<PAGE>   1

                       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, 1999

                         COMMISSION FILE NUMBER 1-8300

                              WMS INDUSTRIES INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                             <C>
                  DELAWARE                                       36-2814522
       (State or other jurisdiction of             (I.R.S. Employer Identification Number)
       incorporation or organization)
3401 NORTH CALIFORNIA AVE., CHICAGO, ILLINOIS                       60618
  (Address of principal executive offices)                       (Zip Code)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 961-1111

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
                                                                NAME OF EACH EXCHANGE
               TITLE OF EACH CLASS                               ON WHICH REGISTERED
               -------------------                              ---------------------
<S>                                                  <C>
           Common Stock, $.50 par value                        New York Stock Exchange
Stock Purchase Rights pursuant to Rights Agreement             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.  [ ]

     The aggregate market value of the 30,300,945 shares of common stock held by
non-affiliates of the registrant on September 1, 1999 was $333,310,395. Solely
for purposes of this calculation, all shares held by directors and executive
officers of the registrant have been excluded. This exclusion should not be
deemed an admission that these individuals are affiliates of the registrant. On
that date, the number of shares of common stock outstanding (excluding 77,312
shares held as treasury shares) was 30,419,200 shares.
<PAGE>   2

     As used in this Annual Report on Form 10-K, the terms "we," "us," "our" and
"WMS" mean WMS Industries Inc., a Delaware corporation, and its subsidiaries,
unless the context indicates a different meaning, and the term "common stock"
means our common stock, $.50 par value per share.

     WMS Gaming(R) is a trademark of our subsidiary WMS Gaming Inc. Our product
names mentioned in this report are trademarks of WMS Gaming Inc., except where
they are licensed. Williams(R), Pinball 2000(TM), DCS Sound System(R),
Dotmation(TM) and Revenge from Mars(TM) are trademarks of our subsidiary
Williams Electronics Games, Inc. Monopoly(R), Chance(R) and Community Chest(R)
are trademarks of Hasbro, Inc. Star Wars(R) is a trademark of Lucasfilm Ltd. The
other trademarks mentioned in this report are the property of their respective
owners.

     This report contains "forward-looking statements," within the meaning of
the federal securities laws, which describe our beliefs concerning future
business conditions and the outlook for WMS based on currently available
information. Wherever possible, we have identified these forward looking
statements by words such as "may," "will," "expect, "anticipate," "believe,"
"estimate," and similar expressions. Our actual results could differ materially
from those contained in the forward-looking statements due to a number of risks
and uncertainties. These risks and uncertainties include the financial strength
of the gaming and amusement games industries, the expansion of legalized gaming
into new markets, the success of planned advertising, marketing and promotional
campaigns, as well as the items set forth under Item 1. Business -- Risk
Factors. We do not intend to update publicly any forward looking statements,
whether as a result of new information, future events or otherwise. Material
containing forward looking statements may be found in the materials set forth
under Item 1. Business, Item 3. Legal Proceedings and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.

                                     PART I

ITEM 1. BUSINESS.

                          DEVELOPMENT OF OUR BUSINESS

     WMS was incorporated in Delaware on November 20, 1974 under the name
Williams Electronics, Inc. and succeeded to the business of designing and
manufacturing pinball games, which had been conducted for almost 30 years by our
predecessors. Our current businesses are reported in the following three
operating segments: gaming; pinball and cabinets; and contract manufacturing. In
our gaming business, we design, manufacture and market video and reel spinning
gaming machines and video lottery terminals. In our pinball and cabinets
business, we design and manufacture coin-operated pinball games and manufacture
cabinets for coin-operated games. In our contract manufacturing business, we
manufacture coin-operated video games.

     We conduct our gaming machine business through our subsidiary WMS Gaming
Inc., which markets its products under the Williams and WMS Gaming trademarks.
We conduct our pinball and cabinets business through our subsidiary Williams
Electronics Games, Inc. ("WEG"), which markets products under the Bally and
Williams trademarks, and through our cabinet manufacturing subsidiary,
Lenc-Smith Inc. We conduct our contract manufacturing business through WEG. Our
fiscal year begins on July 1 and ends on June 30. Financial information for the
years ended June 30, 1999, 1998 and 1997 with respect to our operating segments
appears in Note 15 of the Notes to Consolidated Financial Statements.

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     We have filed a registration statement with the SEC on Form S-3 to offer
3,500,000 shares of our common stock to the public, and we anticipate completing
the offering in September 1999, if market conditions are favorable.

     In April 1998, we distributed to our stockholders all of our stock in our
former subsidiary, Midway Games Inc., a coin-operated and home video game
design, marketing and publishing business. Since this distribution, we
manufacture, under a contract, the coin-operated video games designed and sold
by Midway. The financial position, results of operations and cash flows of our
former video game business are reported as discontinued operations in our
Consolidated Financial Statements included in this report.

     Our principal executive offices are located at 3401 North California
Avenue, Chicago, Illinois 60618, telephone number (773) 961-1111.

                                COMPANY OVERVIEW

     We are a leading designer, manufacturer and marketer of innovative video
and reel spinning gaming machines, video lottery terminals and pinball games.
Our primary focus is the growth of our gaming machine business. We seek to
develop gaming machines that offer greater entertainment value than traditional
slot machines and generate greater revenues for casinos and other gaming machine
operators. Our gaming machines incorporate secondary bonus rounds, advanced
graphics, digital sound and engaging game themes, some of which include popular
songs and recognized trademarks. Our gaming machines are installed in all of the
major gaming jurisdictions in North America and in several foreign
jurisdictions. Our revenues increased 89.2% to $187.3 million in fiscal 1999
from $99.0 million in fiscal 1998.

     In June 1997, we introduced Reel 'Em In, our first single-themed
multi-coin, multi-line video gaming machine that incorporates a secondary bonus
game. Our multi-coin, multi-line gaming machines accept up to 90 coins at a time
and have up to nine distinct pay lines, which gives the players more ways to
win. In addition, secondary bonusing creates a "game-within-a-game" that rewards
players by offering them a chance to advance from the primary game to a
secondary game. The secondary game also gives the players additional payoff
opportunities and allows them to interact with the game by choosing from various
entertaining options in the bonus round. The success of Reel 'Em In led to our
introduction of a series of video gaming machines based on this new-generation
design. This series includes Winning Bid, Top Banana, Filthy Rich, Jackpot
Party, Life of Luxury, Boom! and Instant Winner, each featuring a unique and
entertaining theme. The multi-coin, multi-line and secondary bonus features and
our highly-entertaining themes are designed to attract new players, encourage
repeat play and increase the average wager per play.

     In the fall of 1998, we introduced a series of four Monopoly-themed gaming
machines that were named the "Most Innovative Gaming Product for 1999" at the
American Gaming, Lodging and Leisure Summit. We are the exclusive worldwide
licensee of the widely-recognized Monopoly trademark for use on gaming machines.
Since their introduction, these machines have typically generated average daily
revenue significantly in excess of the average daily revenue of the casinos'
other gaming machines. As a result of their superior earnings, we have been able
to offer our Monopoly-themed gaming machines to casino operators on a revenue
participation or daily lease basis. This allows us to share in the superior
earnings of these gaming machines and to generate a recurring revenue stream for
us. As of August 31, 1999, we had installed a total of 3,034 Monopoly-themed
gaming machines.

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     We are also the world's leading pinball game designer and manufacturer. We
recently developed a new-generation platform for pinball games, Pinball 2000,
that integrates a fully-interactive video monitor with the traditional
playfield. We introduced our first Pinball 2000 game, Revenge From Mars, in
March 1999 and our second Pinball 2000 game, Star Wars: Episode I, in July 1999.
We also manufacture coin-operated video amusement games for Midway.

                               INDUSTRY OVERVIEW

Gaming Machine Industry

     We believe that casino operators are focusing on increasing revenue growth
at their existing casinos. The importance of slot revenue to the casino
operators' profitability has created significant demand for gaming machines that
have the ability to generate superior earnings per machine. As a result, the
pace of innovation in gaming machine design has accelerated, and gaming
equipment manufacturers have increasingly focused on enhancing the overall
entertainment value of gaming machines. We believe that the two most significant
recent developments in gaming machine design have been the development of video
gaming machines that simulate reel spinning slot machines and the introduction
of gaming machines with secondary bonus rounds:

     1. Video gaming machines that simulate a reel spinning slot machine on a
video screen are predominantly multi-coin, multi-line gaming machines that offer
multiple distinct paylines and allow up to 90 coins to be wagered on a single
play. This tends to increase the average wager per play. We believe that
multi-coin, multi-line gaming machines are currently the fastest growing segment
on the casino floor.

     2. Secondary bonusing, or the game-within-a-game concept, allows a player
to advance beyond the primary round into a bonus round if the player obtains a
certain result in the primary round. The bonus round is designed to create
significant player appeal by giving the player various unique interactive
options and a sense of investment in the game. This encourages the player to
continue to play the machine in an effort to achieve the bonus round. In
addition, the bonus round gives designers an opportunity to incorporate
additional entertaining content into the gaming machines.

Over the next few years, we expect significant demand for multi-coin, multi-line
video gaming machines and other gaming machines that offer the player secondary
bonus rounds and other enhanced entertainment features, which we believe will
result in higher revenue per machine for casinos.

     Some of the new-generation gaming machines with secondary bonusing features
and entertaining themes earn significantly more than the older gaming machines
on the casino floors. As a result, gaming machine manufacturers have been able
to lease some of these machines to casino operators for a revenue participation
percentage or, in jurisdictions where this is not permitted, for a fixed daily
lease fee. This allows gaming machine manufacturers to share in the superior
earnings of these games and to generate a recurring revenue stream for
themselves.

     Video lottery terminals ("VLTs") include both video and reel spinning
gaming machines. VLTs are purchased, leased or operated on a
revenue-participation basis to raise revenue for the jurisdictions where they
are placed. Most VLTs are linked to a central computer for accounting and
security purposes and are monitored by the state lotteries or other government
authorities. Unlike gaming machines designed for the casino market, most VLTs
are located in places where casino-type gaming is not the principal attraction,
such as racetracks, bars and restaurants.

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Pinball Industry

     Pinball games are found in amusement arcades, family entertainment centers,
restaurants, bars, bowling alleys, convenience stores and movie theaters,
primarily in Europe and North America. We believe that there are at least
several hundred thousand coin-operated pinball games installed throughout the
world, although no reliable figures are available. The worldwide pinball market
has declined from a high of approximately 100,000 units sold in 1993 to a low in
1998 of only about 15,000 units sold. We believe that this decline was caused by
increased competition from other forms of entertainment, including coin-operated
video games and home entertainment systems, as well as by a lack of design
innovation. In our experience, however, the pinball market has been cyclical,
recovering when a new generation of pinball technology is introduced. The only
manufacturers of pinball games today are WMS, with about a two-thirds market
share, and Sega Pinball.

                               BUSINESS STRATEGY

     Our business strategy is primarily focused on the growth of our gaming
machine business. We intend to increase our market penetration in the major
North American gaming jurisdictions. We also plan to expand distribution to new
gaming jurisdictions and international markets. We seek to increase our market
share and profitability by offering an expanding portfolio of entertaining
gaming machines with higher earning potential. This strategy includes the
following elements:

     - Leverage our strength in developing gaming machines with enhanced
entertainment value: For over half a century, we have been designing successful
amusement games with creative and compelling content and the latest technology.
We believe that this experience allows us to create gaming machines that offer
significantly greater entertainment value than traditional gaming machines. Our
gaming machine development teams combine the talents of about 95 engineers,
designers, artists and musicians. We believe that we are well-positioned to
develop gaming machines that have superior entertainment value and generate
higher revenue for our customers.

     - Maximize the potential of our leasing arrangements and exclusive license
for use of the Monopoly theme on gaming machines:  As the exclusive licensee of
the Monopoly name for use with gaming machines, we have converted a popular
trademark into a successful line of superior-earning gaming machines. The
success of these Monopoly-themed gaming machines has allowed us to lease them to
casino operators, generating a recurring revenue stream for us. We anticipate
introducing additional gaming machines that we expect to offer only on a
recurring revenue basis, including additional Monopoly-themed machines.

     - Focus on the multi-coin, multi-line video gaming machine market:  We
believe that the fastest growing product on the casino floor is the multi-coin,
multi-line video gaming machine. We believe that the growth of this type of
gaming machine will continue because they offer more interactive entertainment
value and because casino managers wish to increase the diversity of the gaming
machines on their slot floors. Our portfolio of multi-coin, multi-line video
gaming machines has established us as a leading supplier of this type of video
gaming machine. We expect to increase the rate at which we introduce these
machines in the future.

     The pinball market has declined significantly in recent years due to the
growth of competition from video and other amusement games. Historically,
however, the pinball market has been cyclical, recovering when a new generation
of pinball technology is introduced. Therefore, we have invested in the new
technologies behind Pinball 2000. Pinball 2000 games integrate a
fully-interactive video monitor with traditional playfield action.

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     Our strategy to maintain our position as the leading designer and
manufacturer of pinball games is to introduce at least two to three new Pinball
2000 games each year in order to offer our distributors and players a continuing
variety of new games with engaging game themes. We introduced our first Pinball
2000 game, Revenge From Mars, in March 1999 and have sold approximately 7,000
Revenge from Mars pinball games, which is the largest number of units of any
pinball game sold since 1994. We introduced Star Wars: Episode I, our second
Pinball 2000 product, in July 1999. We are developing a third Pinball 2000 game
that we intend to introduce in the second half of fiscal 2000. We believe that
Pinball 2000 products are the most advanced and entertaining pinball games
designed to date. We intend to continue to evaluate the market potential of
Pinball 2000 to determine whether this new platform has succeeded in stimulating
a recovery in the pinball market.

                                    PRODUCTS

Gaming

     We have established a fast-growing line of video and reel spinning gaming
machines and VLTs incorporating highly-entertaining themes and innovative gaming
features. Our gaming machines' technological features include dotmatrix
animation ("Dotmation") displays for reel spinning slot machines, touch-screen
video displays for video gaming machines, advanced graphics and our digital
compression DCS Sound System ("DCS") music, voice-overs and sound effects.
Engaging and humorous themes and a high degree of player interactivity are
incorporated into each of our games, particularly in the secondary bonus round.
We believe that by designing gaming machines that are fun and interesting to
play and incorporate the latest gaming technologies, we supply gaming machines
with superior player appeal.

     Our gaming machines integrate a secondary bonus round with the traditional
gaming machine to create a game-within-a-game for more exciting and interactive
play. As players achieve various milestones in the primary round, they move on
to play a secondary round for additional bonuses. The secondary round gives the
player a sense of investment in the game. The player is encouraged to continue
wagering in the hope of entering the bonus round. The player can win in both the
primary round and the secondary round. In our secondary rounds, the player has
various choices to make regarding the bonus features. For example, in some games
the player can select from a variety of tokens or characters that will be used
to obtain or reveal the bonus. Amusing or familiar graphical and musical themes
add to the player appeal of our gaming machines.

     Monopoly-themed gaming machines.  In the fall of 1998, we introduced our
first four Monopoly-themed gaming machines in Las Vegas under an exclusive
worldwide license from Hasbro. These gaming machines have been well-received by
both casinos and players. Our Monopoly-themed gaming machines were named the
"Most Innovative Gaming Product for 1999" at the American Gaming, Lodging and
Leisure Summit in January of 1999. Our game designers used the actual elements
of the Monopoly game to create the four highly interactive and entertaining
machines. These elements include Mr. Monopoly, Chance, Community Chest and the
distinctive game board and tokens, with a big band theme song. To attract
additional player attention, the machines are approximately nine feet tall.
These gaming machines have now been approved for play in every major gaming
jurisdiction in the United States. As of August 31, 1999, we

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had installed 3,034 of these gaming machines. The Monopoly-themed gaming
machines incorporate secondary bonus rounds and the entertaining themes
described below:

     - Once Around -- a multi-coin, multi-line video gaming machine where the
player can build houses and hotels on various Monopoly properties to increase
those properties' bonus round payouts. The player then chooses a token that
travels around the board landing on various properties to collect bonuses.

     - Reel Estate -- a multi-coin, multi-line video gaming machine where the
player picks a token that travels around the Monopoly board. Collecting all the
properties in a color group provides a free spin.

     - Advance to Boardwalk -- a reel spinning slot machine that features up to
six trips around a Monopoly board for bonuses and multipliers.

     - Roll & Win -- a reel spinning slot machine that provides bonus
multipliers by rolling oversized mechanical dice. The player accumulates bonuses
by moving around a mini-Monopoly board.

     Multi-coin, multi-line video gaming machines.  Our new line of multi-coin,
multi-line gaming machines combines advanced graphics, DCS sound effects and
music, secondary bonus rounds and a unique entertaining theme for each game. In
the primary round, the video screen of these gaming machines simulates
traditional reel-spinning slot machines. Depending on the machine, the player
can wager up to either 45 or 90 coins per play. This new line of multi-coin,
multi-line gaming machines includes the following:

     - Winning Bid -- Live auction theme. Features necklaces, vases and antique
lamp reel symbols. Three or more gavel symbols begin the bonus round, which
simulates a live estate auction. The player selects an auction item and a
humorous character to start the bidding. As the characters raise the bids, the
bonuses increase. Introduced in June 1999.

     - Top Banana -- Caribbean party theme. Features beach party reel symbols of
bananas, starfish and tropical fruit. Three or more gorilla, hippo or turtle
symbols start the bonus round. In the bonus round, the player has the option to
stack a number of different silly monkeys. The player decides when to jump for
bananas held by a gorilla in a palm tree. If the monkeys get the bananas, the
player wins additional bonuses. There is also a random multiplier bonus
possibility. Introduced in April 1999.

     - Instant Winner -- Instant lottery ticket theme. Features 3-D lottery
balls and cash reel symbols. Three "Scratch & Win" symbols begin the bonus
round. The player selects from six WMS-themed scratch-off tickets and scratches
off areas of the tickets to reveal the bonus award. There is also a bonus
"sweepstakes" check if the player obtains three or more sweepstakes symbols on
adjacent reels. Introduced in February 1999.

     - Jackpot Party -- 70's party theme. Features music from KC & the Sunshine
Band and The Village People. Three or more party horn symbols start the bonus
round and the disco music. The player chooses party gifts for hidden bonuses
until he or she hits a party gift with one of the "party pooper" characters,
which ends the bonus round. Introduced in October 1998.

     - Life of Luxury -- Material extravagance theme with numerous betting
options. Features images of sports cars, diamonds and yachts as reel symbols.
Obtain three or more gold coin symbols on adjacent reels to receive ten free
bonus spins while jazz music plays. Introduced in September 1998.

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     - Boom! -- Fourth of July backyard barbecue theme. Features hotdogs,
hamburgers and fireworks. Three or more identical barbecue food symbols start
the bonus round. In the bonus round, the player selects a rocket that launches
into the sky and explodes to reveal a bonus. Introduced in April 1998.

     - Filthy Rich -- Barnyard theme. Features cows, chickens and pig reel
symbols. Three or more identical barnyard symbols begin the bonus round. The
player then sees a pigpen on the screen and may choose which mud-caked pig to
wash off, revealing the amusing bonus pig. Introduced in November 1997.

     - Reel 'Em In -- Family fishing theme. Features reel symbols of lures and
fish. Three or more fishing lure symbols on adjacent reels begin the bonus
round. The player then "goes fishing" by choosing a humorous character to hook
the bonus fish. Introduced in July 1997.

     Other video games.  We also offer a selection of other video gaming
machines, including Multi-Pay Plus, which premiered our new-generation graphics
and sound design. Multi-Pay Plus offers the player a varied menu of engaging
themed games on a single machine, including video poker, keno, blackjack and
video slot games.

     Reel spinning slot machines.  Our new line of reel spinning slot machines
includes Perfect Match, Jackpot Limbo, Jackpot Party, X-Factor, Jackpot Stampede
Deluxe, Pharaoh's Fortune, Big Bang Piggy Bankin' and Winning Streak. Each of
these gaming machines features engaging and entertaining themes. With secondary
bonusing through the use of our Dotmation 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. These reel spinning slot
machines also feature DCS sound and exciting glass designs and visuals.

     At the September 1999 World Gaming Congress Exposition, we plan to
introduce five new video gaming machines and five new reel spinning slot
machines.

     Video Lottery Terminals.  Our VLTs include both video and reel spinning
gaming machines. They feature advanced graphics and DCS sound effects and music
and incorporate many of the same features as our other gaming machines. We offer
a variety of multi-game and single-themed VLTs. Our VLTs may be operated as
stand-alone units or may interface with central monitoring computers operated by
governmental agencies. Our VLTs are located in places where casino-type gaming
is not the principal attraction, such as racetracks, bars and restaurants.

Pinball and cabinets

     Pinball:  We are the world's leading designer and manufacturer of pinball
games. For over 50 years, WMS and our predecessors have been making innovative
and highly-entertaining pinball games, which are presently sold under the
Williams and Bally trademarks. We believe that we obtained our leading market
share as a result of the action and humor that we design into our games, as well
as our innovations in design and engineering. These innovations include
CD-quality music and sound effects, multi-level playing fields, multi-ball
releases and a high level of mechanical reliability.

     Our new generation of pinball games, Pinball 2000, integrates a
fully-interactive video monitor with traditional playfield action. Virtual
images are projected onto the playfield, allowing the ball to interact with
video targets as well as traditional 3-D targets. For example, the ball appears
to destroy Martians or space ships, and the video display illustrates the
destruction in dramatic fashion. Images on the video screen move and are
transformed during the play depending on the movement of the balls. The new
stereo sound system places speakers closer to the player for maximum enjoyment
at

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any volume level. There may be multiple balls in play at one time, and the ball
may move onto more than one level on the playfield for added excitement.

     We believe that Pinball 2000 products are the most advanced and
entertaining pinball games designed to date. We also believe that our modular
Pinball 2000 machines offer the best mechanical reliability and serviceability
in the industry for the following reasons:

     - This new platform is modular, allowing the games to be changed by
replacing the software, artwork and removable playfield. Conversion kits are
expected generally to be installable in less than half an hour on site and are
expected to be sold for about $2,400, compared to about $4,000 for a new game.
Therefore, the machine owners will be able to upgrade to a new game easily and
cost effectively.

     - The location owner can service the machine without calling the operator.
For example, the owner can clean the playfield and clear ball jams. This is
because, for the first time, the playfield is accessible by the location owner.
This feature significantly decreases down time and service costs.

     - The advanced design of this platform uses fewer moving parts, and
therefore these machines require less frequent service than older models.

     We introduced our first Pinball 2000 game, Revenge From Mars, in March
1999, our second Pinball 2000 product, Star Wars: Episode I, in July 1999 and
anticipate introducing our third Pinball 2000 game in the second half of fiscal
2000.

     Cabinets:  In addition to manufacturing wooden pinball cabinets, we also
make and sell wooden cabinets and other wooden products to Midway, under a
Cabinet Supply Agreement, and to other third parties from time to time,
primarily for coin-operated video games. See "Item 13. Certain Relationships and
Related Transactions."

Contract manufacturing

     We manufacture coin-operated video games for Midway under a manufacturing
agreement. See "Item 13. Certain Relationships and Related Transactions."

                    DESIGN, RESEARCH AND PRODUCT DEVELOPMENT

     In designing our gaming machines and pinball games, our designers,
engineers and artists build upon the more than 50 years of experience that WMS
and our predecessors have in designing and developing fun, humorous and exciting
games. We are continually developing new games in order to broaden our product
line, introduce new technologies and enhance player appeal. Our gaming machines
are usually designed by our internal gaming design teams or in some cases by
independent designers under contract to us. Gaming machines must be approved and
sometimes tested by certain regulatory authorities before being marketed in a
particular gaming jurisdiction. Our pinball games are designed exclusively by
our internal design teams. The game design teams operate in a studio environment
that encourages creativity, productivity and cooperation among design teams. As
of August 31, we employed about 95 persons in our gaming machine design,
research and development teams and 50 persons in our pinball design, research
and development teams. During the fiscal years ended June 30, 1999, 1998, and
1997, we spent approximately $14.1 million, $12.9 million and $12.9 million,
respectively, on design, research and product development.

     While we primarily seek to develop original proprietary games, certain of
our gaming machines and pinball games are based on popular intellectual
properties licensed from third parties, such as Hasbro and Lucasfilm. Typically,
WMS is obligated to make certain minimum guaranteed royalty

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payments over the term of the license and to advance payment against those
guarantees. In addition, each license typically provides that the licensor
retains the right to exploit the licensed property for all other purposes,
including the right to license the property for use with other products.

                              SALES AND MARKETING

Gaming

     We are authorized to sell our gaming machines directly to casinos in over
90 North American jurisdictions and in several other gaming jurisdictions.
Generally, we sell our gaming machines directly in order to maximize customer
service and to enhance profitability. Our gaming machines are often installed in
casinos on a trial basis, and only after a successful trial period are the
machines purchased by the customers. In addition, we have begun to place our
gaming machines under revenue-participation or daily rental leases. We sell or
lease VLTs, depending on the jurisdictions where they are placed.

