##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

____________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

Commission file number: 1-8300

WMS INDUSTRIES INC.
(Exact Name of Registrant as Specified in Its Charter)

|                                  |  |                                     
|--------------------------------- |  | ------------------------------------
|Delaware                          |  | 36-2814522                          
|(State or Other Jurisdiction      |  | (I.R.S. Employer Identification No.)
|of Incorporation or Organization) |  |                                     

800 South Northpoint Blvd., Waukegan, IL 60085
(Address of Principal Executive Offices) (Zip Code)

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

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YESX          NO______

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).

YESX          NO______

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 29,397,613 shares of common
stock, $.50 par value, were outstanding at November 7, 2003, excluding
2,906,702 shares held as treasury shares.





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##### 



WMS INDUSTRIES INC.

INDEX

|                               |                                                                                               |                                                                                                  |    |        |   | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -- | ------ | - | 
|                               |                                                                                               |                                                                                                  |    | Page  
|                               |                                                                                               |                                                                                                  |    | Number
|PART I. FINANCIAL INFORMATION: |                                                                                               |                                                                                                  |    |       
|                               | ITEM 1. Financial Statements:                                                                 |                                                                                                  |    |        |  
|                               |                                                                                               | Condensed Consolidated Statements of Operations -
Three months ended September 30, 2003 and 2002 |    |        | 3 | 
|                               |                                                                                               | Condensed Consolidated Balance Sheets -
September 30, 2003 and June 30, 2003                     |    |        | 4 | 
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2003 and 2002 |    |        | 6 | 
|                               |                                                                                               | Notes to Condensed Consolidated Financial Statements                                             |    |        | 7 | 
|                               | ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                  |    | 12     |  
|                               | ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk                            |                                                                                                  |    | 17     |  
|                               | ITEM 4. Controls and Procedures                                                               |                                                                                                  |    | 17     |  
|PART II. OTHER INFORMATION:    |                                                                                               |                                                                                                  |    |       
|                               | ITEM 1. Legal Proceedings                                                                     |                                                                                                  |    | 17     |  
|                               | ITEM 2. Changes in Securities and Use of Proceeds                                             |                                                                                                  |    | 17     |  
|                               | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                  |    | 18     |  
|SIGNATURES                     |                                                                                               |                                                                                                  | 20 |       

2



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##### 



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
(Unaudited)

|                                           |                               |                          |        |                    |        |      |       |        |        | 
|------------------------------------------ | ----------------------------- | ------------------------ | ------ | ------------------ | ------ | ---- | ----- | ------ | ------ | 
|                                           |                               |                          |        | Three Months Ended
|                                           |                               |                          |        | September 30,     
|                                           |                               |                          |        |                   
|                                           |                               |                          |        | 2003               |        | 2002
|                                           |                               |                          |        |                    |        |     
|Revenues:                                  |                               |                          |        |                    |        |      |       |       
|                                           | Product sales                 |                          | $      | 24,884             |        |      | $     | 16,149 |       
|                                           | Gaming operations             |                          |        | 21,832             |        |      |       | 26,245 |       
|                                           |                               |                          |        |                    |        |      |       |       
|                                           |                               | Total revenues           |        |                    | 46,716 |      |       |        | 42,394 | 
|                                           |                               |                          |        |                    |        |      |       |       
|Costs and Expenses:                        |                               |                          |        |                    |        |      |       |       
|                                           | Cost of product sales         |                          |        | 15,205             |        |      |       | 10,814 |       
|                                           | Cost of gaming operations     |                          |        | 4,072              |        |      |       | 5,165  |       
|                                           | Research and development      |                          |        | 10,305             |        |      |       | 7,789  |       
|                                           | Selling and administrative    |                          |        | 13,556             |        |      |       | 11,346 |       
|                                           | Depreciation and amortization |                          |        | 6,351              |        |      |       | 6,719  |       
|                                           |                               |                          |        |                    |        |      |       |       
|                                           |                               | Total costs and expenses |        |                    | 49,489 |      |       |        | 41,833 | 
|                                           |                               |                          |        |                    |        |      |       |       
|Operating income (loss)                    |                               |                          | (2,773 | )                  |        |      | 561   |       
|Interest expense                           |                               |                          | (788   | )                  |        |      |      |       
|Interest and other income and expense, net |                               |                          | 559    |                    |        |      | 475   |       
|                                           |                               |                          |        |                    |        |      |       |       
|Income (loss) before income taxes          |                               |                          | (3,002 | )                  |        |      | 1,036 |       
|Provision (benefit) for income taxes       |                               |                          | (1,127 | )                  |        |      | 376   |       
|                                           |                               |                          |        |                    |        |      |       |       
|Net income (loss)                          |                               | $                        | (1,875 | )                  |        | $    | 660   |       
|                                           |                               |                          |        |                    |        |      |       |       
|Earnings (loss) per share of common stock: |                               |                          |        |                    |        |      |       |       
|                                           | Basic                         |                          | $      | (0.06              | )      |      | $     | 0.02   |       
|                                           |                               |                          |        |                    |        |      |       |       
|                                           | Diluted                       |                          | $      | (0.06              | )      |      | $     | 0.02   |       
|                                           |                               |                          |        |                    |        |      |       |       
|Shares used in per share calculations:     |                               |                          |        |                    |        |      |       |       
|                                           | Basic                         |                          |        | 29,289             |        |      |       | 30,901 |       
|                                           |                               |                          |        |                    |        |      |       |       
|                                           | Diluted                       |                          |        | 29,289             |        |      |       | 31,156 |       
|                                           |                               |                          |        |                    |        |      |       |       

See notes to condensed consolidated financial statements.

3



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##### 



WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

|                                                                  |                                          |   |               |         |          |   |         |         | 
|----------------------------------------------------------------- | ---------------------------------------- | - | ------------- | ------- | -------- | - | ------- | ------- | 
|                                                                  |                                          |   | September 30, |         | June 30,
|                                                                  |                                          |   | 2003          |         | 2003    
|                                                                  |                                          |   |               |         |         
|                                                                  |                                          |   | (Unaudited)   |         |          |   |        
|ASSETS                                                            |                                          |   |               |         |          |   |         |        
|Current assets:                                                   |                                          |   |               |         |          |   |         |        
|                                                                  | Cash and cash equivalents                |   | $             | 92,987  |          |   | $       | 99,640  | 
|                                                                  | Restricted cash for progressive jackpots |   |               | 2,025   |          |   |         | 2,326   | 
|                                                                  | Short-term investments                   |   |               | 55,458  |          |   |         | 58,341  | 
|                                                                  |                                          |   |               |         |          |   |         |        
|                                                                  |                                          |   | 150,470       |         |          |   | 160,307 |        
|Receivables, net of allowances of $2,442 and $2,354,
respectively |                                          |   | 27,007        |         |          |   | 25,073  |        
|Notes receivable, current portion                                 |                                          |   | 16,172        |         |          |   | 12,033  |        
|Income tax receivable                                             |                                          |   | 8,938         |         |          |   | 7,722   |        
|Inventories, at lower of cost (FIFO) or market:                   |                                          |   |               |         |          |   |         |        
|                                                                  | Raw materials and work in progress       |   |               | 15,391  |          |   |         | 13,937  | 
|                                                                  | Finished goods                           |   |               | 15,491  |          |   |         | 15,869  | 
|                                                                  |                                          |   |               |         |          |   |         |        
|                                                                  |                                          |   | 30,882        |         |          |   | 29,806  |        
|Other current assets                                              |                                          |   | 23,054        |         |          |   | 15,766  |        
|                                                                  |                                          |   |               |         |          |   |         |        
|                                                                  | Total current assets                     |   |               | 256,523 |          |   |         | 250,707 | 
|Gaming operations machines                                        |                                          |   | 75,287        |         |          |   | 76,283  |        
|Less accumulated depreciation                                     |                                          |   | (48,017       | )       |          |   | (48,693 | )      
|                                                                  |                                          |   |               |         |          |   |         |        
|                                                                  |                                          |   | 27,270        |         |          |   | 27,590  |        
|Property, plant and equipment                                     |                                          |   | 74,620        |         |          |   | 72,986  |        
|Less accumulated depreciation                                     |                                          |   | (24,285       | )       |          |   | (22,773 | )      
|                                                                  |                                          |   |               |         |          |   |         |        
|                                                                  |                                          |   | 50,335        |         |          |   | 50,213  |        
|Other assets                                                      |                                          |   | 29,177        |         |          |   | 22,466  |        
|                                                                  |                                          |   |               |         |          |   |         |        
|Total assets                                                      |                                          | $ | 363,305       |         |          | $ | 350,976 |        
|                                                                  |                                          |   |               |         |          |   |         |         | 

See notes to condensed consolidated financial statements.

