, McKenna and Reich. On September 6, 1997, 1996, 1995
and 1994, Mr. Sheinfeld was granted a non-qualified option to purchase 7,555,
15,109, 10,073 and 5036 shares (all adjusted for the Distribution),
respectively, at a price of $26.19, $18.97, $18.57 and $15.19 (all adjusted for
the Distribution) per share, respectively, pursuant to the formula established
in the 1991 Option Plan. Upon adoption of the 1993 Stock Option Plan, the
following non-employee directors became entitled to and were granted
non-qualified stock options to purchase 62,954 shares (adjusted for the
Distribution) each of the Company's Common Stock at a purchase price of $21.34
each -- Messrs. Baker, Bartholomay, McKenna, Menell, Reich and Sheinfeld.
Options granted under the 1993 Stock Option Plan required that the Company's
Common Stock attain a market price of $21.34 (adjusted for the Distribution, and
$35.00 prior to the Distribution) per share prior to exercise. The Company's
Common Stock has attained a market price of $21.34 and, therefore, the Target
Price Options are all exercisable.
 
     Directors also are entitled to participate at the Company's expense in a
medical reimbursement plan which is supplementary to the primary medical
insurance maintained by such individual.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     During the last fiscal year, Mr. William C. Bartholomay served as Chairman
of the Company's Compensation Committee and Mr. William E. McKenna served as the
sole additional member, neither of whom are employees or officers of the Company
or any of its subsidiaries or had any relationship requiring disclosure herein
by the Company.
 
                                       32
<PAGE>   34
 
EMPLOYMENT CONTRACTS
 
     In contemplation of the Offering of common stock of Midway, the Company and
Midway each entered into separate employment agreements (each a "New Agreement"
and collectively, the "New Agreements") with Mr. Neil D. Nicastro effective as
of July 1, 1996. Each of the New Agreements provides that Mr. Nicastro will
receive salaried compensation at the rate of $300,000 per annum, or such greater
amount as may be determined by the Board of Directors of the Company or Midway,
as applicable. Mr. Nicastro's New Agreement with Midway provides for bonus
compensation in an amount equal to two percent of the pre-tax income of Midway
multiplied by the percentage of Midway common stock outstanding which is not
owned by the Company (which is 13.2%). Mr. Nicastro's New Agreement with the
Company also provides for bonus compensation in an amount equal to two percent
of the pre-tax income of the Company. The portion of Mr. Nicastro's bonus from
the Company that is attributable to the pre-tax income of Midway will be charged
to Midway pursuant to the Manufacturing and Services Agreement between the
Company and Midway. The New Agreement with the Company provides for, among other
things, full participation in all benefit plans available to senior executives
and for reimbursement of all medical and dental expenses incurred by Mr.
Nicastro or his spouse and incurred by his children under the age of twenty-one.
Additionally, the Company and Midway will each provide Mr. Nicastro with
$1,000,000 of life insurance coverage in addition to the standard amount
provided to Company employees. Mr. Nicastro's New Agreement with Midway provides
that should the Company fail for any reason to provide the medical, dental and
other employee benefits to be provided to Mr. Nicastro under the terms of his
New Agreement with the Company, Midway will provide such benefits to him at its
expense. Each of the New Agreements provides that Mr. Nicastro may divide his
attention between the business of the Company and the business of Midway as he
shall consider appropriate.
 
     The New Agreements will expire November 4, 2001, subject to automatic
extensions in order that the term of each of the New Agreements shall at no time
be less than three years. Upon retirement or death and for a period of seven
years thereafter, each of the Company and Midway is required to pay to Mr.
Nicastro or his designee, or if no designation is made, to his estate, for a
period equal to the greater of the balance of the remaining term of the
respective New Agreement or seven years, an annual benefit equal to one-half of
the annual base salary being paid to him on such retirement or death, as the
case may be, but in no event less than $150,000 per annum under each New
Agreement. Such benefits are payable under each of the New Agreements
notwithstanding Mr. Nicastro's termination of employment with the Company or
Midway, as the case may be, for any reason.
 
     The New Agreements further provide for full compensation during periods of
illness or incapacity; however, the Company and Midway, as applicable, may give
30 days' notice of termination if such illness or incapacity disables Mr.
Nicastro from performing his duties for a period of more than six months. Such
termination notice becomes effective if full performance is not resumed within
30 days of such notice and maintained for a period of two months thereafter. The
New Agreements may be terminated at the election of Mr. Nicastro upon the
occurrence without his consent or acquiescence of any one or more of the
following events: (i) the placement of Mr. Nicastro in a position of lesser
stature or the assignment to Mr. Nicastro of duties, performance requirements or
working conditions significantly different from or at variance with those
presently in effect under the respective New Agreement; (ii) the treatment of
Mr. Nicastro in a manner which is in derogation of his status as a senior
executive of WMS or Midway, as applicable; (iii) the cessation of service of Mr.
Nicastro as a member of the Board of Directors of WMS or Midway, as applicable;
(iv) the discontinuance or reduction of amounts payable or personal benefits
available to Mr. Nicastro pursuant to the applicable New Agreement; or (v) the
requirement that Mr. Nicastro work outside his agreed upon metropolitan area. In
any such event, and in the event the Company or Midway is deemed to have
wrongfully terminated Mr. Nicastro's New Agreement with WMS or Midway, as
applicable, under the terms thereof, the Company and/or Midway, as applicable,
is obligated (a) to make a lump sum payment to Mr. Nicastro equal in amount to
the sum of the aggregate base salary during the remaining term of his employment
agreement (but in no event less than three times the highest base salary payable
to him during the one-year period prior to such event), the bonus (assuming all
objectives for payment had been met) and the retirement benefit (assuming the
date of termination was his retirement date) otherwise payable under the terms
of the applicable New Agreement and (b) to purchase at the election of Mr.
Nicastro all stock options held by him
 
                                       33
<PAGE>   35
 
with respect to the Company's Common Stock or Midway common stock, as
applicable, at a price equal to the spread between the option price and the fair
market price of such stock as defined in the agreement. The applicable New
Agreement may also be terminated at the election of Mr. Nicastro if individuals
who presently constitute the Board of Directors of WMS or Midway, or successors
approved by such Board members, cease for any reason to constitute at least a
majority of such Board. Upon such an event, the Company or Midway, as
applicable, may be required to purchase the stock options held by Mr. Nicastro
and make payments similar to those described above.
 
