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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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FORM 10-Q

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

For the quarterly period ended December 31, 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.

YES  [X]   
NO [   ]

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

YES  [X]   
NO [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 29,865,109 of common stock,
$.50 par value, were outstanding at February 9, 2004, excluding 2,493,206
shares held as treasury shares.





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TABLE OF CONTENTS



|                                                  |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                    
|                                                  | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                  |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                  |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                  |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                  |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                  | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION                        
|                                                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                  | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                       
|EXHIBIT INDEX                                    
|License and Developement Agreement               
|1st Amendment to License & Developement Agreement
|2nd Amendment to License & Developement Agreement
|3rd Amendment to License & Developement Agreement
|Certifications of CEO and CFO                    
|Certifications of CEO and CFO                    



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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 and six months ended December 31, 2003 and 2002 |    |        | 3 | 
|                               |                                                                                               | Condensed Consolidated Balance Sheets -
December 31, 2003 and June 30, 2003                                    |    |        | 4 | 
|                               |                                                                                               | Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 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                            |                                                                                                                |    | 23     |  
|                               | ITEM 4. Controls and Procedures                                                               |                                                                                                                |    | 23     |  
|PART II. OTHER INFORMATION:    |                                                                                               |                                                                                                                |    |       
|                               | ITEM 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                |    | 24     |  
|                               | ITEM 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                |    | 24     |  
|SIGNATURES                     |                                                                                               |                                                                                                                | 26 |       

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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 |        | Six Months Ended
|                                           |                               |                          |      | December 31,       |        | December 31,    
|                                           |                               |                          |      |                    |        |                 
|                                           |                               |                          |      | 2003               |        | 2002             |        | 2003   |        | 2002
|                                           |                               |                          |      |                    |        |                  |        |        |        |     
|Revenues:                                  |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           | Product sales                 |                          | $    | 30,846             |        |                  | $      | 20,676 |        |      | $      | 55,730 |         |   | $      | 36,825 |       
|                                           | Gaming operations             |                          |      | 20,659             |        |                  |        | 22,966 |        |      |        | 42,491 |         |   |        | 49,211 |       
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           |                               | Total revenues           |      |                    | 51,505 |                  |        |        | 43,642 |      |        |        | 98,221  |   |        |        | 86,036 | 
|Costs and expenses:                        |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           | Cost of product sales         |                          |      | 18,843             |        |                  |        | 11,499 |        |      |        | 34,048 |         |   |        | 22,313 |       
|                                           | Cost of gaming operations     |                          |      | 3,325              |        |                  |        | 4,444  |        |      |        | 7,397  |         |   |        | 9,609  |       
|                                           | Research and development      |                          |      | 10,177             |        |                  |        | 11,601 |        |      |        | 20,482 |         |   |        | 19,390 |       
|                                           | Selling and administrative    |                          |      | 13,524             |        |                  |        | 12,181 |        |      |        | 27,080 |         |   |        | 23,527 |       
|                                           | Depreciation and amortization |                          |      | 6,063              |        |                  |        | 7,326  |        |      |        | 12,414 |         |   |        | 14,045 |       
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           |                               | Total costs and expenses |      |                    | 51,932 |                  |        |        | 47,051 |      |        |        | 101,421 |   |        |        | 88,884 | 
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|Operating loss                             |                               |                          | (427 | )                  |        |                  | (3,409 | )      |        |      | (3,200 | )      |         |   | (2,848 | )     
|Interest expense                           |                               |                          | (945 | )                  |        |                  |       |        |        |      | (1,895 | )      |         |   |       |       
|Interest and other income and expense, net |                               |                          | 780  |                    |        |                  | 498    |        |        |      | 1,501  |        |         |   | 973    |       
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|Loss before income taxes                   |                               |                          | (592 | )                  |        |                  | (2,911 | )      |        |      | (3,594 | )      |         |   | (1,875 | )     
|Benefit for income taxes                   |                               |                          | (222 | )                  |        |                  | (1,074 | )      |        |      | (1,349 | )      |         |   | (698   | )     
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|Net loss                                   |                               | $                        | (370 | )                  |        | $                | (1,837 | )      |        | $    | (2,245 | )      |         | $ | (1,177 | )     
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|Loss per share of common stock:            |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           | Basic                         |                          | $    | (0.01              | )      |                  | $      | (0.06  | )      |      | $      | (0.08  | )       |   | $      | (0.04  | )     
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           | Diluted                       |                          | $    | (0.01              | )      |                  | $      | (0.06  | )      |      | $      | (0.08  | )       |   | $      | (0.04  | )     
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|Shares used in per share calculations:     |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           | Basic                         |                          |      | 29,535             |        |                  |        | 30,585 |        |      |        | 29,412 |         |   |        | 30,743 |       
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       
|                                           | Diluted                       |                          |      | 29,535             |        |                  |        | 30,585 |        |      |        | 29,412 |         |   |        | 30,743 |       
|                                           |                               |                          |      |                    |        |                  |        |        |        |      |        |        |         |   |        |       

See notes to condensed consolidated financial statements.

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WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