     We sell and lease our gaming machines through 15 salespeople in offices in
several United States locations and a sales/service consultant in Canada. Our
salespeople earn a salary and commissions based on sales volume. Our gaming
machines are marketed through trade shows, promotional videotapes, our website
and advertising in trade journals.

Pinball

     Pinball games are marketed through approximately 50 independent
distributors worldwide, coordinated by Midway's coin-operated machine sales
team, under our sales agreement with Midway. See "Item 13. Certain Relationships
and Related Transactions." Distributors sell these products to operators of
amusement arcades, family entertainment centers, restaurants, bars, bowling
alleys, convenience stores and movie theaters. Distributors generally are
assigned designated exclusive territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. Pinball
games are marketed through trade shows, promotional videotapes, our website and
advertising in trade publications. In addition, we operate an Internet locator
on our website through which players can find our pinball games, wherever they
are located, around the world.

Distributors/Customers

     No one customer accounts for greater than 10% of our revenues. However, our
largest pinball distributor and its affiliates account for approximately 28% of
our pinball and cabinets revenues. In our opinion, the loss of a single
distributor or customer would not have a material adverse effect on our
business. If we were to lose a distributor, we believe that we could make
arrangements with alternate distributors for the distribution of our products.

Export Sales

     Export sales of our products, primarily of pinball games to Western Europe,
were approximately $34.6 million, or 18.5% of total revenues, for fiscal 1999,
compared with $24.4 million, or 24.6% of total revenues, for fiscal 1998 and
$33.7 million, or 44.0% of total revenues, for fiscal 1997. Substantially all
foreign sales are made in United States dollars under letters of credit.

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                                  COMPETITION

Gaming

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

     - continually develop new products with player appeal;

     - offer machines that consistently out-perform other gaming machines;

     - identify and obtain rights to commercially marketable intellectual
properties; and

     - adapt our products for use with new technologies.

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

     - price or lease terms;

     - mechanical reliability;

     - brand recognition; and

     - marketing support.

     Our competitors vary in size from very small companies with limited
resources to large corporations with greater financial, marketing and product
development resources than ours. In the video and reel spinning gaming machine
market, we compete with market leader International Game Technology ("IGT"), as
well as Alliance Gaming, Sigma Game, Casino Data Systems, Silicon Gaming,
Atronic Casino Technology, Anchor Gaming and Aristocrat Leisure Systems. In the
VLT market, we compete primarily with IGT, G-Tech Holdings, Anchor and Spielo
Gaming International.

Pinball and cabinets

     We are the leading manufacturer of pinball games. Our only competitor in
this market is Sega Pinball. We also compete with coin-operated video games and
other amusement games for space in bars, arcades and other traditional pinball
locations and with home entertainment systems. Competition is based on player
appeal, including the use of popular intellectual properties, engaging themes
and technological innovation. In addition, successful competition in our pinball
market is also based upon:

     - price;

     - mechanical reliability;

     - brand recognition; and

     - access to distribution channels.

     We also currently supply Midway with cabinets for their coin-operated video
games. Midway is not required to purchase cabinets under the agreement and may
seek competing third-party bids at any time.

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Contract Manufacturing

     During the term of the Manufacturing Agreement, WMS will not experience
competition for the manufacture of Midway's coin-operated video games; however,
the Manufacturing Agreement may be terminated on six months' notice. No
assurance can be given that Midway will continue to employ our services.

                                 MANUFACTURING

Gaming

     We manufacture our gaming machines in our facility in Chicago, Illinois. We
believe that this facility is adequate for our current and planned gaming
production needs. Manufacturing is generally based on purchase orders from
customers. Gaming machines are generally warranted for a period of 90 days. The
raw materials used in manufacturing our gaming machines include various metals,
plastics, wood and glass obtained from numerous sources. In addition, numerous
component parts, including electronic subassemblies and video monitors, are
purchased from suppliers. We believe that our sources of supply of component
parts and raw materials are adequate and that alternative sources of materials
are available.

     WMS has a long cycle from purchase of inventory to collection of cash on
the sale of 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.

Pinball and cabinets

     We manufacture pinball games in our facility in Waukegan, Illinois. We
believe that this facility is adequate for our current and planned pinball
production needs. Production of pinball games is generally based on advance
purchase orders from distributors. Most pinball games are warranted for a period
of 60 to 90 days. We manufacture cabinets for our pinball games and Midway's
coin-operated video games in our facility in Cicero, Illinois based, in the case
of Midway's cabinets, on purchase orders, subject to our acceptance, according
to Midway designs and specifications. We believe that this facility is adequate
for our current and planned cabinet production needs.

Contract manufacturing

     We manufacture Midway's coin-operated video games in our facility in
Waukegan, Illinois. We believe that this facility is adequate for our current
and planned contract manufacturing needs. Manufacturing for Midway is based on
purchase orders and uses Midway designs and specifications.

Backlog

     We believe that 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 six-month production period of a pinball game and
during the on-going production period for certain models of gaming machines,
which can extend over a period of years.

              PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION

     Each gaming machine and pinball game title may embody a number of
separately-protected intellectual property rights, including trademarks,
copyrights and patents. See "Item 3. Legal

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<PAGE>   13

Proceedings" with respect to certain patent litigation between us and IGT
involving certain older models of reel-type slot machines. We generally seek to
obtain trademark protection for the names or symbols under which we market our
products and to obtain copyright and patent protection of our proprietary
software and other game innovations. We also rely on trade secrets and
proprietary know-how. See "Risk Factors -- We rely on our intellectual property
and proprietary rights." In addition, some of our most popular gaming machines
and pinball games are based on trademarks and other intellectual properties
licensed from third parties. See "Risk Factors -- Our growth may depend in part
upon our ability to obtain licenses to use intellectual properties and
licensors' approvals of new products on a timely basis."

                             GOVERNMENT REGULATION

GENERAL

     The manufacture and distribution of gaming equipment is subject to
extensive federal, state, tribal, local and foreign regulation. Although the
laws and regulations of the various jurisdictions in which we operate 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
machines as well as for the officers, directors, major stockholders and key
personnel of those companies.

     We have obtained the required licenses to manufacture and sell our products
to customers in the following domestic gaming jurisdictions: Arizona, Colorado,
Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North
Dakota, Oregon, Puerto Rico, Rhode Island, South Dakota, West Virginia,
Wisconsin, Ak-Chin Indian Community, Bad River Band of Lake Superior Tribe of
Chippewa Indians, Bay Mills Indian Community, Boise Forte Band of Minnesota
Chippewa (Nett Lake), Chitimacha Tribe of Louisiana, Coushatta Tribe of
Louisiana, Flandreau Santee Sioux Tribe, Fond du Lac Band of Minnesota Chippewa,
Fort McDowell Mohave-Apache Indian Community, Grand Portage Band of Minnesota
Chippewa, Grand Traverse Band of Ottawa & Chippewa Indians, Hannahville Indian
Community, Ho-Chunk Nation, Iowa Tribe of Kansas & Nebraska, Keweenaw Bay Indian
Community, Kickapoo Tribe of Indians in Kansas, Lac du Flambeau Band of Lake
Superior Chippewa, Lac Vieux Desert Band of Lake Superior Chippewa Indians,
Leech Lake Band of Minnesota Chippewa, Lower Sioux Indian Community,
Mashantucket Pequot Tribe, Menominee Indian Tribe of Wisconsin, Mille Lacs Band
of Minnesota Chippewa, Mississippi Band of Choctaw Indians, Mohegan Indian
Tribe, Omaha Tribe of Nebraska, Oneida Tribe of Indians of Wisconsin, Pascua
Yaqui Tribe, Prairie Band of Potawatomi Indians of Kansas, Prairie Island
Community of the Minnesota Mdewakanton Sioux, Pueblo of Acoma, Pueblo of Isleta,
Pueblo of Sandia, Pueblo of San Juan, Pueblo of Santa Ana, Pueblo of Tesuque,
Red Cliff Band of Lake Superior Chippewa, Red Lake Band of Chippewa Indians, Sac
& Fox Nation of Missouri in Kansas and Nebraska, Sac & Fox Tribe of Mississippi
in Iowa, Saginaw Chippewa Indian Tribe, Sault Ste. Marie Tribe of Chippewa,
Shakopee Mdewakanton Sioux Community, Sisseton-Wahpeton Sioux Tribe, Southern
Ute Indian Tribe, Spirit Lake Sioux Tribe, St. Croix Chippewa Indians of
Wisconsin, Standing Rock Sioux Tribe, Tunica-Biloxi Tribe of Louisiana, Turtle
Mountain Band of Chippewa Indians, Upper Sioux Indian Community, Ute Mountain
Ute Tribe, White Earth Band of Minnesota Chippewa, White Mountain Apache Tribe,
Winnebago Tribe of Nebraska, Yankton Sioux Tribe of South Dakota, Yavapai-Apache
Indian Community. We have also obtained the required licenses to manufacture and
sell our products in

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the following additional gaming jurisdictions: the Canadian provinces of
Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia,
Ontario, Quebec and Saskatchewan; Victoria and New South Wales in Australia; the
Bahamas; and Greece.

     To date, we have never been denied any necessary governmental
registrations, licenses, permits, findings of suitability or approvals. In
addition, we believe that all registrations, licenses, permits, findings of
suitability or approvals currently required have been applied for or obtained.
We cannot assure you that the required licenses, permits, approvals or findings
of suitability will be given or renewed in the future.

NEVADA REGULATIONS

     The manufacture, sale and distribution of gaming machines for use or play
in Nevada or for distribution outside of Nevada and the operation of slot
machine routes are subject to the Nevada Gaming Control Act and the regulations
promulgated under that act (collectively, the "Nevada Act"). The license as an
operator of a slot machine route permits a licensee to place slot machines and
gaming devices on the premises of other licensees on a participation basis. Our
manufacturing, distributing and slot route operations are subject to licensing
and regulatory control of the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada State Gaming Control Board (the "Nevada Board") and,
with respect to the operation of slot machine routes, various other county and
city regulatory authorities (all of these authorities 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: (1) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (2) the establishment and maintenance of responsible accounting
practices and procedures; (3) 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; (4) the prevention of cheating and
fraudulent practices; (5) providing a source of state and local revenues through
taxation and licensing fees; and (6) the strict regulation of all persons,
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture and distribution of gaming
devices and associated equipment. A change in these laws, regulations and
procedures could have an adverse effect on our future Nevada operations.

     Certain of our subsidiaries that manufacture and distribute gaming devices
or operate a slot machine route, or which hold stock of a subsidiary which does
so (a "Gaming Subsidiary"), 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. We are registered by the Nevada Commission as a
publicly traded corporation ("Registered Corporation"), and so we are 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. We have obtained from the Nevada Gaming Authorities the various
registrations, findings of suitability, approvals, permits and licenses
(collectively, "Licenses") required to engage in slot route operations, and the
manufacture, sale and distribution of gaming devices for use or play in Nevada
or for distribution outside of Nevada. We cannot assure you that these Licenses
will not be revoked, suspended, limited or conditioned.

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<PAGE>   15

     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 sales, 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 machine meets strict
technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment (as defined in the Nevada Act) must be
administratively approved by the Chairman of the Nevada Board before it is
distributed for use in Nevada.

     The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us in order to determine
whether that individual is suitable or should be licensed as a business
associate of a licensee. Officers, directors and certain key employees of our
Gaming Subsidiaries must file license applications with the Nevada Gaming
Authorities. Our officers, directors and key employees who are actively and
directly involved in activities of our 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. 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
Gaming Authorities have 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 us, the companies involved would have to sever all
relationships with that person. In addition, the Nevada Gaming Authorities may
require us to terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.

     We are required to submit detailed financial and operating reports to the
Nevada Commission. Substantially all material loans, leases, sales of securities
and similar financing transactions by our Gaming Subsidiaries must be reported
to, and approved by, the Nevada Commission.

     If the Nevada Gaming Authorities were to determine that we violated the
Nevada Act, our Licenses could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, we and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada Gaming
Authorities. The limitation, conditioning or suspension of any License or the
appointment of a supervisor could, and the revocation of any License would,
materially adversely affect our future operations in Nevada.

     Any beneficial holder of our voting securities, 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 our voting securities
determined if the Nevada Commission has reason to believe that 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 our voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that

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<PAGE>   16

beneficial owners of more than 10% of our voting securities apply to the Nevada
Commission for a finding of suitability within 30 days after the mailing of the
written notice by the Chairman of the Nevada Board requiring that filing. Under
certain circumstances, an "institutional investor," as defined in the Nevada
Act, which acquires more than 10% but not more than 15% of our voting securities
may apply to the Nevada Commission for a waiver of that finding of suitability
if the 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 our board of directors, any change in our corporate
charter, bylaws, management, policies or operations, or those of any of our
gaming affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding our voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (1) voting on all matters voted
on by stockholders; (2) 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 our management policies or operations; and (3) other
activities that the Nevada Commission may determine to be consistent with
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, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the voting securities of a Registered
Corporation beyond that period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. We are subject to disciplinary
action if, after we receive notice that a person is unsuitable to be a
stockholder or to have any other relationship with us, we: (1) pay that
unsuitable person any dividend or interest upon our voting securities; (2) allow
that person to exercise, directly or indirectly, any voting rights conferred
through securities held by that person; (3) pay remuneration in any form to that
person for services rendered or otherwise; or (4) fail to pursue all lawful
efforts to require the unsuitable person to relinquish voting securities
including, if necessary, the immediate repurchase of the voting securities for
cash at fair market value.

     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 ownership of theses securities
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
that security, then under 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: (1) pays to the unsuitable person any
dividend, interest or any distribution whatsoever; (2) recognizes any voting
right by the unsuitable person in connection with that security; (3) pays the
unsuitable person remuneration in any form; or (4) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.

     We are required to maintain a current stock ledger in the State of Nevada
which may be examined by the Nevada Gaming Authorities at any time. 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

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<PAGE>   17

owner to the Nevada Gaming Authorities. A failure to make this disclosure may be
grounds for finding the record holder unsuitable. We are also required to render
maximum assistance in determining the identity of the beneficial owner. The
Nevada Commission has the power to require that our stock certificates bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed this requirement on us.

     We may not make a public offering of our 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 these purposes.

     Changes in control of WMS 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 Commission and the Nevada Board
in a variety of stringent standards prior to assuming control of the 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: (1) assure the
financial stability of corporate licensees and their affiliates; (2) preserve
the beneficial aspects of conducting business in the corporate form; and (3)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada Commission
before we 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 our 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 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, distributor and
operator of a slot machine route.

     Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with any such person, and who
proposes to 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 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 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 the
licensee knowingly violates any laws of the foreign

                                       16
<PAGE>   18

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.

RECENT NEVADA LEGISLATION

     On May 21, 1999 legislation became effective in the State of Nevada
imposing additional requirements on persons who provide gaming machines to
casino customers on a revenue participation basis. Among other things, the new
law requires these persons to pay their "full proportionate share" of license
fees and taxes imposed on gaming revenues generated by these participation
gaming machines. Although the new law imposes some additional costs upon us, we
do not believe that these costs will be material to our business.

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") under 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, integrity and financial stability.

     We have been 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"). These
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission. Although not identical, the Mississippi Act is similar to
the Nevada Act.

     Our 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. As in Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, us, including, but not limited to, record or beneficial
holders of any of our voting securities and any other person whom the
Mississippi Commission determines exercises a significant influence upon our
management or affairs. We are required to maintain a current stock

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ledger in Mississippi which may be examined by the Mississippi Commission at any
time. Any applicant for a finding of suitability must pay all investigative fees
and costs of the Mississippi Commission in connection with the 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 that 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 the finding of suitability if the
institutional investor holds the voting securities for investment purposes only
and otherwise meets the regulatory requirements of the institutional investor
waiver provisions.

     We may not make a public offering of our securities without the prior
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 these purposes. The
Mississippi Commission has the authority to grant a continuous approval of
securities offerings and has granted this approval to us, subject to an annual
renewal of this approval. All loans by us must be reported to the Mississippi
Commission and certain loans and other stock transactions must be approved in
advance.

     If it were determined that we violated the Mississippi Act, the licenses
that we hold could be limited, conditioned, suspended or revoked, subject to
compliance with statutory and regulatory procedures, which action, if taken,
could materially adversely affect our manufacturing and distribution of gaming
machines.

FEDERAL REGISTRATION

     Any of our subsidiaries that are involved in gaming activities are required
to register annually with the United States Department of Justice, Criminal
Division, in connection with the sale, distribution or operation of Gaming. The
Federal Gambling Devices Act of 1962 makes it unlawful, in general, for a person
to manufacture, deliver or receive gaming machines and components across state
lines or to operate gaming machines unless that person has first registered with
the Attorney General of the United States. We are required to register and renew
our registration annually. We have complied with these registration
requirements. In addition, various record keeping and equipment identification
requirements are imposed by this 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 we operate require the licensing of
gaming machines, gaming machine operators and manufacturers. We and our gaming
machines have been properly licensed and approved or have applied for licensure
and approval in all jurisdictions where our operations require licensure and
approval.

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NATIVE AMERICAN GAMING REGULATION

     Numerous Native American tribes have become engaged in or have licensed
gaming activities on Indian lands as a means of generating tribal governmental
revenue. We manufacture and supply gaming equipment for Native American 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 the notice of approval
published in the Federal Register. Tribal-state compacts vary from state to
state. Many require that equipment suppliers meet ongoing registration and
licensing requirements of the state and/or the tribe and some impose background
check requirements on the officers, directors and shareholders of gaming
equipment suppliers. Under IGRA, tribes are required to regulate all commercial
gaming under ordinances approved by the NIGC. These 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 WMS and our gaming subsidiaries do business are subject to
change from time to time. In addition, the license status of WMS and our gaming
subsidiaries with respect to these jurisdictions is subject to change. The
information set forth in this report represents the most current available at
the time of filing.

                                  SEASONALITY

     Sales of gaming machines to casinos are generally strongest in the spring
and slowest in the summer months. In addition, quarterly revenues and net income
may increase when a coin-operated gaming machine or pinball game that achieves
significant player appeal is introduced.

                                   EMPLOYEES

     At August 26, 1999, we employed approximately 1,475 persons. Approximately
715 of those employees were represented by the International Brotherhood of
Electrical Workers (the "IBEW"), and approximately 165 were represented by the
International Union of Electronic, Electrical, Salaried Machine and Furniture
Workers (the "IUE"). The collective bargaining agreements with the IBEW relate
to our Chicago and Waukegan, Illinois manufacturing facilities, respectively,
and expire on June 30, 2000. The collective bargaining agreement with the IUE
relates to our Cicero, Illinois manufacturing facility and expires June 30,
2002. We believe that our relations with our employees are satisfactory.

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<PAGE>   21

                               THE MIDWAY SPINOFF

     On April 6, 1998, we distributed to our stockholders through a dividend all
of the Midway common stock that we owned. Previously, through Midway, we
designed, published and marketed coin-operated and home video games. On the date
of this spinoff, under our stock option plans, the WMS stock options held by our
directors, officers and other employees were adjusted, and adjustment payments
were made to holders of these options. See "Item 11. Executive Compensation."
The financial position, results of operations and cash flows of Midway are
reported as discontinued operations in our Consolidated Financial Statements
included in this report.

     The Midway spinoff was also accompanied by certain executive officer
changes. Prior to the spinoff, in June 1996, Louis J. Nicastro had resigned from
his positions with WMS at the request of our Board of Directors to devote his
full time to the position of Chief Executive Officer of our former subsidiary,
WHG Resorts & Casinos Inc., a Puerto Rico-based hotel, casino and hotel
management business ("WHG"), in contemplation of the 1997 distribution by WMS of
all the common stock of WHG to our stockholders. In January 1998, WHG was merged
with a large resort and casino company. The Board of Directors, in view of Mr.
Nicastro's experience with WMS and in the industry, invited him to return to WMS
as Chief Executive Officer and President, effective on the date of the Midway
spinoff, when our former Chief Executive Officer and President, Neil D.
Nicastro, resigned from WMS in order to devote substantially all of his business
time to Midway. In addition, Kevin L. Verner became our Vice President and Chief
Operating Officer shortly after the Midway spinoff. See "Item 11. Executive
Compensation -- Employment Contracts".

     In November 1997, the Board of Directors adopted a rights plan under the
Rights Agreement dated as of March 5, 1998 between us and The Bank of New York,
as Rights Agent, which became effective on the date of the Midway spinoff. The
Rights Agreement provides that one preferred stock purchase right will attach to
each share of our common stock. The rights will expire at the close of business
on April 6, 2007 unless we previously redeem them for nominal consideration
prior to exercisability. The rights become exercisable after a person or group
announces a tender or exchange offer, which, if consummated, would result in
that person or group beneficially owning 15% or more of our common stock. Each
right, other than rights owned by the person acquiring 15% or more, would then
entitle the holder to purchase a number of shares of our common stock having a
market value of twice the exercise price.

                                  RISK FACTORS

     Some of the risks and uncertainties that may cause our operating results to
vary from anticipated results or that may that adversely affect our operating
results are as follows:

WE HAVE EXPERIENCED LOSSES FROM CONTINUING OPERATIONS.

     We have experienced operating losses (excluding discontinued businesses) in
two of our last three fiscal years due to a variety of factors, including:

     - market acceptance of our products;

     - development costs and promotional expenses relating to the introduction
       of our new generations of gaming machines and pinball games;

     - adverse litigation rulings that prevented us from selling our older reel
       spinning slot machine models; and

     - the decline of the pinball industry and related reorganization costs.

                                       20
<PAGE>   22

Although we had operating income in our most recent fiscal year, we cannot
assure you that we will sustain profitability.

WE DEPEND ON INTRODUCING NEW GAMING MACHINES THAT ACHIEVE AND MAINTAIN MARKET
ACCEPTANCE.

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

OUR GROWTH INCREASINGLY DEPENDS ON RECURRING REVENUE LEASE ARRANGEMENTS, RATHER
THAN ON OUTRIGHT SALES OF GAMING MACHINES.

     In October 1998 we began to enter into recurring revenue arrangements,
which are either participation leases or other short-term lease arrangements
with casinos for our Monopoly-themed machines, rather than selling the machines
to the casino operators. Approximately $16.6 million, or 13.2%, of our gaming
revenues for fiscal 1999 were derived from these leases, and we expect that
lease revenues will constitute an increasing share of our future revenues.
Gaming machines under recurring revenue arrangements are replaced by the casinos
if they do not meet and sustain revenue expectations. Therefore, these machines
are particularly susceptible to pressure from competitors, declining popularity
and changes in economic conditions and are at risk of replacement by the
casinos, ending the recurring revenues from these machines. We cannot assure you
that our gaming machines will continue to meet the casinos' revenue
requirements. In addition, casinos in certain jurisdictions have sought and may
continue to seek legislation prohibiting or restricting recurring revenue
arrangements. We cannot assure you that the various gaming jurisdictions will
continue to permit recurring revenue arrangements.

THE GAMING MACHINE MARKET IS INTENSELY COMPETITIVE, AND SOME OF OUR COMPETITORS
HAVE ADVANTAGES OVER US.

     The gaming machine business is intensely competitive and is characterized
by the rapid development of new technologies and the continuous introduction of
new products. Some of our competitors are large companies with greater
financial, marketing and product development resources than ours. In addition,
new competitors may enter our key markets. Obtaining space and favorable
placement on casino gaming floors is a competitive factor in our industry.
Competitors with a larger installed base of gaming machines than ours have an
advantage in retaining the most space and best placement. These competitors may
also have the advantage of being able to convert their installed machines to
newer models in order to maintain their share of casino floor space.

PATENT INFRINGEMENT CLAIMS COULD LIMIT OR AFFECT OUR ABILITY TO MARKET SOME OF
OUR CURRENT OR NEW GAMING MACHINES.

     Our competitors have been granted patents covering various gaming machine
features. If our products use processes or other subject matter that is claimed
under these existing patents, or if other companies obtain patents claiming
subject matter that we use, those companies may bring

                                       21
<PAGE>   23

infringement actions against us. We might then be forced to discontinue the
affected products or be required to obtain licenses from the company holding the
patent, if it is willing to give us a license, to develop, manufacture or market
our products. We also might then be limited in our ability to market new
products. We are currently involved in two lawsuits in federal court regarding
patent infringement claims concerning products that we no longer manufacture.
See "Item 3. Legal Proceedings."

OUR GROWTH MAY DEPEND IN PART UPON OUR ABILITY TO OBTAIN LICENSES TO USE
INTELLECTUAL PROPERTIES AND LICENSORS' APPROVALS OF NEW PRODUCTS ON A TIMELY
BASIS.