RETIREMENT PLANS
 
     Under the Company's noncontributory pension plan for salaried employees of
the Company and its wholly-owned subsidiaries, the amount of monthly benefits
payable upon attainment of normal retirement age (assumed to be 65) are computed
as follows: $50.00 plus $7.50 per year of credited service to a maximum of 30
years' credited service. Under this plan an employee's benefits vest after five
years of service. The estimated annual benefit payable upon retirement to each
officer listed in the Summary Compensation Table who is entitled to such
benefit, assuming continued employment and retirement at age 65, is as follows:
Mr. Neil D. Nicastro $1,500; Mr. Harold H. Bach, Jr. $690; and, for all
executive officers as a group, $2,190. The plan was amended effective September
1, 1990, to discontinue on that date the acceptance of new participants in the
plan and on December 31, 1991 to discontinue the accrual of future benefits.
 
TREASURY SHARE BONUS PLAN
 
     On April 19, 1993, the Board of Directors adopted a Treasury Share Bonus
Plan for key employees (the "Bonus Plan"). The shares of Common Stock allocated
to the Bonus Plan consist as of the close of the 1997 fiscal year of 52,312
shares of the Company's Common Stock. Awards are made at no direct cost to the
employees selected by management for awards and vest on dates selected in the
discretion of management. Unvested portions of awards are forfeited upon the
termination of employment by award recipients for any reason other than death,
in which event, shares representing the remaining portion of any award are to be
issued to the executor or administrator of the employee's estate. During the
1997 fiscal year, no shares were awarded under the Bonus Plan.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
VOTING PROXY AGREEMENT
 
     In order for the Company to be permitted to manufacture and sell slot
machines in Nevada, the Company and its Gaming Subsidiaries and Mr. Louis J.
Nicastro and Mr. Neil D. Nicastro were required to be registered, licensed or
found suitable and have been registered, licensed or found suitable by the
Nevada Board and the Nevada Commission, as applicable, as a Registered
Corporation, as registered holding companies, for licensure as a manufacturer
and distributor of gaming devices and as directors, officers and stockholders of
such entities, as applicable. Under applicable Nevada law and administrative
procedure, as a greater than 10% stockholder of the Company, Mr. Sumner M.
Redstone ("SMR") was required to apply and has an application pending with the
Nevada Gaming Authorities for a finding of suitability as a stockholder of the
Company. Pending completion of the processing of SMR's application, SMR and
National Amusements, Inc. ("NAI") have voluntarily granted to Mr. Louis J.
Nicastro and, if he is unable to perform his duties under the Proxy Agreement
(as defined herein), Mr. Neil D. Nicastro, individually, a voting proxy for all
of the shares of Common Stock which they own beneficially or of record.
 
     On September 21, 1995, Mr. Louis J. Nicastro and Mr. Neil D. Nicastro
entered into a Voting Proxy Agreement (the "Proxy Agreement") with the Company,
SMR and NAI, pursuant to which Mr. Louis J. Nicastro and, if he is unable to
perform his duties under the Proxy Agreement, Mr. Neil D. Nicastro have been
appointed, individually, as proxy holder with full power of substitution during
and for the term of the voting proxy, to vote all shares of the Company's Common
Stock as the proxy of SMR and NAI at any annual, special or adjourned meeting of
the stockholders of the Company, including the right to execute consents,
certificates or other documents relating to the Company that the law of the
State of Delaware may
 
                                       34
<PAGE>   36
 
permit or require on any and all matters which may be presented to the
stockholders of the Company. The term of the Proxy Agreement is for 10 years
commencing August 25, 1995, unless sooner terminated upon 30 days' written
notice. The Proxy Agreement will be deemed terminated as to any subject matter
that will be presented for approval, consent or ratification to the stockholders
of the Company if the Company fails to give SMR and NAI 45 days' notice of such
subject matter. The Proxy Agreement will also terminate if SMR and NAI are found
suitable as stockholders of the Company by the Nevada Gaming Authorities or are
no longer subject to the provisions of Nevada gaming laws applicable to holders
of more than 10% of the Company's Common Stock. The Proxy Agreement is not
applicable to any shares of the Company's Common Stock sold or otherwise
disposed of by SMR or NAI to any person who is not an affiliate of SMR or NAI.
SMR and NAI have agreed to give notice of any sale or disposition to the
Chairman of the Nevada Board within 10 days after such sale or disposition. The
Proxy Agreement was entered into to assure that the passive investment position
of SMR and NAI relative to the Company will not change without prior
notification to the Nevada Gaming Authorities.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information as of September 5, 1997
(except as otherwise footnoted) with respect to persons known to be the
beneficial owner of more than five percent of the Company's Common Stock, each
Executive Officer of the Company who is not also a Director of the Company, and
Directors and Executive Officers of the Company as a group. Security ownership
of the individual Directors of the Company is set forth under the heading
"Identification of Directors" in Item 10(a) above.
 