|                                                                  |                                          |   |              |         |          |   |         |         | 
|----------------------------------------------------------------- | ---------------------------------------- | - | ------------ | ------- | -------- | - | ------- | ------- | 
|                                                                  |                                          |   | December 31, |         | June 30,
|                                                                  |                                          |   | 2003         |         | 2003    
|                                                                  |                                          |   |              |         |         
|                                                                  |                                          |   | (Unaudited)  |         |          |   |        
|ASSETS                                                            |                                          |   |              |         |          |   |         |        
|Current assets:                                                   |                                          |   |              |         |          |   |         |        
|                                                                  | Cash and cash equivalents                |   | $            | 87,608  |          |   | $       | 99,640  | 
|                                                                  | Restricted cash for progressive jackpots |   |              | 1,516   |          |   |         | 2,326   | 
|                                                                  | Short-term investments                   |   |              | 55,688  |          |   |         | 58,341  | 
|                                                                  |                                          |   |              |         |          |   |         |        
|                                                                  |                                          |   | 144,812      |         |          |   | 160,307 |        
|Receivables, net of allowances of $2,539 and $2,354, respectively |                                          |   | 37,669       |         |          |   | 25,073  |        
|Notes receivable, current portion                                 |                                          |   | 13,964       |         |          |   | 12,033  |        
|Income tax receivable                                             |                                          |   | 6,712        |         |          |   | 7,722   |        
|Inventories, at lower of cost (FIFO) or market:                   |                                          |   |              |         |          |   |         |        
|                                                                  | Raw materials and work in progress       |   |              | 23,058  |          |   |         | 13,937  | 
|                                                                  | Finished goods                           |   |              | 16,251  |          |   |         | 15,869  | 
|                                                                  |                                          |   |              |         |          |   |         |        
|                                                                  |                                          |   | 39,309       |         |          |   | 29,806  |        
|Other current assets                                              |                                          |   | 27,206       |         |          |   | 15,766  |        
|                                                                  |                                          |   |              |         |          |   |         |        
|                                                                  | Total current assets                     |   |              | 269,672 |          |   |         | 250,707 | 
|Gaming operations machines                                        |                                          |   | 74,359       |         |          |   | 76,283  |        
|Less accumulated depreciation                                     |                                          |   | (49,638      | )       |          |   | (48,693 | )      
|                                                                  |                                          |   |              |         |          |   |         |        
|                                                                  | Gaming operations machines, net          |   |              | 24,721  |          |   |         | 27,590  | 
|Property, plant and equipment                                     |                                          |   | 79,007       |         |          |   | 72,986  |        
|Less accumulated depreciation                                     |                                          |   | (26,011      | )       |          |   | (22,773 | )      
|                                                                  |                                          |   |              |         |          |   |         |        
|                                                                  | Property, plant and equipment, net       |   |              | 52,996  |          |   |         | 50,213  | 
|Other assets                                                      |                                          |   | 28,304       |         |          |   | 22,466  |        
|                                                                  |                                          |   |              |         |          |   |         |        
|Total assets                                                      |                                          | $ | 375,693      |         |          | $ | 350,976 |        
|                                                                  |                                          |   |              |         |          |   |         |         | 

See notes to condensed consolidated financial statements.

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WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

|                                                 |                                                                               |   |              |         |          |   |         |         |  
|------------------------------------------------ | ----------------------------------------------------------------------------- | - | ------------ | ------- | -------- | - | ------- | ------- | -
|                                                 |                                                                               |   | December 31, |         | June 30,
|                                                 |                                                                               |   | 2003         |         | 2003    
|                                                 |                                                                               |   |              |         |         
|                                                 |                                                                               |   | (Unaudited)  |         |          |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY             |                                                                               |   |              |         |          |   |         |        
|Current liabilities:                             |                                                                               |   |              |         |          |   |         |        
|                                                 | Accounts payable                                                              |   | $            | 14,345  |          |   | $       | 10,717  |  
|                                                 | Accrued compensation and related benefits                                     |   |              | 3,336   |          |   |         | 3,065   |  
|                                                 | Other accrued liabilities                                                     |   |              | 14,847  |          |   |         | 16,009  |  
|                                                 |                                                                               |   |              |         |          |   |         |        
|                                                 | Total current liabilities                                                     |   |              | 32,528  |          |   |         | 29,791  |  
|2.75% Convertible subordinated notes due 2010    |                                                                               |   | 115,000      |         |          |   | 100,000 |        
|Commitments and contingencies (See note 8 and 9) |                                                                               |   |              |         |          |   |         |        
|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                                                    |   |              | 202,909 |          |   |         | 197,009 |  
|                                                 | Retained earnings                                                             |   |              | 41,713  |          |   |         | 43,958  |  
|                                                 | Accumulated other comprehensive income                                        |   |              | 1,292   |          |   |         | 1,107   |  
|                                                 | Unearned restricted stock (29,912 shares)                                     |   |              | (491    | )        |   |         | (298    | )
|                                                 | Treasury stock, at cost (2,546,706 shares and
2,882,995 shares, respectively) |   |              | (33,437 | )        |   |         | (36,770 | )
|                                                 |                                                                               |   |              |         |          |   |         |        
|                                                 | Total stockholders equity                                                    |   |              | 228,165 |          |   |         | 221,185 |  
|                                                 |                                                                               |   |              |         |          |   |         |        
|Total liabilities and stockholders equity       |                                                                               | $ | 375,693      |         |          | $ | 350,976 |        
|                                                 |                                                                               |   |              |         |          |   |         |        

See notes to condensed consolidated financial statements.

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WMS INDUSTRIES INC.

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

|                                                                                       |                                                           |   |                  |         |      |   |         |        |  
|-------------------------------------------------------------------------------------- | --------------------------------------------------------- | - | ---------------- | ------- | ---- | - | ------- | ------ | -
|                                                                                       |                                                           |   | Six Months Ended
|                                                                                       |                                                           |   | December 31,    
|                                                                                       |                                                           |   |                 
|                                                                                       |                                                           |   | 2003             |         | 2002
|                                                                                       |                                                           |   |                  |         |     
|CASH FLOWS FROM OPERATING ACTIVITIES                                                   |                                                           |   |                  |         |      |   |         |       
|Net loss                                                                               |                                                           | $ | (2,245           | )       |      | $ | (1,177  | )     
|Adjustments to reconcile net loss to net
cash (used) provided by operating activities: |                                                           |   |                  |         |      |   |         |       
|                                                                                       | Depreciation and amortization                             |   |                  | 12,414  |      |   |         | 14,045 |  
|                                                                                       | Receivables provision                                     |   |                  | 185     |      |   |         | 10     |  
|                                                                                       | Deferred income taxes                                     |   |                  | (1,349  | )    |   |         | (1,971 | )
|                                                                                       | Non-cash expenses                                         |   |                  | 575     |      |   |         | 992    |  
|                                                                                       | Tax benefit from exercise of stock options                |   |                  | 3,710   |      |   |         | 120    |  
|                                                                                       | Non-cash write off of licensed technology                 |   |                  |        |      |   |         | 2,750  |  
|                                                                                       | Decrease from changes in operating
assets and liabilities |   |                  | (30,934 | )    |   |         | (4,600 | )
|                                                                                       |                                                           |   |                  |         |      |   |         |       
|Net cash (used) provided by operating activities                                       |                                                           |   | (17,644          | )       |      |   | 10,169  |       
|CASH FLOWS FROM INVESTING ACTIVITIES                                                   |                                                           |   |                  |         |      |   |         |       
|Purchase of property, plant and equipment                                              |                                                           |   | (6,021           | )       |      |   | (5,686  | )     
|Additions to gaming operations machines                                                |                                                           |   | (6,476           | )       |      |   | (12,676 | )     
|Net change in short-term investments                                                   |                                                           |   | 2,653            |         |      |   | 8,518   |       
|                                                                                       |                                                           |   |                  |         |      |   |         |       
|Net cash used by investing activities                                                  |                                                           |   | (9,844           | )       |      |   | (9,844  | )     
|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                                      |                                                           |   | 6,023            |         |      |   | 195     |       
|Purchase of treasury stock                                                             |                                                           |   | (5,009           | )       |      |   | (13,464 | )     
|                                                                                       |                                                           |   |                  |         |      |   |         |       
|Net cash provided (used) by financing activities                                       |                                                           |   | 15,271           |         |      |   | (13,269 | )     
|EFFECT OF EXCHANGE RATES ON CASH                                                       |                                                           |   | 185              |         |      |   | 754     |       
|                                                                                       |                                                           |   |                  |         |      |   |         |       
|Decrease in cash and cash equivalents                                                  |                                                           |   | (12,032          | )       |      |   | (12,190 | )     
|Cash and cash equivalents at beginning of period                                       |                                                           |   | 99,640           |         |      |   | 31,421  |       
|                                                                                       |                                                           |   |                  |         |      |   |         |       
|Cash and cash equivalents at end of period                                             |                                                           | $ | 87,608           |         |      | $ | 19,231  |       
|                                                                                       |                                                           |   |                  |         |      |   |         |       