4



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WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

|                                              |                                                                               |   |               |         |          |   |         |         |  
|--------------------------------------------- | ----------------------------------------------------------------------------- | - | ------------- | ------- | -------- | - | ------- | ------- | -
|                                              |                                                                               |   | September 30, |         | June 30,
|                                              |                                                                               |   | 2003          |         | 2003    
|                                              |                                                                               |   |               |         |         
|                                              |                                                                               |   | (Unaudited)   |         |          |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY          |                                                                               |   |               |         |          |   |         |        
|Current liabilities:                          |                                                                               |   |               |         |          |   |         |        
|                                              | Accounts payable                                                              |   | $             | 9,055   |          |   | $       | 10,717  |  
|                                              | Accrued compensation and related benefits                                     |   |               | 5,263   |          |   |         | 3,065   |  
|                                              | Other accrued liabilities                                                     |   |               | 12,983  |          |   |         | 16,009  |  
|                                              |                                                                               |   |               |         |          |   |         |        
|                                              | Total current liabilities                                                     |   |               | 27,301  |          |   |         | 29,791  |  
|2.75% Convertible subordinated notes due 2010 |                                                                               |   | 115,000       |         |          |   | 100,000 |        
|Commitments and contingencies (See note 8)    |                                                                               |   |               |         |          |   |         |        
|Stockholders equity:                         |                                                                               |   |               |         |          |   |         |        
|                                              | Preferred stock (5,000,000 shares authorized, none
issued)                    |   |               |        |          |   |         |        |  
|                                              | Common stock (100,000,000 shares authorized and
32,358,315 shares issued)     |   |               | 16,179  |          |   |         | 16,179  |  
|                                              | Additional paid-in capital                                                    |   |               | 201,298 |          |   |         | 197,009 |  
|                                              | Retained earnings                                                             |   |               | 42,083  |          |   |         | 43,958  |  
|                                              | Accumulated other comprehensive income                                        |   |               | 933     |          |   |         | 1,107   |  
|                                              | Unearned restricted stock (29,912 shares)                                     |   |               | (420    | )        |   |         | (298    | )
|                                              | Treasury stock, at cost (2,975,702 shares and
2,882,995 shares, respectively) |   |               | (39,069 | )        |   |         | (36,770 | )
|                                              |                                                                               |   |               |         |          |   |         |        
|                                              | Total stockholders equity                                                    |   |               | 221,004 |          |   |         | 221,185 |  
|                                              |                                                                               |   |               |         |          |   |         |        
|Total liabilities and stockholders equity    |                                                                               | $ | 363,305       |         |          | $ | 350,976 |        
|                                              |                                                                               |   |               |         |          |   |         |        

See notes to condensed consolidated financial statements.

5



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WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

|                                                                                                |                                                                      |   |                    |         |      |   |         |       |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | - | ------------------ | ------- | ---- | - | ------- | ----- | -
|                                                                                                |                                                                      |   | Three Months Ended
|                                                                                                |                                                                      |   | September 30,     
|                                                                                                |                                                                      |   |                   
|                                                                                                |                                                                      |   | 2003               |         | 2002
|                                                                                                |                                                                      |   |                    |         |     
|CASH FLOWS FROM OPERATING ACTIVITIES                                                            |                                                                      |   |                    |         |      |   |         |      
|Net income (loss)                                                                               |                                                                      | $ | (1,875             | )       |      | $ | 660     |      
|Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities: |                                                                      |   |                    |         |      |   |         |      
|                                                                                                | Depreciation and amortization                                        |   |                    | 6,351   |      |   |         | 6,719 |  
|                                                                                                | Deferred income taxes                                                |   |                    | (1,127  | )    |   |         | (796  | )
|                                                                                                | Non-cash expenses                                                    |   |                    | 187     |      |   |         | 212   |  
|                                                                                                | Tax benefit from exercise of stock options                           |   |                    | 1,193   |      |   |         | 20    |  
|                                                                                                | Increase (decrease) from changes in operating
assets and liabilities |   |                    | (18,579 | )    |   |         | 93    |  
|                                                                                                |                                                                      |   |                    |         |      |   |         |      
|Net cash provided (used) by operating activities                                                |                                                                      |   | (13,850            | )       |      |   | 6,908   |      
|CASH FLOWS FROM INVESTING ACTIVITIES                                                            |                                                                      |   |                    |         |      |   |         |      
|Purchase of property, plant and equipment                                                       |                                                                      |   | (1,634             | )       |      |   | (1,867  | )    
|Additions to gaming operations machines                                                         |                                                                      |   | (4,719             | )       |      |   | (5,149  | )    
|Net change in short-term investments                                                            |                                                                      |   | 2,883              |         |      |   | 6,660   |      
|                                                                                                |                                                                      |   |                    |         |      |   |         |      
|Net cash used by investing activities                                                           |                                                                      |   | (3,470             | )       |      |   | (356    | )    
|CASH FLOWS FROM FINANCING ACTIVITIES                                                            |                                                                      |   |                    |         |      |   |         |      
|Gross proceeds from the issuance of convertible
notes                                           |                                                                      |   | 15,000             |         |      |   |        |      
|Debt issuance costs                                                                             |                                                                      |   | (743               | )       |      |   |        |      
|Cash received on exercise of common stock options                                               |                                                                      |   | 1,593              |         |      |   | 33      |      
|Purchase of treasury stock                                                                      |                                                                      |   | (5,009             | )       |      |   | (11,618 | )    
|                                                                                                |                                                                      |   |                    |         |      |   |         |      
|Net cash provided (used) by financing activities                                                |                                                                      |   | 10,841             |         |      |   | (11,585 | )    
|EFFECT OF EXCHANGE RATES ON CASH                                                                |                                                                      |   | (174               | )       |      |   | (53     | )    
|                                                                                                |                                                                      |   |                    |         |      |   |         |      
|Decrease in cash and cash equivalents                                                           |                                                                      |   | (6,653             | )       |      |   | (5,086  | )    
|Cash and cash equivalents at beginning of period                                                |                                                                      |   | 99,640             |         |      |   | 31,421  |      
|                                                                                                |                                                                      |   |                    |         |      |   |         |      
|Cash and cash equivalents at end of period                                                      |                                                                      | $ | 92,987             |         |      | $ | 26,335  |      
|                                                                                                |                                                                      |   |                    |         |      |   |         |      

See notes to condensed consolidated financial statements.