<TABLE>
<CAPTION>
                                                                                         PERCENTAGE OF
                                                         NUMBER OF SHARES OF COMMON       OUTSTANDING
        NAME AND ADDRESS OF BENEFICIAL OWNER             STOCK BENEFICIALLY OWNED(1)    COMMON STOCK(2)
        ------------------------------------             ---------------------------    ---------------
<S>                                                      <C>                            <C>
Sumner M. Redstone and National Amusements, Inc......             6,917,700(3)               28.6%
  200 Elm Street
  Dedham, MA 02026
FMR Corp.............................................             2,735,350(4)               11.3%
  82 Devonshire St.
  Boston, MA 02109
Neil D. Nicastro.....................................             7,986,986(5)               31.7%
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Louis J. Nicastro....................................             7,551,886(6)               30.4%
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Harold H. Bach, Jr...................................                96,433(7)                   *
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Orrin J. Edidin......................................                     0                      0
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Directors and Executive Officers as a group..........             9,251,140(8)               35.0%(9)
  (ten persons)
</TABLE>
 
-------------------------
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
    amended, shares underlying options are deemed to be beneficially owned if
    the holder of the option has the right to acquire beneficial ownership of
    such shares within 60 days.
 
(2) For purposes of calculating the percentage of outstanding Common Stock,
    shares issuable upon the exercise of options within 60 days have been deemed
    to be outstanding.
 
                                       35
<PAGE>   37
 
(3) The number of shares reported is based upon information contained in
    Amendment No. 20, dated January 7, 1997 to the Schedule 13D filed by Mr.
    Sumner M. Redstone with the Securities and Exchange Commission. Pursuant to
    such Schedule, as amended, Mr. Redstone and National Amusements, Inc., a
    Maryland corporation, reported beneficial ownership of and sole investment
    power with respect to 3,433,800 and 3,483,900 shares, respectively, of the
    Common Stock and shared voting power with respect to such shares pursuant to
    a Proxy Agreement entered into with the Company, and Messrs. Louis J. and
    Neil D. Nicastro (see "Voting Proxy Agreement" above described). Mr.
    Redstone is the beneficial owner of 66 2/3% of the issued and outstanding
    shares of the common stock of National Amusements, Inc.
 
(4) The number of shares reported is based upon information contained in a
    letter dated June 27, 1997 addressed to Shack & Siegel, P.C., counsel to the
    Company, from FMR Corp. Pursuant to such letter, FMR Corp. reported that
    Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
    Corp. and an investment adviser registered under Section 203 of the
    Investment Advisers Act of 1940, as amended, is the beneficial owner of
    2,735,350 shares or 11.3% of the Common Stock as a result of acting as
    investment adviser to various investment companies registered under Section
    8 of the Investment Company Act of 1940. FMR Corp. reported it has sole
    power to dispose of or direct the disposition of all such shares and sole
    power to vote 7,000 of such shares.
 
(5) The number of shares reported as beneficially owned includes 6,917,700
    shares of Common Stock owned by Sumner M. Redstone and National Amusements,
    Inc. for which the reporting person has shared voting power but no
    dispositive power. Additionally, the number of shares reported as
    beneficially owned includes 1,069,286 shares for which the reporting person
    has sole voting and sole dispositive power, 1,007,286 of which may be
    acquired upon the exercise of stock options. For a discussion concerning the
    shared voting power with respect to the 6,917,700 shares of Common Stock
    referred to above, see "Voting Proxy Agreement" above.
 
(6) The number of shares reported as beneficially owned includes 6,917,700
    shares owned by Sumner M. Redstone and National Amusements, Inc. for which
    the reporting person has shared voting power but no dispositive power.
    Additionally, the number of shares reported as beneficially owned includes
    634,186 shares for which the reporting person has sole voting and sole
    dispositive power, 629,554 of which may be acquired upon the exercise of
    stock options. For a discussion concerning the shared voting power with
    respect to the 6,917,700 shares of Common Stock referred to above, see
    "Voting Proxy Agreement" above.
 
(7) Includes 94,433 shares of Common Stock which Mr. Harold H. Bach, Jr. has the
    right to acquire upon the exercise of stock options.
 
(8) Includes 2,239,950 shares of Common Stock which directors and executive
    officers have the right to acquire upon the exercise of stock options.
    Additionally, includes 6,917,700 shares of Common Stock owned by Sumner M.
    Redstone and National Amusements, Inc. with respect to which Mr. Louis J.
    Nicastro and Mr. Neil D. Nicastro both have shared voting power but no
    dispositive power. For a discussion concerning the shared voting power with
    respect to the 6,917,700 shares of Common Stock referred to above, see
    "Voting Proxy Agreement" above.
 
(9) For purposes of this calculation, the 6,917,700 shares of Common Stock owned
    by Sumner M. Redstone and National Amusements, Inc. with respect to which
    Mr. Louis J. Nicastro and Mr. Neil D. Nicastro have shared voting power but
    no dispositive power have only been counted once. For a discussion
    concerning the shared voting power with respect to the 6,917,700 shares of
    Common Stock referred to above, see "Voting Proxy Agreement" above.
 
                                       36
<PAGE>   38
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
RELATIONSHIP WITH MIDWAY
 
     Prior to the Offering, Midway was a wholly-owned subsidiary of WMS. As a
result of the Offering, WMS' beneficial ownership of Midway common stock was
reduced from 100.0% to 86.8%. A majority of Midway's directors are directors
and/or officers of WMS. Additionally, several of the executive officers of
Midway are officers and/or directors of WMS. See "Item 10 -- Directors and
Executive Officers of the Registrant."
 