See notes to condensed consolidated financial statements.

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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, us 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
December 31, 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 notes thereto included in
our Annual Report on Form 10-K for the year ended June 30, 2003.                                                                                                                                                                                                      
|  
|2. |  | 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 SURVIVOR
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 designed and marketed specified games, which were manufactured
by IGT and placed in casinos on IGTs WAP system. In January 2004, the
remaining SURVIVORWAP was shut down.
|  
|   |  | Certain prior period balances have been reclassified to conform to the
current period presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|3. |  | STOCK OPTION COMPENSATION AND 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 loss, 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 |       | Six Months Ended
|                                                                                                              |          |                 |         |      | December 31,       |       | December 31,    
|                                                                                                              |          |                 |         |      |                    |       |                 
|                                                                                                              |          |                 |         |      | 2003               |       | 2002             |        | 2003 |       | 2002
|                                                                                                              |          |                 |         |      |                    |       |                  |        |      |       |     
|As Reported:                                                                                                  |          |                 |         |      |                    |       |                  |        |      |       |      |        |   |       |   |       
|                                                                                                              | Net loss |                 | $       | (370 | )                  |       | $                | (1,837 | )    |       | $    | (2,245 | ) |       | $ | (1,177 | )
|                                                                                                              |          |                 |         |      |                    |       |                  |        |      |       |      |        |   |       |   |       
|                                                                                                              |          | Loss per share: |         |      |                    |       |                  |        |      |       |      |        |   |       |   |        |   |      
|                                                                                                              |          |                 | Basic   |      | $                  | (0.01 | )                |        | $    | (0.06 | )    |        | $ | (0.08 | ) |        | $ | (0.04 | )
|                                                                                                              |          |                 | Diluted |      | $                  | (0.01 | )                |        | $    | (0.06 | )    |        | $ | (0.08 | ) |        | $ | (0.04 | )
|Stock based employee compensation cost, net of related tax
effects, included in the determination of net loss |          | $               |        |      |                    | $     |                 |        |      | $     |     |        |   | $     |  |       
|                                                                                                              |          |                 |         |      |                    |       |                  |        |      |       |      |        |   |       |   |       

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|                                                                                                                                   |         |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------------- | ------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                                                                   |         |   | Three Months Ended |       | Six Months Ended
|                                                                                                                                   |         |   | December 31,       |       | December 31,    
|                                                                                                                                   |         |   | 2003               |       | 2002             |   | 2003   |       | 2002
|                                                                                                                                   |         |   |                    |       |                  |   |        |       |     
|Pro forma amounts if the fair value method had been
applied to all stock compensation awards:                                      |         |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Pro forma net loss                                                                                                                 |         | $ | (1,756             | )     |                  | $ | (3,481 | )     |      | $ | (7,214 | )     |   | $ | (4,466 | )    
|Pro forma net loss per share:                                                                                                      |         |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                                                                                                                   | Basic   |   | $                  | (0.06 | )                |   | $      | (0.11 | )    |   | $      | (0.25 | ) |   | $      | (0.15 | )
|                                                                                                                                   | Diluted |   | $                  | (0.06 | )                |   | $      | (0.11 | )    |   | $      | (0.25 | ) |   | $      | (0.15 | )
|Stock based employee compensation cost, net of related
tax effects, that would have been included in the
determination of net loss |         | $ | 1,386              |       |                  | $ | 1,644  |       |      | $ | 4,969  |       |   | $ | 3,289  |      
|                                                                                                                                   |         |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      



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

|                        |  |                    |      |                  |  |         |      |         |  |  |      |   |  |  |      |  
|----------------------- |  | ------------------ | ---- | ---------------- |  | ------- | ---- | ------- |  |  | ---- | - |  |  | ---- | -
|                        |  | Three Months Ended |      | Six Months Ended
|                        |  | December 31,       |      | December 31,    
|                        |  |                    |      |                 
|                        |  | 2003               |      | 2002             |  | 2003    |      | 2002   
|                        |  |                    |      |                  |  |         |      |        
|Risk-free interest rate |  |                    | 3.25 | %                |  |         | 4.00 | %       |  |  | 3.25 | % |  |  | 4.00 | %
|Expected life           |  | 6 years            |      | 6 years          |  | 6 years |      | 6 years
|Expected volatility     |  |                    | .54  |                  |  |         | .44  |         |  |  | .54  |   |  |  | .44  |  
|Expected dividend yield |  |                    | 0    |                  |  |         | 0    |         |  |  | 0    |   |  |  | 0    |  