6



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##### 



WMS INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed consolidated financial statements of WMS
Industries Inc., (WMS, we or the Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(including normal recurring accruals) considered necessary for a fair
presentation have been included.                                                                                                                                                                                                                                                                  
|  
|   |  | Sales of our gaming machines to casinos are generally strongest in the spring
and slowest in the summer months. In addition, quarterly revenues and net
income may increase when we receive a larger number of approvals for new
games from regulators than in other quarters, when a game that achieves
significant player appeal is introduced or if gaming is permitted in a
significant new jurisdiction. Operating results for the quarter ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2004. For further information,
refer to the consolidated financial statements and footnotes thereto included
in our Annual Report on Form 10-K for the year ended June 30, 2003.                                                                                                                                
|  
|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Our condensed consolidated financial statements include the accounts of WMS
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. We account for our joint operating
agreement with International Game Technology (IGT) for the current wide-area
progressive (WAP) systems, for which no legal entity exists, in our
consolidated financial statements by recording our proportionate share of
revenues and expenses from operating activities and the full value of all of
the assets we own and liabilities we owe related to this agreement. The
purpose of the joint operating agreement is to combine our licensing rights
and game design expertise with the proprietary WAP system of IGT. Under the
agreement, we design and market specified games, which are manufactured by
IGT and placed in casinos on IGTs WAP system.
|  
|   |  | Certain prior period balances have been reclassified to conform to the
current period presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|3. |  | EARNINGS (LOSS) PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | We have elected to continue to follow APB Opinion No. 25 to account for stock
options granted to employees and directors, as allowed by SFAS No. 123,
Accounting for Stock Based Compensation. Under APB No. 25, we do not
recognize compensation expense because the option terms are fixed and the
exercise price equals the market price of the underlying stock on the grant
date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The following table presents a comparison of the reported net income (loss),
earnings (loss) per share and compensation cost of options granted to
employees to the pro forma amounts that would have been reported if stock
option compensation expense had been determined using the fair value method
allowed by SFAS No. 123 (in thousands of dollars, except per share amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                                                                                                       |                            |         |   |                    |      |      |   |     |      | 
|---------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | - | ------------------ | ---- | ---- | - | --- | ---- | 
|                                                                                                                       |                            |         |   | Three Months Ended
|                                                                                                                       |                            |         |   | September 30,     
|                                                                                                                       |                            |         |   |                   
|                                                                                                                       |                            |         |   | 2003               |      | 2002
|                                                                                                                       |                            |         |   |                    |      |     
|As Reported:                                                                                                           |                            |         |   |                    |      |      |   |    
|                                                                                                                       | Net income (loss)          |         | $ | (1,875             | )    |      | $ | 660 |     
|                                                                                                                       |                            |         |   |                    |      |      |   |     |     
|                                                                                                                       | Earnings (loss) per share: |         |   |                    |      |      |   |     |     
|                                                                                                                       |                            | Basic   |   | $                  | (.06 | )    |   | $   | 0.02 | 
|                                                                                                                       |                            | Diluted |   | $                  | (.06 | )    |   | $   | 0.02 | 
|Stock based employee compensation cost, net of related tax
effects, included in the determination of net income (loss) |                            | $       |  |                    |      | $    |  |    
|                                                                                                                       |                            |         |   |                    |      |      |   |     |     

7



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##### 



|                                                                                                                                            |         |   |                    |       |      |   |       |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ------- | - | ------------------ | ----- | ---- | - | ----- | ----- | -
|                                                                                                                                            |         |   | Three Months Ended
|                                                                                                                                            |         |   | September 30,     
|                                                                                                                                            |         |   |                   
|                                                                                                                                            |         |   | 2003               |       | 2002
|                                                                                                                                            |         |   |                    |       |     
|Pro forma amounts if the fair value method had been
applied to all stock compensation awards:                                               |         |   |                    |       |      |   |       |      
|Pro forma net (loss)                                                                                                                        |         | $ | (5,458             | )     |      | $ | (954  | )    
|                                                                                                                                            |         |   |                    |       |      |   |       |      
|Pro forma (loss) per share:                                                                                                                 |         |   |                    |       |      |   |       |      
|                                                                                                                                            | Basic   |   | $                  | (0.19 | )    |   | $     | (0.03 | )
|                                                                                                                                            | Diluted |   | $                  | (0.19 | )    |   | $     | (0.03 | )
|Stock based employee compensation cost, net of related
tax effects, that would have been included in the
determination of net income (loss) |         | $ | 3,583              |       |      | $ | 1,614 |      
|                                                                                                                                            |         |   |                    |       |      |   |       |      



| |  | The following weighted average assumptions were used to value the options
in the periods indicated:
| |  | ---------------------------------------------------------------------------------------------------

|                        |  |                    |  |      |  |         |      |         |  |  |      |  
|----------------------- |  | ------------------ |  | ---- |  | ------- | ---- | ------- |  |  | ---- | -
|                        |  | Three Months Ended
|                        |  | September 30,     
|                        |  |                   
|                        |  | 2003               |  | 2002
|                        |  |                    |  |     
|Risk-free interest rate |  |                    |  |      |  |         | 3.25 | %       |  |  | 4.00 | %
|Expected life           |  |                    |  |      |  | 6 years |      | 6 years
|Expected volatility     |  |                    |  |      |  |         | .54  |         |  |  | .44  |  
|Expected dividend yield |  |                    |  |      |  |         | 0    |         |  |  | 0    |  



| |  | At September 30, 2003 and 2002, the Company had 4,036,000 and 3,439,000
stock options outstanding, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Effective March 1, 2002, we issued a restricted stock grant of 250,000
shares of common stock held in treasury to Mr. Louis
J. Nicastro, Chairman of our Board of Directors and a non-employee
director. On May 7, 2003, we purchased Mr. Nicastros
rights to the 250,000 restricted shares for a purchase price of $14.00 per
share. The diluted earnings per share calculation for
the three months ended September 30, 2002 does not include the 250,000
shares under the restricted stock grant.                                                                                                                                                                      
|
| |  | On June 11, 2003, the Board of Directors approved a grant of restricted
stock of 7,478 shares to each of four officers in
lieu of any cash bonuses for Fiscal 2003. The restricted shares will
vest on June 11, 2004, subject to the individuals
continued employment with WMS. The 29,912 shares of unearned restricted
stock were not included in the computation of
diluted earnings per share for the three months ended September 30,
2003.                                                                                                                                                                                                                          
|
| |  | Had we recognized net income for the three months ended September 30, 2003,
incremental shares attributable to the hypothetical assumed exercise of stock
options and warrants under the treasury stock method would have increased
diluted shares outstanding by 734,000 shares. For the three months ended
September 30, 2003, the diluted earnings per share calculation excludes
748,000 shares underlying stock options and warrants, because the exercise
price was greater than the average market value price of the common stock for
the period, and therefore, the effect would be anti-dilutive.                                                                
|
| |  | The diluted earnings per share calculation for the three months ended
September 30, 2002 is different from the basic earnings per share calculation
because the diluted calculation includes 255,000 potential incremental shares
of common stock outstanding from the hypothetical assumed exercise of stock
options under the treasury stock method. For the three months ended
September 30, 2002, the diluted earnings per share calculation excludes
2,388,000 shares underlying stock options because the option exercise price
was greater than the average market value price of the common stock for the
period, and therefore, the effect would be anti-dilutive.

8



---



##### 





| |  | The following summarizes the stock options exercised during the periods
indicated:
| |  | ----------------------------------------------------------------------------------

|                                |  |                    |         |      |  |   |       | 
|------------------------------- |  | ------------------ | ------- | ---- |  | - | ----- | 
|                                |  | Three Months Ended
|                                |  | September 30,     
|                                |  |                   
|                                |  | 2003               |         | 2002
|                                |  |                    |         |     
|Stock options exercised         |  |                    | 206,393 |      |  |   | 7,750 | 
|Weighted average exercise price |  | $                  | 7.72    |      |  | $ | 4.24  | 



|4. |  | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands of dollars)
|-- |  | --------------------------------------------------------------------------

|                                                  |                                                     |  |                    |       |      |  |   |       | 
|------------------------------------------------- | --------------------------------------------------- |  | ------------------ | ----- | ---- |  | - | ----- | 
|                                                  |                                                     |  | Three Months Ended
|                                                  |                                                     |  | September 30,     
|                                                  |                                                     |  |                   
|                                                  |                                                     |  | 2003               |       | 2002
|                                                  |                                                     |  |                    |       |     
|Supplemental Disclosure of Cash Flow Information: |                                                     |  |                    |       |      |  |   |      
|                                                  | Income taxes paid                                   |  | $                  | 180   |      |  | $ | 7     | 
|                                                  | Income tax refunds received                         |  | $                  | 322   |      |  | $ | 5,922 | 
|                                                  | Interest paid                                       |  | $                  |      |      |  | $ |      | 
|                                                  | Investment income received                          |  | $                  | 453   |      |  | $ | 401   | 
|Schedule of Non Cash Investing Activities:        |                                                     |  |                    |       |      |  |   |      
|                                                  | Issuance of 250,000 stock warrants to licensor      |  | $                  | 3,905 |      |  | $ |      | 
|                                                  | Gaming operations machines transferred
to inventory |  | $                  | 200   |      |  | $ |      | 