     In contemplation of the Offering, Midway and WMS entered into the following
agreements:
 
     Manufacturing and Services Agreement. Midway and WMS entered into the
Manufacturing and Services Agreement with respect to various aspects of their
future relationship. The Manufacturing and Services Agreement became effective
as of July 1, 1996 and will continue in effect unless terminated (a) by either
party for any reason upon 180 days' notice or (b) in the event of a material
default, immediately at the election of the non-defaulting party. Midway also
has the right, upon 180 days' notice, to terminate the manufacturing and related
services provided by WMS while retaining WMS' other services. The Manufacturing
and Services Agreement provides, among other things, that WMS will provide
Midway with management, legal and administrative services and certain services
for its coin-operated video games including, without limitation, (i)
manufacturing; (ii) engineering support; (iii) sales and marketing; (iv)
warranty and field services; and (v) creative services. The aforementioned
services are provided to Midway upon terms which Midway believes are fair and
reasonable. The parties have agreed that with respect to matters not
specifically covered in the Manufacturing and Services Agreement, or if changes
in business circumstances should cause the method of handling matters
specifically covered to be unfair to either party, such matters will be referred
to a negotiating committee consisting of two designees of each party.
 
     All of Midway's coin-operated video games are manufactured and assembled by
WMS at its facilities in Cicero and Waukegan, Illinois. Materials used in the
manufacture of coin-operated video games are purchased by Midway at its expense.
Certain other manufacturing costs are allocated based upon units produced for
Midway and the other amusement games businesses of WMS. All labor costs
associated with the manufacturing of coin-operated video games are charged to
Midway at actual cost to WMS. Certain management, legal and administrative
expenses and sales and marketing expenses are allocated based upon the revenues
of and/or units produced for Midway and the other amusement games businesses of
WMS or other methods appropriate for the allocation of the particular expense.
 
     For so long as the Manufacturing and Services Agreement remains in effect
and for a period of five years thereafter, (i) WMS is precluded from engaging,
directly or indirectly, in the business of designing, developing, manufacturing,
marketing or distributing coin-operated video games or home video games (except
for its activities on behalf of Midway) and (ii) Midway is precluded from
engaging, directly or indirectly, in the business of designing, developing,
manufacturing, marketing or distributing coin-operated pinball games, novelty
games, video lottery terminals or gaming machines such as slot machines.
 
     Tax Sharing Agreement. Midway has been a member of the consolidated group
of corporations of which WMS was the common parent for federal income tax
purposes (the "WMS Group") since 1988. Therefore, Midway is jointly and
severally liable for any federal tax liability incurred by the WMS Group. Midway
and WMS entered into a Tax Sharing Agreement (the "Tax Sharing Agreement")
whereby WMS and Midway have agreed upon a method for: (i) determining the amount
which Midway must pay to WMS in respect of federal income taxes; (ii)
compensating any member of the WMS Group for use of its net operating losses,
tax credits and other tax benefits in arriving at the WMS Group tax liability as
determined under the federal consolidated return regulations; and (iii)
providing for the receipt of any refund arising from a carryback of net
operating losses or tax credits from subsequent taxable years and for payments
upon subsequent adjustments. The amount Midway is required to pay to WMS in
respect of federal income taxes is determined as if Midway was filing a separate
tax return. If any two or more members of the WMS Group are required to elect,
or WMS elects to cause two or more members of the WMS Group to file combined or
consolidated income tax returns under state or local income tax law, the
financial consequences of such filings among such members
 
                                       37
<PAGE>   39
 
shall be determined in a manner as similar as practicable to those provided for
under the Tax Sharing Agreement for federal taxes. The Tax Sharing Agreement is
not binding on the Internal Revenue Service (the "IRS") or upon state, local or
foreign taxing authorities. The effectiveness of the Tax Sharing Agreement is
therefore dependent on each member of the WMS Group having the ability to pay
its relative share of taxes. Because the IRS or other taxing authorities can be
expected to seek payment from WMS prior to seeking payment from the individual
group members, it is likely that Midway would seek to enforce any rights it may
have against WMS for sharing at a time when WMS was unable to pay its
proportionate share of taxes.
 
     Registration Rights Agreement. Prior to the consummation of the Offering,
Midway entered into a registration rights agreement (the "Registration Rights
Agreement") with WMS, pursuant to which Midway has agreed, upon the request of
WMS, to file up to two registration statements under the Securities Act of 1933,
as amended, in order to permit WMS to offer and sell shares of Common Stock that
WMS or its affiliates may beneficially own. Midway will pay all registration
fees and expenses in connection with any requested registration, except that WMS
will pay any underwriting discounts or commissions relating to shares owned by
it and included in any such registration. Midway will not be required to comply
with any request for registration unless the request involves at least 5% of the
total number of the then outstanding shares of Common Stock. The Registration
Rights Agreement also provides WMS the right to include its Common Stock
holdings in certain registration statements covering offerings by Midway and
Midway will pay all fees and expenses of such offerings other than underwriting
discounts or commissions as they relate to WMS' shares. Midway will indemnify
WMS and its officers, directors and controlling persons against certain
liabilities in respect of any registrations or other offerings covered by the
Registration Rights Agreement. WMS will indemnify Midway against any liability
arising as a result of information provided by WMS and included in any offering
document covered by the Registration Rights Agreement. Midway has the right to
request WMS to delay any exercise by WMS of its rights to require registration
and other actions for a period of up to 60 days under certain circumstances. WMS
has further agreed that it will not include any Common Stock in any registration
statement of Midway which, in the judgment of the underwriters for such
offering, would adversely affect such offering by Midway. The rights of WMS
under the Registration Rights Agreement are transferable to an assignee of WMS
at its option.
 