| |  | At December 31, 2003 and 2002, the Company had approximately 3,761,000 and
3,405,000 stock options and warrants
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 loss per share calculation
for the three and six months ended December 31, 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 loss per share for the three and six months ended December 31,
2003.                                                    
|
| |  | The following summarizes the stock options exercised during the periods
indicated:                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                |  |                    |         |                  |  |      |        |      |  |   |         |  |  |   |        | 
|------------------------------- |  | ------------------ | ------- | ---------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------ | 
|                                |  | Three Months Ended |         | Six Months Ended
|                                |  | December 31,       |         | December 31,    
|                                |  |                    |         |                 
|                                |  | 2003               |         | 2002             |  | 2003 |        | 2002
|                                |  |                    |         |                  |  |      |        |     
|Stock options exercised         |  |                    | 428,996 |                  |  |      | 27,796 |      |  |   | 635,389 |  |  |   | 35,546 | 
|Weighted average exercise price |  | $                  | 10.33   |                  |  | $    | 5.83   |      |  | $ | 9.48    |  |  | $ | 5.48   | 



| |  | For the periods presented, if WMS had recognized income, the total diluted
shares outstanding would have increased based
upon the hypothetical assumed exercise of stock options and warrants
under the treasury stock method and the conversion of
our 2.75% convertible subordinated notes. The following table describes
the number of additional shares that would have been
included in the total diluted shares outstanding assuming the hypothetical
exercise of stock options and warrants under the
treasury stock method and the conversion of our 2.75% convertible
subordinated notes:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                                                                                                               |                                                                                                                                                    |                            |  |                    |         |                  |  |         |           |      |  |           |         |  |  |         |           | 
|------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- |  | ------------------ | ------- | ---------------- |  | ------- | --------- | ---- |  | --------- | ------- |  |  | ------- | --------- | 
|                                                                                                                               |                                                                                                                                                    |                            |  | Three Months Ended |         | Six Months Ended
|                                                                                                                               |                                                                                                                                                    |                            |  | December 31,       |         | December 31,    
|                                                                                                                               |                                                                                                                                                    |                            |  |                    |         |                 
|                                                                                                                               |                                                                                                                                                    |                            |  | 2003               |         | 2002             |  | 2003    |           | 2002
|                                                                                                                               |                                                                                                                                                    |                            |  |                    |         |                  |  |         |           |     
|If WMS had recognized income:                                                                                                  |                                                                                                                                                    |                            |  |                    |         |                  |  |         |           |      |  |           |         |  |  |        
|                                                                                                                               | Impact of incremental stock options and
warrants that
would have resulted in additional diluted shares
outstanding under the treasury stock method |                            |  | 817,000            |         |                  |  | 326,000 |           |      |  | 708,000   |         |  |  | 269,000 |          
|If WMS had recognized income in excess of $0.084 and $0.168, respectively,
per share:                                          |                                                                                                                                                    |                            |  |                    |         |                  |  |         |           |      |  |           |         |  |  |        
|                                                                                                                               | Common stock issued upon conversion of the 2.75%
convertible subordinated notes                                                                    |                            |  | 5,813,953          |         |                  |  |        |           |      |  | 5,813,953 |         |  |  |        |          
|Excluded anti-dilutive common stock equivalents
due to the option grant price exceeding the
market price for WMS common stock: |                                                                                                                                                    |                            |  |                    |         |                  |  |         |           |      |  |           |         |  |  |        
|                                                                                                                               |                                                                                                                                                    | Stock options and warrants |  |                    | 313,000 |                  |  |         | 1,718,000 |      |  |           | 580,000 |  |  |         | 1,733,000 | 



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

|                                                  |                                                     |  |                  |       |      |  |   |       | 
|------------------------------------------------- | --------------------------------------------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                                                  |                                                     |  | Six Months Ended
|                                                  |                                                     |  | December 31,    
|                                                  |                                                     |  |                 
|                                                  |                                                     |  | 2003             |       | 2002
|                                                  |                                                     |  |                  |       |     
|Supplemental Disclosure of Cash Flow Information: |                                                     |  |                  |       |      |  |   |      
|                                                  | Income taxes paid                                   |  | $                | 180   |      |  | $ | 299   | 
|                                                  | Income tax refunds received                         |  | $                | 322   |      |  | $ | 6,086 | 
|                                                  | Interest paid                                       |  | $                |      |      |  | $ |      | 
|                                                  | Investment income received                          |  | $                | 793   |      |  | $ | 805   | 
|Schedule of Non Cash Investing Activities:        |                                                     |  |                  |       |      |  |   |      
|                                                  | Issuance of 250,000 stock warrants to licensor      |  | $                | 3,905 |      |  | $ |      | 
|                                                  | Gaming operations machines transferred
to inventory |  | $                | 171   |      |  | $ |      | 



|5. |  | COMPREHENSIVE INCOME (LOSS)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Comprehensive loss consists of net loss and foreign currency translation
adjustments and totaled a loss of $11,000 and $1.0 million for the three
months ended December 31, 2003 and 2002, respectively, and totaled a loss of
$2.1 million and $423,000 for the six months ended December 31, 2003 and
2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|6. |  | CONVERTIBLE SUBORDINATED NOTES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In June 2003, we issued $100 million of convertible subordinated notes
bearing interest at 2.75% maturing on July 15, 2010.
In July 2003, we issued an additional $15 million of convertible
subordinated notes under identical terms to cover an over-
allotment option granted to the initial purchasers of the notes. The notes
are convertible at any time into an aggregate of
5,813,953 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 are effectively subordinated to all of the
indebtedness and liabilities of our subsidiaries. The notes are not
callable. We pay interest on the notes semi-annually on
January 15 and July 15 of each year, which commenced on January 15, 2004.
|  
|   |  | We have no maturities of debt or sinking fund requirements through June
30, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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|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 six months ended December 31, 2002, 1,022,500 shares were repurchased
under this plan 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 under this $20 million plan.                                                                                                                                                                                                                                                                                                                    
|  
|   |  | 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 December 31, 2002, repurchases of 151,500 shares at a
cost of $2.1 million had been made under this plan. As of March 31, 2003,
this repurchase plan was completed with 681,700 shares purchased for a cost
of $7.9 million during the March 2003 quarter.                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | 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
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
plan. During the six months ended December 31, 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 3,193,500 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 December 31, 2003, we had 29.8 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 Grant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In September 2003, our Board of Directors, as part of the inducement to a
licensor to extend their license agreement with us, approved a grant of
250,000 common stock purchase warrants valued at $3.9 million. The warrants
exercise price is $35.04 per share of our common stock, subject to
adjustment. The warrants are non-cancelable and vest with respect to 20% of
the underlying shares in each year commencing on January 1, 2007 until fully
vested on January 1, 2011, subject to earlier vesting under specified
circumstances. The warrants 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
guaranteed royalty payments as well as additional contingent payments based
on future events. In the September 2003 quarter, we amended licensing
agreements and entered into new licensing agreements, which significantly
increased our total potential royalty commitments. The total potential
royalty commitments at December 31, 2003 increased to $69.2 million from
$29.6 million at June 30, 2003. The total potential future royalty payments
at December 31, 2003 increased to $40.2 million from $13.0 million at June
30, 2003.