|5. |  | COMPREHENSIVE INCOME (LOSS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Comprehensive income (loss) consists of net income and foreign currency
translation adjustments and totaled a loss of $(2.0) million and income of
$0.6 million for the three months ended September 30, 2003 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|6. |  | CONVERTIBLE SUBORDINATED NOTES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In June 2003, we issued $100.0 million of convertible subordinated notes
bearing interest at 2.75% maturing on July 15, 2010.
On July 3, 2003, we issued an additional $15 million of convertible
subordinated notes under identical terms to cover an over-
allotment option granted to the initial purchasers of the notes. The notes
are convertible at any time into an aggregate of
5,813,953 shares of our common stock at a conversion price of $19.78 per
share, subject to adjustment. The notes are
subordinated in right of payment to all existing and future senior debt
and will be effectively subordinated to all of the
indebtedness and liabilities of our subsidiaries. The notes are not
callable. We will pay interest on the notes semi-annually on
January 15 and July 15 of each year, commencing on January 15, 2004.
|  
|   |  | We have no maturities of debt or sinking fund requirements through June
30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|7. |  | STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Common Stock Repurchase Program                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In January 2002, our Board of Directors authorized a $20 million plan to
repurchase our common stock in open market transactions from time to time. In
the September 2002 quarter, 1,022,500 shares were repurchased under this
authorization for $11.4 million. By July 31, 2002, this repurchase program
was completed. In total, we repurchased 1,568,000 shares, or approximately 5%
of the previously outstanding shares, at an average share price of $12.75
under the $20 million authorization.                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In September 2002, our Board of Directors authorized a twelve-month plan to
repurchase up to an additional $10 million of our common stock in open market
transactions. As of September 30, 2002, repurchases of 16,700 shares at a
cost of $0.2 million had been made under this plan at an average price of
$14.71 per share. As of March 31, 2003, this repurchase program was
completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | In April 2003, our Board of Directors authorized a new twelve-month plan
to repurchase up to an additional $10 million of our
common stock from time to time in open market or privately negotiated
transactions. In June 2003, in conjunction with the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

9



---



##### 





|   |  | completion of our private placement of convertible subordinated notes due
2010 to qualified institutional buyers, our Board of
Directors authorized the expansion of this repurchase plan to $25 million.
During the fiscal year ended June 30, 2003, we
repurchased 493,200 shares for an aggregate price of $7.5 million under
this authorization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During the quarter ended September 30, 2003, we purchased 299,100 shares
of our common stock on the open market for
$5.0 million at an average price of $16.75 per share. Since the initial
buyback program was authorized in January 2002, we
have repurchased 3.2 million shares, or 9.9% of the previous number of
shares outstanding, for a total expenditure of $42.5
million at an average price of $13.31 per share. At September 30, 2003, we
had 29.4 million shares outstanding and $12.5
million remaining on the $25 million share buyback plan approved by our
Board of Directors in April 2003 and expanded in
June 2003. The timing and actual number of shares to be purchased in the
future will depend on market conditions.                                                                                                                     
|  
|   |  | Warrant Grants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In September 2003, our Board of Directors, as part of the inducement to a
licensor to extend their license agreement with us, approved a grant of
250,000 common stock purchase warrants valued at $3.9 million. The warrants
exercise price is $35.04 per share of our common stock, subject to
adjustment. The warrants are non cancelable and vest with respect to 20% of
the underlying shares in each year commencing on January 1, 2007 until fully
vested on January 1, 2011, subject to earlier vesting under specified
circumstances. The warrants expire on September 14, 2013.                                                                                                                                                                                                                                                                         
|  
|   |  | In valuing the warrants, we used the Black-Scholes model and incorporated the
following assumptions: risk free rate 4.15%; expected volatility .54;
expected life 10 years; and expected dividend-zero. The risk-free rate is
determined based on the interest rate of U.S. Government treasury obligations
with a maturity date comparable to the life of the warrants issued. Other
assumptions, relating to the warrants life, strike price and our common
stock price, were determined at the date the warrants were issued. We will
recognize expense based on the terms of the underlying license agreement.                                                                                                                                                                                                                                                
|  
|8. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | We routinely enter into license agreements with others for the use of their
intellectual properties in our products. These agreements generally provide
for royalty advances when the agreements are signed, and provide for minimum
guarantees as well as additional contingent payments based on future events.
In the September 2003 quarter, we entered into new licensing agreements,
which significantly increased our total potential royalty commitments. The
total potential commitments at September 30, 2003 increased to $68.6 million
from $29.6 million at June 30, 2003. The total potential future payments at
September 30, 2003 increased to $39.8 million from $13.0 million at June 30,
2003. At September 30, 2003, we had total potential royalty commitments,
advances and payments made, and potential, future royalty payments as
follows:

|                                  |  |                       |         |            |  |           |       |  |  |   |         |  
|--------------------------------- |  | --------------------- | ------- | ---------- |  | --------- | ----- |  |  | - | ------- | -
|                                  |  | At September 30, 2003
|                                  |  |                      
|                                  |  | Guaranteed            |         | Contingent |  | Total    
|                                  |  | Minimums              |         | Payments   |  | Potential
|                                  |  |                       |         |            |  |          
|                                  |  | (in thousands)       
|Total royalty commitments         |  | $                     | 63,910  |            |  | $         | 4,682 |  |  | $ | 68,592  |  
|Advances and payments made        |  |                       | (28,759 | )          |  |           |      |  |  |   | (28,759 | )
|                                  |  |                       |         |            |  |           |       |  |  |   |         |  
|Potential future royalty payments |  | $                     | 35,151  |            |  | $         | 4,682 |  |  | $ | 39,833  |  
|                                  |  |                       |         |            |  |           |       |  |  |   |         |  



| |  | Of the $28.8 million total advances and payments through September 30, 2003,
$4.1 million has been charged to expense and the remaining $24.7 million is
included in the September 30, 2003 balance sheet; $7.9 million in other
current assets and $16.8 million in other assets.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



---



##### 





| |  | As of September 30, 2003, we estimate that potential future royalty payments
in each fiscal year will be as follows:
| |  | --------------------------------------------------------------------------------------------------------------------

|                    |       |          |        |            |       |            |   |                |       |  |        |        |       | 
|------------------- | ----- | -------- | ------ | ---------- | ----- | ---------- | - | -------------- | ----- |  | ------ | ------ | ----- | 
|                    |       |          |        |            |       |            |   |                |       |  |        | Total 
|                    |       |          |        | Guaranteed |       | Contingent |   | Potential     
|Year Ended June 30, |       | Minimums |        | Payments   |       | Payments  
|                    |       |          |        |            |       |           
|                    |       |          |        |            |       |            |   | (in thousands) |       |  |        |       
|                    |       | 2004     |        | $          | 1,410 |            |   | $              | 2,907 |  |        | $      | 4,317 | 
|                    |       | 2005     |        |            | 6,216 |            |   |                | 1,250 |  |        |        | 7,466 | 
|                    |       | 2006     |        |            | 5,525 |            |   |                | 525   |  |        |        | 6,050 | 
|                    |       | 2007     |        |            | 4,400 |            |   |                |      |  |        |        | 4,400 | 
|                    |       | 2008     |        |            | 4,400 |            |   |                |      |  |        |        | 4,400 | 
|Thereafter          |       |          | 13,200 |            |       |            |  |                |       |  | 13,200 |       
|                    |       |          |        |            |       |            |   |                |       |  |        |       
|                    | Total |          | $      | 35,151     |       |            | $ | 4,682          |       |  | $      | 39,833 |      
|                    |       |          |        |            |       |            |   |                |       |  |        |       