     Patent License Agreement. Midway and WMS entered into a patent license
agreement pursuant to which Midway and WMS each licensed to the other, on a
perpetual, royalty-free basis, certain patents used in the development and
manufacture of both coin-operated video games and video lottery terminals and
other gaming machines.
 
RELATIONSHIP WITH WHG
 
     For the purpose of governing certain of the ongoing relationships between
WHG and WMS and to provide mechanisms for an orderly transition after the
Distribution, WHG and WMS entered into a Plan of Reorganization and Distribution
Agreement (the "Distribution Agreement") and a tax sharing agreement, as amended
(the "WHG Tax Sharing Agreement").
 
     Distribution Agreement. The Distribution Agreement provides for, among
other things: (i) the Distribution; (ii) cross-indemnification between WHG and
WMS with respect to the respective businesses of WHG and WMS; and (iii) certain
other arrangements for the furnishing of certain financial, legal and corporate
secretary functions for a transitional period following the Distribution.
 
     Subject to certain exceptions, the Distribution Agreement provides for
cross-indemnities designed to allocate, effective as of the date of the
Distribution, financial responsibility for the liabilities arising out of or in
connection with the business of WHG and its subsidiaries, and financial
responsibility for the liabilities arising out of or in connection with WMS and
its subsidiaries remaining businesses.
 
     The Distribution Agreement provides for WHG to indemnify WMS in respect of
certain limited guarantees provided by WMS in respect of the El Conquistador
Partnership L.P., and for WMS to provide, following the date of the
Distribution, certain financial, legal and corporate services to WHG on a
transitional basis. With respect to any services provided by WMS to WHG, WHG
will reimburse WMS for the estimated cost of such services based upon an hourly
rate for employees furnishing the services calculated using the
 
                                       38
<PAGE>   40
 
individual's base salary. WMS anticipates that costs associated with the
aforementioned services will not exceed $200,000.
 
     WMS has a registered trademark of the name "Williams" for video game
machines, coin-operated video games, video game cartridges and disks, computer
video game software and coin-operated pinball machines. The Distribution
Agreement provides that following the Distribution, WHG and its subsidiaries,
particularly Williams Hospitality Group Inc. ("WHGI"), will continue to be able
to use the "Williams" name in the ownership and management of hotels and casinos
but will not use the "Williams" name as a corporate name, except WHGI, and will
not use the "Williams" name outside its business of owning and managing hotels
and casinos. WMS has agreed not to use the "Williams" name in the future in
connection with the ownership and management of hotels and casinos.
 
     The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses in connection with
the Distribution will be borne by WMS.
 
     WHG Tax Sharing Agreement. WHG and WMS have entered into the WHG Tax
Sharing Agreement that defines the parties' rights and obligations with respect
to deficiencies and refunds of federal, state, Puerto Rico and other income or
franchise taxes relating to WHG's business of tax years prior to the
Distribution and with respect to certain tax attributes of WHG after the
Distribution. In general, with respect to periods ending on or before the last
day of the year in which the Distribution occurred, WMS is responsible for: (i)
filing both consolidated federal tax returns for the WMS affiliated group and
combined or consolidated state tax returns for any group that includes a member
of the WMS affiliated group, including in each case WHG and its subsidiaries for
the relevant periods of time that such companies were members of the applicable
group; and (ii) paying state taxes relating to such returns (including any
subsequent adjustments resulting from the redetermination of such tax
liabilities by the applicable taxing authorities). WHG will reimburse WMS for a
defined portion of such taxes relating to WHG's business. WHG is responsible for
filing returns and paying taxes related to WHG's business for subsequent
periods. WHG and WMS have agreed to cooperate with each other and to share
information in preparing such tax returns and in dealing with other tax matters.
 
OTHER RELATED TRANSACTIONS
 
     Mr. Ira S. Sheinfeld, a Director of the Company, is a member of the law
firm of Squadron, Ellenoff, Plesent & Sheinfeld LLP which the Company has
retained to provide tax services during the last fiscal year and proposes to
retain for such services during the current fiscal year.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
     (a)(1) Financial Statements of the Company. All financial statements of the
Company required to be disclosed in this Item 14(a)(1) appear in the Financial
Statements in the 1997 Annual Report. Such Financial Statements are incorporated
by reference herein. See "Index to Financial Information" on page F-1.
 
        (2) Financial Statement Schedule of the Company. See "Index to Financial
Information" on page F-1.
 
        (3) Exhibits.
 
<TABLE>
            <C>          <S>
              *2(a)      Plan of Reorganization and Distribution Agreement dated as
                         of March 20, 1997 among the Company, Williams Hotel
                         Corporation and WHG, incorporated by reference to Exhibit
                         2.1 to the Company's Report on Form 8-K filed May 5, 1997
                         (the "1997 Form 8-K")
</TABLE>
 