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| |  | At December 31, 2003, we had total royalty commitments, advances and
payments made, and potential, future royalty
payments as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------

|                           |  |                      |         |            |  |           |       |  |  |   |         |  
|-------------------------- |  | -------------------- | ------- | ---------- |  | --------- | ----- |  |  | - | ------- | -
|                           |  | At December 31, 2003
|                           |  |                     
|                           |  | Guaranteed           |         | Contingent |  | Total    
|                           |  | Minimums             |         | Payments   |  | Potential
|                           |  |                      |         |            |  |          
|                           |  | (in thousands)      
|Total royalty commitments  |  | $                    | 64,789  |            |  | $         | 4,424 |  |  | $ | 69,213  |  
|Advances and payments made |  |                      | (28,988 | )          |  |           |      |  |  |   | (28,988 | )
|                           |  |                      |         |            |  |           |       |  |  |   |         |  
|Future royalty payments    |  | $                    | 35,801  |            |  | $         | 4,424 |  |  | $ | 40,225  |  
|                           |  |                      |         |            |  |           |       |  |  |   |         |  



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Of the $29.0 million total advances and payments through December 31, 2003,
$3.0 million has been charged to expense and the remaining $26.0 million is
included in the December 31, 2003 balance sheet with $9.2 million in other
current assets and $16.8 million in other assets.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | As of December 31, 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                |  | $        | 1,110  |                |  | $          | 2,649 |           |  | $ | 3,759  |      
|2005                |  |          | 6,166  |                |  |            | 1,250 |           |  |   | 7,416  |      
|2006                |  |          | 6,025  |                |  |            | 525   |           |  |   | 6,550  |      
|2007                |  |          | 4,900  |                |  |            |      |           |  |   | 4,900  |      
|2008                |  |          | 4,400  |                |  |            |      |           |  |   | 4,400  |      
|Thereafter          |  |          | 13,200 |                |  |            |      |           |  |   | 13,200 |      
|                    |  |          |        |                |  |            |       |           |  |   |        |      
|Total               |  | $        | 35,801 |                |  | $          | 4,424 |           |  | $ | 40,225 |      
|                    |  |          |        |                |  |            |       |           |  |   |        |      



|   |  | As part of the third phase of our technologies improvement plan, we have
licensed technologies from third parties. At December 31, 2003, we had incurred
guaranteed minimum payments related to such technologies
aggregating $4.1 million, all of which had been paid as advances. An
additional $1.4 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, we
will record an immediate charge against earnings at the time of such
determination. If all of the contingent payments became due and all of the
technologies were to have no further value to us, we would record
a charge of up to $5.5 million.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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.                                                                       

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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, includes the gaming machines
that we lease, based upon any of the following payment methods: (1) a
percentage of the net win of the gaming machines, (2) fixed daily fees, or
(3) in the case of wide-area progressive games, a percentage of the amount
wagered.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | OVERVIEW                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Our historical product sales strength has been in the multi-line, multi-coin
video product line, which, together with our VLT product, accounted for
substantially all of our new unit sales for the past three fiscal years. Our
strategy is to become a full service gaming device provider to casinos by
developing and obtaining regulatory approval for three additional product
lines:                                                                                                                                                                                                                         