|   |  | We announced a three-part technology improvement plan in January 2002 to
stabilize the operating system software that runs our gaming devices. As part
of this technology improvement plan, we have pursued alternative strategies
for each phase of the plan, including licensing technology from third
parties. At September 30, 2003, we had guaranteed minimum payments related to
such technology alternatives aggregating $8.6 million, all of which had been
paid as advances. An additional $3.2 million of contingent payments may
become payable based on future events. These amounts are included in the
table above. If we determine that we will not realize the value of a
particular licensed technology alternative, we will record an immediate
charge against earnings at the time of such determination of up to $11.8
million if all of the contingent payments became due and all of the
technology alternatives were to have no further value to us.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | LITIGATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | On May 18, 2001, La Societe de Loteries du Quebec (Loto-Quebec) was served
with a class action lawsuit alleging that the members of the class developed
a pathological gambling addiction by using Loto-Quebecs video lottery
terminals (VLTs) and that Loto-Quebec, as owner, operator and distributor
of VLTs, failed to warn players of the alleged dangers associated with VLTs.
Class status was granted by the Superior Court, Province of Quebec, District
of Quebec on May 6, 2002, authorizing Jean Brochu to act as the
representative plaintiff. The class of 119,000 members is requesting damages
totaling almost $700 million Canadian dollars, plus interest.                                                                                                                                                                                                                                                                                          
|  
|   |  | On October 2, 2003, Loto-Quebec filed a claim against us and Video Lottery
Consultants Inc., a subsidiary of IGT (VLC), alleging that, in the event
that the class action plaintiffs are successful in the pending class action
lawsuit against Loto-Quebec, Loto-Quebec is entitled to be indemnified by the
manufacturers of the VLTs, specifically us and VLC. We filed our appearance
on October 16, 2003 and are currently proceeding with discovery. We intend to
vigorously defend ourselves against the allegations. At this time, we are
unable to predict the outcome of these actions, or a reasonable estimate of
the range of possible loss, if any, given the status of the litigation.                                                                                                                                                                                                                                                                    

11



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##### 





| |  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As used in this quarterly report on Form 10-Q, the terms we, us, our,
and WMS mean WMS Industries Inc., a Delaware corporation, and its
subsidiaries, and the term common stock means our common stock, $0.50 par
value per share, unless the context indicates a different meaning. Gaming
operations, as used throughout this report, refers to our gaming machines
leased, based upon any of the following payment methods: (1) a percentage of
the net win of the gaming machines, (2) fixed daily fees, or (3) in the case
of wide-area progressive games, a percentage of the amount wagered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | MONOPOLYis a trademark of Hasbro Inc. ©2003 Hasbro. Used with permission.
All rights reserved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | MEN IN BLACK& ©2002 Columbia Pictures Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | POWERBALLis a trademark of the Multi-State Lottery Association. Used with
permission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | CPU-NXTand Bluebirdare trademarks of WMS Gaming Inc. All rights reserved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | This report contains forward-looking statements concerning our future
business conditions and outlook based on currently available information that
involves risks and uncertainties. These statements reflect information as of
the date of this report. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of these
risks and uncertainties, including, without limitation, the expansion of
legalized gaming into new markets; the development, introduction and success
of new games and new technologies; the ability to maintain the scheduling of
these introductions; the occurrence of software anomalies that affect our
games; our ability to implement our technology improvement plan; and our
ability to qualify for and maintain gaming licenses and approvals and other
risks more fully described under Item 1. Business  Risk Factors in our
Annual Report on Form 10-K for the year ended June 30, 2003. We make no
commitment to update any forward-looking statements, except as required by
law, or to disclose any facts, events, or circumstances after the date hereof
that may affect the accuracy of any forward-looking statement.
|
| |  | SIGNIFICANT EVENTS AND TRENDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Technology Improvement Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In January 2002, we began to execute a three-part technology improvement plan
to stabilize and modernize our operating system software that runs our gaming
devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In the first phase of the plan, we improved the stability of our operating
system by introducing two upgrades, version 2.57 for hopper-based games and
version 2.59 for printer-based games. Version 2.57 was first approved by
Mississippi regulators in June 2002 has now been approved by all six of the
North American gaming labs. Since its implementation, the 2.57 version has
been substantially more stable than previous software versions, and we have
been required to upgrade our hopper game operating systems to version 2.57 in
four jurisdictions. Other jurisdictions could require upgrades in the future.
We are making version 2.57 available in other jurisdictions as an optional
upgrade.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Version 2.59, our printer upgrade version, was approved by Gaming
Laboratories Inc., or GLI, in March 2003, and by the Nevada gaming
authorities in September 2003. We have installed version 2.59 in several
riverboat and Native American casinos which use GLI, and are currently
upgrading our printer gaming machines installed in casinos in Nevada to
version 2.59. Nevada is currently the only jurisdiction requiring all printer
games be upgraded to version 2.59. Other jurisdictions may require upgrades
in the future, and we are making version 2.59 available in other
jurisdictions as an optional upgrade.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Despite this progress in stabilizing our legacy operating systems, we
anticipate that our revenues from sales of new gaming devices through the
December 2003 quarter will improve only modestly over the levels experienced
in fiscal 2003, as customers await the introduction of our new operating
system and platform. We expect continued strength from game conversion
revenues in the next six months, as operators seek the benefits of our new
games without purchasing new units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The second phase of our technology improvement plan is to introduce a new
circuit board and operating system called CPU-NXT, and this phase of the
plan continues on schedule.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The commercial version of CPU-NXThas been approved by GLI, one of the six
North American labs, and we expect that the other five labs will approve the
system in a staggered process between now and the end of March 2004. We also
received GLI                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

12



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##### 





| |  | approval for nine game themes on this new system, and we have submitted four
additional new video gaming machine themes to GLI for which we expect to
receive approval in January. We recently completed a field trial for the
first submission of the CPU-NXTsystem in Nevada and received unanimous
approval for this system from the Nevada Gaming Control Board. We are on the
November 2003 agenda for approval from the Nevada Gaming Commission. We
have submitted the commercial version of CPU-NXTto the Nevada regulators
together with nine game themes, which we expect to be approved in January of
2004.                                                                                                                                                                                                                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On our new mechanical reel platform, we have received approvals for the first
submission from four of the six labs and are preparing for a field trial of
the first version in Ontario in the December 2003 quarter. The testing at the
remaining lab is on track. We expect to submit the commercial version of this
product line in the December 2003 quarter to the six North American gaming
labs, and we continue to expect the first regulatory approvals in April 2004.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | With respect to our new Bluebird upright cabinet, we made our initial
submission of the mechanical reel operating system and game in this new
cabinet. This means that as regulators approve the mechanical reel product,
they are also approving the Bluebirdcabinet. We now have received approvals
from four of the six testing labs on the first submission and have recently
submitted the commercial version of the Bluebirdcabinet with all the
features and functionality, including the modifications for the video version
of the cabinet, to GLI and Nevada and expect to submit this to the other four
labs in November 2003. We expect the initial approval for the marketable
version of the Bluebirdcabinet from GLI at the end of November and approvals
from the remaining five labs to follow over the five months following GLIs
approval.                                 
|
| |  | The GLI and Nevada labs are reporting continued progress in their evaluation
and testing of the first stage of our proprietary wide-area progressive
system, or WAP. The submission of a WAP-enabled game theme will be sent to
GLI and the Nevada labs in November and will be tested by the labs prior to
an expected field trial early in calendar 2004. Our WAP system requires
three sets of approvals: first, an associated equipment approval for the
linked system itself  which submission we have already made; second, a
WAP-enabled gaming device approval which we expect to submit to the labs in
the next 30 days, and third, approval of the game theme, in this case our
MONOPOLY Moneyoffering, which we expect to submit in November. We
anticipate final GLI and Nevada regulatory approvals in June 2004, with the
commercial launch of the system in July 2004.         
|
| |  | We are evaluating specifications and requirements for an even more advanced
gaming system that will be developed in the long-term, third phase of the
technology improvement plan. We continue to refine the design and
specifications to incorporate additional features we desire for this platform
and have recently begun allocating more resources to this longer-term effort.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | New Products and Licenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | During the first quarter, we extended our agreement with Hasbro, Inc. for the
use of their MONOPOLY®brand through calendar 2011. We expect to introduce
three new MONOPOLYgames by June 2004 and to launch our proprietary wide-area
progressive systems featuring a new theme, MONOPOLY Moneyin July 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | We announced our agreement with Sony Pictures Consumer Products to develop,
market and distribute MEN IN BLACKbranded games. We plan to introduce this
new series of participation games on our new Bluebirdplatform beginning in
the March 2004 quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In October 2003 we entered into an exclusive agreement to develop, market and
distribute games using the lottery brand POWERBALL®. We look forward to
debuting the first POWERBALLgame on our Bluebirdcabinet at the 2004 G2E
trade show next October.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Other Recent Matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | In June 2003, we issued $100.0 million of convertible subordinated notes
bearing interest at 2.75% maturing on July 15, 2010.
On July 3, 2003, we issued an additional $15 million of convertible
subordinated notes under identical terms to cover an over-
allotment option granted to the initial purchasers of the notes. The notes
are convertible at any time into an aggregate of
5,813,953 shares of our common stock at a conversion price of $19.78 per
share, subject to adjustment. The notes are
subordinated in right of payment to all existing and future senior debt
and will be effectively subordinated to all of the
indebtedness and liabilities of our subsidiaries. The notes are not
callable. We will pay interest on the notes semi-annually on
January 15 and July 15 of each year, commencing on January 15, 2004. The
net proceeds of the offering will be used for