                                       39
<PAGE>   41
<TABLE>
<S><C>
              *3(a)      Amended and Restated Certificate of Incorporation of the
                         Company dated February 17, 1987; Certificate of Amendment
                         dated January 28, 1993; and Certificate of Correction dated
                         May 4, 1994, incorporated by reference to Exhibit 3(a) to
                         the Company's Annual Report on Form 10-K for the year ended
                         June 30, 1994 (the "1994 10-K").
              *3(b)      By-Laws of the Company, as amended and restated through June
                         26, 1996, incorporated by reference to Exhibit 3(b) to the
                         Company's Annual Report on Form 10K for the year ended June
                         30, 1996.
              *4(a)      Specimen of Common Stock certificate, incorporated by
                         reference to Exhibit 4(a) to the 1994 10-K.
              *4(b)      Specimen 5 3/4% Convertible Subordinated Debenture Due 2002,
                         incorporated by reference to Exhibit 4(b) to the 1994 10-K.
              *4(c)      Form of Indenture dated as of December 1, 1992 between the
                         Company and United States Trust Company of New York, as
                         Trustee, incorporated by reference to Exhibit 4(c) to the
                         1994 10-K.
            **10(a)      Third Amended and Restated Employment Agreement dated as of
                         July 1, 1996 between the Company and Neil D. Nicastro.
             *10(b)      Second Amendment and Restatement of the Company's Pension
                         Plan for Salaried Employees adopted June 24, 1986 and
                         Amendment Nos. 1 to 5 thereof, incorporated by reference to
                         Exhibit 10(c) to the 1994 10-K.
             *10(c)      Second Amended and Restated Williams Electronics Games, Inc.
                         Group Annuity Plan for Hourly Employees (effective as of
                         January 1, 1987), incorporated by reference to Exhibit 10(f)
                         to Company's Quarterly Report on Form 10-Q for the quarter
                         ended March 31, 1988.
             *10(d)      1982 Employee Stock Option Plan, as amended, incorporated by
                         reference to Exhibit 10(e) to the 1994 10-K.
             *10(e)      1991 Stock Option Plan, as amended, incorporated by
                         reference to Exhibit 10(f) to the 1994 10-K.
             *10(f)      1993 Stock Option Plan, incorporated by reference to Exhibit
                         10(g) to the 1994 10-K.
             *10(g)      1994 Stock Option Plan, incorporated by reference to
                         Appendix A to the Company's Definitive Proxy Statement dated
                         December 12, 1994.
             *10(h)      Form of Indemnity Agreement authorized to be entered into
                         between the Company and each officer and director approved
                         by the Board of Directors, incorporated by reference to
                         Exhibit 10(k) to the 1994 10-K.
             *10(i)      WMS Industries Inc. 401(k) Retirement Savings Plan for
                         Non-Union Employees adopted January 1, 1992, incorporated by
                         reference to Exhibit 10(cc) to the Form 10-K for the fiscal
                         year ended June 30, 1992 (the "1992 10-K").
             *10(j)      Williams Innovative Technologies, Inc. 401(k) Retirement
                         Savings Plan (Union Employees) adopted January 1, 1992,
                         incorporated by reference to Exhibit 10(dd) to the 1992
                         10-K.
             *10(k)      WMS Industries Inc. Treasury Share Bonus Plan adopted April
                         19, 1993, incorporated by reference to Exhibit 10(ee) to the
                         Annual Report on Form 10-K for the fiscal year ended June
                         30, 1993.
 

</TABLE>
                                       40
<PAGE>   42
<TABLE>
<S><C>
             *10(l)      Asset Purchase Agreement dated April 4, 1994 among
                         Tradewest, Inc., Tradewest International, Inc., Williams
                         Entertainment Inc., Leland P. Cook, Byron C. Cook and John
                         R. Rowe and the Company and Asset Purchase Agreement dated
                         April 4, 1994 among the Leland Corporation, Williams
                         Entertainment Inc., Leland P. Cook, Byron C. Cook and John
                         R. Rowe and the Company, incorporated by reference to
                         Exhibits 2(a) and 2(b), respectively, to Company's Report on
                         Form 8-K filed May 7, 1994 and Amendment No. 1 thereto filed
                         July 14, 1994.
             *10(m)      Voting Proxy Agreement dated September 21, 1995 among Louis
                         J. Nicastro, Neil D. Nicastro, the Company, Sumner M.
                         Redstone and National Amusements, Inc., incorporated by
                         reference to Exhibit 10(u) to Company's Annual Report on
                         Form 10-K for the fiscal year ended June 30, 1995.
             *10(n)      Manufacturing and Services Agreement dated as of July 1,
                         1996 between the Company and Midway, incorporated by
                         reference to Exhibit 10.1 to the Midway Registration
                         Statement on Form S-1, File No. 333-11919, filed on
                         September 13, 1996 (the "Midway S-1").
             *10(o)      Tax Sharing Agreement dated as of July 1, 1996 among the
                         Company, Midway, Midway Home Entertainment Inc., Midway
                         Interactive Inc., Atari Games and Tengen, Inc., incorporated
                         by reference to Exhibit 10.2 to the Midway S-1.
             *10(p)      Registration Rights Agreement dated as of July 1, 1996
                         between the Company and Midway, incorporated by reference to
                         Exhibit 10.3 to the Midway S-1.
             *10(q)      Patent License Agreement dated as of July 1, 1996 between
                         Williams and Midway, incorporated by reference to Exhibit
                         10.4 to the Midway S-1.
             *10(r)      Tax Sharing Agreement, dated as of March 20, 1997, between
                         the Company, Williams Hotel Corporation, WHG, ESJ Hotel
                         Corporation, WMS Property Inc. and WHG El Con Corp., as
                         amended April 15, 1997, incorporated by reference to Exhibit
                         10.1 to the 1997 Form 8-K.
            **11         Computation of Net Income Per Share.
            **13         1997 Annual Report to Stockholders.
            **21         Subsidiaries of the Company.
            **23         Consent of Ernst & Young LLP.
            **27         Financial Data Schedule (filed with EDGAR version only).

</TABLE>
 
-------------------------
 * Incorporated by reference
 
** Filed herewith
 
     (b) Reports on Form 8-K.
 
     A Report on Form 8-K was filed by the Company on May 5, 1997, reporting the
disposition of WHG as a result of the Distribution.
 
                                       41
<PAGE>   43
 
                                   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
26th day of September, 1997.
 