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



| |  | We believe these new product lines account for approximately 75% of the
typical casino slot floor and represent a significant market share growth
opportunity for us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As a result of software anomalies that were present in our legacy operating
system that ran our gaming devices, in January 2002, we began to execute a
three-part technology improvement plan to first stabilize and then modernize
our operating system software. Customers were apprised of this technology
improvement plan and our intention to introduce our new Bluebirdgaming
cabinet and new CPU-NXTcomputer circuit board and operating system that
would provide features and functionality that our existing products lacked.
As a result, since January 2002, our product sales revenues have declined
from levels experienced in fiscal 2000 and 2001. We expect that as we
receive regulatory approvals throughout fiscal 2004 for our new CPU-NXT,
computer circuit board and operating system,new Bluebirdcabinet and new
games from each of the six North American gaming labs, our product sales
revenues will grow. In fiscal 2005, with all of the approvals in hand for all
of our product lines, well look to achieve growing market share with our new
product lines: mechanical reel, video poker and wide area progressive
jackpots.                                                                                                                                                                                                                          
|
| |  | Technology Improvement Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | In the first phase of this 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 has now been approved by
all six of the North American gaming labs, and we were required to and
completed an upgrade of our hopper game operating system to version 2.57 in
four jurisdictions. Other jurisdictions may require upgrades in the future.
We are
making version 2.57 available in other jurisdictions as an optional upgrade.
Gaming Laboratories, Inc. (GLI) approved version 2.59, our printer upgrade version, in March 2003. The
GLI lab tests product for all of the Native American casinos and the Midwest
Riverboat casinos where in the aggregate we believe about 50% of our existing
gaming devices are deployed. The Nevada gaming authorities approved version
2.59 in September 2003. We have installed version 2.59 in several riverboat
and Native American casinos, which use GLI, and will be upgrading 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 approved jurisdictions as an
optional upgrade.
|
| |  | The second phase of our technology improvement plan is to introduce our new
CPU-NXTcomputer circuit board and operating system and this phase of the
plan continues on schedule. The commercial version of CPU-NXTwas approved by
Gaming Laboratories, Inc. (GLI) in September 2003 when we also received GLI approval for nine game themes
on this new system. In January 2004, we received Nevada and Mississippi lab
approval for CPU-NXTand we are on track for the approvals we expect to
receive from Michigan, New Jersey and Ontario regulators over the next twelve
weeks. In Nevada, Mississippi, New Jersey and Ontario, we need to complete a
field trial for ticket-in-ticket-out printer devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  | We are evaluating specifications and requirements for an even more advanced
gaming system that will be developed over 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 continue to allocate resources to this longer-term effort.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Bluebirdand CPU-NXTCommercialization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Our focus in the near term is to refresh our existing installed base of video
gaming devices in casinos through either replacement with Bluebirdvideo
gaming devices or through CPU-NXTupgrade kits. We received approval from GLI
for the marketable version of the Bluebirdvideo cabinet at the end of
November 2003. The Bluebirdvideo cabinet was approved by the labs in Nevada
and Mississippi in January 2004, and we are on track to receive lab approvals
from Michigan, New Jersey and Ontario over the next twelve weeks. We expect
to sell and ship our first new video Bluebirdgaming devices to casinos in
Nevada, New Jersey and Detroit, Michigan in the March 2004 quarter and begin
shipments to Ontario and Mississippi early in the June 2004 quarter after
completion of the field trials.                                                                                                                                                          
|
| |  | Customer acceptance of Bluebirdand our new games continues to appear very
favorable. From the initial performance data we have received through January
2004 for Bluebirdinstallations, WMS new games at a majority of casinos were
performing at two times house average win per day. Since we started selling
Bluebird, we have corporate agreements or sales orders for over 6,900
Bluebirdvideo gaming devices, of which 896 were delivered in the December
2003 quarter with most of the balance deliverable over the next two quarters.
These agreements are with multi-jurisdictional casino operators such as
Harrahs, Argosy, Ameristar, Stations, Pinnacle and Isle of Capri, along with
a number of tribal and individual casino properties. We expect order levels
to continue at a strong pace now that we have the first Bluebirdvideo gaming
devices and new games generating strong performance data, coupled with
additional jurisdictional approvals.
|
| |  | Since we started selling CPU-NXTupgrade kits, we have corporate agreements
or sales orders for almost 3,800 CPU-NXTupgrade kits of which 585 were
delivered in December 2003 with most of the balance deliverable over the next
two quarters. Each jurisdictional approval of the CPU-NXToperating system
allows us to submit new games written to that system to the regulators for
approval, which enables us to sell and ship additional CPU-NXTupgrade kits.
We expect strength in game conversion revenues over the next several months
as operators see the value and performance benefits of our CPU-NXTupgrade
kits and printer upgrades.                                                                                                                                                                                                                                                                                                                        
|
| |  | Product Line Expansion Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In January 2004, we received Nevada regulatory approval for our mechanical
reel product and three new game themes: two for our wide area progressive
system and one for sale game theme. The timing of these approvals is ahead
of schedule, and we are beginning to sell this product line in advance of our
June 2004 quarter launch date. We plan to submit additional
mechanical reel game themes, on which we expect to receive approval in time
for our product launch date. The
other five regulators are on track for our planned approval schedule for the
mechanical reel product.                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | We expect to submit our first video poker product to the regulators in the
March 2004 quarter and anticipate first approvals and first product shipments
in the June 2004 quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The field trials of our WAP system began the first week of February 2004 in
Nevada and should begin in the coming weeks for the Native American wide area
progressive link in GLI territories. We continue to expect to receive Nevada
and GLI approval for our new progressive jackpot system in June 2004 with product
launch in July 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Brand Licenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | During the September 2003 quarter, we extended our agreement with Hasbro,
Inc. for the use of their MONOPOLY®brand through calendar year 2011. We
expect to introduce two new MONOPOLYthemed participation games by June
2004 and to launch our proprietary wide-area progressive systems featuring
the MONOPOLY Money progressivejackpot in July 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | In September 2003, 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 in our new Bluebird
cabinet beginning in our last quarter of fiscal 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

13



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##### Table of Contents





| |  | In October 2003, we entered into an exclusive agreement to develop, market
and distribute games using the lottery brand POWERBALL®which we intend to
develop as a wide-area progressive game. We look forward to debuting the
first POWERBALLgame on our Bluebirdcabinet at the 2004 G2E trade show in
October 2004.                                                                                                                                                                                                                                                                                                                                                                       
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | CRITICAL ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | During the quarter ended December 31, 2003, we added revenue recognition as a
new critical accounting policy, in addition to those policies reported in our
Annual Report on Form 10-K for the year ended June 30, 2003. We have not
made any changes in the application of this or any other policy.                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The application of revenue recognition policies has become more critical
due to the variety of product sales contracts now
being used. We record revenue on product sales, net of rebates, discounts
and allowances, when persuasive evidence of an
agreement exists, the sales price is fixed or determinable, the product
is delivered and collectibility is reasonably assured.
When multiple product deliverables are included under the sales contract,
we allocate revenue to each product based
upon
their respective selling prices against total contract value and defer
revenue recognition on those deliverables where we
have
not met all requirements of revenue recognition.
|
| |  | Gaming operations revenues under operating type lease agreements are
estimated and recognized as earned. Lease
agreements
are based on either a pre-determined percentage of the daily net win of
each gaming machine or a fixed daily rental
fee. WAP
revenues are recognized based upon a percentage of amounts wagered, or
coin in, on each gaming machine
and are recognized
as earned. Royalties from licensees are recorded as earned.                                                                                                                                                                                                                                               
|
| |  | The application of this policy affects the level of our sales revenue, cost
of product sold, accounts receivable, deferred revenue and accrued expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | 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 December 31, 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
|                                    |  |       |         |        |  |                                      |       |           |  |        
|Operating Leases                    |  | $     | 2,143   |        |  | $                                    | 1,065 |           |  | $       | 980    |  |  | $ | 98    |           |  | $ |        | 
|Convertible Subordinated Notes      |  |       | 115,000 |        |  |                                      |      |           |  |         |       |  |  |   |      |           |  |   | 115,000 | 
|Guaranteed
Minimum
Royalty Payments |  |       | 35,801  |        |  |                                      | 1,110 |           |  |         | 12,191 |  |  |   | 9,300 |           |  |   | 13,200  | 
|                                    |  |       |         |        |  |                                      |       |           |  |         |        |  |  |   |       |           |  |   |         | 
|Total                               |  | $     | 152,944 |        |  | $                                    | 2,175 |           |  | $       | 13,171 |  |  | $ | 9,398 |           |  | $ | 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 $40.2 million at December 31, 2003 due to new and amended brand
licensing agreements. Although potential royalty commitments could continue
to increase in the future as we enter into new brand licensing agreements, we
do not expect such increases to be as large as the increase in the six months
ended December 31, 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.                                                                                           