     Some of our most popular gaming machines and pinball games are based on
trademarks and other intellectual properties licensed from third parties. Our
future success may depend upon our ability to obtain licenses for additional
popular intellectual properties. There is competition for these licenses, and we
cannot assure you that we will be successful in acquiring additional
intellectual property rights with significant commercial value on acceptable
terms.

     Our intellectual property licenses generally require that we submit new
products developed under licenses to the licensor for approval prior to release.
This approval is generally discretionary. Rejection or delay in approval of a
product by a licensor could have a material adverse effect on our business,
operating results and financial condition.

WE RELY ON OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.

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

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

OUR GAMING MACHINE BUSINESS IS HEAVILY REGULATED, AND WE DEPEND ON OUR ABILITY
TO OBTAIN AND MAINTAIN REGULATORY APPROVALS.

     The manufacture and distribution of gaming machines are subject to
extensive federal, state, local and foreign regulations and taxes, and the
governments of the various gaming jurisdictions amend these regulations from
time to time. Virtually all of these jurisdictions require licenses, permits,
documentation of qualification, including evidence of financial stability, and
other forms of approval for manufacturers and distributors of gaming machines
and for their officers, directors, major stockholders and key personnel. The
gaming authorities in some jurisdictions may investigate any individual who has
a material relationship with us and any stockholder to determine whether the
individual or stockholder is acceptable to those gaming authorities. Each of our
gaming machines must be approved in each jurisdiction in which it is placed, and
we cannot assure you that a particular game will be approved in any
jurisdiction. Licenses, approvals or findings of suitability

                                       22
<PAGE>   24

may be revoked, suspended or conditioned. The revocation or denial of a license
in a particular jurisdiction could adversely affect our ability to obtain or
maintain licenses in other jurisdictions.

     If we fail to seek or do not receive a necessary registration, license,
approval or finding of suitability, we may be prohibited from selling our gaming
machines for use in the jurisdiction or may be required to sell them through
other licensed entities at a reduced profit to us. Some jurisdictions require
gaming manufacturers to obtain government approval before engaging in some
transactions, such as business combinations. Obtaining licenses and approvals
can be time consuming and costly. We cannot assure you that we will be able to
obtain all necessary registrations, licenses, permits, approvals or findings of
suitability in a timely manner, or at all. Similarly, we cannot assure you that
our current registrations, licenses, approvals or findings of suitability will
not be revoked, suspended or conditioned. See "Government Regulation."

     The National Gambling Impact Study Commission (the "NGIC") was created by
the U.S. Congress in 1996 to conduct a comprehensive legal and factual study of
the social and economic impacts of gaming on federal, state, local and Native
American tribal governments and on communities and social institutions. The NGIC
issued a report to the President, Congress, state governors and tribal leaders
containing its findings and conclusions, together with recommendations for
legislation and administrative actions in June 1999. The NGIC report calls for a
pause in the growth of legalized gambling and encourages state and local
governments to form their own gambling study commissions. Although the NGIC has
no regulatory or enforcement powers, its recommendations could result in the
enactment of new laws and the adoption of new regulations that could adversely
impact the gaming industry in general.

THE PINBALL MARKET HAS CONTRACTED AND MAY NOT GROW AGAIN.

     During fiscal 1997, we completed a downsizing of our pinball design and
manufacturing operations in response to the industry-wide decline in demand for
pinball games over the past few years. Nevertheless, our pinball operations
continued to generate an operating loss in fiscal 1998 and fiscal 1999. Pinball
games face increased competition from video games and other amusement games for
space in their traditional locations, such as arcades and bars, and from home
amusement systems. We cannot assure you that demand in the pinball market will
revive or that our pinball business will return to profitability. In our
experience, it has been essential to introduce new technologies and product
innovations in order to stimulate demand for pinball games. We cannot assure you
that we will be able to develop successful new pinball technologies in the
future. In addition, we may not recover our development costs for a new pinball
game unless it achieves significant market acceptance. We cannot assure you that
our new pinball games will achieve or sustain consumer acceptance.

WE FACE RISKS ASSOCIATED WITH POTENTIAL BUSINESS ACQUISITIONS.

     We may seek to grow through acquiring other companies, intellectual
property or other assets. Our success with this strategy will depend on our
ability to identify and negotiate attractive investments that will complement or
enhance our business. We cannot assure you that we will be able to:

     - properly identify and evaluate acquisition opportunities;

     - control costs and liabilities incurred with the acquisition of the new
       businesses or assets;

     - effectively manage growth of operations; or

                                       23
<PAGE>   25

     - anticipate and evaluate the numerous risks involved in acquiring and
       operating a new business or asset.

     The focus on potential acquisitions could divert our management's resources
from other projects. The acquisition of a costly or unproductive business or
asset could materially and adversely affect our business. We are not currently
in discussions with any acquisition candidate.

WE DEPEND ON OUR KEY PERSONNEL.

     Our success depends to a significant extent upon the performance of senior
management and on our ability to continue to attract, motivate and retain highly
qualified game developers. Competition for highly skilled employees with
technical, management, marketing, sales, product design and development and
other specialized training is intense. We cannot assure you that we will be
successful in attracting and retaining these employees. We may also experience
increased costs in order to attract and retain skilled employees.

OUR CONTRACT MANUFACTURING BUSINESS DEPENDS ON ONE CUSTOMER.

     We manufacture coin-operated video games for Midway, which is currently our
only contract manufacturing customer. Midway may cancel our contract by giving
us six months' notice. Midway would then be free to use one or more of our
competitors to fulfill its manufacturing needs. We earned approximately $1.3
million of operating income from contract manufacturing in fiscal 1999. We
cannot assure you that Midway will continue to employ our services and keep our
agreement in effect. In addition, if Midway were to cancel the contract, we
would continue to incur the fixed costs of maintaining our Waukegan, Illinois
manufacturing facility.

WE MAY HAVE CONFLICTS OF INTEREST WITH MIDWAY.

     Most of our directors are also directors and stockholders of Midway. In
addition, Louis J. Nicastro, our Chairman of the Board, President and Chief
Executive Officer, is also a director of Midway. Neil D. Nicastro, one of our
directors and a consultant to WMS, is also the Chairman of the Board, President,
Chief Executive Officer and Chief Operating Officer of Midway. Neil D. Nicastro
is the son of Louis J. Nicastro. Kenneth J. Fedesna, who heads our pinball
operations, is also an officer and director of Midway. In addition, Harold H.
Bach, Jr., our Chief Financial Officer and Orrin J. Edidin, our General Counsel,
are also officers of Midway. Each of these officers has duties and
responsibilities with Midway that may conflict with time that might otherwise be
devoted to his duties with WMS.

     These officers must also administer the various contracts and arrangements
in effect between Midway and WMS. For instance, these officers must decide
whether to terminate or permit to continue in force various operating agreements
between Midway and WMS that either party may terminate upon six months' notice,
including the manufacturing agreement, the cabinet supply agreement and the
sales agreement. See "Item 13. Certain Relationships and Related Transactions."
In addition, these officers may be called upon to negotiate new agreements to be
entered into in the future between Midway and WMS.

WE MAY EXPERIENCE ADVERSE EFFECTS AS A RESULT OF THE YEAR 2000 COMPUTER PROBLEM.

     Many currently installed software programs and embedded programs in
electronic systems throughout the world will not work properly when processing
dates later than 1999. If we experience any Year 2000 failures, or if any
suppliers or customers experience a Year 2000 problem affecting us, shipments or
orders of our affected products might be delayed. We cannot assure you that we

                                       24
<PAGE>   26

will be free from exposure to legal actions, loss of sales or other unforeseen
costs relating to the Year 2000 problem. For information about our Year 2000
information system readiness, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."

SUMNER REDSTONE OWNS OR CONTROLS OVER 20% OF OUR COMMON STOCK AND MAY DISPOSE OF
IT AT ANY TIME.

     Sumner Redstone beneficially owns 7,180,200 shares, or approximately 23.6%,
of our common stock. Mr. Redstone could sell any or all of these shares at any
time on the open market or otherwise. In addition, although Mr. Redstone has
stated that he has no plans to acquire control of WMS, he may sell his stock to
a person who wishes to acquire control of WMS. We cannot assure you that any
such person will agree with our strategy and business goals described in this
report. The sale by Mr. Redstone of a large number of shares could have an
adverse effect on the market price of our common stock. See "Item 13. Certain
Relationships and Related Transactions."

OUR BOARD OF DIRECTORS COULD USE OUR RIGHTS PLAN AND BLANK CHECK PREFERRED STOCK
TO INHIBIT THE ACQUISITION OF WMS.

     Rights plan.  Under an agreement with The Bank of New York, as rights
agent, each share of our common stock has an accompanying right to purchase
convertible preferred stock that permits each holder to receive shares of our
common stock at half price. The rights become exercisable if any person or
entity that did not, before the plan was adopted, own 15% or more of our common
stock acquires beneficial ownership of 15% or more of our common stock. We can
redeem the rights at $.01 per right, subject to certain conditions, at any time.
The rights expire in 2007. Our board of directors could use this agreement as an
anti-takeover device to discourage, delay or prevent a change in control of WMS.
The existence of this agreement could adversely affect the market price of our
common stock.

     Blank check preferred stock.  Our certificate of incorporation authorizes
the issuance of five million shares of preferred stock with designations, rights
and preferences that may be determined from time to time by the board of
directors. Accordingly, our board has broad power, without stockholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of our common stock. Our board of directors could use preferred stock to
discourage, delay or prevent a change in control. Our board has no current
plans, agreements or commitments to issue any shares of preferred stock. The
existence of the blank check preferred stock, however, could adversely affect
the market price of our common stock.

THE SUBSTANTIAL NUMBER OF SHARES AVAILABLE FOR SALE IN THE FUTURE COULD HAVE AN
ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.

     We have 100,000,000 authorized shares of common stock, of which 30,419,200
shares were issued and outstanding as of August 26, 1999, excluding 77,312
treasury shares. On that date, we also had outstanding options to purchase an
aggregate of approximately 2,261,000 shares of our common stock issuable at an
average exercise price of approximately $5.00 per share. If all of our issued
and outstanding stock options were exercised as of that date, approximately
32,680,000 shares of our common stock would be outstanding. Our board of
directors has broad discretion to issue authorized but unissued shares,
including discretion to issue shares in compensatory and acquisition
transactions. In addition, if we seek financing through the sale of our
securities, our then current stockholders may suffer dilution in their
percentage ownership of our common stock. The future

                                       25
<PAGE>   27

issuance, or even the potential issuance, of shares at a price below the then
current market price may have a depressive effect on the future market price of
our common stock.

OUR STOCK PRICE MAY BE VOLATILE.

     Our stock price has fluctuated between a low of $3.50 and a high of $17.00
in the last 12 months. We may continue to experience volatility in our stock
price.

ITEM 2. PROPERTIES.

     The following table sets forth our principal properties, principal use,
approximate floor space and the annual rental and lease expiration date, where
leased, at August 31, 1999.

<TABLE>
<CAPTION>
                                                                                   LEASE
                                   PRINCIPAL           APPROXIMATE   ANNUAL      EXPIRATION
        LOCATION                      USE              SQUARE FEET   RENT($)      DATE(1)
        --------                   ---------           -----------   -------   --------------
<S>                        <C>                         <C>           <C>       <C>
3401 N. California Ave.    Principal Office              129,400       Owned               --
Chicago, IL                & Gaming Mfg.
313 1/2 Worth Ave., #B-1   Administrative                    665      16,625         03/31/00
Palm Beach, FL             Office
13820 West Business        Gaming Warehouse               54,107     221,838         07/31/00
Center Drive               and Distribution Center
Green Oaks, IL
2704 W. Roscoe St.         Gaming Office/R&D              28,500       Owned               --
Chicago, IL
4170 W. Harmon Ave.        Gaming Office/Warehouse        26,809     135,120         01/31/00
Las Vegas, NV
350 Commerce Dr.           Gaming Office/Warehouse        16,500      82,500         09/30/99
Pleasantville, NJ
3950 N.E. 33rd Terrace     Gaming Office/Warehouse         6,600      38,280         04/31/01
Suites 10 and 11
Kansas City, MO
12450 Short Cut Rd.        Gaming Office/Warehouse         5,750      24,000         07/31/02
Biloxi, MS
6620 Escondido Terrace     Gaming Warehouse               13,200      80,784         04/30/00
Suite F
Las Vegas, NV
912 E. Park Avenue         Gaming Warehouse                6,000      42,000   month-to-month
Libertyville, IL
4750 Longley Ln.           Gaming Office/Warehouse         4,960      34,784         07/31/00
Reno, NV
420 Corporate Cir., Suite  Gaming Office/Warehouse         1,500      18,105         01/15/02
C
Golden, CO
3812-118 Avenue            Gaming Warehouse                  300         N/A   month-to-month
Edmonton, Alberta Canada
800 S. North Point Rd.     Pinball and Contract Mfg.     236,000       Owned               --
Waukegan, IL
4616 W. 19th St.           Cabinet Mfg.                  105,000       Owned               --
Cicero, IL
</TABLE>

                                       26
<PAGE>   28

<TABLE>
<CAPTION>
                                                                                   LEASE
                                   PRINCIPAL           APPROXIMATE   ANNUAL      EXPIRATION
        LOCATION                      USE              SQUARE FEET   RENT($)      DATE(1)
        --------                   ---------           -----------   -------   --------------
<S>                        <C>                         <C>           <C>       <C>
2033 Swanson Ct.           Warehouse                      15,000      14,000         09/30/00
Gurnee, IL
</TABLE>

---------------

(1) Under leases that contain renewal options, additional amounts may be payable
    for taxes, insurance, utilities and maintenance.

     We believe that all of the facilities listed in the foregoing table are in
good repair and are adequate for their respective purposes. Except during the
July vacation shutdown, the manufacturing facilities are generally operated on a
one-shift basis. During periods of increased production, however, 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.

     We own substantially all of the machinery, equipment, tools and dies,
furnishings and fixtures used in our businesses, all of which are well
maintained and satisfactory for the purposes intended.

ITEM 3. LEGAL PROCEEDINGS.

     In May 1994, we instituted a declaratory judgment action against IGT in the
United States District Court for the Northern District of Illinois. The action
sought a declaration that a patent issued in 1984 and owned by IGT (the
"Telnaes" patent) was invalid, and that certain reel spinning slot machines that
we were then manufacturing did not infringe the Telnaes patent. IGT
counterclaimed, alleging that the Telnaes patent was infringed by our reel
spinning 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 spinning slot 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 that the Telnaes patent is valid, finding that our Model 400 slot
machine infringes the Telnaes patent, and enjoining us from further infringement
of the Telnaes patent. On February 28, 1997, after a hearing on IGT's alleged
damages, the court awarded a treble-damage judgment in favor of IGT and against
us in the amount of $32.8 million, plus post-judgment interest. Subsequently,
the court granted our motion for a stay of proceedings to enforce the money
judgment pending disposition of our motion for a new trial and a similar stay
pending appeal. On October 1, 1997, the court denied our motion for a new trial.
We filed a notice of appeal on October 20, 1997 with the United States Court of
Appeals for the Federal Circuit. On July 20, 1999, the appeals court reversed
the trial court's holding of literal infringement, affirmed its holding of
infringement under the doctrine of equivalents, vacated its holding of willful
infringement, affirmed its holding that the Telnaes Patent is not invalid and
affirmed the award of actual damages of $10.8 million (plus interest), but
vacated the award to the extent that it was based on trebling for willful
infringement and remanded the case to the trial court for further proceedings to
reconsider the issue of willful infringement in light of the appellate court's
finding of no literal infringement. On August 3, 1999, we filed a petition for
rehearing with the United States Court of Appeals for the Federal Circuit with
respect to the appellate court's affirmance of the trial court's finding of
infringement under the doctrine of equivalents. Since we had previously filed a
bond, enforcement of the money judgment has been stayed pending the disposition
of the appeal.

                                       27
<PAGE>   29

     On November 26, 1996, IGT commenced a second action against us in the
United States District Court for the Northern District of Illinois. In this
action, IGT seeks a judgment declaring that our Model 401 slot machine also
infringes the Telnaes patent. The complaint also seeks a preliminary and
permanent injunction and treble damages. On December 18, 1996, the court granted
IGT's petition for a preliminary injunction and enjoined us from the
manufacture, use and sale of the Model 401 slot machine. On May 5, 1998, the
court denied our motion to vacate the preliminary injunction. We filed a notice
of appeal on May 7, 1998. In decisions rendered on July 22, 1999 and September
3, 1999, the United States Court of Appeals for the Federal Circuit (a) vacated
the preliminary injunction and the amount of the security bond set by the trial
court and (b) remanded the case to the trial court for further proceedings. In
the event that the court ultimately determines that these slot machines infringe
upon the Telnaes patent, we would not be able to make, use or sell the Model 401
slot machine and we would be required to pay additional damages.

     If the appeals ultimately determine that the Model 400 or Model 401 slot
machines infringe the Telnaes patent, and we are unable to obtain a license to
use that patent, we will be unable to develop certain types of reel spinning
slot machines. The Telnaes patent relates only to reel spinning slot machines
that we no longer manufacture and does not relate to our video gaming machines
or to our currently-marketed reel spinning slot machines.

     The previously reported litigation with GT Interactive Software Corp. was
settled on August 16, 1999 at no cost to WMS.

     We are not currently involved in any legal proceeding that we believe could
have a material adverse effect on us other than those described above.

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

     Not applicable.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock is traded publicly on the New York Stock Exchange under
the symbol "WMS." The following table shows the high and low sale prices of our
common stock, for the two most recent fiscal years, as reported on the NYSE:

<TABLE>
<CAPTION>
                                                                 HIGH         LOW
                                                              ----------   ----------
<S>                                                           <C>          <C>
FISCAL YEAR ENDED JUNE 30, 1998
  First Quarter.............................................    30 3/16      23 5/8
  Second Quarter............................................    30 3/8       18
  Third Quarter.............................................    32 1/4       19 1/16
  Fourth Quarter (through April 6)(1).......................    33 3/4       31 1/8
  Fourth Quarter (after April 6)(1).........................     5 5/8        2 1/2
FISCAL YEAR ENDED JUNE 30, 1999
  First Quarter.............................................     8 13/16      3 1/2
  Second Quarter............................................    10 3/8        5
  Third Quarter.............................................     9 7/8        6 15/16
  Fourth Quarter............................................    17            7 1/2
</TABLE>

                                       28
<PAGE>   30

---------------

(1) On April 6, 1998, we distributed to our stockholders a tax-free dividend of
    1.19773 shares of Midway common stock for each share of our common stock.

     No cash dividends were declared or paid during fiscal 1999 or 1998. The
payment of future cash dividends will depend upon, among other things, our
earnings, anticipated expansion and capital requirements and financial
condition.

     On August 31, 1999, there were approximately 1,200 holders of record of our
common stock.

ITEM 6. SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED JUNE 30,
                                              ------------------------------------------------------------
                                                1999         1998         1997         1996         1995
  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)    --------     --------     --------     --------     --------
<S>                                           <C>          <C>          <C>          <C>          <C>
STATEMENT OF INCOME DATA
Revenue.....................................  $187,290     $ 98,990     $ 76,596     $ 93,202     $134,015
                                              --------     --------     --------     --------     --------
Operating income (loss).....................     4,947      (78,664)     (79,316)     (29,707)     (13,886)
                                              --------     --------     --------     --------     --------
Income (loss) from continuing operations
  before income taxes.......................     8,472      (74,254)     (77,098)     (29,308)     (11,906)
Provision (credit) for income taxes.........     3,219      (25,430)     (30,301)     (11,556)      (5,779)
                                              --------     --------     --------     --------     --------
Income (loss) from continuing operations....     5,253(1)   (48,824)(2)  (46,797)(3)  (17,752)(4)   (6,127)
Discontinued operations, net of applicable
  income taxes
  Video games segment
    Income from discontinued
      operations -- net.....................        --       26,746       35,804       25,229       29,139
    Gain on initial public offering of
      subsidiary............................        --           --       47,771           --           --
  Hotel and casino segments
    Income (loss) from discontinued
      operations -- net.....................        --           --        3,917       (2,938)      (3,805)
                                              --------     --------     --------     --------     --------
Net income (loss)...........................  $  5,253     $(22,078)    $ 40,695     $  4,539     $ 19,207
                                              ========     ========     ========     ========     ========
Basic and diluted per share of common stock:
  Income (loss) from continuing
    operations..............................  $   0.18(1)  $  (1.85)(2) $  (1.92)(3) $  (0.74)(4) $  (0.25)
                                              --------     --------     --------     --------     --------
  Net income (loss).........................  $   0.18     $  (0.84)    $   1.67     $   0.19     $   0.80
                                              --------     --------     --------     --------     --------
Average number of shares outstanding........    29,308       26,446       24,334       24,122       24,102
                                              --------     --------     --------     --------     --------
</TABLE>

<TABLE>
<CAPTION>
                                                                       AS OF JUNE 30,
                                                    ----------------------------------------------------
                                                      1999       1998       1997       1996       1995
                                                    --------   --------   --------   --------   --------
<S>                                                 <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA
Total assets......................................  $238,079   $207,522   $306,915   $295,071   $294,190
Working capital...................................   110,040    112,066    103,910    157,248    112,891
Long-term debt....................................        --         --     57,500     57,500     57,500
Stockholders' equity..............................   172,079    155,291    196,000    210,033    208,571
</TABLE>

---------------

(1) Income from continuing operations for fiscal 1999 includes an after-tax
    charge of $1.9 million, or $0.06 per share, related to adjustment to
    previously outstanding WMS stock options that vested subsequent to the
    Midway spin-off.

(2) Loss from continuing operations for fiscal 1998 includes an after-tax charge
    of $39.9 million, or $1.51 per share, related to adjustment to previously
    outstanding WMS stock options made in connection with the Midway spin-off.

                                       29
<PAGE>   31

(3) Loss from continuing operations for fiscal 1997 includes an after-tax charge
    of $37.4 million, or $1.54 per share related to patent litigation. See Note
    12 in the Notes to Consolidated Financial Statements.

(4) Loss from continuing operations for fiscal 1996 includes after-tax
    restructuring charges of $2.1 million, or $0.09 per share, related to
    pinball business downsizing and after-tax provisions for gaming inventory
    obsolescence of $1.3 million, or $0.05 per share.

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

LIQUIDITY AND CAPITAL RESOURCES

     We believe that cash and cash equivalents of $58.7 million at June 30,
1999, along with our $25.0 million bank revolving line of credit that extends to
August 1, 2000 will be adequate to fund our anticipated level of inventories and
receivables required in the operation of our business, to fund other presently
anticipated needs and to fund any payment required in the event that we are
unsuccessful in our further appeal of our patent litigation. See Note 12 to the
Consolidated Financial Statements, regarding patent litigation.

     Cash flows from operating, investing and financing activities during fiscal
1999 resulted in a net cash increase of $21.7 million, as compared with a net
cash increase of $39.4 million during fiscal 1998. The cash increase in fiscal
1999 was primarily from the sale of short-term investments. The increase in
fiscal 1998 was primarily from the sale of short-term investments and other
marketable equity securities.

     Cash provided by operating activities before changes in operating assets
and liabilities was $21.3 million for fiscal 1999, as compared with cash used of
$23.4 million for fiscal 1998.

     The changes in operating assets and liabilities, as shown in the
Consolidated Statements of Cash Flows, resulted in a cash outflow of $2.8
million during fiscal 1999, compared with a cash outflow of $17.5 million during
fiscal 1998. The cash outflow in fiscal 1999 was primarily due to an increase in
receivables, offset, in part, by a reduction in income tax receivables and an
increase in accounts payable from the comparable balances at June 30, 1998. The
cash outflow for fiscal 1998 was primarily due to increased inventories and
income tax receivables from the comparable balances at June 30, 1997.

     Cash used by investing activities was $4.6 million for fiscal 1999 compared
with cash provided of $66.1 million for fiscal 1998. Cash used for the purchase
of property, plant and equipment during fiscal 1999 was $10.4 million compared
with $6.2 million for fiscal 1998. Cash used for additions to gaming machines on
participation or lease was $20.2 million in fiscal 1999 compared with $305,000
in fiscal 1998. Net cash of $26.0 million was provided from the sale of
short-term investments during fiscal 1999 compared with $72.6 million from the
sale of short-term investments and equity securities in fiscal 1998.

     Cash provided by financing activities, which was primarily from common
stock option proceeds, for fiscal 1999 was $7.9 million compared with $14.2
million for fiscal 1998.

RESULTS OF OPERATIONS

FISCAL 1999 COMPARED WITH FISCAL 1998

     Segment data discussed below is taken or derived from segment disclosures
in Note 15 to the Consolidated Financial Statements.