                                          WMS INDUSTRIES INC.
 
                                          By:     /s/ NEIL D. NICASTRO
                                            ------------------------------------
                                                      Neil D. Nicastro
                                               President and 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 in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                    TITLE                          DATE
                  ---------                                    -----                          ----
<C>                                              <S>                                   <C>
 
            /s/ NEIL D. NICASTRO                 President, Chief Executive            September 26, 1997
---------------------------------------------    Officer, Chief Operating Officer
              Neil D. Nicastro                   and Director (Principal Executive
                                                 Officer)
 
           /s/ HAROLD H. BACH, JR.               Vice President -- Finance and         September 26, 1997
---------------------------------------------    Treasurer (Principal Financial and
             Harold H. Bach, Jr.                 Principal Accounting Officer)
 
            /s/ LOUIS J. NICASTRO                Chairman of the Board of Directors    September 26, 1997
---------------------------------------------
              Louis J. Nicastro
 
            /s/ NORMAN J. MENELL                 Vice Chairman of the Board of         September 26, 1997
---------------------------------------------    Directors
              Norman J. Menell
 
         /s/ WILLIAM C. BARTHOLOMAY              Director                              September 26, 1997
---------------------------------------------
           William C. Bartholomay
 
           /s/ KENNETH J. FEDESNA                Director                              September 26, 1997
---------------------------------------------
             Kenneth J. Fedesna
 
           /s/ WILLIAM E. MCKENNA                Director                              September 26, 1997
---------------------------------------------
             William E. McKenna
 
              /s/ HARVEY REICH                   Director                              September 26, 1997
---------------------------------------------
                Harvey Reich
 
            /s/ IRA S. SHEINFELD                 Director                              September 26, 1997
---------------------------------------------
              Ira S. Sheinfeld
</TABLE>
 
                                       42
<PAGE>   44
 
                              WMS INDUSTRIES INC.
                         INDEX TO FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                              PAGE NO.
                                                              --------
<S>                                                           <C>
 
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of independent auditors..............................    F-2
Consolidated balance sheets at June 30, 1997 and June 30,
  1996......................................................      *
Consolidated statements of income for the years ended June
  30, 1997, 1996 and 1995...................................      *
Consolidated statements of changes in stockholders' equity
  for the years ended June 30, 1997, 1996 and 1995..........      *
Consolidated statements of cash flows for the years ended
  June 30, 1997, 1996 and 1995..............................      *
Notes to consolidated financial statements..................      *
Financial statements schedule II -- Valuation and qualifying
  accounts for the years ended June 30, 1997, 1996 and
  1995......................................................    F-3
</TABLE>
 
-------------------------
* Incorporated by reference to the 1997 Annual Report filed as Exhibit 13 to
this Form 10-K.
 
     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
<PAGE>   45
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Stockholders and Board of Directors
WMS Industries Inc.
 
     We have audited the consolidated financial statements of WMS Industries
Inc. and subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K
of WMS Industries Inc. for the year ended June 30, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
The financial statements and related schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and related schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. 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 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with 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 19, 1997
 
                                       F-2
<PAGE>   46
 
                                                                     SCHEDULE II
 
                              WMS INDUSTRIES INC.
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                       COLUMN C
         COLUMN A                COLUMN B              ADDITIONS             COLUMN D       COLUMN E
---------------------------    ------------    -------------------------    -----------    -----------
                                BALANCE AT     CHARGED TO    CHARGED TO     DEDUCTIONS-    BALANCE AT
                               BEGINNING OF    COSTS AND        OTHER         AMOUNTS        END OF
        DESCRIPTION               PERIOD        EXPENSES      ACCOUNTS      WRITTEN OFF      PERIOD
        -----------            ------------    ----------    ----------     -----------    ----------
<S>                            <C>             <C>           <C>            <C>            <C>
Allowance for receivables:
  1997.....................     $   831,000    $5,285,000    $        --       $677,000    $ 5,439,000
  1996.....................     $   437,000    $  432,000    $        --       $ 38,000    $   831,000
  1995.....................     $   500,000    $   75,000    $        --       $138,000    $   437,000
Unrealized holding loss on
  noncurrent marketable
  equity securities:
  1997.....................     $ 8,321,000    $       --    $ 4,437,000       $    --     $12,758,000(1)
  1996.....................     $ 4,571,000    $       --    $ 3,750,000       $    --     $ 8,321,000(1)
  1995.....................     $12,258,000    $       --    $(7,687,000)      $    --     $ 4,571,000(1)
</TABLE>
 
-------------------------
(1) Included as a direct reduction of stockholders' equity.
 
                                       F-3
<PAGE>   47
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
EXHIBIT                                                                      NUMBERED
  NO.                              DESCRIPTION                                PAGES
-------                            -----------                             ------------
<C>        <S>                                                             <C>
 