14



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##### Table of Contents





| |  | LIQUIDITY AND CAPITAL RESOURCES
| |  | -------------------------------

|                                      |  |              |         |          |  |            |         |  |  |   |         |  
|------------------------------------- |  | ------------ | ------- | -------- |  | ---------- | ------- |  |  | - | ------- | -
|                                      |  | As of        |         |          |  |           
|                                      |  |              |         |          |  |           
|                                      |  | December 31, |         | June 30, |  | Increase  
|(in thousands of dollars)             |  | 2003         |         | 2003     |  | (Decrease)
|                                      |  |              |         |          |  |           
|Total cash and short-term investments |  | $            | 144,812 |          |  | $          | 160,307 |  |  | $ | (15,495 | )
|Total current assets                  |  |              | 269,672 |          |  |            | 250,707 |  |  |   | 18,965  |  
|Total assets                          |  |              | 375,693 |          |  |            | 350,976 |  |  |   | 24,717  |  
|Total current liabilities             |  |              | 32,528  |          |  |            | 29,791  |  |  |   | 2,737   |  
|Long-term debt                        |  |              | 115,000 |          |  |            | 100,000 |  |  |   | 15,000  |  
|Stockholdersequity                   |  |              | 228,165 |          |  |            | 221,185 |  |  |   | 6,980   |  
|Net working capital                   |  |              | 237,144 |          |  |            | 220,916 |  |  |   | 16,228  |  



| |  | Our sources of liquidity for the six months ended December 31, 2003 were:
| |  | -------------------------------------------------------------------------



| |  |  | Existing cash, cash equivalents and short-term investments,                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | $15 million cash received from the issuance of additional 2.75% convertible subordinated notes in July 2003,
|
| |  |  | Non-cash expenses of $11.8 million more than offsetting our net loss of $2.2 million, and                   
|
| |  |  | Proceeds from stock option exercises of $6.0 million, excluding related tax related benefits.               



| |  | We believe that cash and cash equivalents and short-term investments of
$144.8 million at December 31, 2003, inclusive of $1.5 million of restricted
cash, 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 and we do not expect to borrow any money under our
$50 million revolving credit line that expires May 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Our short-term investments primarily consist of Auction Market Preferred
Stocks stated at cost, which approximates market value. These investments
generally have no fixed maturity date but most have dividend-reset dates
every 49 days or longer. These investments can be liquidated under an auction
process on the dividend-reset dates subject to a sufficient number of bids
being submitted. Our policy is to invest cash with issuers that have high
credit ratings and to limit the amount of credit exposure to any one issuer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | During the six months ended December 31, 2003, our net working capital
increased primarily due to the issuance of $15.0 million proceeds from additional convertible notes placed under our June 2003 convertible note offering in July 2003. Accounts and notes
receivable, net, increased by $14.7 million due to higher new unit sales
levels and decreased collections during the six months ended December 31,
2003. Inventory increased by $9.5 million due to higher levels of raw
materials as we prepare for an increasing volume of business. Royalty
advances increased by $7.1 million due to new technology and brand license
agreements we entered into or amended during the six months ended December
31, 2003. Income tax receivables decreased by $1.0 million
primarily due to receipt of
prior year tax refunds. Current liabilities increased by $2.7 million due
to higher accounts payable reflecting higher inventory levels, partially
offset by our payment to Midway Games Inc. of a $4.0 million tax advance.
We have not
experienced significant bad debt expense in any of the periods presented.
|
| |  | Due to our operating loss in fiscal 2003, we have recorded $6.7 million and
$7.7 million of current income tax receivables on our balance sheets as of
December 31, 2003 and at June 30, 2003, respectively. 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 $14.3 million of deferred tax assets on our balance sheet as of
December 31, 2003, an increase of $5.1 million from June 30, 2003. These
represent taxable temporary differences expected to reverse in future years,
and tax credits and tax operating losses generated in fiscal 2003 and in the
six months ended December 31, 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 related
to realizability of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

15



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##### Table of Contents





| |  | such assets as of December 31, 2003. However, such valuation allowances could
be recorded against these deferred tax assets in future periods if our future
estimates of amounts realizable are reduced or if the timing of such
realization extends beyond our current expectations.                                                                                                                                                                                                                                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We utilize financing arrangements for operating leases of regional office
facilities and for some equipment. We have royalty commitments for brand and
technology licenses that are not recorded in our balance sheet. Our total
potential royalty commitments, including payments contingent upon future
events, increased from $29.6 million at June 30, 2003 to $69.2 million at
December 31, 2003, of which $29.0 million has been paid. Please refer to the
table under Off-Balance Sheet Arrangements and Contractual Obligations
above and Note 8 to our Condensed Consolidated Financial Statements in Item 1
above.
|
| |  | Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The following table summarizes our sources and uses of cash for the periods
shown (in thousands of dollars):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                      |  |                                |         |          |  |            |         |   |  |   |         |  
|------------------------------------- |  | ------------------------------ | ------- | -------- |  | ---------- | ------- | - |  | - | ------- | -
|                                      |  | For the Six Month Period Ended |         |          |  |           
|                                      |  | December 31,                   |         | Increase
|                                      |  |                                |         |         
|                                      |  | 2003                           |         | 2002     |  | (Decrease)
|                                      |  |                                |         |          |  |           
|Cash provided (used) by:              |  |                                |         |          |  |            |         |   |  |   |         |  
|Operating activities                  |  | $                              | (17,644 | )        |  | $          | 10,169  |   |  | $ | (27,813 | )
|Investing activities                  |  |                                | (9,844  | )        |  |            | (9,844  | ) |  |   |        |  
|Financing activities                  |  |                                | 15,271  |          |  |            | (13,269 | ) |  |   | 28,540  |  
|Effect of exchange rates on cash      |  |                                | 185     |          |  |            | 754     |   |  |   | (569    | )
|                                      |  |                                |         |          |  |            |         |   |  |   |         |  
|Decrease in cash and cash equivalents |  | $                              | (12,032 | )        |  | $          | (12,190 | ) |  | $ | 158     |  
|                                      |  |                                |         |          |  |            |         |   |  |   |         |  