                                       30
<PAGE>   32

     Consolidated revenues increased $88.3 million, or 89.2%, to $187.3 million
in fiscal 1999 from $99.0 million in fiscal 1998. Consolidated gross profit
increased to $56.7 million in fiscal 1999 from $22.0 million in fiscal 1998 due
primarily to increased gaming machine sales and participation and lease revenue,
particularly from our Monopoly-themed gaming machines introduced in fiscal 1999,
and a higher gaming gross profit margin percentage. Gross profit margin
increased to 30.3% in fiscal 1999 from 22.2% in fiscal 1998, primarily because
of the higher gross margin generated by participation and lease arrangements,
compared with the gross margin on product sales. Consolidated operating income
increased to $4.9 million in fiscal 1999 from an operating loss of $18.8 million
in fiscal 1998, after excluding a $59.9 million common stock option adjustment
expense in fiscal 1998 that compensated option holders for the lost opportunity
value represented by the shares of Midway stock distributed in the spin-off, in
which distribution option holders did not participate.

     Income from continuing operations was $5.3 million, or $0.18 per share, in
fiscal 1999, compared to a loss from continuing operations of $48.8 million, or
$1.85 per share, in fiscal 1998. Net income (loss), which included continuing
operations, and in fiscal 1998, discontinued operations, was net income of $5.3
million, or $0.18 per share, for fiscal 1999 compared to net loss of $22.1
million, or $0.84 per share, for fiscal 1998. Income from continuing operations
and net income for fiscal 1999 were decreased by $950,000, or $0.03 per share,
due to costs from a strike at our cabinet manufacturing facility that was
settled during the third quarter of fiscal 1999, and were also decreased by $1.9
million, or $0.06 per share, from the adjustments to previously outstanding WMS
stock options that vested during fiscal 1999. Income from continuing operations
and net income for fiscal 1999 were increased by $790,000, or $0.03 per share,
from a net recovery relating to purchased parts overcharges primarily from
certain pinball games suppliers in prior years. Loss from continuing operations
and net loss for fiscal 1998 included an after tax charge of $39.9 million, or
$1.51 per share, related to the common stock option adjustment.

     Gaming.  Gaming revenues increased $69.2 million, or 121.8%, to $126.0
million in fiscal 1999 from $56.8 million in fiscal 1998. Gaming machine sales
represented $101.9 million, and participation and lease revenues represented
$24.1 million, or 80.9% and 19.1% of gaming revenues, respectively. The increase
in revenues resulted primarily from the sale of 13,582 video and reel type
gaming machines in fiscal 1999 compared to 7,207 gaming machines in fiscal 1998,
because of the market acceptance of new models introduced over the last twelve
months. Participation and lease revenues tripled to $24.1 million in fiscal 1999
compared with $8.0 million in fiscal 1998. The increase was from Monopoly-themed
gaming machines introduced in fiscal 1999 under participation or lease
arrangements. At June 30, 1999, we had approximately 2,715 Monopoly-themed
gaming machines installed nationwide. Gaming had an operating profit of $16.8
million for fiscal 1999, compared to an operating loss of $9.6 million for
fiscal 1998 because of the increased revenues and the higher gross margin
primarily generated by participation and lease arrangements, compared with the
gross margin on gaming machine sales.

     Pinball and cabinets.  Pinball and cabinets revenues increased $7.8
million, or 20.4%, to $46.1 million in fiscal 1999 from $38.3 million in fiscal
1998, primarily due to sales of our next-generation pinball games, Pinball 2000,
introduced in March 1999. Pinball and cabinets operating loss decreased by
$773,000 to $7.0 million because of higher revenues, partially offset by
continued research and development costs for Pinball 2000. This segment had
operating income in the fourth quarter of fiscal 1999.

     Contract manufacturing.  Contract manufacturing revenues in fiscal 1999
were $15.2 million and included the contract manufacturing business segment
activity for the entire year, generating

                                       31
<PAGE>   33

operating income of $1.3 million. In fiscal 1998, this segment was included for
only approximately three months and had revenues of $4.0 million and operating
income of $347,000. Prior to the Midway spin-off, we recorded these operations
as a cost allocation between a parent and a consolidated subsidiary.

FISCAL 1998 COMPARED WITH FISCAL 1997

     Consolidated revenues increased $22.4 million, or 29.2% to $99.0 million in
fiscal 1998 from $76.6 million in fiscal 1997. Consolidated gross profit
increased to $22.0 million in fiscal 1998 from $16.5 million in fiscal 1997 due
primarily to increased gaming machine revenues which generated increased gross
profit and an increase in the gaming segment gross profit margin due to
spreading certain fixed costs over greater production.

     In fiscal 1998 we recorded a pre-tax charge of $59.9 million for the
adjustment to our outstanding stock options to compensate the holders for the
lost opportunity value represented by the shares of Midway stock distributed in
the spin-off, in which distribution option holders did not participate. In
fiscal 1997 we recorded a provision of $61.9 million relating to patent
litigation. See Note 12 to the Consolidated Financial Statements.

     Loss from continuing operations was $48.8, or $1.85 per share, in fiscal
1998 compared with $46.8 million, or $1.92 per share, in fiscal 1997. Loss from
continuing operations in fiscal 1998 included an after-tax charge of $39.9
million, or $1.51 per share, from the adjustment to our stock options. Loss from
continuing operations in fiscal 1997 included after-tax provisions relating to
our patent litigation of $37.4 million, or $1.54 per share. After excluding
these after tax items, loss from continuing operations was $8.9 million, or
$0.34 per share, in fiscal 1998 and $9.4 million, or $0.39 per share, in fiscal
1997. The decreased loss was primarily from the increased gaming segment gross
profit, after absorbing the increased selling and administrative expenses.

     Gaming.  Gaming revenues increased $23.2 million, or 68.9%, to $56.8
million in fiscal 1998 from $33.6 million in fiscal 1997, primarily from the
increase in the number of gaming machines sold during the year to 7,207 from
3,754 in fiscal 1997. Gaming revenues in fiscal 1998 included newly-released
reel spinning and video gaming machines including slot machines and video
lottery terminals. Fiscal 1997 revenues included primarily old model reel
spinning slot machines and video lottery terminals.

     Pinball and cabinets.  Pinball and cabinets revenues decreased $4.7
million, or 11.0%, to $38.3 million in fiscal 1998 from $43.0 million in fiscal
1997. The decrease was primarily due to the continuing industry-wide decline in
demand for pinball games. The pinball and cabinets operating loss increased to
$7.8 million in fiscal 1998 from $3.0 million in fiscal 1997. The increase
resulted primarily from lower gross profit due to reduced unit sales prices and
continued development expense for the next generation of pinball games.

     Contract manufacturing.  In fiscal 1998, contract manufacturing revenues of
$4.0 million and operating income of $347,000 included operations for the period
April 6, 1998 to June 30, 1998.

IMPACT OF INFLATION

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

                                       32
<PAGE>   34

YEAR 2000

     The term Year 2000 is used to refer to a worldwide computer-related problem
where some software programs and embedded programs in electronic systems will
not work properly when processing a date after 1999.

     We began addressing this problem in 1996. We believe that most of the
systems utilized for our internal operations have been made Year 2000 ready, at
an estimated cost of $1.3 million. The remaining Year 2000-related work is
primarily to upgrade our network servers. This work is expected to be completed
by September 30, 1999, at a cost estimated to be less than $200,000. We believe
that there are no Year 2000 issues with respect to the functionality of our
products sold in the past or to be sold in the future. We also believe that our
assembly of products will not be affected by malfunctioning tools or equipment
using embedded microprocessors, because the assembly process is not heavily
reliant on these tools or equipment.

     We rely on suppliers of components for our gaming machines and pinball
games. In the event that they experience a Year 2000-related failure, they may
expose us to Year 2000 problems. We have contacted certain suppliers and
customers to assess their potential Year 2000 problems. We cannot determine with
certainty our customers' or suppliers' levels of Year 2000 readiness. Based on
the significant level of responses, however, our suppliers and customers appear
to be either Year 2000-ready or working toward becoming Year 2000-ready. We will
continue to follow up with those customers and suppliers who have not responded
or indicated that their Year 2000 work is in process. If needed, to avoid
potential Year 2000 problems detected by our suppliers or customers, we will
adjust the shipping dates for products accordingly. At worst, we would expect a
short-term delay in shipments. If a delay should occur, we do not expect it to
have a material effect on our operating results for any reportable period.

     We do not have a contingency plan for undetected Year 2000 problems. We
intend to respond to those problems if and when they occur. We cannot determine
the effect on our business, if any, of any undetected Year 2000 problems.

     This discussion of Year 2000 risks and readiness contains certain
forward-looking statements concerning future conditions and our business outlook
based on currently available information that involve risks and uncertainties.
The actual state of our Year 2000 readiness and exposure could differ materially
from that anticipated in the forward-looking statements as a result of certain
risks and uncertainties, including, without limitation, the ability to obtain
supplies and energy, to make deliveries, to communicate with business partners
and the Year 2000 readiness of suppliers, customers and other business partners.

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

     Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

     Not applicable.

                                       33
<PAGE>   35

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     (a) Identification of Directors.  Except as set forth below, the directors
listed in the following table were elected to serve until the 2000 Annual
Meeting of Stockholders and until their respective successors are duly elected
and qualify. All are present directors of WMS. Neil D. Nicastro is the son of
Louis J. Nicastro. Otherwise, there is no family relationship between any of our
directors or executive officers.

<TABLE>
<CAPTION>
                                                                           SHARES OF
                                                                          COMMON STOCK
                                         POSITION WITH                    DEEMED TO BE   PERCENTAGE OF
                                       WMS AND PRINCIPAL     EXECUTIVE    BENEFICIALLY    OUTSTANDING
                                       OCCUPATION AS OF      OFFICER OF     OWNED AT        COMMON
          DIRECTOR (AGE)                   09/01/99          WMS SINCE    09/01/99(1)      STOCK(2)
          --------------               -----------------     ----------   ------------   -------------
<S>                                  <C>                     <C>          <C>            <C>
Louis J. Nicastro (71)               Chairman of the Board      1974       7,734,832(3)      25.0%
                                     of Directors,
                                     President and Chief
                                     Executive Officer of
                                     WMS
Norman J. Menell (67)                Vice Chairman of the       1980          75,902(4)         *
                                     Board of Directors of
                                     WMS
William C. Bartholomay (71)          Director of WMS and        1981          92,486(4)         *
                                     President of Near
                                     North National Group
William E. McKenna (80)              Director of WMS and        1981          76,280(4)         *
                                     General Partner, MCK
                                     Investment Company
Neil D. Nicastro (42)                Director of WMS,           1986       7,180,214(5)      23.6%
                                     President, Chief
                                     Executive Officer and
                                     Chief Operating
                                     Officer of Midway
Harvey Reich (70)                    Director of WMS and        1983          49,876(6)         *
                                     Attorney
Ira S. Sheinfeld (61)                Director of WMS and        1993         118,930(7)         *
                                     Attorney, Squadron,
                                     Ellenoff, Plesent &
                                     Sheinfeld LLP
David M. Satz, Jr. (73)              Director of WMS and        1998          51,000(8)         *
                                     Attorney, Saiber
                                     Schlesinger Satz &
                                     Goldstein
</TABLE>

---------------

 *  Less than 1% of the number of outstanding shares of common stock on August
    31, 1999.

(1) Under Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, shares
    underlying options are considered to be beneficially owned if the holder of
    the option has the right to acquire beneficial ownership of the shares
    within 60 days.

(2) Based on 30,419,200 shares outstanding on August 31, 1999. Shares issuable
    upon the exercise of options exercisable within 60 days have been deemed to
    be outstanding.

                                       34
<PAGE>   36

(3) The number of shares reported as beneficially owned includes 7,180,200
    shares owned by Sumner M. Redstone and National Amusements, Inc. for which
    the reporting person has shared voting power but no dispositive power.
    Includes 500,000 shares that Mr. Nicastro may acquire upon the exercise of
    stock options. For a discussion concerning the shared voting power with
    respect to the 7,180,200 shares referred to above, see "Item 12. Security
    Ownership of Certain Beneficial Owners and Management -- Voting Proxy
    Agreement."

(4) Includes 62,955 shares that this person may acquire upon the exercise of
    stock options.

(5) The number of shares reported as beneficially owned includes 7,180,200
    shares owned by Sumner M. Redstone and National Amusements, Inc. for that
    the reporting person has shared voting power but no dispositive power. See
    "Item 12. Security Ownership of Certain Beneficial Owners and
    Management -- Voting Proxy Agreement."

(6) Includes 37,955 shares that Mr. Reich may acquire upon the exercise of stock
    options.

(7) Includes 100,728 shares that Mr. Sheinfeld may acquire upon the exercise of
    stock options.

(8) Includes 50,000 shares that Mr. Satz may acquire upon the exercise of stock
    options.

     LOUIS J. NICASTRO has been our President and Chief Executive Officer since
April 6, 1998 and was also Chief Operating Officer from April 6, 1998 to May 14,
1998. He served as Chairman of the Board of WMS since our incorporation in 1974.
From 1983 to January 1998, Mr. Nicastro was also the Chairman of the Board and
Chief Executive Officer of WHG Resorts & Casinos. Mr. Nicastro also served as
our Co-Chief Executive Officer (1994-1996), Chief Executive Officer (1974-1994),
President (1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986). Mr.
Nicastro is a director of Midway, and he held various executive positions for
Midway from 1988 until 1996. Mr. Nicastro is Neil D. Nicastro's father.

     NORMAN J. MENELL has been Vice Chairman of the Board since 1990 and a
director since 1980. He has also served as our President (1988-1990), Chief
Operating Officer (1986-1990) and Executive Vice President (1981-1988). Mr.
Menell is also a director of Midway.

     WILLIAM C. BARTHOLOMAY is President of Near North National Group, insurance
brokers in Chicago, Illinois and Chairman of the Board of the Atlanta Braves. He
has served as Vice Chairman of Turner Broadcasting System, Inc., a division of
Time Warner Inc., for more than five years. Mr. Bartholomay was elected a
director of WMS in 1981. 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 more than five years. He also is a
director of Midway, California Amplifier, Inc., Drexler Technology Corporation
and Safeguard Health Enterprises, Inc. Mr. McKenna has served as a director of
WMS since 1981.

     NEIL D. NICASTRO has been Midway's President and Chief Operating Officer
for more than five years, Co-Chief Executive Officer since December 1994,
Chairman of the Board and Chief Executive Officer since July 1996 and has held
various other executive positions for Midway since 1988. Mr. Nicastro was also
our President, Chief Executive Officer and Chief Operating Officer for more than
five years before his resignation from those positions in April 1998. Mr.
Nicastro became a director of WMS in 1986, and he remains a director and a
consultant to us. Mr. Nicastro is Louis J. Nicastro's son.

     HARVEY REICH was a member of the law firm of Robinson Brog Leinwand Greene
Genovese & Gluck, P.C., New York, New York and its predecessor firms for more
than five years until his

                                       35
<PAGE>   37

retirement in July 1998. Mr. Reich was elected a director of WMS in 1983. Mr.
Reich is also a director of Midway.

     DAVID M. SATZ, JR. became a director of WMS in April 1998. Mr. Satz has
been a member of the law firm Saiber Schlesinger Satz & Goldstein, Newark, New
Jersey, for more than five years. Mr. Satz is also a director of the Atlantic
City Racing Association.

     IRA S. SHEINFELD became a director of WMS in 1993. He has been a member of
the law firm of Squadron, Ellenoff, Plesent & Sheinfeld LLP, New York, New York,
for more than five years. Mr. Sheinfeld is also a director of Midway.

     (b) Identification of Executive Officers.  The following officers will
serve until the 2000 Annual Meeting of the Board of Directors and until their
respective successors are duly elected and qualify.

     LOUIS J. NICASTRO. The principal employment of Louis J. Nicastro during the
last five years is set forth in Item 10(a) above.

     KEVIN L. VERNER, 40, has served as our Vice President and Chief Operating
Officer since May 14, 1998, and as Executive Vice President and General Manager
of WMS Gaming since February 1997. Previously, Mr. Verner served as Vice
President and Director of New Business Development of R.J. Reynolds Tobacco
Company from 1993 until February 1997.

     HAROLD H. BACH, JR., 67, has held the positions of Treasurer since 1994 and
Vice President-Finance, Chief Financial and Chief Accounting Officer since 1990.
Additionally, Mr. Bach has served as Executive Vice President -- Finance, Chief
Financial Officer and a director of Midway since August 1996. He served as
Senior Vice President -- Finance and Chief Financial Officer of Midway from 1990
to August 1996, and he has served as Treasurer of Midway since December 1994.
Prior to joining WMS, Mr. Bach was a partner in the accounting firms of Ernst &
Young (1989-1990) and Arthur Young & Company (1967-1989).

     ORRIN J. EDIDIN, 38, has served as our Vice President, Secretary and
General Counsel since May 1997. Mr. Edidin served as Associate General Counsel
of Fruit of the Loom, Inc. from 1992 until May 1997. Mr. Edidin has also served
as Vice President, Secretary and General Counsel of Midway since June 1997.

     TERENCE M. DUNLEAVY, 42, joined us in May 1997 and was appointed Vice
President, Assistant General Counsel and Chief Compliance Officer in June 1999.
Mr. Dunleavy was Assistant General Counsel/Director of Compliance of Mikohn
Gaming Nevada, Inc. a gaming systems manufacturer, from April 1996 to November
1996, Senior Regulatory Attorney with Madison Gas & Electric Company, from
December 1994 to January 1996 and Commissioner of the Wisconsin Gaming
Commission from September 1992 to December 1994.

     (c) Anticipated Executive Officer Changes.  We anticipate that, shortly
after the filing of this Report, Harold H. Bach, Jr. and Orrin J. Edidin will
begin to devote substantially all of their business time to Midway. We
anticipate that Messrs. Bach and Edidin will remain as consultants to WMS. We
hired Jeffrey M. Schroeder on June 7, 1999, and we expect that he will assume
the office of Chief Financial Officer in the near future. Mr. Schroeder, 42, is
a certified public accountant and was, until July 1998, the chief financial
officer of Farley Industries, Inc., a management services company. He joined
that company in 1985. We are in the process of searching for a new general
counsel.

     (d) Section 16(a) Beneficial Ownership Reporting Compliance.  Section 16(a)
of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own more than

                                       36
<PAGE>   38

10 percent of a registered class of our equity securities, to file reports of
ownership and changes in ownership with the SEC. These reporting persons are
required by regulation to furnish us with copies of all Section 16(a) reports
that they file. Based on our review of the copies of these reports, or written
representations from some of the reporting persons that no Form 5 was required,
we believe that during fiscal 1999 all filing requirements applicable to our
officers, directors and greater than 10 percent beneficial owners were complied
with, except that Sumner Redstone was late in filing one transaction on Form 4.

ITEM 11. EXECUTIVE COMPENSATION.

     The Summary Compensation Table below sets forth the compensation paid for
service in all capacities during the fiscal years ended June 30, 1999, 1998 and
1997 to each of our current executive officers who served during these periods,
and whose compensation exceeds $100,000. Where an officer served as an employee
of both WMS and Midway, the table sets forth the aggregate compensation paid by
WMS and Midway. After Midway's initial public offering in 1996 and until the
Midway spin-off, the compensation that we paid to our executive officers who
also serve Midway was allocated to Midway based upon management's estimates of
the percentage of time devoted to Midway. After the Midway spin-off,
compensation that we or Midway pay to these executive officers is reimbursed by
the other party in amounts equal to the allocated cost under the Temporary
Support Services Agreement dated as of April 6, 1998 between Midway and us. Our
management believes that these executive officers devoted, from time to time,
40% to 70% of their time to Midway during fiscal 1999 and 1998. See "Item 13.
Certain Relationships and Related Transactions" for a description of the
Temporary Support Services Agreement.

                                       37
<PAGE>   39

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        LONG TERM COMPENSATION AWARDS
                                    ANNUAL COMPENSATION                -------------------------------
                       ---------------------------------------------    SECURITIES
NAME AND PRINCIPAL                                    OTHER ANNUAL      UNDERLYING        ALL OTHER
POSITION               YEAR   SALARY($)   BONUS($)   COMPENSATION($)   OPTIONS(#)(1)   COMPENSATION($)
------------------     ----   ---------   --------   ---------------   -------------   ---------------
<S>                    <C>    <C>         <C>        <C>               <C>             <C>
Louis J. Nicastro      1999    450,000    500,000                 --              --             --
  Chairman of the      1998    107,308         --                 --         500,000      4,956,640(2)
    Board,
  President and Chief  1997         --         --                 --         629,554(3)    9,261,503(4)
  Executive
  Officer(5)
Kevin L. Verner        1999    250,000    200,000                 --          50,000         72,000(6)(7)
  Vice President and   1998    250,000    100,000                 --              --         50,100(6)(7)
  Chief Operating
  Officer(8)
Harold H. Bach, Jr.    1999    315,000         --                 --              --             --(6)
  Vice President --    1998    300,000    220,000                 --              --             --(6)
    Finance,
  Treasurer, Chief     1997    300,000    175,000                 --          94,433(3)           --
  Financial Officer
  and Chief
  Accounting Officer
Orrin J. Edidin        1999    200,000     75,000                 --              --             --(6)
  Vice President,      1998    180,000     75,000                 --          25,000             --(6)
  Secretary and
  General Counsel(9)
Terence M. Dunleavy    1999    113,000     36,000                 --           5,000             --
  Vice President,
  Assistant General
  Counsel and Chief
  Compliance
  Officer(10)
</TABLE>

---------------

 (1) Does not include Midway stock options, all of which were granted at an
     exercise price equal to market value on the date of grant. In fiscal 1999,
     Mr. Bach received options to purchase 43,842 shares of Midway common stock,
     and Mr. Edidin received options to purchase 41,304 shares of Midway common
     stock. In fiscal 1998, Mr. Nicastro received options to purchase 10,000
     shares of Midway common stock, Mr. Bach received options to purchase 50,000
     shares of Midway common stock, and Mr. Edidin received options to purchase
     35,000 shares of Midway common stock. In fiscal 1997, Mr. Nicastro received
     an option to purchase 25,000 shares of Midway common stock, and Mr. Bach
     received options to purchase 100,000 shares of Midway common stock.

 (2) Represents a payment made to Mr. Nicastro to compensate him in lieu of
     adjusting his WMS stock options in connection with the Midway spinoff. See
     "Adjustment to Options Resulting from the Midway Spinoff."

 (3) Reflects the amount of stock options previously granted by WMS as adjusted
     as a result of the distribution of the common stock of our former
     subsidiary, WHG.

 (4) Represents a termination payment received in connection with Mr. Nicastro's
     leaving WMS to devote his full time to WHG. See "Item 1. Business -- The
     Midway Spinoff".

                                       38
<PAGE>   40

 (5) Mr. Nicastro rejoined WMS on April 6, 1998. He has been Chairman of the
     Board of Directors since 1974 and had served as Co-Chief Executive Officer
     until June 26, 1996. See "Item 1. Business -- The Midway Spinoff".

 (6) Excludes the value of adjustments to WMS stock options of these holders due
     to the Midway Spinoff. These amounts are as follows: Kevin L. Verner
     received $175,615 in cash and common stock valued at $85,904 in fiscal 1998
     and $531,959 in cash in fiscal 1999. Mr. Verner will receive additional
     cash adjustment payments, up to a total of $1,755,133 (plus interest) if he
     is still serving WMS through the end of the vesting period, on the dates
     that his options would have vested. Harold H. Bach, Jr. received $1,093,193
     in cash and common stock valued at $534,722. Orrin J. Edidin received
     $49,442 in cash in fiscal 1998 and $105,748 in cash in fiscal 1999. He will
     receive additional cash adjustment payments, up to a total of $343,260
     (plus interest) if he is still serving WMS or Midway through the end of the
     vesting period, on the dates that his options would have vested. Our common
     stock was valued at the average of the high and low sale prices on the New
     York Stock Exchange on April 3, 1998, the last day of trading prior to the
     spinoff.

 (7) Includes $72,000 and $50,100 paid in fiscal 1999 and 1998, respectively, to
     Mr. Verner in consideration of his forfeiture of performance units granted
     by his previous employer.

 (8) Mr. Verner was elected Vice President and Chief Operating Officer of WMS in
     May 1998.

 (9) Mr. Edidin joined WMS as Vice President, Secretary and General Counsel in
     May 1997.

(10) Mr. Dunleavy was elected Vice President, Assistant General Counsel and
     Chief Compliance Officer of WMS as of June 1, 1999.