  *2(a)    Plan of Reorganization and Distribution Agreement dated as
           of March 20, 1997 among the Company, Williams Hotel
           Corporation and WHG, incorporated by reference to Exhibit
           2.1 to the Company's Report on Form 8-K filed May 5, 1997
           (the "1997 Form 8-K")
  *3(a)    Amended and Restated Certificate of Incorporation of the
           Company dated February 17, 1987; Certificate of Amendment
           dated January 28, 1993; and Certificate of Correction dated
           May 4, 1994, incorporated by reference to Exhibit 3(a) to
           the Company's Annual Report on Form 10-K for the year ended
           June 30, 1994 (the "1994 10-K").
  *3(b)    By-Laws of the Company, as amended and restated through June
           26, 1996, incorporated by reference to Exhibit 3(b) to the
           Company's Annual Report on Form 10-K for the year ended June
           30, 1996.
  *4(a)    Specimen of Common Stock certificate, incorporated by
           reference to Exhibit 4(a) to the 1994 10-K.
  *4(b)    Specimen 5 3/4% Convertible Subordinated Debenture Due 2002,
           incorporated by reference to Exhibit 4(b) to the 1994 10-K.
  *4(c)    Form of Indenture dated as of December 1, 1992 between the
           Company and United States Trust Company of New York, as
           Trustee, incorporated by reference to Exhibit 4(c) to the
           1994 10-K.
**10(a)    Third Amended and Restated Employment Agreement dated as of
           July 1, 1996 between the Company and Neil D. Nicastro.
 *10(b)    Second Amendment and Restatement of the Company's Pension
           Plan for Salaried Employees adopted June 24, 1986 and
           Amendment Nos. 1 to 5 thereof, incorporated by reference to
           Exhibit 10(c) to the 1994 10-K.
 *10(c)    Second Amended and Restated Williams Electronics Games, Inc.
           Group Annuity Plan for Hourly Employees (effective as of
           January 1, 1987), incorporated by reference to Exhibit 10(f)
           to Company's Quarterly Report on Form 10-Q for the quarter
           ended March 31, 1988.
 *10(d)    1982 Employee Stock Option Plan, as amended, incorporated by
           reference to Exhibit 10(e) to the 1994 10-K.
 *10(e)    1991 Stock Option Plan, as amended, incorporated by
           reference to Exhibit 10(f) to the 1994 10-K.
 *10(f)    1993 Stock Option Plan, incorporated by reference to Exhibit
           10(g) to the 1994 10-K.
 *10(g)    1994 Stock Option Plan, incorporated by reference to
           Appendix A to the Company's Definitive Proxy Statement dated
           December 12, 1994.
 *10(h)    Form of Indemnity Agreement authorized to be entered into
           between the Company and each officer and director approved
           by the Board of Directors, incorporated by reference to
           Exhibit 10(k) to the 1994 10-K.
 *10(i)    WMS Industries Inc. 401(k) Retirement Savings Plan for
           Non-Union Employees adopted January 1, 1992, incorporated by
           reference to Exhibit 10(cc) to the Form 10-K for the fiscal
           year ended June 30, 1992 (the "1992 10-K").
</TABLE>

 
                                       E-1
<PAGE>   48
<TABLE>
<CAPTION>
                                                                           SEQUENTIALLY
EXHIBIT                                                                      NUMBERED
  NO.                              DESCRIPTION                                PAGES
-------                            -----------                             ------------
<C>        <S>                                                             <C>
 *10(j)    Williams Innovative Technologies, Inc. 401(k) Retirement
           Savings Plan (Union Employees) adopted January 1, 1992,
           incorporated by reference to Exhibit 10(dd) to the 1992
           10-K.
 *10(k)    WMS Industries Inc. Treasury Share Bonus Plan adopted April
           19, 1993, incorporated by reference to Exhibit 10(ee) to the
           Report on Form 10-K for the fiscal year ended June 30, 1993.
 *10(l)    Asset Purchase Agreement dated April 4, 1994 among
           Tradewest, Inc., Tradewest International, Inc., Williams
           Entertainment Inc., Leland P. Cook, Byron C. Cook and John
           R. Rowe and the Company and Asset Purchase Agreement dated
           April 4, 1994 among the Leland Corporation, Williams
           Entertainment Inc., Leland P. Cook, Byron C. Cook and John
           R. Rowe and the Company, incorporated by reference to
           Exhibits 2(a) and 2(b), respectively, to Company's Report on
           Form 8-K Report filed May 7, 1994 and Amendment No. 1
           thereto filed July 14, 1994.
 *10(m)    Voting Proxy Agreement dated September 21, 1995 among Louis
           J. Nicastro, Neil D. Nicastro, the Company, Sumner M.
           Redstone and National Amusements, Inc., incorporated by
           reference to Exhibit 10(u) to Company's Annual Report on
           Form 10-K for the fiscal year ended June 30, 1995.
 *10(n)    Manufacturing and Services Agreement dated as of July 1,
           1996 between the Company and Midway, incorporated by
           reference to Exhibit 10.1 to the Midway Registration
           Statement on Form S-1, File No. 333-11919, filed on
           September 13, 1996 (the "Midway S-1").
 *10(o)    Tax Sharing Agreement dated as of July 1, 1996 among the
           Company, Midway, Midway Home Entertainment Inc., Midway
           Interactive Inc., Atari Games and Tengen, Inc., incorporated
           by reference to Exhibit 10.2 to the Midway S-1.
 *10(p)    Registration Rights Agreement dated as of July 1, 1996
           between the Company and Midway, incorporated by reference to
           Exhibit 10.3 to the Midway S-1.
 *10(q)    Patent License Agreement dated as of July 1, 1996 between
           Williams and Midway, incorporated by reference to Exhibit
           10.4 to the Midway S-1.
 *10(r)    Tax Sharing Agreement, dated as of March 20, 1997, between
           the Company, Williams Hotel Corporation, WHG, ESJ Hotel
           Corporation, WMS Property Inc. and WHG El Con Corp., as
           amended April 15, 1997, incorporated by reference to Exhibit
           10.1 to the 1997 Form 8-K.
   **11    Computation of Net Income Per Share.
   **13    1997 Annual Report to Stockholders.
   **21    Subsidiaries of the Company.
   **23    Consent of Ernst & Young LLP.
   **27    Financial Data Schedule (filed with EDGAR version only).
</TABLE>
 
-------------------------
 * Incorporated by reference
** Filed herewith
 
                                       E-2