13



---



##### 





| |  | working capital, capital expenditures and other general corporate
purposes, which may include acquisitions and repurchase of
shares of our common stock under our existing share buyback program. In
June 2003, upon completion of the $100 million
offering, the Board of Directors expanded the existing share buyback
program authorization by $15 million to $25 million.                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | CRITICAL ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | During the quarter ended September 30, 2003, we made no changes in our
critical accounting policies or in the application of those policies, as
reported in our Annual Report on Form 10-K for the year ended June 30, 2003.                                                                                                                                                                                                                                        
|
| |  | OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | We are not dependent on off-balance sheet financing arrangements to fund our
operations. We utilize financing arrangements for operating leases of
equipment and facilities, none of which are in excess of our current needs.
We also have minimum guaranteed royalty payments for intellectual property
used in our gaming machines. Our obligations under these arrangements and
under our convertible subordinated notes at September 30, 2003, were as
follows:

|                               |  |                                      |         |        |  |           |       |           |  |         |        |  |  |   |       |           |  |   |         | 
|------------------------------ |  | ------------------------------------ | ------- | ------ |  | --------- | ----- | --------- |  | ------- | ------ |  |  | - | ----- | --------- |  | - | ------- | 
|                               |  | Payment Due by Period (in thousands)
|                               |  |                                     
|                               |  |                                      |         |        |  | Less than |       |           |  |         |        |  |  |   |       | More than
|Contractual Obligations        |  | Total                                |         | 1 Year |  | 1-3 Years |       | 3-5 Years |  | 5 Years
|                               |  |                                      |         |        |  |           |       |           |  |        
|Convertible Subordinated Notes |  | $                                    | 115,000 |        |  |           |      |           |  |         |       |  |  |   |      |           |  | $ | 115,000 | 
|Operating Leases               |  |                                      | 2,485   |        |  | $         | 1,163 |           |  | $       | 1,161  |  |  | $ | 161   |           |  |   |        | 
|Minimum Royalty Payments       |  |                                      | 35,151  |        |  |           | 1,410 |           |  |         | 11,741 |  |  |   | 8,800 |           |  |   | 13,200  | 
|                               |  |                                      |         |        |  |           |       |           |  |         |        |  |  |   |       |           |  |   |         | 
|Total                          |  | $                                    | 152,636 |        |  | $         | 2,573 |           |  | $       | 12,902 |  |  | $ | 8,961 |           |  | $ | 128,200 | 
|                               |  |                                      |         |        |  |           |       |           |  |         |        |  |  |   |       |           |  |   |         | 



| |  | The total potential royalty commitments, including payments already made and
those contingent upon future events, increased from $13.0 million at June 30,
2003 to $39.8 million at September 30, 2003. We do not have any special
purpose entities for investment or the conduct of our operations. We have not
entered into any derivative financial instruments, although we have granted
stock options and restricted stock to our employees, officers, directors and
consultants and warrants to a licensor. We do not currently have any
significant firm purchase commitments for raw material inventory.                                                                                                                                                                  
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | LIQUIDITY AND CAPITAL RESOURCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | We believe that cash and cash equivalents and short-term investments of
$148.4 million at September 30, 2003, exclusive of $2.0 million of restricted
cash, along with our available $50.0 million bank revolving line of credit
that extends to May 21, 2004, and to a lesser extent, cash flow from
operations will be adequate to fund our anticipated level of expenses,
capital expenditures, cash to be invested in gaming operations machines, and
the levels of inventories and receivables required in the operation of our
business. For the next twelve months we do not expect to be dependent on cash
flow from operations due to the amount of cash and short-term investments we
hold and the borrowing capacity available under our bank revolving line of
credit.
|
| |  | Our short-term investments primarily consist of Auction Market Preferred
Stocks stated at cost, which approximates market value. These investments
generally have no fixed maturity date but most have dividend-reset dates
every 49 days or more. These investments can be liquidated under an auction
process on the dividend-reset dates subject to a sufficient number of bids
being submitted. Our policy is to invest cash with issuers that have a high
credit rating and to limit the amount of credit exposure to any one issuer.                                                                                                                                                                                                                                        
|
| |  | Due to our operating losses in fiscal 2003 and in the quarter ended September
30, 2003, we have recorded $8.9 million of current income tax receivables on
our balance sheet as of September 30, 2003. This tax receivable is based on
our ability to receive tax refunds from applying our fiscal 2003 tax loss
against prior years income and for refunds of tax payments made in fiscal
2003.                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | We also have $10.3 million of deferred tax assets on our balance sheet as of
September 30, 2003. These represent taxable temporary differences expected to
reverse in future years, and tax credits and tax operating losses generated
in fiscal 2003 and in the quarter ended September 30, 2003, that can be
claimed on future income tax returns to reduce current tax due in those
years. We believe it is more likely than not that we will realize the
benefits of these deferred tax assets. On this basis, we have not provided
any valuation allowance as of September 30, 2003. However, valuation
allowances could be recorded against these deferred tax assets in future
periods if our future estimates of amounts realizable are reduced.                          

14



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##### 





| |  | We utilize financing arrangements for operating leases of regional office
facilities and some equipment. We have royalty commitments for brand and
technology licenses that are not recorded in our balance sheet. Our total
potential royalty commitments, including payments contingent upon future
events, increased from $29.6 million at June 30, 2003 to $68.6 million at
September 30, 2003, of which $28.8 million has been paid. Please refer to the
table under Off-Balance Sheet Arrangements and Contractual Obligations
above and Note 8 to Condensed Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash used by operating activities was $13.9 million for the three months
ended September 30, 2003, as compared to cash provided of $6.9 million for
the three months ended September 30, 2002. The current period decrease
relative to the comparable prior year period was due to lower net income, and
a decrease from changes in operating assets and liabilities, partially offset
by greater tax benefit from the exercise of stock options than in the prior
year quarter. We anticipate cash to be provided by operations over the next
twelve months due to anticipated higher revenues from increased game sales,
partially offset by higher research and development expenses related to the
ongoing execution of our technology improvement plan, product approval costs,
product line expansion costs and increased game offerings and higher selling
and administrative costs due to the execution of the re-emergence plan and
the ongoing implementation of an Oracle Enterprise Resource Planning system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The changes in operating assets and liabilities resulted in $18.6 million of
cash outflow for the three months ended September 30, 2003, compared with a
cash inflow of $0.1 million during the comparable quarter last year. The cash
outflow for the three months ended September 30, 2003 was primarily due to a
$6.1 million increase in accounts and notes receivable, a $7.3 million
increase in other current assets, primarily short-term royalty advances, a
$1.2 million increase in income tax receivable and a $2.5 million reduction
in current liabilities from the comparable balances at June 30, 2003. The
increase in accounts and notes receivable reflects higher unit sales levels
and decreased collections during the period. The increase in royalty advances
was due to new technology and brand license agreements entered into during
the September 2003 quarter. The increase in income tax receivable was due to
stock options exercises that reduced our income taxes. The reduction of
current liabilities is primarily due to the payment to Midway Games Inc. of a
$4.0 million tax advance, which we had written off in the June 2003 quarter.
The cash inflow for the three months ended September 30, 2002 was primarily
due to a $7.0 million decrease in income taxes receivable and a $2.1 million
decrease in accounts and notes receivable, partially offset by a $4.9 million
increase in short-and long-term royalty advances and a $2.5 million reduction
in current liabilities from the comparable balances at June 30, 2002. We
have not experienced significant bad debt expense in any of the periods
presented.
|
| |  | Cash used by investing activities was $3.5 million for the three months ended
September 30, 2003, compared with $0.4 million used for the comparable prior
year period. Cash used for the purchase of property, plant and equipment for
the three months ended September 30, 2003 was $1.6 million compared with $1.9
million for the comparable prior year period. Cash used for additions to
gaming operation machines was $4.7 million and $5.1 million for the three
months ended September 30, 2003 and 2002, respectively. Net cash of $2.9
million was provided by the redemption of short-term investments for the
three months ended September 30, 2003, compared to $6.7 million provided by
the redemption of such investments in the comparable prior year period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Cash provided by financing activities was $10.8 million for the three months
ended September 30, 2003 compared with cash used of $11.6 million for the
comparable prior year period. We received net cash of $14.3 million in July
2003 from the exercise of the over-allotment option relating to our
convertible subordinated notes. We also received $1.6 million from the
exercise of employee stock options in the September 2003 quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In the September 2003 quarter, we repurchased 299,100 shares of our common
stock for an aggregate price of $5.0 million at an average price of $16.75
per share. The timing and actual number of shares to be purchased in the
future will depend on market conditions. Since the inception of the first
common stock repurchase program in January 2002 through September 30, 2003,
we have purchased 3,193,500 or 9.9% of our previously outstanding shares for
an aggregate price of $42.5 million at an average price of $13.31 per share.
At September 30, 2003 we have $12.5 million remaining on the $25 million
share buyback program approved by our Board of Directors in April 2003 and
expanded in June 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In the September 2002 quarter, we completed our twelve-month, $20 million
common stock share repurchase program authorized by our Board of Directors in
January 2002. In September 2002, our Board of Directors authorized an
additional twelve-month, $10 million common stock share repurchase program.
During the quarter ended September 30, 2002, we repurchased 1,022,500 shares
for an aggregate price of $11.4 million in completing the $20 million
program, and repurchased 16,700 shares for an aggregate price of $0.2 million
under the $10 million program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