     The following table sets forth certain information with respect to options
to purchase common stock granted in fiscal 1999 under our stock option plans to
persons named in the Summary Compensation Table.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                                POTENTIAL REALIZABLE
                                  INDIVIDUAL GRANTS                                               VALUE AT ASSUMED
                       ---------------------------------------                                  ANNUAL RATES OF STOCK
                                              PERCENT OF TOTAL                                 PRICE APPRECIATION FOR
                       NUMBER OF SECURITIES   OPTIONS GRANTED                                      OPTION TERM(1)
                        UNDERLYING OPTIONS      TO EMPLOYEES     EXERCISE PRICE   EXPIRATION   -----------------------
NAME                        GRANTED(#)         FISCAL YEAR(%)      ($/SHARE)         DATE        5%($)       10%($)
----                   --------------------   ----------------   --------------   ----------   ---------   -----------
<S>                    <C>                    <C>                <C>              <C>          <C>         <C>
Louis J. Nicastro....             --                  --                  --            --           --            --
Kevin L. Verner(2)...         50,000                11.0            $10.0625       4/29/09     $881,500    $1,701,500
Harold H. Bach,
  Jr. ...............             --                  --                  --            --           --            --
Orrin J. Edidin......             --                  --                  --            --           --            --
Terence M.
  Dunleavy(2)........          5,000                 1.1            $10.0625       4/29/09     $ 88,150    $  170,150
</TABLE>

---------------

(1) The assumed appreciation rates are set under the rules and regulations
    promulgated under the Securities Exchange Act of 1934 and are not derived
    from the historical or projected prices of our common stock.

                                       39
<PAGE>   41

(2) This option becomes exercisable for up to 10%, 30%, 60% and 100% of the
    option grant upon the first, second, third and fourth anniversaries,
    respectively, of the date of the grant.

     The following table sets forth certain information with respect to the
exercise of options to purchase our common stock and the number and value of
outstanding options owned by persons named in the Summary Compensation Table.

                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               OPTIONS
                                         SHARES                     AT 6/30/99(#)        AT 6/30/99($)(1)
                                       ACQUIRED ON      VALUE        EXERCISABLE/          EXERCISABLE/
                NAME                   EXERCISE(#)   REALIZED($)    UNEXERCISABLE         UNEXERCISABLE
                ----                   -----------   -----------   ----------------   ----------------------
<S>                                    <C>           <C>           <C>      <C>       <C>         <C>
Louis J. Nicastro....................      --            --        500,000/      --    $5,781,250/         --
Kevin L. Verner......................      --            --         37,773/ 138,138    $  525,271/ $1,572,522
Harold H. Bach, Jr. .................      --            --         94,433/      --    $1,273,051/         --
Orrin J. Edidin......................      --            --         10,000/  40,000    $  133,864/ $  521,724
Terence M. Dunleavy..................      --            --          2,000/  23,000    $   25,125/ $  260,813
</TABLE>

---------------

(1) Based on the closing price of our common stock on the New York Stock
    Exchange on June 30, 1999, which was $17.

ADJUSTMENT TO OPTIONS RESULTING FROM THE MIDWAY SPINOFF

     Each of our four stock option plans in effect prior to the Midway spinoff
provided that in the event of a dividend or other distribution, such as a
spinoff, outstanding options were to be adjusted to prevent dilution of the
benefits or potential benefits intended to be made available by the options in a
manner that the Board of Directors deemed equitable.

     In consultation with our financial advisors, the Board approved and
proposed to option holders a plan in which option holders retained their options
to acquire shares of our common stock after the Midway spinoff at an exercise
price adjusted to reflect the difference in the value of our common stock
immediately before and after the spinoff, and option holders received
compensation for the lost value resulting from the distribution of the shares of
common stock of Midway to our stockholders in which option holders would not
participate. In order to preserve our cash resources, the Board also provided
that the compensation be paid through a combination of cash and shares of our
common stock. The adjustment plan was accepted by holders of all outstanding
options under our four stock option plans then in effect, including each of the
persons listed in the Summary Compensation Table.

     Payment by us for the lost opportunity value of the stock options was
initially approved by the Board to be paid in cash up to maximum of $30.0
million and in shares of our common stock up to a maximum of 2,000,000 shares.
Shortly before the spinoff, the Board became concerned that, after payment of
taxes, optionees would have little cash remaining and might be inclined, for
investment concentration or other reasons, to sell shares of Midway common stock
received in the spinoff, which sales might have a depressive effect on the
market price of that stock. The Board believed that this concern would be
alleviated if $5.0 million of additional cash were available to pay to optionees
so that optionees would receive at least 70% of their adjustment payments in
cash.

                                       40
<PAGE>   42

     In order to raise the additional $5.0 million in cash as well as additional
cash of approximately $8.5 million used to pay expenses of the spinoff and for
additional working capital, we requested that Louis J. Nicastro, Chairman of the
Board of WMS, forego his entitlement under the adjustment plan to receive
payments valued at $10,406,059 and an adjustment of the exercise price of his
stock options to $3.519 per share. Instead, at the request of the Board, shortly
before the spinoff, Mr. Nicastro exercised his options to purchase 629,554
shares of our common stock, sold these shares in the public market and received
from us a payment of $4,956,640 representing the difference between $10,406,059
and the net amount he received from the exercise and sale. When Mr. Nicastro
exercised his options, we received an aggregate exercise price of $13,437,200.
We used $5.0 million of the proceeds from the aforementioned exercise, together
with $30.0 million, to pay the 1998 cash portion of the adjustment to the other
option holders. The consideration paid under the adjustment plan to the persons
named in the Summary Compensation Table is as set forth in footnote 6 to that
table.

COMPENSATION OF DIRECTORS

     We pay a fee of $30,000 per year to each director who is not also an
employee of WMS or our subsidiaries. Each director who serves as the chairman of
any committee of our Board of Directors receives a further fee of $5,000 per
year for his services in that capacity, and each member of our Audit and Ethics
Committee receives an additional fee of $5,000 per year.

     Our 1991, 1993 and 1998 stock option plans (each, a "Plan") provide for the
issuance of shares of our common stock under non-qualified stock options which
may be granted to non-employee directors of WMS, generally at not less than 100%
of the fair market value of the shares on the date of grant. Under the 1991
Plan, Mr. Sheinfeld holds options to purchase 37,773 shares of our common stock.
Under the 1993 Plan, the following non-employee directors each hold options to
purchase 62,955 shares of common stock: Messrs. Bartholomay, McKenna, Menell and
Sheinfeld, and Mr. Reich holds options to purchase 37,955 shares. Under the 1998
Plan, Mr. Satz holds options to purchase 50,000 shares of common stock.

     Directors also are also entitled to participate, at our expense, in a
medical reimbursement plan which is supplementary to their primary medical
insurance.

STOCK OPTION PLANS

     We currently have the following five stock option plans in effect: the 1982
Employee Stock Option Plan; the 1991 Stock Option Plan; the 1993 Stock Option
Plan; the 1994 Stock Option Plan; and the 1998 Non-Qualified Stock Option Plan
(collectively, the "Plans"). The Plans provide for the issuance of shares of
common stock under options which may be granted thereunder. Options granted
under the Plans may be in the form of options meeting the requirements of
Section 422 of the Internal Revenue Code ("incentive stock option", except in
the case of the 1998 Plan), or options not meeting the requirements of that
section ("non-qualified stock options").

     The purpose of each of the Plans is to encourage our employees and our
subsidiaries and, under certain of the Plans, non-employee directors,
consultants and advisers of WMS to acquire a proprietary interest in WMS and to
enable these individuals to realize benefits from an increase in the value of
our common stock. We believe that this benefit provides these individuals with
greater incentive and encourages their continued provision of services to us
and, generally, promotes our interests and those of our stockholders.

     Under the 1982 Plan, there are 167,961 options outstanding, and no further
options are available for grant. Under the 1991 Plan, there are 285,186 options
outstanding and 88,445 options

                                       41
<PAGE>   43

available for grant through September 6, 2001. Under the 1993 Plan, there are
443,469 outstanding options, and no further options are available for grant.
Under the 1994 Plan, there are 678,382 options outstanding and 269,676 options
available for grant through June 20, 2004. Under the 1998 Plan, there are
685,900 options outstanding and 312,000 options available for grant through May
13, 2008. The average exercise price of the outstanding exercisable options at
August 26, 1999, was approximately $5.16. Of the 2,260,898 options outstanding,
1,222,892 were held by officers and directors of WMS (including 500,000 held by
Louis J. Nicastro).

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No member of our Compensation Committee or Stock Option Committee is an
employee or officer of WMS, and no officer, director or other person had any
relationship required to be disclosed here.

EMPLOYMENT CONTRACTS

     We employ Louis J. Nicastro under the terms of an Employment Agreement
dated September 2, 1999. The agreement provides for salaried compensation at the
rate of $450,000 per year, or a greater amount if determined by the Board of
Directors. Under the agreement, Mr. Nicastro is entitled to a bonus in an amount
equal to two percent of our pre-tax income. Mr. Nicastro may participate in all
benefit plans and perquisites generally available to senior executives and is
entitled to reimbursement of all medical and dental expenses incurred by him or
his wife during their lives to the extent that these expenses are not otherwise
reimbursed by insurance that we provide. Additionally, Mr. Nicastro is entitled
to receive any special bonuses that may be determined by the Board of Directors.
The agreement also provides that the stock options granted to Mr. Nicastro in
1998, when he rejoined WMS, will be exercisable for their full 10-year term,
even if he dies or retires, as long as he complies with his non-competition
obligations. The agreement expires on June 30, 2003, subject to automatic
extensions so that the term of Mr. Nicastro's employment shall at no time be
less than two years.

     In addition, Mr. Nicastro or his estate is entitled to receive certain
death, retirement and disability benefits. The death and retirement benefits are
payable in installments and are equal to one-half of Mr. Nicastro's salary at
the time of death or retirement, provided that payments would not be less than
$225,000 per annum. The payment period of the death or retirement benefits is
the lesser of 7 years or the number of years Mr. Nicastro is employed by WMS,
beginning April 6, 1998, times 2 1/3. If Mr. Nicastro is disabled for more than
six consecutive months, and Mr. Nicastro is not able to resume his duties within
30 days of notice of disability, Mr. Nicastro's employment terminates, and he is
entitled to receive retirement or death benefits under the agreement.

     Either party may terminate the agreement effective upon expiration of the
original term or an extended term upon written notice from the terminating party
to the other party dated and received at least two years prior to the respective
termination date. The employment agreement may be terminated at the election of
Mr. Nicastro upon the occurrence without his prior written consent of any one or
more of the following events:

     - the placement of Mr. Nicastro in a position of lesser status, the
       assignment to Mr. Nicastro of duties inconsistent with his current
       positions with us or duties which, if performed, would result in a
       significant change in the nature or scope of powers, authority, functions
       or duties inherent in his positions, the assignment to Mr. Nicastro of
       performance requirements or working conditions which are at variance with
       those presently in effect, or the treatment of

                                       42
<PAGE>   44

       Mr. Nicastro in a manner which is in derogation of his status as
       President and Chief Executive Officer;

     - the cessation of service of Mr. Nicastro as a member of the Board of
       Directors of WMS;

     - the discontinuance or reduction (from the highest level in effect during
       the term of the employment agreement) of base salary payable to Mr.
       Nicastro; and

     - the discontinuance or reduction (from the level in effect on the date of
       the employment agreement) of the perquisites inherent in Mr. Nicastro's
       position on the date of the employment agreement.

If any of these events occurs, if the individuals who presently constitute the
Board of Directors, or successors approved by these Board members, cease for any
reason to constitute at least a majority of the Board or if we are considered to
have wrongfully terminated Mr. Nicastro's employment agreement, then we would be
obligated (a) to pay Mr. Nicastro a lump sum payment equal in amount to Mr.
Nicastro's base salary, at the highest annual rate in effect during the one-year
period immediately preceding termination, through the end of the term of the
agreement; (b) the greater of $500,000 or the aggregate bonus which would have
been payable during the remaining term of the agreement at the highest level
achieved in either of the last two fiscal years prior to termination and (c) the
maximum aggregate retirement benefits which would have been payable in the event
of retirement on the date of termination; provided that the aggregate payment
would not be less than three times base salary. In addition, we would be
obligated to purchase at the election of Mr. Nicastro all stock options held by
him with respect to our common stock and options to purchase the securities of
any other company at least 20% of the voting securities of which we own at a
price equal to the spread between the option price and the fair market price of
our common stock as defined in the employment agreement.

     If payments made to Mr. Nicastro under the employment agreement after a
change of control are considered "excess parachute payments" under Section 280G
of the Internal Revenue Code of 1986, additional compensation is required to be
paid to Mr. Nicastro to the extent necessary to eliminate the economic effect on
him of the resulting excise tax. Under Section 280G, in addition to income
taxes, the recipient is subject to a 20% nondeductible excise tax on excess
parachute payments. An excess parachute payment is a payment in the nature of
compensation which is contingent on a change of ownership or effective control
and which exceeds the portion of the base amount (i.e., the average compensation
for the five-year period prior to the change of control) allocable to the
payment. These rules apply only if the present value of all payments of
compensation (including non-taxable fringe benefits) at the time of a change of
control is at least equal to three times the base amount. Excess parachute
payments are not deductible by us.

     Kevin L. Verner is employed by us under the terms of an Employment
Agreement dated as of June 1, 1999. The employment agreement provides for
salaried compensation at the rate of $250,000 per year, or a greater amount as
may be determined by the Board of Directors. The employment agreement of Mr.
Verner provides for, among other things, full participation in all benefit plans
and perquisites generally available to executive employees. The agreement
expires on May 31, 2001, subject to automatic extensions so that the term of Mr.
Verner's employment shall at no time be less than two years. Either party may
terminate the agreement effective upon expiration of the original term or an
extended term upon written notice from the terminating party to the other party
dated and received at least two years prior to the respective termination date.
WMS may also terminate the agreement upon 30 days written notice for cause. The
employment agreement may also be terminated at the election of Mr. Verner if the
individuals who presently constitute the Board

                                       43
<PAGE>   45

of Directors, or successors approved by these Board members, cease for any
reason to constitute at least a majority of the Board. If this happens, and Mr.
Verner gives us notice of termination within 60 days, then in lieu of any other
rights under the agreement, all of Mr. Verner's unvested stock options will
immediately vest, and we will be required to pay him a lump sum of three times
his base salary. If any portion of the amount paid to Mr. Verner is subject to
the excise tax imposed by Section 4999 or the Internal Revenue Code of 1986,
then additional compensation is required to be paid to him to the extent
necessary to eliminate the economic effect on him of the resulting excise tax.

     Terence M. Dunleavy is employed by us under the terms of an Employment
Agreement dated as of June 1, 1999. The employment agreement provides for
salaried compensation at the rate of $120,000 per year, or a greater amount as
may be determined by us. Mr. Dunleavy may participate in all benefit plans
generally available to employees. Additionally, Mr. Dunleavy may receive
discretionary bonuses of up to 30% of his base salary. The agreement expires May
31, 2000, subject to automatic extensions so that the term of Mr. Dunleavy's
employment shall at no time be less than one year, unless the agreement is
terminated voluntarily by Mr. Dunleavy or for cause by WMS. The employment
agreement may also be terminated at the election of Mr. Dunleavy if the
individuals who presently constitute the Board of Directors, or successors
approved by these Board members, cease for any reason to constitute at least a
majority of the Board and if we then breach our obligations to Mr. Dunleavy
under the agreement. If both of these conditions are satisfied, and Mr. Dunleavy
gives us notice of termination within 60 days of the breach, then in lieu of any
other rights under the agreement, all of Mr. Dunleavy's unvested stock options
will immediately vest, and we will be required to pay to Mr. Dunleavy the lesser
of the following: (a) one year's base salary; or (b) the maximum amount which
could be paid to him without any portion of that amount being subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code.

     On March 5, 1998 in connection with the Midway spinoff, and at the request
of our Board of Directors, Neil D. Nicastro entered into an agreement with us
(the "Termination Agreement") under which Mr. Nicastro's employment with us
terminated effective at the time of the spinoff. Under the Termination
Agreement, at the time of the spinoff, Mr. Nicastro resigned as our President,
Chief Executive Officer and Chief Operating Officer to devote his full time to
Midway. As full consideration for payments that would otherwise have been made
to Mr. Nicastro under his earlier employment agreement with us, Mr. Nicastro was
paid a lump sum of $2,500,000, and he was granted a 10-year option to purchase
250,000 shares of our common stock at an exercise price of $5.4375.

     In connection with the Midway spinoff, we also entered into a consulting
agreement (the "Consulting Agreement") with Mr. Nicastro under which Mr.
Nicastro agreed to make himself reasonably available at our request, to render
services to us that the Board of Directors or the Chairman of the Board and
Chief Executive Officer of WMS may reasonably request. The term of the
Consulting Agreement is for five years from the date of the spinoff, and is
automatically renewable for successive one year terms unless either party shall
give notice of termination not less than six months prior to the end of the term
then in effect. We pay Mr. Nicastro $1,000 per month for his services under the
Consulting Agreement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

VOTING PROXY AGREEMENT

     In order for us to manufacture and sell gaming machines in Nevada, our
officers are required to be, and have been, registered, licensed or found
suitable by the Nevada Gaming Authorities. In

                                       44
<PAGE>   46

addition, under applicable Nevada law and administrative procedure, as a greater
than 10% stockholder of WMS, Sumner M. Redstone was required to apply, and has
an application pending with the Nevada Gaming Authorities, for a finding of
suitability as a stockholder of WMS. Mr. Redstone and National Amusements, Inc.
("NAI"), a company that he controls, collectively own 7,180,200 shares of our
common stock. Pending completion of the processing of this application, Mr.
Redstone and NAI, on September 21, 1995, voluntarily granted a voting proxy
under a voting agreement to Louis J. Nicastro and, if he is unable to perform
his duties under the voting agreement, Neil D. Nicastro, individually, to vote
all of Mr. Redstone's and NAI's shares of our common stock. The voting agreement
is intended to assure that the passive investment position of Mr. Redstone and
NAI relative to WMS will not change without prior notification to the Nevada
Gaming Authorities.

     Under the voting agreement, Mr. Nicastro votes each share of our common
stock owned by Mr. Redstone and NAI at his discretion at meetings of our
stockholders or acts as proxy in connection with any written consent of our
stockholders. The term of the voting agreement ends August 24, 2004 unless Mr.
Redstone terminates it upon 30 days' written notice. It may also be terminated
upon a finding by the Nevada Gaming Authorities that Mr. Redstone and NAI are
suitable as stockholders of WMS or are no longer subject to the applicable
provisions of Nevada gaming laws.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information as of August 31, 1999
(except as otherwise footnoted) with respect to persons known to be the
beneficial owner of more than five percent of our common stock, each of our
executive officers who is not also a director of WMS, and all of our directors
and executive officers as a group. Security ownership of our directors,
individually, is set forth under the heading "Identification of Directors" in
Item 10(a) above.

<TABLE>
<CAPTION>
                                                           NUMBER OF
                                                           SHARES OF          PERCENTAGE OF
                                                         COMMON STOCK          OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER                 BENEFICIALLY OWNED(1)   COMMON STOCK(2)
------------------------------------                 ---------------------   ---------------
<S>                                                  <C>                     <C>
Sumner M. Redstone and National Amusements,
  Inc. ............................................        7,180,200(3)           23.6%
  200 Elm Street
  Dedham, MA 02026
FMR Corp...........................................        3,499,880(4)           11.5%
  82 Devonshire St.
  Boston, MA 02109
Louis J. Nicastro(5)...............................        7,734,832(6)           25.0%
Harold H. Bach, Jr.(5).............................          112,530(7)              *
Kevin L. Verner(5).................................           45,359(8)              *
Orrin J. Edidin(5).................................           10,000(9)              *
Terence M. Dunleavy(5).............................            3,000(10)             *
Directors and executive officers as a group (12
  persons).........................................        8,370,209(11)          26.6%
</TABLE>

---------------

  *  Less than 1% of the number of outstanding shares of common stock on August
     31, 1999.

 (1) Under Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, shares
     underlying options are deemed to be beneficially owned if the holder of the
     option has the right to acquire beneficial ownership of the shares within
     60 days.

                                       45
<PAGE>   47

 (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.

 (3) The number of shares reported is based upon Amendment No. 20, dated January
     7, 1997, to the Schedule 13D filed by Sumner M. Redstone with the SEC and a
     Form 4, dated June 30, 1999, filed by Redstone with the SEC. On those
     filings, Redstone and National Amusements, Inc. reported beneficial
     ownership of and sole investment power with respect to 3,671,300 and
     3,483,900 shares, respectively, and shared voting power with respect to
     those shares under a Proxy Agreement entered into with WMS and Messrs.
     Louis J. and Neil D. Nicastro. See "Voting Proxy Agreement." As a result of
     his stock ownership in National Amusements, Redstone is considered the
     beneficial owner of the shares owned by National Amusements.

 (4) The number of shares reported is based upon Schedule 13G filed with the SEC
     by FMR Corp., the sole stockholder of Fidelity Management & Research
     Company, dated August 10, 1999. FMR reported that it is the beneficial
     owner of the shares as a result of Fidelity Management's acting as
     investment adviser to various investment companies and that Fidelity
     Advisor Value Strategies Fund, one of those investment companies, was a
     beneficial owner of 1,895,100 of these shares. FMR reported that it has
     sole power to dispose of or direct the disposition of the shares. FMR also
     reported that it may be deemed to be controlled by members of the Edward C.
     Johnson 3d family.

 (5) This person's address is c/o WMS Industries Inc., 3401 North California
     Avenue, Chicago, IL 60618.

 (6) The number of shares reported as beneficially owned includes 7,180,200
     shares owned by Sumner M. Redstone and National Amusements, Inc. for which
     the reporting person has shared voting power but no dispositive power.
     Includes 500,000 shares that Mr. Nicastro may acquire upon the exercise of
     stock options. For a discussion concerning the shared voting power with
     respect to the 7,180,200 shares referred to above, see "Voting Proxy
     Agreement."

 (7) Includes 94,433 shares that Mr. Bach may acquire upon the exercise of stock
     options.

 (8) Includes 37,773 shares that Mr. Verner may acquire upon the exercise of
     stock options.

 (9) Includes 10,000 shares that Mr. Edidin may acquire upon the exercise of
     stock options.

(10) Includes 2,000 shares that Mr. Dunleavy may acquire upon the exercise of
     stock options.

(11) Includes 1,021,754 shares that directors and executive officers may acquire
     upon the exercise of stock options. Additionally, includes 7,180,200 shares
     of common stock owned by Sumner M. Redstone and National Amusements, Inc.
     with respect to which Louis J. Nicastro and Neil D. Nicastro both have
     shared voting power but no dispositive power. See "Voting Proxy Agreement."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

RELATIONSHIP WITH MIDWAY

     Midway was formerly a wholly-owned subsidiary of ours. Since we distributed
all of our Midway stock to our stockholders in April 1998, we do not own any
Midway common stock. A majority of Midway's directors are also directors and/or
officers of ours. Additionally, three of the executive officers of Midway are
officers and/or directors of ours. See "Item 10 -- Directors and Executive
Officers of the Registrant."

                                       46
<PAGE>   48

     We have the following agreements with Midway, all of which became effective
on April 6, 1998:

     Manufacturing Agreement.  We manufacture coin-operated video games and kits
for Midway under this agreement. The agreement has a term of three years and
will automatically renew for successive terms of six months unless terminated
(a) by either party for any reason upon six months' notice or (b) if there is a
material default under the agreement or under the confidentiality provisions of
the Confidentiality and Non-Competition Agreement discussed below, immediately
at the election of the non-defaulting party. The agreement requires us to
allocate 65% of our combined production and storeroom square footage at our
Waukegan plant to perform our obligations under the agreement. Midway designs
its coin-operated video games, including programming, graphic design, electrical
engineering, sound engineering and model shop engineering. We provide some
production engineering activities, such as the design process for the assembly
of each game, creating work station profiles and quality control of incoming
parts and the assembly process. Midway supplies most of the materials used in
the manufacture of coin-operated video games, but we supply about 5% of the
materials, which are common with materials used in the production of our pinball
games, and charge Midway our cost plus 9.0% for these materials. All labor
costs, including fringe benefits, directly associated with the manufacturing of
coin-operated video games are charged to Midway at our cost, plus 9.0%. The
Waukegan plant's operating costs are either identified as Midway costs and
charged to Midway, or allocated as agreed between the parties plus 9%. The
identified or allocated costs include manufacturing costs, materials management
costs, quality assurance costs and administration costs.

     Cabinet Supply Agreement.  We supply cabinets for coin-operated video games
to Midway. The agreement has a term of three years and will automatically renew
for successive terms of six months each unless terminated (a) by either party
for any reason upon six months' notice or (b) in the event of a material
default, immediately at the election of the non-defaulting party. To initiate
the purchase of video game cabinets, Midway issues a pricing inquiry to us
specifying the number of cabinets to be ordered and the cabinet specifications.
We then provide a formal quote on the pricing inquiry, and, upon agreement on a
final price, a purchase order is issued. We build the cabinets in our Cicero,
Illinois plant and ship them to our Waukegan, Illinois plant for use in the
manufacture of coin-operated video games. Midway may purchase cabinets from
manufacturers other than us if we do not meet competitive bona-fide quotes.

     Spare Parts Sales and Service Agreement.  We sell spare parts for Midway's
coin-operated video games. The agreement has the same term and is terminable in
the same manner as the Cabinet Supply Agreement. We must purchase and maintain
an adequate inventory of spare parts needed by end-users of Midway's
coin-operated video games. Midway sells and arranges for the sale of some
specialized parts to us. We purchase all other parts through our usual vendor
sources or through Midway at negotiated prices. Midway is required to refer its
customers to us for spare parts purchases during the term of the agreement. The
agreement does not include warranty services, which Midway provides directly to
its customers.

     Sales Agreement.  This agreement was amended as of June 15, 1999. It has
the same term and is terminable in the same manner as the Cabinet Supply
Agreement. Midway markets, sells and field tests our new pinball products,
coordinating and negotiating print advertising and video presentations with
advertising and media firms, and negotiating distribution and sales agency
agreements with distributors. For these services, we pay Midway $500,000 per
annum (or a higher amount if agreed to between the parties -- through December
31, 1999, we have agreed to pay Midway at the rate of approximately $135,000 per
month) plus a commission of 1.5% on the first

                                       47
<PAGE>   49

$25.0 million of annual net sales by Midway of our products and 1.0% on annual
net sales of our products in excess of $25.0 million. An annual budget for
marketing and testing is developed and agreed upon in advance between the
parties annually and modified quarterly by mutual agreement. Additional services
that were not included in the budget are provided at Midway's cost plus 8.0% for
payroll, overhead and expense.

     Information Systems Service Agreement.  This agreement has a term of three
years with successive renewal periods of 18 months and is terminable by either
party (a) upon 18 months' notice or (b) upon a material default, immediately by
the non-defaulting party. We provide Midway with access to our computer systems
for many of their computing needs, including order entry, financial and
manufacturing modules, marketing and sales and engineering (including
engineering documentation and blueprint systems) as well as support for the
computer system. We also coordinate the provision and maintenance of cabling,
wiring, switching components, routers and gateway and the purchasing,
maintaining and upgrading of network services for Midway. These services include
purchasing of desktop computers and related hardware as well as providing some
telecommunications services to Midway. Midway may also request that we provide
services to it to develop their communications networking, operating and
computer system and other related services. Midway pays us an amount equal to
our cost for all services provided plus 6.6%.

     Confidentiality and Non-Competition Agreement.  Under this agreement,
Midway or we may designate business information as confidential, and the other
party must use its best efforts to keep this information confidential. The
agreement also includes five year non-competition and one year post-employment
non-solicitation clauses.

     Right of First Refusal Agreement.  We granted Midway a right of first
refusal with respect to any offer to us to purchase the Waukegan plant, as long
as the offer is not made in connection with the sale of our stock or assets and
business as a going concern, if we intend to accept the offer. The term of the
agreement expires April 5, 2008.

     Third Parties Agreement.  This agreement governs the treatment of the
numerous arrangements with third parties with respect to game development,
licensing and other matters. Under the agreement, Midway and we allocate the
rights and obligations under third party arrangements so that the party
receiving the benefits will bear the burdens of those agreements. The agreement
will remain in effect as long as any prior third party arrangements remain
outstanding.

     Temporary Support Services Agreement.  We supply all or a portion of
Midway's administrative, legal and accounting, information services, and
janitorial and other agreed upon services, including the use of space by Midway
in any of our facilities, as requested at any time by Midway. In exchange for
these services, Midway pays us an amount equal to our direct or allocated cost
(including wages, salaries, fringe benefits and materials), as indicated on our
monthly invoices. The agreement will continue for successive renewal periods of
three months each; provided, however, that each party may, upon 60 days' notice,
terminate any one or more of the services provided, except the use of space by
Midway in any WMS facility.

     Tax Separation 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 of the WMS Group. The agreement
sets forth the parties' respective liabilities for federal, state and local
taxes as well as their agreements as a result of Midway and its subsidiaries
ceasing to be members of the WMS Group. The agreement governs, among other
things, (i) the filing of tax returns with federal, state and local authorities,
(ii) the carryover of any tax benefits of Midway, (iii) the treatment of the
deduction attributable to the exercise of stock options to purchase our

                                       48
<PAGE>   50

common stock which are held by employees or former employees of Midway and any
other similar compensation related tax deductions, (iv) the treatment of certain
net operating loss carrybacks, (v) the treatment of audit adjustments, (vi)
procedures with respect to any proposed audit adjustment or other claim made by
any taxing authority with respect to a tax liability of Midway or any of its
subsidiaries. Some other tax matters are addressed in the Tax Sharing Agreement
described below.

     Tax Indemnification Agreement.  This agreement provides for indemnification
if the Midway spinoff fails to qualify under Section 355 of the Internal Revenue
Code of 1986 (the "Code"). Each of the parties agreed, among other things, that
for a period of two years after the spinoff, each would continue active conduct
of its historic trade or business as conducted by it during the five-year period
prior to the spinoff. Additionally, each party agreed not to: (i) merge or
consolidate with another entity; (ii) liquidate or partially liquidate; (iii)
sell or transfer all or substantially all its assets in a single transaction or
a series of transactions; (iv) redeem or otherwise repurchase any of its capital
stock in a manner contrary to certain Internal Revenue Service ("IRS") revenue
procedures; (v) enter into any transaction or make any change in its equity
structure which may cause the spinoff to be treated as a plan under which one or
more persons acquire directly or indirectly its common stock representing a "50
percent or greater interest" within the meaning of Section 355(d)(4) of the
Code; or (vi) in the case of Midway, except in connection with stock issued
under an employee benefit or compensation plan, and except as described in the
private letter ruling issued in connection with the spinoff, issue additional
shares of its capital stock, unless that party first obtains the consent of the
other party and, if applicable, the person or persons acquiring a "50 percent or
greater interest" in the party have agreed to become jointly or severally liable
for payments required to be made by that party under the Tax Indemnification
Agreement.

     Midway will indemnify WMS with respect to any action referred to above
which it takes that causes the spinoff to fail to qualify under Section 355 of
the Code, against any federal, state and local taxes, interest, penalties and
additions to tax imposed upon or incurred by the WMS Group or any member. WMS
will indemnify Midway and its subsidiaries against federal, state and local
taxes, interest, penalties and additions to tax resulting from the spinoff,
other than any of these liabilities for which Midway is required to indemnify
WMS. The agreement also governs the procedures for indemnification, calculation
of the amount of indemnified liability for income taxes and reduction of
indemnity by income tax benefits from indemnified liabilities.

     We also have the following agreements with Midway:

     Tax Sharing Agreement.  This agreement is dated July 1, 1996 and remains in
effect, except to the extent described in the Tax Separation Agreement referred
to above. Under this agreement, 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 that Midway is required
to pay to WMS for 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 these filings are 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 IRS or upon
state,

                                       49
<PAGE>   51

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 is
unable to pay its proportionate share of taxes.

     Patent License Agreement.  We entered into a patent license agreement dated
July 1, 1996 with Midway under which each party licensed to the other, on a
perpetual, royalty-free basis, some patents used in the development and
manufacture of both coin-operated video games and video lottery terminals and
other gaming machines.

OTHER RELATED PARTY TRANSACTIONS

     Ira S. Sheinfeld, one of our directors, is a member of the law firm of
Squadron, Ellenoff, Plesent & Sheinfeld LLP which we have retained to provide
tax services during the last fiscal year and propose to retain for tax services
during the current fiscal year.

     We pay Neil D. Nicastro $1,000 per month for his services under the
Consulting Agreement. See "Item 11. Executive Compensation -- Employment
Contracts."

     Under the Termination Agreement, as full consideration for payments that
would otherwise have been made to Neil D. Nicastro under his earlier employment
agreement with us with respect to base salary, bonus, retirement and death
benefits, Mr. Nicastro was paid a lump sum of $2,500,000, and he was granted a
10-year option to purchase 250,000 shares of our common stock at an exercise
price of $5.4375. See "Item 11. Executive Compensation -- Employment Contracts."

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

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

       (2) Financial Statement Schedule.  See "Index to Financial Information"
on page F-1.

       (3) Exhibits.

<TABLE>
<C>                      <S>
          2(a)           Plan of Reorganization and Distribution Agreement dated as
                         of March 20, 1997 among WMS, Williams Hotel Corporation and
                         WHG, incorporated by reference to Exhibit 2.1 to WMS's
                         Report on Form 8-K filed May 5, 1997 (the "1997 Form 8-K").
          3(a)           Amended and Restated Certificate of Incorporation of WMS
                         dated February 17, 1987; Certificate of Amendment dated
                         January 28, 1993; and Certificate of Correction dated May 4,
                         1994, incorporated by reference to Exhibit 3(a) to WMS's
                         Annual Report on Form 10-K for the year ended June 30, 1994
                         (the "1994 10-K").
          3(b)           Certificate of Amendment to the Amended and Restated
                         Certificate of Incorporation of WMS, as filed with the
                         Secretary of State of the State of Delaware on February 25,
                         1998, incorporated by reference to Exhibit 3.1 to WMS's
                         Quarterly Report on Form 10-Q for the fiscal quarter ended
                         March 31, 1998.
          3(c)           Form of Certificate of Designations of Series A Preferred
                         Stock (included as Exhibit A to the Rights Agreement
                         referred to in Exhibit 4(b) hereto).
</TABLE>

                                       50
<PAGE>   52
<TABLE>
<C>                      <S>
          3(d)           By-Laws of WMS, as amended and restated through June 26,
                         1996, incorporated by reference to Exhibit 3(b) to WMS's
                         Annual Report on Form 10-K for the year ended June 30, 1996.
          4              Rights Agreement dated as of March 5, 1998 between WMS and
                         The Bank of New York, as Rights Agent, incorporated by
                         reference to Exhibit 1 to WMS's Registration Statement on
                         Form 8-A (File No. 1-8300) filed March 25, 1998 and Form of
                         Rights Certificate (included as Exhibit B to the Rights
                         Agreement).
         10(a)           1982 Employee Stock Option Plan, as amended, incorporated by
                         reference to Exhibit 10(e) to the 1994 10-K.
         10(b)           1991 Stock Option Plan, as amended, incorporated by
                         reference to Exhibit 10(f) to the 1994 10-K.
         10(c)           1993 Stock Option Plan, incorporated by reference to Exhibit
                         10(g) to the 1994 10-K.
         10(d)           1994 Stock Option Plan, incorporated by reference to
                         Appendix A to WMS's Definitive Proxy Statement dated
                         December 12, 1994.
         10(e)           Form of Indemnity Agreement authorized to be entered into
                         between WMS and each officer and director approved by the
                         Board of Directors, incorporated by reference to Exhibit
                         10(k) to the 1994 10-K.
         10(f)           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.
         10(g)           Voting Proxy Agreement dated September 21, 1995 among Louis
                         J. Nicastro, Neil D. Nicastro, WMS, Sumner M. Redstone and
                         National Amusements, Inc., incorporated by reference to
                         Exhibit 10(u) to Company's Annual Report on Form 10-K for
                         the fiscal year ended June 30, 1995.
         10(h)           Tax Sharing Agreement dated as of July 1, 1996 among WMS,
                         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(i)           Patent License Agreement dated as of July 1, 1996 among WMS,
                         Williams Electronics Games, Inc. ("WEG") and Midway,
                         incorporated by reference to Exhibit 10.4 to the Midway S-1.
         10(j)           Tax Sharing Agreement, dated as of March 20, 1997, between
                         WMS, 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.
         10(k)           Amendment to Article III, Section 3 (Option Adjustments) of
                         1982 Employee Stock Option Plan, incorporated by reference
                         to Proposal No. 2 to WMS's Definitive Proxy Statement on
                         Schedule 14A as filed with the Commission on December 11,
                         1996.
         10(l)           Amendment to Article III, Section 3 (Option Adjustments) of
                         1991 Stock Option Plan, incorporated by reference to
                         Proposal No. 2 to WMS's Definitive Proxy Statement on
                         Schedule 14A as filed with the Commission on December 11,
                         1996.
         10(m)           Amendment to Article III, Section 3 (Option Adjustments) of
                         1993 Stock Option Plan, incorporated by reference to
                         Proposal No. 2 to WMS's Definitive Proxy Statement on
                         Schedule 14A as filed with the Commission on December 11,
                         1996.
         10(n)           Amendment to Article III, Section 3 (Option Adjustments) of
                         1994 Stock Option Plan, incorporated by reference to
                         Proposal No. 2 to WMS's Definitive Proxy Statement on
                         Schedule 14A as filed with the Commission on December 11,
                         1996.
</TABLE>

                                       51
<PAGE>   53
<TABLE>
<C>                      <S>
         10(o)           1998 Non-Qualified Stock Option Plan, incorporated by
                         reference to Exhibit 4.6(a) to WMS's Registration Statement
                         No. 333-57585 on Form S-8 filed with the Commission on June
                         24, 1998 (the "1998 S-8").
         10(p)           Severance Agreement dated March 5, 1998 between WMS and Neil
                         D. Nicastro, incorporated by reference to Exhibit 2 to the
                         Report on Form 8-K filed April 17, 1998 (the "April 1998
                         8-K").
         10(q)           Consulting Agreement dated as of April 6, 1998 between WMS
                         and Neil D. Nicastro, incorporated by reference to Exhibit 3
                         to the April 1998 8-K.
         10(r)           Employment Agreement dated as of April 6, 1998 between WMS
                         and Louis J. Nicastro, incorporated by reference to Exhibit
                         1 to the April 1998 8-K.
         10(s)           Manufacturing Agreement dated as of April 6, 1998 between
                         WEG and Midway and the Guaranty of the obligations of WEG
                         thereunder by WMS, incorporated by reference to Exhibit
                         10.23 to the Midway Annual Report on Form 10-K for the
                         fiscal year ended June 30, 1998 (the "Midway 1998 10-K").
         10(t)           Cabinet Supply Agreement dated as of April 6, 1998 between
                         Lenc-Smith Inc. and Midway, incorporated by reference to
                         Exhibit 10.24 to the Midway 1998 10-K.
         10(u)           Spare Parts Sales and Service Agreement dated as of April 6,
                         1998 among WEG, Midway and Atari Games Corporation,
                         incorporated by reference to Exhibit 10.25 to the Midway
                         1998 10-K.
         10(v)           Sales Agreement dated as of April 6, 1998 between WEG and
                         Midway, incorporated by reference to Exhibit 10.26 to the
                         Midway 1998 10-K.
         10(w)           Information Systems Service Agreement dated as of April 6,
                         1998 between WEG and Midway, incorporated by reference to
                         Exhibit 10.27 to the Midway 1998 10-K.
         10(x)           Confidentiality and Non-Competition Agreement dated as of
                         April 6, 1998 between WMS and Midway, incorporated by
                         reference to Exhibit 10.28 to the Midway 1998 10-K.
         10(y)           Right of First Refusal Agreement dated as of April 6, 1998
                         between WMS and Midway, incorporated by reference to Exhibit
                         10.29 to the Midway 1998 10-K.
         10(z)           Third Parties Agreement dated as of April 6, 1998 between
                         WMS and Midway, incorporated by reference to Exhibit 10.30
                         to the Midway 1998 10-K.
         10(aa)          Temporary Support Services Agreement dated as of April 6,
                         1998 between WMS and Midway, incorporated by reference to
                         Exhibit 10.31 to the Midway 1998 10-K.
         10(bb)          Tax Separation Agreement dated as of April 6, 1998 between
                         WMS and Midway, incorporated by reference to Exhibit 10.32
                         to the Midway 1998 10-K.
         10(cc)          Tax Indemnification Agreement dated as of April 6, 1998
                         between WMS and Midway, incorporated by reference to Exhibit
                         10.33 to the Midway 1998 10-K.
         10(dd)          Worldwide Merchandising Agreement/License Agreement Summary
                         and License Agreement between WMS Gaming Inc., Hasbro, Inc.
                         and Hasbro International, Inc. dated as of the first day of
                         September, 1997, incorporated by reference to Exhibit 99.1
                         to WMS's Registration Statement No. 83021 on Form S-3 filed
                         with the Commission on July 16, 1999 (the "1999 S-3").
                         Portions of this exhibit have been omitted under a request
                         for confidential treatment filed separately with the
                         Commission.
         10(ee)          Amendment to License Agreement between WMS Gaming Inc.,
                         Hasbro, Inc. and Hasbro International, Inc. dated 1998,
                         incorporated by reference to Exhibit 99.2 to the 1999 S-3.
                         Portions of this exhibit have been omitted under a request
                         for confidential treatment filed separately with the
                         Commission.
         10(ff)          Employment Agreement between Terence M. Dunleavy and WMS
                         dated June 1, 1999, incorporated by reference to Exhibit
                         99.3 to the 1999 S-3.
</TABLE>

                                       52
<PAGE>   54
<TABLE>
<C>                      <S>
         10(gg)          Employment Agreement between Kevin L. Verner and WMS dated
                         June 1, 1999, incorporated by reference to Exhibit 99.4 to
                         the 1999 S-3.
         10(hh)          Letter agreement dated June 15, 1999 amending Sales
                         Agreement dated as of April 6, 1998 between WEG and Midway,
                         incorporated by reference to Exhibit 99.5 to the 1999 S-3.
         10(ii)          Employment Agreement between Louis J. Nicastro and WMS dated
                         September 2, 1999.
         21              Subsidiaries of the Registrant, incorporated by reference to
                         Exhibit 21 to WMS's Annual Report on Form 10-K for the
                         fiscal year ended June 30, 1998.
         23              Consent of Ernst & Young LLP.
         27              Financial Data Schedule.
</TABLE>

  (b) Reports on Form 8-K.

     No Reports on Form 8-K were filed by us in the quarter ended June 30, 1999.

                                       53
<PAGE>   55

                         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, 1999 and June 30,
  1998......................................................    F-3
Consolidated statements of income for the years ended June
  30, 1999, 1998 and 1997...................................    F-4
Consolidated statements of changes in stockholders' equity
  for the years ended June 30, 1999, 1998 and 1997..........    F-5
Consolidated statements of cash flows for the years ended
  June 30, 1999, 1998 and 1997..............................    F-6
Notes to consolidated financial statements..................    F-7
Financial statement schedule II -- Valuation and Qualifying
  Accounts for the years ended June 30, 1999, 1998 and
  1997......................................................   F-21
</TABLE>

     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>   56

                         REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors
WMS Industries Inc.

     We have audited the accompanying consolidated balance sheets of WMS
Industries Inc. and subsidiaries as of June 30, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. Our audits
also included the financial statement schedule listed in the Index on page F-1.
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 financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WMS Industries Inc. and subsidiaries at June 30, 1999 and 1998, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended June 30, 1999, 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 12, 1999

                                       F-2
<PAGE>   57

                              WMS INDUSTRIES INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(IN THOUSANDS)                                                  1999       1998
JUNE 30,                                                      --------   --------
<S>                                                           <C>        <C>
ASSETS
Current assets:
Cash and cash equivalents...................................  $ 58,669   $ 36,943
Short-term investments......................................        --     26,000
                                                              --------   --------
                                                                58,669     62,943
Receivables, net of allowances of $3,807 in 1999 and $2,397
  in 1998...................................................    48,135     30,432
Income tax receivable.......................................     3,257     10,114
Inventories
  Raw materials and work in progress........................    20,094     17,523
  Finished goods............................................    25,421     22,097
                                                              --------   --------
                                                                45,515     39,620
Deferred income taxes.......................................    17,595     18,155
Other current assets........................................       976        769
                                                              --------   --------
TOTAL CURRENT ASSETS........................................   174,147    162,033
Gaming machines on participation or lease, net..............    19,731      3,725
Property, plant and equipment, net..........................    38,157     32,607
Other assets................................................     6,044      9,157
                                                              --------   --------
Total assets................................................  $238,079   $207,522
                                                              ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable............................................  $ 14,868   $  7,818
Accrued compensation and related benefits...................     4,988      3,020
Accrued liability related to WMS Gaming Inc. patent
  litigation................................................    38,543     35,372
Other accrued liabilities...................................     5,708      3,757
                                                              --------   --------
TOTAL CURRENT LIABILITIES...................................    64,107     49,967
Deferred income taxes.......................................       625        869
Other noncurrent............................................     1,268      1,395
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none
  issued)...................................................        --         --
Common stock (issued 30,428,621 shares in 1999 and
  28,032,766 shares in 1998)................................    15,214     14,016
Additional paid-in capital..................................   180,989    170,418
Accumulated deficit.........................................   (23,742)   (28,995)
                                                              --------   --------
                                                               172,461    155,439
Treasury stock, at cost (77,312 shares in 1999 and 52,312
  shares in 1998)...........................................      (382)      (148)
                                                              --------   --------
TOTAL STOCKHOLDERS' EQUITY..................................   172,079    155,291
                                                              --------   --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................  $238,079   $207,522
                                                              ========   ========
</TABLE>

See notes to consolidated financial statements.

                                       F-3
<PAGE>   58

                              WMS INDUSTRIES INC.

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,                                            1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
REVENUES
  Gaming:
  Machine sales.............................................  $101,895   $ 48,820   $ 25,334
  Participation and lease...................................    24,061      7,968      8,279
                                                              --------   --------   --------
                                                               125,956     56,788     33,613
  Pinball and other.........................................    61,334     42,202     42,983
                                                              --------   --------   --------
Total revenues..............................................   187,290     98,990     76,596
                                                              --------   --------   --------
COST AND EXPENSES
  Cost of sales.............................................   130,612     76,971     60,146
  Research and development..................................    14,143     12,908     12,882
  Selling and administrative................................    34,551     27,885     20,959
  Adjustment to common stock options........................     3,037     59,890         --
  Provisions related to WMS Gaming Inc. patent litigation...        --         --     61,925
                                                              --------   --------   --------
Total costs and expenses....................................   182,343    177,654    155,912
                                                              --------   --------   --------
Operating income (loss).....................................     4,947    (78,664)   (79,316)
Interest and other income...................................     3,525      4,410      5,661
Interest expense............................................        --         --     (3,443)
                                                              --------   --------   --------
Income (loss) from continuing operations before income
  taxes.....................................................     8,472    (74,254)   (77,098)
Provision (credit) for income taxes.........................     3,219    (25,430)   (30,301)
                                                              --------   --------   --------
Income (loss) from continuing operations....................     5,253    (48,824)   (46,797)
Discontinued operations, net of applicable income taxes:
  Video games segment
     Income from discontinued operations....................        --     28,302     34,813
     Extraordinary gain on early extinguishment of debt.....        --         --      2,641
     Costs related to discontinuance, net...................        --     (1,556)    (1,650)
     Gain on initial public offering of subsidiary..........        --         --     47,771
  Hotel and casino segments
     Income from discontinued operations....................        --         --      4,742
     Costs related to discontinuance........................        --         --       (825)
                                                              --------   --------   --------
Net income (loss)...........................................  $  5,253   $(22,078)  $ 40,695
                                                              ========   ========   ========
Basic and diluted per share of common stock:
  Income (loss) from continuing operations..................  $    .18   $  (1.85)  $  (1.92)
                                                              --------   --------   --------
  Net income (loss).........................................  $    .18   $   (.84)  $   1.67
                                                              --------   --------   --------
Average number of shares outstanding........................    29,308     26,446     24,334
                                                              --------   --------   --------
</TABLE>

See notes to consolidated financial statements.