15



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| |  | RESULTS OF OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Consolidated revenues in the September 2003 quarter increased 10% to $46.7
million compared to $42.4 million in the quarter ended September 30, 2002.
Total revenue increased $4.3 million; $8.7 million from increased product
sales revenue, partially offset by a $4.4 million reduction in gaming
revenue. We shipped 2,220 video and reel-type gaming devices in the current
quarter, included in product sales of $24.9 million versus 1,292 gaming
devices and $16.1 million of product sales in the comparable prior year
quarter. The average sales price decreased 2.7% from $8,545 in the prior year
quarter to $8,316 in the current year quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Gaming operations revenues decreased to $21.8 million in the September 2003
quarter from $26.2 million in the September 2002 quarter. We had a total of
4,797 units installed at September 30, 2003, compared to 6,039 units
installed at September 30, 2002. The decrease in gaming operations revenue
was mainly due to a decline from the September 30, 2002 quarter in the
average installed base of gaming operations machines by 1,181 units to 4,853
units in the September 2003 quarter, partially offset by an increase in the
net revenue per day to $40.72 from $40.42. The decline in the installed base
since the September 2002 quarter resulted from our current gaming platform
not supporting key features and functionality that casino operators demand,
such as certain cashless gaming options and multi-denominational and
tokenization capabilities. In addition, competition for space has
intensified as casinos have more participation product to choose from. Also
we removed participation games from locations that had lower net revenue per
day. Average revenue per day for gaming operations machines increased as we
continue to refresh the installed participation base with new games. The
installed base declined by 289 units since June 30, 2003 primarily due to
casinos reducing the number of gaming operations machines in New Jersey and
Illinois due to recently enacted higher tax rates and the fact that our
legacy operating system does not currently support dual port cashless gaming
technology.
|
| |  | Consolidated gross profit increased to $27.4 million for the September 2003
quarter from $26.4 million in the September 2002 quarter. The gross profit
margin on product sales was 39% for the September 2003 quarter, up from 33%
in the prior year quarter, reflecting higher production volumes and higher
margin products representing a greater percentage of product sales revenues.
The gross profit margin on gaming operations revenues increased to 81% in the
September 2003 quarter compared to 80% in the prior year quarter, due to an
increase in the average net revenue per day and higher royalties received
from licensees, partially offset by higher royalty rates payable to
licensors. Gaming operations revenues were 47% of total revenues in the
September 2003 quarter, compared to 62% in the September 2002 quarter due to
the increase of product sales revenue in the current year quarter and an
overall decline of gaming operations revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Research and development expenses increased $2.5 million, or 32%, to $10.3
million in the September 2003 quarter compared to $7.8 million in the prior
year quarter resulting from the ongoing execution of our technology
improvement plan, product approval costs, product line expansion costs and
increased game offerings. We expect quarterly research and development
expenses to continue to exceed levels in the comparable prior quarter
throughout fiscal 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Selling and administrative expenses increased $2.2 million, or 19%, to $13.6
million in the September 2003 quarter compared to $11.3 million in the
September 2002 quarter, due to higher costs for the G2E trade show, the
execution of our re-emergence plan and the ongoing implementation of an
Oracle Enterprise Resource Planning system.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | We incurred an operating loss of $2.8 million in the September 2003 quarter,
compared to operating income of $0.6 million in the September 2002 quarter.
The decreased operating performance in the September 2003 quarter resulted
from increases of $2.5 million in research and development expenses and $2.2
million in selling and administrative expenses, partially offset by a $1.0
million increase in gross profit and a $0.4 million decrease in depreciation
and amortization. We also incurred $0.8 million pre-tax of interest expense
in the September 2003 quarter related to our 2.75% convertible subordinated
notes issued in the Summer of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The provision (benefit) for income taxes, which includes both current and
deferred taxes, is based on our annual estimated effective tax rate of 37.5%,
which is slightly higher than the 36.3% rate in the September 2002 quarter
due to higher expected foreign income in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Net loss was $1.9 million or $0.06 loss per share for the current year
quarter compared to net income of $0.7 million, or $0.02 per diluted share,
for the prior year quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

16



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##### 





| |  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We are subject to market risks in the ordinary course of our business,
primarily associated with interest rate and foreign currency fluctuations. We
do not currently hedge either of these risks, or utilize financial
instruments for trading or other speculative purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Interest Rate Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We have exposure to interest rate risk from our convertible subordinated
notes and short-term line of credit. The notes bear interest at a fixed rate
and the short-term line of credit bears interest at a variable rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | As of September 30, 2003, we had $115 million of convertible fixed-rate debt
with an interest rate of 2.75% with a fair value of $167 million due to the
increase in the market value of our common stock underlying the conversion
provisions. Using a discounted cash flow model, we currently estimate that a
50 basis point change in the prevailing market interest rates would impact
the fair value of our fixed rate debt by approximately $3.7 million, but
would not be material to cash flows or future results of operations.                                                                                                                                                                                                                                  
|
| |  | Foreign Currency Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | During the quarter ended September 30, 2003, we had no changes in our foreign
currency risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | ITEM 4. CONTROLS AND PROCEDURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | As of the end of the period covered by this report, our Chief Executive
Officer and our Chief Financial Officer carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as required by Rule 13a-15 under the Securities Exchange of 1934.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective
in ensuring that material information about us and our subsidiaries,
including the material information required to be disclosed in our filings
under the Exchange Act, is recorded, processed, summarized and communicated
to them as appropriate to allow timely decisions regarding required
disclosure.