                                       F-4
<PAGE>   59

                              WMS INDUSTRIES INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                             ADDITIONAL   RETAINED    TREASURY   UNREALIZED       TOTAL
                                   COMMON     PAID-IN     EARNINGS     STOCK,     HOLDING     STOCKHOLDERS'
                                    STOCK     CAPITAL     (DEFICIT)   AT COST       LOSS         EQUITY
         (IN THOUSANDS)            -------   ----------   ---------   --------   ----------   -------------
<S>                                <C>       <C>          <C>         <C>        <C>          <C>
BALANCE AS OF JUNE 30, 1996......  $12,100    $ 82,496    $123,906     $(148)     $ (8,321)     $ 210,033
Net income for the year ended
  June 30, 1997..................      --           --      40,695        --            --         40,695
Increase in unrealized holding
  loss on noncurrent investment
  in marketable equity
  securities.....................      --           --          --        --        (4,437)        (4,437)
                                                                                                ---------
Comprehensive income.............                                                                  36,258
Issuance of 70,104 shares of
  common stock through exercise
  of options.....................      35        1,325          --        --            --          1,360
Tax benefit from common stock
  options........................      --          147          --        --            --            147
Adjustment to common stock
  options for distribution of
  subsidiary.....................      --          705          --        --            --            705
Distribution of subsidiary as a
  tax-free dividend..............      --           --     (52,503)       --            --        (52,503)
                                   -------    --------    --------     -----      --------      ---------
BALANCE AS OF JUNE 30, 1997......  12,135       84,673     112,098      (148)      (12,758)       196,000
Net loss for the year ended June
  30, 1998.......................      --           --     (22,078)       --            --        (22,078)
Decrease in unrealized loss on
  noncurrent investment in
  marketable equity securities...      --           --          --        --        12,758         12,758
                                                                                                ---------
Comprehensive loss...............                                                                  (9,320)
Issuance of 758,385 shares of
  common stock through exercise
  of stock options...............     379       13,954          --        --            --         14,333
Issuance of 2,488,855 shares of
  common stock in conversion of
  subordinated debentures........   1,244       55,090          --        --            --         56,334
Issuance of 515,360 shares of
  common stock relating to
  adjustment of common stock
  options........................     258       14,717          --        --            --         14,975
Tax benefit from common stock
  options........................      --        1,984          --        --            --          1,984
Distribution of subsidiary as a
  tax-free dividend..............      --           --    (119,015)       --            --       (119,015)
                                   -------    --------    --------     -----      --------      ---------
BALANCE AS OF JUNE 30, 1998......  14,016      170,418     (28,995)     (148)           --        155,291
Net income for the year ended
  June 30, 1999..................      --           --       5,253        --            --          5,253
Issuance of 2,395,855 shares of
  common stock through exercise
  stock options..................   1,198        6,893          --        --            --          8,091
Tax benefit from common stock
  options........................      --        3,678          --        --            --          3,678
Received 25,000 treasury shares
  in lieu of cash from exercise
  of stock options...............      --           --          --      (234)           --           (234)
                                   -------    --------    --------     -----      --------      ---------
BALANCE AS OF JUNE 30, 1999......  $15,214    $180,989    $(23,742)    $(382)     $     --      $ 172,079
                                   =======    ========    ========     =====      ========      =========
</TABLE>

See notes to consolidated financial statements.
                                       F-5
<PAGE>   60

                              WMS INDUSTRIES INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED JUNE 30,                                            1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $  5,253   $(22,078)  $ 40,695
Adjustments to reconcile net income (loss) to net cash
  provided (used) by operating activities:
  Income from discontinued operations -- video games
     segment................................................        --    (28,302)   (37,454)
  Income from discontinued operations -- gain on initial
     public offering of subsidiary -- video games segment...        --         --    (47,771)
  Income from discontinued operations -- hotel and casino
     segments...............................................        --         --     (4,742)
  Costs related to discontinuance...........................        --      1,556      2,475
  Gain on sale of marketable equity securities..............        --       (859)        --
  Depreciation and amortization.............................     8,752      5,642      6,279
  Receivables provision.....................................     3,271        581        335
  WMS common stock issued in common stock option
     adjustment.............................................        --     14,975         --
  Provisions related to Gaming patent litigation............        --         --     60,875
  Deferred income taxes.....................................       316      3,098    (21,247)
  Stock option compensation expense.........................        --         --        705
  Tax benefit from exercise of common stock options.........     3,678      1,984        147
  Increase (decrease) resulting from changes in operating
     assets and liabilities
     Receivables............................................   (20,974)    (3,738)    (4,505)
     Income tax receivable..................................     6,857    (10,114)        --
     Inventories............................................    (2,296)    (6,031)   (12,207)
     Other current assets...................................      (207)       490      3,972
     Accounts payable and accruals..........................    10,969      2,369     (2,608)
     Other assets and liabilities not reflected elsewhere...     2,845       (458)     1,657
                                                              --------   --------   --------
Net cash provided (used) by operating activities............    18,464    (40,885)   (13,394)
INVESTING ACTIVITIES
Purchase of property, plant and equipment...................   (10,394)    (6,192)    (3,471)
Additions to gaming machines on participation or lease......   (20,201)      (305)    (2,184)
Net change in short-term investments........................    26,000     44,000    (42,891)
Proceeds from sale of marketable equity securities..........        --     28,617         --
                                                              --------   --------   --------
Net cash provided (used) by investing activities............    (4,595)    66,120    (48,546)
FINANCING ACTIVITIES
Cash received on exercise of stock options..................     7,857     14,333      1,360
Redemption of long-term debt................................        --       (178)        --
                                                              --------   --------   --------
Net cash provided by financing activities...................     7,857     14,155      1,360
DISCONTINUED OPERATIONS
Net transfer from discontinued operations and payment of
  transaction costs in 1998 -- video games segment..........        --     (4,300)    50,000
Net transfer to discontinued operations and payment of
  transaction costs -- hotel and casino segments............        --         --    (11,918)
                                                              --------   --------   --------
Net cash (used) provided by discontinued operations.........        --     (4,300)    38,082
Increase (decrease) in cash and cash equivalents............    21,726     35,090    (22,498)
Cash and cash equivalents at beginning of year..............    36,943      1,853     24,351
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $ 58,669   $ 36,943   $  1,853
                                                              ========   ========   ========
</TABLE>

See notes to consolidated financial statements.

                                       F-6
<PAGE>   61

                              WMS INDUSTRIES INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BUSINESS OVERVIEW

     WMS Industries Inc. ("WMS") operates in three business segments: the gaming
segment which is engaged in the design, manufacture and sale of slot machines
(video and reel type), video lottery terminals and other gaming devices; the
pinball and cabinets segment which is engaged in the design, manufacture and
sale of coin-operated pinball games and the manufacture of cabinets; and the
contract manufacturing segment which continues to manufacture under a contract
the coin-operated video games designed and sold by Midway Games Inc. ("Midway").
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Such preparation requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.

     On April 6, 1998, WMS completed a spin-off of its 86.8% ownership interest
in Midway consisting of 33,400,000 shares of Midway common stock, to the WMS
stockholders. The activities of Midway prior to its spin-off, which was the
video game segment of WMS, are shown as discontinued operations.

     On April 22, 1997, WMS completed the spin-off of 100% of WMS' Puerto Rico
based hotel, casino and hotel management business, WHG Resorts & Casinos Inc.
("WHG Resorts & Casinos"), to the WMS stockholders. Its activities prior to its
spin-off are shown as discontinued operations.

NOTE 2: PRINCIPAL ACCOUNTING POLICIES

CONSOLIDATION POLICY

     The consolidated financial statements include the accounts of WMS and its
majority-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated. Certain prior year balances have
been reclassified to conform with the current year presentation.

CASH EQUIVALENTS

     All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.

INVENTORIES

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

PROPERTY, PLANT AND EQUIPMENT AND GAMING MACHINES

     Property, plant and equipment and gaming machines are stated at cost and
depreciated by the straight-line method over their estimated useful lives.

                                       F-7
<PAGE>   62
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING EXPENSE

     The cost of advertising is charged to earnings as incurred and for fiscal
1999, 1998 and 1997 was $1,263,000, $633,000 and $590,000, respectively.

ACCOUNTING PRONOUNCEMENTS

     As of July 1, 1998, the Company adopted Financial Accounting Standards No.
130, Reporting Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on net income or stockholders' equity.
Prior year financial statements have been reclassified to conform to these
requirements.

NOTE 3: DISCONTINUED OPERATIONS

     As discussed in Note 1, on April 6, 1998, the Company completed a spin-off
of its 86.8% interest in Midway. Accordingly, the results of operations and cash
flows of Midway have been reported as discontinued operations in the
consolidated financial statements. Net assets of the video games segment of
$119,015,000 at the time of spin-off were included as a reduction of retained
earnings from the tax-free dividend.

     In conjunction with the Midway spin-off, at the request of the Board of
Directors, on April 6, 1998 Neil D. Nicastro resigned as President, Chief
Executive Officer and Chief Operating Officer of WMS to devote his full time to
Midway as Chairman of the Board, President, Chief Executive Officer and Chief
Operating Officer. Neil D. Nicastro agreed to the early termination and full
settlement of his employment agreement with WMS pursuant to which, in lieu of
all future payments of base salary, bonus, retirement and death benefits, he
received a payment of $2,500,000 and a 10 year option to purchase 250,000 shares
of the Company's common stock. The payment less income tax benefit of $861,000
and amounts previously accrued under his employment agreement are included in
discontinuance costs in fiscal 1998. Other discontinuance costs of $150,000 were
accrued in connection with the Midway spin-off in addition to the $1,650,000
accrued at June 30, 1997.

     The condensed income statement for Midway for the nine months ended March
31, 1998 and for the fiscal year ended June 30, 1997 is as follows:

<TABLE>
<CAPTION>
                                                                1998       1997
                       (IN THOUSANDS)                         --------   --------
<S>                                                           <C>        <C>
Revenues....................................................  $293,144   $388,266
Cost and expenses...........................................   242,850    327,693
                                                              --------   --------
Operating income............................................    50,294     60,533
Interest and other income, net..............................     2,326      2,130
                                                              --------   --------
Income before tax provision and extraordinary credit........    52,620     62,663
Provision for income taxes..................................   (19,996)   (23,812)
                                                              --------   --------
Income before extraordinary credit..........................    32,624     38,851
Extraordinary gain, net.....................................        --      3,044
                                                              --------   --------
Net income..................................................  $ 32,624   $ 41,895
                                                              ========   ========
</TABLE>

                                       F-8
<PAGE>   63
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The income from discontinued operations of the video games segment for the
nine months ended March 31, 1998 and fiscal 1997 shown in the WMS consolidated
statements of income is equal to income before extraordinary credit of Midway
reduced by minority interest in income of $4,322,000 and $4,038,000,
respectively. The extraordinary gain is reduced by minority interest of
$403,000. WMS recognized an after tax gain of $47,771,000 on the Midway initial
public offering completed on October 29, 1996.

     On April 22, 1997 the Company completed a spin-off of WHG Resorts &
Casinos. Accordingly, the results of operations and cash flows of these business
segments have been reported as discontinued operations in the consolidated
financial statements for fiscal 1997. Net assets of the hotel and casino
segments of $52,503,000 at the time of spin-off were included as a reduction of
retained earnings from the tax-free dividend.

     Income from discontinued operations includes the results of WHG Resorts &
Casinos for the nine months ended March 31, 1997 as follows:

<TABLE>
<CAPTION>
                                                               1997
                       (IN THOUSANDS)                          ----
<S>                                                           <C>
Revenues....................................................  $41,206
Costs and expenses..........................................   30,384
                                                              -------
Operating income............................................   10,822
Interest expense, net.......................................     (846)
                                                              -------
Income before income taxes and minority interests...........    9,976
Provision for income taxes..................................   (2,302)
Minority interests..........................................   (2,932)
                                                              -------
Income from discontinued operations.........................  $ 4,742
                                                              =======
</TABLE>

NOTE 4: INVESTMENTS IN SECURITIES

     All investments are designated as available-for-sale and are recorded at
market value with the holding gain or loss reflected in stockholders' equity.
Short-term investments consist principally of money market preferred stocks that
generally have no fixed maturity dates but have dividend reset dates every 49
days or less. There were no securities held at June 30,1999. At June 30, 1998
securities with costs equal to market were securities included as part of cash
equivalents of $9,407,000 and short-term investments of $26,000,000.

NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND GAMING MACHINES

     At June 30 net property, plant and equipment were:

<TABLE>
<CAPTION>
                                                                1999       1998
                       (IN THOUSANDS)                         --------   --------
<S>                                                           <C>        <C>
Land........................................................  $  3,481   $  3,481
Buildings and improvements..................................    27,629     25,113
Machinery and equipment.....................................    33,690     26,626
Furniture and fixtures......................................     2,214      2,107
                                                              --------   --------
                                                                67,014     57,327
Less accumulated depreciation...............................   (28,857)   (24,720)
                                                              --------   --------
Net property, plant and equipment...........................  $ 38,157   $ 32,607
                                                              ========   ========
</TABLE>

                                       F-9
<PAGE>   64
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Accumulated depreciation of gaming machines on participation or lease at
June 30, 1999 and 1998 was $7,135,000 and $2,940,000, respectively.

NOTE 6: INCOME TAXES

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

<TABLE>
<CAPTION>
                                                               1999      1998
                       (IN THOUSANDS)                         -------   -------
<S>                                                           <C>       <C>
Deferred tax assets resulting from
  Inventory valuation.......................................  $ 2,556   $ 2,335
  Receivables valuation.....................................    1,221       472
  Accrued items not currently deductible....................      507       517
  Accruals relating to Gaming litigation....................   15,500    18,275
                                                              -------   -------
  Total deferred tax assets.................................   19,784    21,599
                                                              -------   -------
Deferred tax liabilities resulting from
  Tax over book depreciation................................      650       924
  Federal tax on deferred state tax.........................      897     1,682
  Other.....................................................    1,267     1,707
                                                              -------   -------
  Total deferred tax liabilities............................    2,814     4,313
                                                              -------   -------
Net deferred tax assets.....................................  $16,970   $17,286
                                                              =======   =======
</TABLE>

     Significant components of the provision (credit) for income taxes for the
years ended June 30, 1999, 1998 and 1997 were:

<TABLE>
<CAPTION>
                                                          1999      1998       1997
                    (IN THOUSANDS)                       ------   --------   --------
<S>                                                      <C>      <C>        <C>
Current
  Federal..............................................  $ (671)  $(26,753)  $ (7,754)
  State................................................    (104)    (3,759)    (1,447)
                                                         ------   --------   --------
          Total current................................    (775)   (30,512)    (9,201)
Deferred
  Federal..............................................    (200)     2,679    (17,297)
  State................................................     (21)       419     (3,950)
  Change in state allocations..........................     537         --         --
                                                         ------   --------   --------
          Total deferred...............................     316      3,098    (21,247)
Provision for tax benefits resulting from stock
  options..............................................   3,678      1,984        147
                                                         ------   --------   --------
Provision (credit) for income taxes on continuing
  operations...........................................   3,219    (25,430)   (30,301)
Provision for income taxes on discontinued operations
  extraordinary gain...................................      --         --      2,001
Provision for income taxes on discontinued
  operations...........................................      --     19,135     57,522
                                                         ------   --------   --------
Income tax (credit) provision, net.....................  $3,219   $ (6,295)  $ 29,222
                                                         ======   ========   ========
</TABLE>

                                      F-10
<PAGE>   65
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The provision or credit for income taxes on continuing operations differs
from the amount computed using the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
                                                              1999   1998   1997
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Statutory federal income tax rate...........................  35.0%  35.0%  35.0%
State income taxes, net of federal effect...................  8.7    2.7     4.6
Dividend received deduction on investment income............  (5.1)   --      --
Option adjustment cost not deductible.......................   --    (3.5)    --
Other, net..................................................  (0.6)   --    (0.3)
                                                              ----   ----   ----
                                                              38.0%  34.2%  39.3%
</TABLE>

NOTE 7: LINE OF CREDIT AND LONG-TERM DEBT

     The Company has a line of credit for $25,000,000 under a revolving credit
agreement for a one-year term to August 1, 2000 which contains usual bank line
of credit terms.

     During fiscal 1998, as a result of a call for redemption on September 22,
1997 of 33% of the $57,500,000 in outstanding debentures and a call for
redemption on October 29, 1997 of the remaining outstanding debentures,
debentures with an aggregate principal amount of $57,322,000 were converted into
2,488,855 shares of WMS common stock and $178,000 of such debentures were
redeemed.

     The amount of interest paid during fiscal 1997 was $3,443,000.

NOTE 8: STOCKHOLDERS' EQUITY

     Authorized common stock of the Company consists of 100,000,000 shares of
$.50 par value. At June 30, 1999, 2,998,910 shares of common stock were reserved
for possible issuance for stock option plans. Additionally, there are 5,000,000
shares of $.50 par value preferred stock authorized. The preferred stock is
issuable in series, and the relative rights and preferences and the number of
shares in each series are to be established by the Board of Directors.

     At the date of the Midway spin-off the WMS Rights Agreement became
effective. Under the Rights Agreement, each share of WMS common stock has an
accompanying Right to purchase, under certain conditions, one one-hundredth of a
share of the Company's Series A Preferred Stock at an exercise price of $100,
permitting each holder to receive $200 worth of the Company's common stock
valued at the then current market price. The Rights are redeemable by the
Company at $.01 per Right, subject to certain conditions, at any time and expire
in 2007. The Rights are intended to assure fair shareholder treatment in any
attempted takeover of the Company and to guard against abusive takeover tactics.

NOTE 9: COMMON STOCK PLANS

     Under the stock option plans the Company may grant both incentive stock
options and nonqualified options on shares of common stock through the year
2008. Options may be granted to employees and under certain conditions to
non-employee directors and consultants. The stock option committee has the
authority to fix the terms and conditions upon which each employee option is
granted, but in no event shall the term exceed ten years or generally be granted
at less than 100% of the fair market value of the stock at the date of grant.

                                      F-11
<PAGE>   66
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On September 30, 1997, the Company entered into an agreement with each of
the holders of all of the common stock options then outstanding, which were
exercisable into 4,089,011 shares of WMS common stock, regarding option
adjustment in connection with the Midway spin-off. Each option holder agreed not
to exercise their stock option through the date of the Midway spin-off (see Note
1).

     On the spin-off record date of March 31, 1998, the Company recorded a
pre-tax charge of $59,890,000 for the adjustment to stock options, pursuant to
the anti-dilution provision of the Company's stock option plans, to compensate
the holders for the lost opportunity value represented by the shares of Midway
distributed in the spin-off which option holders did not participate in. Of that
amount, cash payments on April 6, 1998 totaled $35,001,000, and 515,360 pre
spin-off shares of WMS common stock were issued valued at $14,974,000. An
additional $4,179,000 was paid in the fourth quarter of fiscal 1998 and $779,000
was accrued for the Company's portion of payroll tax. Expense related to the
adjustment of stock options that were not vested as of June 30, 1998 are being
recorded and paid consistent with the options' vesting schedule. During fiscal
1999 $3,037,000 of such expense was recorded. At June 30, 1999, the maximum
additional future pre-tax expense related to non-vested stock options is
$2,911,000 plus interest.

     At the request of the Board of Directors, in lieu of receiving from the
Company the adjustment to stock option payment, Louis J. Nicastro, Chairman of
the Board, exercised all of his 629,554 WMS common stock options and sold the
shares of common stock on March 19, 1998. The cash received by the Company of
$13,437,000 from exercise of these options was then available for the stock
option adjustment payments. Louis J. Nicastro received $4,957,000 from the
Company as compensation for the difference between what the Company would have
paid him for his stock option adjustment and the net he received from exercise
and sale.

     The Company accounts for stock options for purposes of determining net
income in accordance with APB No. 25. During fiscal 1997, $705,000 was
recognized as stock option compensation in connection with the modification by
the Board of Directors of the outstanding stock option terms because of the
spin-off of the Company's hotel and casino segments.

                                      F-12
<PAGE>   67
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the status of the Company's stock option plans for the three
years ended June 30, 1999 was as follows:

<TABLE>
<CAPTION>
                                                              SHARES   WEIGHTED AVERAGE
                                                              (000)     EXERCISE PRICE
                                                              ------   ----------------
<S>                                                           <C>      <C>
Outstanding at June 30, 1996................................   3,156        $24.50
Granted.....................................................     215         23.62
Exercise....................................................     (53)        20.48
Forfeited...................................................     (50)        21.63
                                                              ------
Outstanding at modification date (4/22/97)..................   3,268         24.54
                                                              ------
Activity after 4/22/97 modification:
Outstanding as modified.....................................   4,114         19.49
Granted.....................................................      25         20.25
Exercised...................................................     (17)        16.07
                                                              ------
Outstanding at June 30, 1997................................   4,122         19.51
Exercised...................................................    (663)        21.22
                                                              ------
Outstanding at modification date (4/6/98)...................   3,459         19.18
                                                              ------
Activity after 4/6/98 modification:
Outstanding as modified.....................................   3,459          3.16
Granted.....................................................   1,041          5.16
Exercised...................................................     (94)         2.57
                                                              ------
Outstanding at June 30, 1998................................   4,406          3.65
Granted.....................................................     456          9.93
Exercised...................................................  (2,396)         3.38
Forfeited...................................................    (137)         3.67
                                                              ------
Outstanding at June 30, 1999................................   2,329          5.16
                                                              ======
</TABLE>

     The following tables summarize information about stock options outstanding
at June 30, 1999:

Options outstanding

<TABLE>
<CAPTION>
                                                         WEIGHTED AVERAGE
                                             NUMBER         REMAINING          WEIGHTED
                RANGE OF                   OUTSTANDING   CONTRACTUAL LIFE      AVERAGE
             EXERCISE PRICES                  (000)          IN YEARS       EXERCISE PRICE
             ---------------               -----------   ----------------   --------------
<S>                                        <C>           <C>                <C>
$ 2.51 - $ 4.44..........................     1,413            5.6              $ 3.48
  5.25 -   7.88..........................       565            8.9                5.63
 10.63 -  15.00..........................       351            9.8               11.17
                                              -----
  2.51 -  15.00..........................     2,329            7.1                5.16
</TABLE>

                                      F-13
<PAGE>   68
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options exercisable

<TABLE>
<CAPTION>
                        RANGE OF                             NUMBER          WEIGHTED
                        EXERCISE                           OUTSTANDING       AVERAGE
                         PRICES                               (000)       EXERCISE PRICE
                        --------                           -----------    --------------
<S>                                                        <C>            <C>
$2.51 - $4.44............................................     1,066           $3.37
 5.25 -  7.88............................................       500            5.44
                                                              -----
 2.51 -  7.88............................................     1,566            4.03
</TABLE>

     At June 30, 1999, 670,000 shares were available for future grants under the
plans. At June 30, 1998, 3,799,000 options with a weighted average exercise
price of $3.66 per share were exercisable. At June 30, 1997, 3,506,000 options
with a weighted average exercise price of $19.70 per share were exercisable.

     On April 6, 1998, the Board of Directors reduced the exercise price of each
option by approximately 83.5% to reflect the initial post Midway spin-off
trading price of WMS common stock. This modification did not result in any
additional pro forma compensation expense.

     On April 22, 1997, the Board of Directors increased the number of
outstanding stock options by approximately 26% for each option holder and
reduced the exercise price of each option by approximately 20% to reflect the
dilution to the outstanding stock options for the distribution of WHG Resorts &
Casinos Inc. to the shareholders of WMS.

     The Company has a Treasury Share Bonus Plan for key employees covering all
the shares of common stock held in the treasury. The vesting and other terms of
the awards are flexible. No awards of treasury stock were outstanding at June
30, 1999 and 1998.

     SFAS No. 123 regarding stock option plans permits the use of APB 25 but
requires the inclusion of certain pro forma disclosures in the footnotes. Pro
forma net income (loss) and net income (loss) per share adjusted for the pro
forma expense provisions of SFAS 123 were:

<TABLE>
<CAPTION>
                                                   1999          1998          1997
                                                ----------   ------------   -----------
<S>                                             <C>          <C>            <C>
Pro forma net income (loss)...................  $4,784,000   $(25,850,000)  $28,367,000
Pro forma basic and diluted net income (loss)
  per share...................................  $      .16   $       (.98)  $      1.17
</TABLE>

     The fiscal 1997 pro forma net income includes an after tax charge of
$7,985,000 relating to the modification of options because of the spin-off of
the hotel and casino segments. The fiscal 1998 and 1997 pro forma net income
(loss) includes an after tax charge of $1,747,000 and $4,343,000, respectively,
for the granting of Midway options.

     The pro forma fair value of each option grant and the 1997 modification is
estimated on the date of grant or modification using the Black-Scholes option
pricing model with the following weighted average assumptions used for
modifications and grants in fiscal 1999, 1998 and 1997: dividend yield 0% for
all three years; expected volatility of .80 in fiscal 1999 and .37 for fiscal
1998 and 1997; risk free interest rates of 5.95% in 1999, 5.65% in 1998 and 6.1%
in 1997; and expected life of the options of six years for 1999 and 1998 and
three years for 1997. The weighted average pro forma fair value, using the
Black-Scholes assumptions noted above, of the options granted during fiscal
1999, 1998 and 1997 was $7.22, $2.36 and $5.33, respectively.

                                      F-14
<PAGE>   69
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS

     Financial instruments which potentially subject the Company to
concentrations of credit and market risk consist primarily of cash equivalents
and trade notes and accounts receivable. By policy, the Company places its cash
equivalents and short-term investments only in high credit quality securities
and limits the amounts invested in any one security. At June 30, 1999, 25% of
trade accounts receivable are from sale of games to the Company's distributors
located primarily throughout the United States and Western Europe and because of
the number and geographic distribution, concentration is limited. Foreign sales
are typically made in U.S. dollars and typically on the basis of a letter of
credit. The accounts and notes receivable from the sale of gaming devices are
generally from a large number of customers with no significant concentration
other than in Nevada.

     The amount reported for cash equivalents are considered to be a reasonable
estimate of their fair value.

NOTE 11: LEASE COMMITMENTS

     The Company leases certain of its office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 1999 as follows:

<TABLE>
<CAPTION>
                       (IN THOUSANDS)
<S>                                                           <C>
2000........................................................  $  823
2001........................................................     306
2002........................................................      35
2003........................................................       2
                                                              ------
                                                              $1,166
                                                              ======
</TABLE>

     Rent expense for fiscal 1999, 1998 and 1997 was $1,837,000, $1,699,000 and
$1,414,000, respectively.

NOTE 12: PATENT LITIGATION

     The Company's subsidiary, WMS Gaming Inc. ("WGI"), is currently involved in
patent infringement litigation with its competitor International Game Technology
("IGT") regarding a certain slot machine component patent. During fiscal 1997,
the U.S. District Court for the Northern District of Illinois ruled that WMS
Gaming's Model 400 reel spinning slot machine infringed IGT's patent and issued
a permanent injunction prohibiting the sale of Model 400 and entered a judgment
in favor of IGT and against WGI in the amount of $32,845,000 in the Model 400
slot machine action. The same District Court issued a preliminary injunction
prohibiting the sale of WMS Gaming's reel spinning slot machine Model 401. The
Model 400 and Model 401 operate differently and each machine is based on
separate and distinct methods of operation, each corresponding to separate
patents granted by the U.S. Patent and Trademark Office to WGI. WGI appealed the
decisions of the District Court to the U.S. Court of Appeals for the Federal
Circuit. In July 1999 the U.S. Court of Appeals for the Federal Circuit rendered
its decision in the Model 400 and Model 401 litigation. In the Model 400
litigation, the appellate court reversed the district court's holding of literal
infringement, affirmed the district court's holding of infringement under the
doctrine of

                                      F-15
<PAGE>   70
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

equivalents, vacated the district court's holding of willful infringement,
affirmed the district court's holding that IGT's patent is not invalid, and
affirmed the amount of actual damages of $10,753,550 but vacated the damages
award to the extent it was based on trebling for willful infringement. The
appellate court remanded the case to the district court to reconsider the issue
of willful infringement in light of the appellate court's finding of no literal
infringement. In the Model 401 litigation, the appellate court vacated the
preliminary injunction and remanded the case to the district court for further
proceedings consistent with its ruling. The Company has filed petitions with the
Court of Appeals for rehearing of certain aspects of its decisions.

     Due to the fact that obtaining a complete reversal before the Federal
Circuit occurs in only a minority of the patent cases it reviews, as of December
31, 1996, management accrued $61,925,000 to provide for the judgment and other
costs and losses. The $61,925,000 loss provision, as adjusted, provides for the
judgment award of $32,845,000 and, among other things, realization of inventory,
receivables and legal fees. The major components of the balance of the provision
were $6,950,000 for sales returns and uncollectible receivables and $16,300,000
for excess and unusable reel spinning slot machine inventory. Through June 30,
1999, $18,803,000 has been charged to the provisions primarily for uncollectible
receivables, inventory and legal fees.

     The slot machines component which is the subject of the litigation is only
used in reel spinning slot machines and not in video lottery terminals and other
video gaming machines. If the Company is unable to obtain a complete reversal of
the District Court judgment on further appeal, and is unable to further develop
or acquire non-infringing alternate devices or obtain a license to use the
patent, further development of the Company's reel spinning slot machine business
may be adversely affected.

NOTE 13: PENSION PLANS

     During fiscal 1992 and 1998, the Company suspended the salary and hourly
defined benefit plans and substituted defined contribution employee retirement
savings plans. The components of net periodic pension cost of the defined
benefit plans were:

<TABLE>
<CAPTION>
                                                              1999    1998    1997
                       (IN THOUSANDS)                         -----   -----   -----
<S>                                                           <C>     <C>     <C>
Service costs...............................................  $  --   $ 107   $ 185
Interest cost...............................................    289     372     395
Expected return on plan assets..............................   (112)   (155)   (185)
Net amortization of transition and other....................      2     (43)    (13)
                                                              -----   -----   -----
Benefit cost................................................  $ 179   $ 281   $ 382
                                                              =====   =====   =====
</TABLE>

                                      F-16
<PAGE>   71
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                               1999      1998
                       (IN THOUSANDS)                         -------   -------
<S>                                                           <C>       <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.....................  $ 4,683   $ 4,724
Service cost................................................       --        77
Interest cost...............................................      288       369
Actuarial (gains) loss......................................     (296)      580
Benefit paid................................................   (1,011)   (1,067)
                                                              -------   -------
Benefit obligation at end of year...........................    3,664     4,683
                                                              -------   -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..............    2,790     3,184
Actual return on plan assets................................      120       190
Company contributions.......................................      141       518
Benefits paid and expenses..................................   (1,031)   (1,102)
                                                              -------   -------
Fair value of plan assets at end of year....................    2,020     2,790
                                                              -------   -------
Funded status of the plan (underfunded).....................   (1,644)   (1,893)
Unrecognized amounts........................................      903     1,273
                                                              -------   -------
Accrued benefit cost........................................  $  (741)  $  (620)
                                                              =======   =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30
Discount rate...............................................      7.5%      7.5%
Expected return on plan assets..............................      9.0       9.0
AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSISTS
  OF:
Accrued benefit liability...................................  $(1,644)  $(1,893)
Intangible asset............................................      903     1,273
                                                              -------   -------
Net amount recognized.......................................  $  (741)  $  (620)
                                                              =======   =======
</TABLE>

     The Company has two defined contribution employee retirement savings plans.
These defined contribution plans cover certain hourly and salaried employees of
the amusement game and gaming businesses and corporate headquarters. The
Company's contributions to these plans are based on employee participation with
certain limitations. The Company may change any of the factors which determine
the Company's contribution to such plans. A subsidiary is required to make
contributions on behalf of unionized employees to defray part of the costs of
the multi-employer pension plan established by its labor union. Such
contributions are computed using a fixed charge per employee. Contributions to
the defined contribution and multi-employer plans for fiscal 1999, 1998 and 1997
were $303,000, $207,000 and $181,000, respectively.

                                      F-17
<PAGE>   72
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Summarized quarterly financial information for fiscal 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                 SEPT. 30   DEC. 31   MAR. 31   JUNE 30
                                                   1998      1998      1999      1999
   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)      --------   -------   -------   -------
<S>                                              <C>        <C>       <C>       <C>
FISCAL 1999 QUARTERS
Revenues.......................................  $26,799    $38,991   $48,954   $72,546
Gross profit...................................    6,214      9,166    14,539    26,759
Net income (loss)..............................   (1,644)    (1,235)    1,837     6,295
Per share of common stock:
Basic :
  Net income (loss)............................  $  (.06)   $  (.04)  $   .06   $   .21
                                                 -------    -------   -------   -------
  Shares used..................................   27,988     29,039    30,055    30,196
                                                 -------    -------   -------   -------
Diluted:
  Net income (loss)............................  $  (.06)   $  (.04)  $   .06   $   .20
                                                 -------    -------   -------   -------
  Shares used..................................   27,988     29,039    30,055    31,168
                                                 -------    -------   -------   -------
</TABLE>

     The December 31, 1998, March 31, 1999 and June 30, 1999 quarters include an
after-tax charge of $375,000, $.01 per share, $330,000, $.01 per share and
$1,178,000, $.04 per share, respectively, for the spin-off related adjustment to
WMS outstanding common stock options vesting during each quarter.

<TABLE>
<CAPTION>
                                                SEPT. 30   DEC. 31   MAR. 31    JUNE 30
                                                  1997      1997       1998      1998
   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)     --------   -------   --------   -------
<S>                                             <C>        <C>       <C>        <C>
FISCAL 1998 QUARTERS
Revenues......................................  $20,035    $23,397   $ 20,511   $35,047
Gross profit..................................    5,350      5,767      4,308     6,594
Loss from continuing operations...............   (2,989)    (1,502)   (43,350)     (983)
Discontinued operations
  Video games segment.........................    6,277     15,947      4,522        --
                                                -------    -------   --------   -------
Net income (loss).............................  $ 3,288    $14,445   $(38,828)  $  (983)
                                                =======    =======   ========   =======
Basic and diluted per share of common stock:
  Loss from continuing operations.............  $  (.12)   $  (.06)  $  (1.62)  $  (.04)
                                                -------    -------   --------   -------
  Net income (loss)...........................  $   .13    $   .54   $  (1.45)  $  (.04)
                                                -------    -------   --------   -------
  Average number of shares outstanding........   24,549     26,471     26,843    27,944
                                                -------    -------   --------   -------
</TABLE>

     The March 31, 1998 quarter includes an after-tax charge of $39,917,000,
$1.49 per share, for the spin-off related adjustment to WMS outstanding common
stock options. The June 30, 1998 quarter includes an after-tax gain of $530,000,
$.02 per share, on the sale of non current marketable securities.

                                      F-18
<PAGE>   73
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15: OPERATING SEGMENTS

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                       (IN THOUSANDS)                         --------   --------   --------
<S>                                                           <C>        <C>        <C>
REVENUES (ALL EXTERNAL)
Gaming......................................................  $125,956   $ 56,788   $ 33,613
Pinball and cabinets........................................    46,109     38,251     42,983
Contract manufacturing......................................    15,225      3,951         --
                                                              --------   --------   --------
Total revenues..............................................  $187,290   $ 98,990   $ 76,596
                                                              ========   ========   ========
GROSS PROFIT
Gaming......................................................  $ 50,380   $ 17,338   $  6,898
Pinball and cabinets........................................     4,408      4,068      9,552
Contract manufacturing......................................     1,890        613         --
                                                              --------   --------   --------
Total gross profit..........................................  $ 56,678   $ 22,019   $ 16,450
                                                              ========   ========   ========
OPERATING INCOME (LOSS)
Gaming......................................................  $ 16,786   $ (9,590)  $(12,510)
Pinball and cabinets........................................    (6,988)    (7,761)    (2,997)
Contract manufacturing......................................     1,257        347         --
All other:
Provisions related to patent litigation (Note 12)...........        --         --    (61,925)
Adjustment to common stock options (Note 9).................    (3,037)   (59,890)        --
Unallocated general corporate expenses......................    (3,071)    (1,770)    (1,884)
                                                              --------   --------   --------
Total operating income (loss)...............................     4,947    (78,664)   (79,316)
Unallocated amounts:
Interest and other income...................................     3,525      4,410      5,661
Interest expense............................................        --         --     (3,443)
                                                              --------   --------   --------
Income (loss) from continuing operations before income
  taxes.....................................................  $  8,472   $(74,254)  $(77,098)
                                                              ========   ========   ========
TOTAL ASSETS
Gaming......................................................  $106,092   $ 70,517   $ 53,225
Pinball and cabinets........................................    34,931     30,855     51,930
Contract manufacturing......................................    14,841     14,940         --
All other:
Corporate...................................................    82,215     91,210    111,047
Net assets of discontinued operations.......................        --         --     90,713
                                                              --------   --------   --------
Total assets................................................  $238,079   $207,522   $306,915
                                                              ========   ========   ========
DEPRECIATION
Gaming......................................................  $  5,941   $  2,321   $  2,529
Pinball and cabinets........................................     1,502      2,967      3,448
Contract manufacturing......................................     1,300        203         --
All other:
Corporate...................................................         9        151        302
                                                              --------   --------   --------
Total depreciation..........................................  $  8,752   $  5,642   $  6,279
                                                              ========   ========   ========
</TABLE>

                                      F-19
<PAGE>   74
                              WMS INDUSTRIES INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                       (IN THOUSANDS)                         --------   --------   --------
<S>                                                           <C>        <C>        <C>
CAPITAL EXPENDITURES
Gaming......................................................  $ 24,408   $  2,152   $  3,683
Pinball, novelty and cabinets...............................     2,054      4,315      1,953
Contract manufacturing......................................     2,155         --         --
All other:
Corporate...................................................     1,978         30         19
                                                              --------   --------   --------
Total capital expenditures..................................  $ 30,595   $  6,497   $  5,655
                                                              ========   ========   ========
Sales to major customers (Pinball and cabinets segment).....  $ 12,811   $  7,960   $ 12,099
                                                              --------   --------   --------
Export sales................................................  $ 34,594   $ 24,364   $ 33,731
                                                              --------   --------   --------
</TABLE>

                                      F-20
<PAGE>   75

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                    YEARS ENDED JUNE 30, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                     COLUMN C
          COLUMN A              COLUMN B             ADDITIONS            COLUMN D      COLUMN E
-----------------------------  -----------   -------------------------   -----------   -----------
                               BALANCE AT     CHARGED       CHARGED        BALANCE       BALANCE
                                BEGINNING        TO            TO        DEDUCTIONS-       AT
                                   OF        COSTS AND       OTHER         AMOUNTS       END OF
         DESCRIPTION             PERIOD       EXPENSES      ACCOUNTS     WRITTEN OFF     PERIOD
         -----------           -----------   ----------   ------------   -----------   -----------
<S>                            <C>           <C>          <C>            <C>           <C>
Allowance for receivables:
  1999.......................  $ 2,397,000   $3,271,000   $         --   $1,861,000    $ 3,807,000
  1998.......................  $ 5,439,000   $  581,000   $         --   $3,623,000    $ 2,397,000
  1997.......................  $   831,000   $5,285,000   $         --   $  677,000    $ 5,439,000
Unrealized holding loss on
  noncurrent marketable
  equity securities:
  1999.......................  $        --   $       --   $         --   $       --    $        --
  1998.......................  $12,758,000   $       --   $(12,758,000)  $       --    $        --
  1997.......................  $ 8,321,000   $       --   $  4,437,000   $       --    $12,758,000(1)
</TABLE>

---------------

(1) Included as a direct reduction of stockholders' equity.

                                      F-21
<PAGE>   76

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
2nd day of September, 1999.

                                            WMS INDUSTRIES INC.

                                            By: /s/ LOUIS J. NICASTRO
                                              ----------------------------------
                                              Louis J. Nicastro
                                              Chairman of the Board, 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 and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                 TITLE                  DATE
                      ---------                                 -----                  ----
<C>                                                    <S>                       <C>
/s/ LOUIS J. NICASTRO                                  Chairman of the Board,    September 2, 1999
-----------------------------------------------------  President, Chief
Louis J. Nicastro                                      Executive Officer and
                                                       Director (Principal
                                                       Executive Officer)

/s/ HAROLD H. BACH, JR.                                Vice                      September 2, 1999
-----------------------------------------------------  President -- Finance,
Harold H. Bach, Jr.                                    Chief Financial Officer
                                                       and Treasurer (Principal
                                                       Financial and Principal
                                                       Accounting Officer)

/s/ NORMAN J. MENELL                                   Vice Chairman of the      September 2, 1999
-----------------------------------------------------  Board of Directors
Norman J. Menell

/s/ WILLIAM C. BARTHOLOMAY                             Director                  September 2, 1999
-----------------------------------------------------
William C. Bartholomay

/s/ WILLIAM E. MCKENNA                                 Director                  September 2, 1999
-----------------------------------------------------
William E. McKenna

/s/ NEIL D. NICASTRO                                   Director                  September 2, 1999
-----------------------------------------------------
Neil D. Nicastro

/s/ HARVEY REICH                                       Director                  September 2, 1999
-----------------------------------------------------
Harvey Reich
</TABLE>
<PAGE>   77

<TABLE>
<CAPTION>
                      SIGNATURE                                 TITLE                  DATE
                      ---------                                 -----                  ----
<C>                                                    <S>                       <C>
/s/ DAVID M. SATZ, JR.                                 Director                  September 2, 1999
-----------------------------------------------------
David M. Satz, Jr.

/s/ IRA S. SHEINFELD                                   Director                  September 2, 1999
-----------------------------------------------------
Ira S. Sheinfeld
</TABLE>
<PAGE>   78

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<S>                      <C>
          2(a)            Plan of Reorganization and Distribution Agreement dated
                          as of March 20, 1997 among WMS, Williams Hotel
                          Corporation and WHG, incorporated by reference to Exhibit
                          2.1 to WMS's Report on Form 8-K filed May 5, 1997 (the
                          "1997 Form 8-K").

          3(a)            Amended and Restated Certificate of Incorporation of WMS
                          dated February 17, 1987; Certificate of Amendment dated
                          January 28, 1993; and Certificate of Correction dated May
                          4, 1994, incorporated by reference to Exhibit 3(a) to
                          WMS's Annual Report on Form 10-K for the year ended June
                          30, 1994 (the "1994 10-K").

          3(b)            Certificate of Amendment to the Amended and Restated
                          Certificate of Incorporation of WMS, as filed with the
                          Secretary of State of the State of Delaware on February
                          25, 1998, incorporated by reference to Exhibit 3.1 to
                          WMS's Quarterly Report on Form 10-Q for the fiscal
                          quarter ended March 31, 1998.

          3(c)            Form of Certificate of Designations of Series A Preferred
                          Stock (included as Exhibit A to the Rights Agreement
                          referred to in Exhibit 4(b) hereto).

          3(d)            By-Laws of WMS, as amended and restated through June 26,
                          1996, incorporated by reference to Exhibit 3(b) to WMS's
                          Annual Report on Form 10-K for the year ended June 30,
                          1996.

          4               Rights Agreement dated as of March 5, 1998 between WMS
                          and The Bank of New York, as Rights Agent, incorporated
                          by reference to Exhibit 1 to WMS's Registration Statement
                          on Form 8-A (File No. 1-8300) filed March 25, 1998 and
                          Form of Rights Certificate (included as Exhibit B to the
                          Rights Agreement).

         10(a)            1982 Employee Stock Option Plan, as amended, incorporated
                          by reference to Exhibit 10(e) to the 1994 10-K.

         10(b)            1991 Stock Option Plan, as amended, incorporated by
                          reference to Exhibit 10(f) to the 1994 10-K.

         10(c)            1993 Stock Option Plan, incorporated by reference to
                          Exhibit 10(g) to the 1994 10-K.

         10(d)            1994 Stock Option Plan, incorporated by reference to
                          Appendix A to WMS's Definitive Proxy Statement dated
                          December 12, 1994.

         10(e)            Form of Indemnity Agreement authorized to be entered into
                          between WMS and each officer and director approved by the
                          Board of Directors, incorporated by reference to Exhibit
                          10(k) to the 1994 10-K.

         10(f)            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.

         10(g)            Voting Proxy Agreement dated September 21, 1995 among
                          Louis J. Nicastro, Neil D. Nicastro, WMS, Sumner M.
                          Redstone and National Amusements, Inc., incorporated by
                          reference to Exhibit 10(u) to Company's Annual Report on
                          Form 10-K for the fiscal year ended June 30, 1995.

         10(h)            Tax Sharing Agreement dated as of July 1, 1996 among WMS,
                          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(i)            Patent License Agreement dated as of July 1, 1996 between
                          Williams Electronics Games, Inc. ("WEG") and Midway,
                          incorporated by reference to Exhibit 10.4 to the Midway
                          S-1.
</TABLE>

<PAGE>   79

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                  DESCRIPTION
        -------                                -----------
<S>                       <C>
         10(j)            Tax Sharing Agreement, dated as of March 20, 1997,
                          between WMS, 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.

         10(k)            Amendment to Article III, Section 3 (Option Adjustments)
                          of 1982 Employee Stock Option Plan, incorporated by
                          reference to Proposal No. 2 to WMS's Definitive Proxy
                          Statement on Schedule 14A as filed with the Commission on
                          December 11, 1996.

         10(l)            Amendment to Article III, Section 3 (Option Adjustments)
                          of 1991 Stock Option Plan, incorporated by reference to
                          Proposal No. 2 to WMS's Definitive Proxy Statement on
                          Schedule 14A as filed with the Commission on December 11,
                          1996.

         10(m)            Amendment to Article III, Section 3 (Option Adjustments)
                          of 1993 Stock Option Plan, incorporated by reference to
                          Proposal No. 2 to WMS's Definitive Proxy Statement on
                          Schedule 14A as filed with the Commission on December 11,
                          1996.

         10(n)            Amendment to Article III, Section 3 (Option Adjustments)
                          of 1994 Stock Option Plan, incorporated by reference to
                          Proposal No. 2 to WMS's Definitive Proxy Statement on
                          Schedule 14A as filed with the Commission on December 11,
                          1996.

         10(o)            1998 Non-Qualified Stock Option Plan, incorporated by
                          reference to Exhibit 4.6(a) to WMS's Registration
                          Statement No. 333-57585 on Form S-8 filed with the
                          Commission on June 24, 1998 (the "1998 S-8").

         10(p)            Severance Agreement dated March 5, 1998 between WMS and
                          Neil D. Nicastro, incorporated by reference to Exhibit 2
                          to the Report on Form 8-K filed April 17, 1998 (the
                          "April 1998 8-K").

         10(q)            Consulting Agreement dated as of April 6, 1998 between
                          WMS and Neil D. Nicastro, incorporated by reference to
                          Exhibit 3 to the April 1998 8-K.

         10(r)            Employment Agreement dated as of April 6, 1998 between
                          WMS and Louis J. Nicastro, incorporated by reference to
                          Exhibit 1 to the April 1998 8-K.

         10(s)            Manufacturing Agreement dated as of April 6, 1998 between
                          WEG and Midway and the Guaranty of the obligations of WEG
                          thereunder by WMS, incorporated by reference to Exhibit
                          10.23 to the Midway Annual Report on Form 10-K for the
                          fiscal year ended June 30, 1998 (the "Midway 1998 10-K").

         10(t)            Cabinet Supply Agreement dated as of April 6, 1998
                          between Lenc-Smith Inc. and Midway, incorporated by
                          reference to Exhibit 10.24 to the Midway 1998 10-K.

         10(u)            Spare Parts Sales and Service Agreement dated as of April
                          6, 1998 among WEG, Midway and Atari Games Corporation,
                          incorporated by reference to Exhibit 10.25 to the Midway
                          1998 10-K.

         10(v)            Sales Agreement dated as of April 6, 1998 between WEG and
                          Midway, incorporated by reference to Exhibit 10.26 to the
                          Midway 1998 10-K.

         10(w)            Information Systems Service Agreement dated as of April
                          6, 1998 between WEG and Midway, incorporated by reference
                          to Exhibit 10.27 to the Midway 1998 10-K.

         10(x)            Confidentiality and Non-Competition Agreement dated as of
                          April 6, 1998 between WMS and Midway, incorporated by
                          reference to Exhibit 10.28 to the Midway 1998 10-K.

         10(y)            Right of First Refusal Agreement dated as of April 6,
                          1998 between WMS and Midway, incorporated by reference to
                          Exhibit 10.29 to the Midway 1998 10-K.

         10(z)            Third Parties Agreement dated as of April 6, 1998 between
                          WMS and Midway, incorporated by reference to Exhibit
                          10.30 to the Midway 1998 10-K.
</TABLE>

<PAGE>   80

<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                  DESCRIPTION
        -------                                -----------
<S>                       <C>
         10(aa)           Temporary Support Services Agreement dated as of April 6,
                          1998 between WMS and Midway, incorporated by reference to
                          Exhibit 10.31 to the Midway 1998 10-K.

         10(bb)           Tax Separation Agreement dated as of April 6, 1998
                          between WMS and Midway, incorporated by reference to
                          Exhibit 10.32 to the Midway 1998 10-K.

         10(cc)           Tax Indemnification Agreement dated as of April 6, 1998
                          between WMS and Midway, incorporated by reference to
                          Exhibit 10.33 to the Midway 1998 10-K.

         10(dd)           Worldwide Merchandising Agreement/License Agreement
                          Summary and License Agreement between WMS Gaming Inc.,
                          Hasbro, Inc. and Hasbro International, Inc. dated as of
                          the first day of September, 1997, incorporated by
                          reference to Exhibit 99.1 to WMS's Registration Statement
                          No. 83021 on Form S-3 filed with the Commission on July
                          16, 1999 (the "1999 S-3"). Portions of this exhibit have
                          been omitted under a request for confidential treatment
                          filed separately with the Commission.

         10(ee)           Amendment to License Agreement between WMS Gaming Inc.,
                          Hasbro, Inc. and Hasbro International, Inc. dated 1998,
                          incorporated by reference to Exhibit 99.2 to the 1999
                          S-3. Portions of this exhibit have been omitted under a
                          request for confidential treatment filed separately with
                          the Commission.

         10(ff)           Employment Agreement between Terence M. Dunleavy and WMS
                          dated June 1, 1999, incorporated by reference to Exhibit
                          99.3 to the 1999 S-3.

         10(gg)           Employment Agreement between Kevin L. Verner and WMS
                          dated June 1, 1999, incorporated by reference to Exhibit
                          99.4 to the 1999 S-3.

         10(hh)           Letter agreement dated June 15, 1999 amending Sales
                          Agreement dated as of April 6, 1998 between WEG and
                          Midway, incorporated by reference to Exhibit 99.5 to the
                          1999 S-3.

         10(ii)           Employment Agreement between Louis J. Nicastro and WMS
                          dated September 2, 1999.

         21               Subsidiaries of the Registrant, incorporated by reference
                          to Exhibit 21 to WMS's Annual Report on Form 10-K for the
                          fiscal year ended June 30, 1998.

         23               Consent of Ernst & Young LLP.

         27               Financial Data Schedule.
</TABLE>