PART II
OTHER INFORMATION



| |  | ITEM 1. LEGAL PROCEEDINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 18, 2001, La Societe de Loteries du Quebec (Loto-Quebec) was
served with a class action lawsuit alleging that the
members of the class developed a pathological gambling addiction by
using Loto-Quebecs video lottery terminals (VLTs)
and that Loto-Quebec, as owner, operator and distributor of VLTs, failed
to warn players of the alleged dangers associated
with VLTs. Class status was granted by the Superior Court, Province of
Quebec, District of Quebec on May 6, 2002,
authorizing Jean Brochu to act as the representative plaintiff. The
class of 119,000 members is requesting damages totaling
almost $700 million Canadian dollars, plus interest.
|
| |  | On October 2, 2003, Loto-Quebec filed a claim against us and Video Lottery
Consultants Inc., a subsidiary of IGT (VLC),
alleging that, in the event that the class action plaintiffs are
successful in the pending class action lawsuit against Loto-
Quebec, Loto-Quebec is entitled to be indemnified by the manufacturers of
the VLTs, specifically us and VLC. We filed our
appearance on October 16, 2003 and are currently proceeding with
discovery. We intend to vigorously defend ourselves
against the allegations.                                                                                                                                                  
|
| |  | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | On July 3, 2003, we issued $15 million principal amount of 2.75% Convertible
Subordinated Notes due July 15, 2010, upon the exercise of the over allotment
option granted in connection with our private placement of $100 million of
the notes on June 25, 2003, pursuant to Rule 144A under the Securities Act of
1933. CIBC World Markets Corp., a qualified institutional buyer, was the
initial purchaser of the notes, and CIBC resold the notes in reliance on Rule
144A.                                                                                                                                                                                                 

17



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##### 





| |  | In connection with the offering, CIBC represented and warranted to us, among
other things, as follows:
| |  | ------------------------------------------------------------------------------------------------------



| |  |  | It was not acquiring the notes with a view to any public
distribution or with an intention of offering or selling the
securities in a transaction that would violate the Securities Act of
1933 or the securities laws of any state;                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | It is a qualified institutional buyer as defined in Rule 144A
or is an accredited investor within the meaning of Regulation D with
such knowledge and experience in financial and business matters as is
necessary in order to evaluate the merits and risks of an investment
in the notes;
|
| |  |  | It would not use any form of general solicitation or general
advertising within the meaning of Regulation D in connection with the
offer and sale of the notes; and                                                                                                                            
|
| |  |  | It did not offer or sell and will not offer or sell the notes
except to persons whom it believes to be qualified institutional
buyers.                                                                                                                                                       



| |  | Subsequently, we have registered the notes and underlying common stock with
the SEC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The notes are convertible at the option of the holder into our common stock
at a conversion price of $19.78 per share, subject to adjustment. The notes
may be converted at any time on or before the close of business on July 15,
2010, unless we previously repurchase them. The net proceeds from the sale
of the $15 million principal amount of the notes were approximately $14.3
million, after deducting the initial purchasers discounts and offering
expenses that aggregated to approximately $0.7 million. The net proceeds of
the exercise of the over-allotment option will be used for working capital,
capital expenditures and other general corporate purposes, which may include
acquisitions and repurchase of shares of our common stock under our existing
share buyback program.                                                                                                                                     
|
| |  | On September 19, 2003, we issued 250,000 warrants to a licensor as an
inducement to extend an agreement that provides WMS a license for the use of
intellectual property. The warrants exercise price is $35.04 per share of
our common stock, subject to adjustment. The warrants vest with respect to
20% of the underlying shares in each year commencing on January 1, 2007 until
fully vested on January 1, 2011, subject to earlier vesting under specified
circumstances. The warrants expire on September 14, 2013. The warrants were
valued at a total of $3.9 million under the Black-Scholes pricing model used
to determine the fair value of equity instruments issued in exchange for
goods or services. The grant was exempt from registration under Section 5 of
the Securities Act of 1933, since it was made only to the licensor and did
not involve any public offering under Section 4(2) of the Securities Act of
1933.
|
| |  | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | (a) Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|            |  |                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                  
|3.1         |  | Amended and Restated Certificate of Incorporation of WMS dated February 17, 1987;
Certificate of Amendment dated January 28, 1993; and Certificate of Correction dated May
4, 1994, incorporated by reference to Exhibit 3(a) to our Annual Report on Form 10-K for
the year ended June 30, 1994.
|            |  |                                                                                                                                                                                                                                                                                                  
|3.2         |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of WMS,
as filed with the Secretary of the State of Delaware on February 25, 1998, incorporated by
reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.  
|            |  |                                                                                                                                                                                                                                                                                                  
|3.3         |  | Form of Certificate of Designations of Series A Preferred Stock, incorporated by reference
to Exhibit A to the Form of Rights Agreement filed as Exhibit 1 to our Registration
Statement on Form 8-A (File No. 1-8300) filed March 25, 1998 (the Form 8-A).                                    
|            |  |                                                                                                                                                                                                                                                                                                  
|3.4         |  | By-Laws of WMS, as amended and restated through June 26, 1996, incorporated by reference
to Exhibit 3(b) to our Annual Report on Form 10-K for the year ended June 30, 1996.                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                  
|4.1         |  | Rights Agreement dated as of March 5, 1998 between WMS and The Bank of New York, as Rights
Agent, incorporated by reference to Exhibit B to the Form 8-A.                                                                                                                                        

18



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##### 



|     |  |                                                                                                                                                                                                                                                                                         
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.2  |  | Warrant to purchase common stock of the Registrant, issued to a licensor of the Registrant.                                                                                                                                                                                             
|     |  |                                                                                                                                                                                                                                                                                         
|10.1 |  | Amendment No. 3, dated December 16, 2002 to the License Agreement dated September 1, 1997
among WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc. Portions of this exhibit
have been omitted under a request for confidential treatment filed separately with the
commission. 
|     |  |                                                                                                                                                                                                                                                                                         
|10.2 |  | Amendment No. 4, dated September 15, 2003 to the License Agreement dated September 1,
1997 among WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc. Portions of this
exhibit have been omitted under a request for confidential treatment filed separately with
the commission.
|     |  |                                                                                                                                                                                                                                                                                         
|31   |  | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                                   
|     |  |                                                                                                                                                                                                                                                                                         
|32   |  | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                     



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



| | (1) |  | Current report on Form 8-K filed August 14, 2003, under items 12 and 7.
| | --- |  | -----------------------------------------------------------------------
|
| | (2) |  | Current report on Form 8-K filed July 3, 2003, under items 5 and 7.    

19



---



##### 



SIGNATURES



| |  | Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  |                                                                                                                                                                 
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|                         |  | WMS INDUSTRIES INC.                                                                                                                                             
|                        
|Dated: November 12, 2003 |  | By: /s/ Scott D. Schweinfurth
Scott D. Schweinfurth
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)





---



##### 



EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                  
|3.1         |  | Amended and Restated Certificate of Incorporation of WMS dated February 17, 1987;
Certificate of Amendment dated January 28, 1993; and Certificate of Correction dated May
4, 1994, incorporated by reference to Exhibit 3(a) to our Annual Report on Form 10-K for
the year ended June 30, 1994.
|            |  |                                                                                                                                                                                                                                                                                                  
|3.2         |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of WMS,
as filed with the Secretary of the State of Delaware on February 25, 1998, incorporated by
reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.  
|            |  |                                                                                                                                                                                                                                                                                                  
|3.3         |  | Form of Certificate of Designations of Series A Preferred Stock, incorporated by reference
to Exhibit A to the Form of Rights Agreement filed as Exhibit 1 to our Registration
Statement on Form 8-A (File No. 1-8300) filed March 25, 1998 (the Form 8-A).                                    
|            |  |                                                                                                                                                                                                                                                                                                  
|3.4         |  | By-Laws of WMS, as amended and restated through June 26, 1996, incorporated by reference
to Exhibit 3(b) to our Annual Report on Form 10-K for the year ended June 30, 1996.                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                  
|4.1         |  | Rights Agreement dated as of March 5, 1998 between WMS and The Bank of New York, as Rights
Agent, incorporated by reference to Exhibit B to the Form 8-A.                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                  
|4.2         |  | Warrant to purchase common stock of the Registrant, issued to a licensor of the Registrant.                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                  
|10.1        |  | Amendment No. 3, dated December 16, 2002 to the License Agreement dated September 1, 1997
among WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc. Portions of this exhibit
have been omitted under a request for confidential treatment filed separately with the
commission.          
|            |  |                                                                                                                                                                                                                                                                                                  
|10.2        |  | Amendment No. 4, dated September 15, 2003 to the License Agreement dated September 1,
1997 among WMS Gaming Inc., Hasbro, Inc. and Hasbro International Inc. Portions of this
exhibit have been omitted under a request for confidential treatment filed separately with
the commission.         
|            |  |                                                                                                                                                                                                                                                                                                  
|31          |  | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.                                                                            
|            |  |                                                                                                                                                                                                                                                                                                  
|32          |  | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.