| |  | Cash used by operating activities was $17.6 million for the six months ended
December 31, 2003, as compared to cash provided of $10.2 million for the six
months ended December 31, 2002. The current period decrease relative to the
comparable prior year period was due to $30.9 million of cash invested in
operating assets and liabilities due to growth of our business, compared to
$4.6 million of cash invested in operating assets and liabilities in the six
months ended December 31, 2002. Depreciation expense provided $12.4 million
of cash to operations for the six months ended December 31, 2003, as compared
to $14.0 million for the six months ended December 31, 2002. We anticipate
cash to be provided by operations over the next twelve months ended December
31, 2004, due to anticipated higher revenues from increased new unit sales,
partially offset by higher research and development expenses related to the
ongoing execution of our technology improvement plan, product approval costs,
product line expansion costs and increased game offerings, as well as higher
selling and administrative costs due to the execution of the re-emergence
plan and the ongoing implementation of an Oracle Enterprise Resource Planning
system. In addition, we expect that our cash invested in operating assets and
liabilities will not continue to increase at the rate experienced in the six
months ended December 31, 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Components of the $30.9 million and $4.6 million invested in operating assets
and liabilities for the six month periods ended December 31, 2003 and 2002,
respectively, are as follows: (in thousands of dollars)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Changes in Operating Assets and
Liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                                 |                     |   |                                |        |          |   |            |       |  |   |        |        |  
|------------------------------------------------ | ------------------- | - | ------------------------------ | ------ | -------- | - | ---------- | ----- |  | - | ------ | ------ | -
|                                                 |                     |   | For the Six Month Period Ended |        |          |   |           
|                                                 |                     |   | December 31,                   |        | Increase
|                                                 |                     |   |                                |        |         
|                                                 |                     |   | 2003                           |        | 2002     |   | (Decrease)
|                                                 |                     |   |                                |        |          |   |           
|Increase (decrease) in operating assets:         |                     |   |                                |        |          |   |            |       |  |   |        |       
|Accounts and notes receivable                    |                     | $ | 14,712                         |        |          | $ | (357       | )     |  | $ | 15,069 |       
|Raw material and finished goods inventories      |                     |   | 9,503                          |        |          |   | (1,676     | )     |  |   | 11,179 |       
|Income tax receivable                            |                     |   | (1,010                         | )      |          |   | (7,235     | )     |  |   | 6,225  |       
|All other operating assets                       |                     |   | 10,466                         |        |          |   | 11,960     |       |  |   | (1,494 | )     
|(Increase) decrease in operating liabilities:    |                     |   |                                |        |          |   |            |       |  |   |        |       
|                                                 | Current liabilities |   |                                | (2,737 | )        |   |            | 1,908 |  |   |        | (4,645 | )
|                                                 |                     |   |                                |        |          |   |            |       |  |   |        |       
|Net increase in operating assets and liabilities |                     | $ | 30,934                         |        |          | $ | 4,600      |       |  | $ | 26,334 |       
|                                                 |                     |   |                                |        |          |   |            |       |  |   |        |       

16



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| |  | For the six months ended December 31, 2003, the increase in accounts and
notes receivable reflects an increasing trend in new unit sales, while raw
material inventories increased $9.1  million as we prepared for an increased
volume of business. The decrease in income tax receivable was
primarily due to receipt
of prior year tax refunds. The increase in all other operating assets is due
to $12.8 million of royalty advances for new technology and brand license
agreements entered into or amended during the current six months ended
December 2003. The increase of current liabilities is due to higher
accounts payable reflecting higher inventory levels, partially offset
by our payment to Midway Games Inc. of a $4.0 million tax advance.                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the six months ended December 31, 2002 the cash invested in all other
operating assets was primarily due to a $2.2 million increase in long-term
receivables, a $7.6 million increase in long-term royalty advances, a $2.0
million increase in short and long-term deferred taxes. The increase in
royalty advances was due to new technology and brand license agreements
entered into during the six months ended December 31, 2002. The reduction of
current liabilities is due to a lower level of business. The decrease in
income taxes receivable was due to receipt of prior years refunds. The
decrease in inventories reflects lower sales levels and activity during the
period.                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Cash used by investing activities was $9.8 million for both the six months
ended December 31, 2003 and 2002. Cash used for the purchase of property,
plant and equipment for the six months ended December 31, 2003 was $6.0
million compared with $5.7 million for the comparable prior year period. Cash
used for additions to gaming operation machines was $6.5 million and $12.7
million for the six months ended December 31, 2003 and 2002, respectively.
The current period investment in gaming operation machines is lower because
we have delayed investment until we receive regulatory approval for new games
using our new Bluebirdcabinet. We expect this investment to increase
starting in March 2004 as we prepare for the initial rollout of new
participation games installed in our Bluebirdcabinet. Net cash of $2.7
million was provided by the redemption of short-term investments for the six
months ended December 31, 2003, compared to $8.5 million provided by the
redemption of such investments in the comparable prior year period.
|
| |  | Cash provided by financing activities was $15.3 million for the six months
ended December 31, 2003 compared with cash used of $13.3 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 $6.0 million and $0.2
million from the exercise of stock options in the six months ended December
31, 2003 and 2002, respectively. The amount we receive from the exercise of
stock options is dependent on individuals choices to exercise options, which
are dependent on the spread of the market price of our stock above the strike
price of vested options.                                                                                                                                                                                                                                                                                                                                             
|
| |  | In the six months ended December 31, 2003, we repurchased 299,100 shares of
our common stock for an aggregate price of $5.0 million. Since the inception
of the first common stock repurchase program in January 2002 through December
31, 2003, we purchased 3,193,500 or 9.9% of our previously outstanding shares
for an aggregate price of $42.5 million. At December 31, 2003, we had $12.5
million remaining on the twelve month, $25 million share buyback program
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                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | During the six months ended December 31, 2002, we purchased $13.5 million of
our common stock for treasury. 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 six months ended December 31, 2002, we repurchased 1,022,500
shares for an aggregate price of $11.4 million in completing the $20 million
program, and repurchased 151,500 shares for an aggregate price of $2.1
million under the $10 million program.                                                                                                                                                                                                                                                                                                                                                                                                           

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| |  | RESULTS OF OPERATIONS                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We are engaged in the business of designing, manufacturing and marketing slot
machines (video and mechanical reel type) and video lottery terminals for use
by casino operators and government lotteries. Our operating revenues come
from two sources:



| |  |  | Product sales consisting of new gaming devices, game and
printer conversion kits, used gaming devices, related parts and
original equipment manufacturing (OEM) revenues, and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Gaming operations, consisting of the placement of participation
games, gaming equipment leasing revenues and royalties from licensing
of our games to third parties.         



| |  | THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 2002            
| |  | ---------------------------------------------------------------------------------------------------
|
| |  | Revenues, Gross Margins and Key Performance Indicators (in thousands of
dollars, except unit data):

|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |       |      | 
|--------------------------- | ---------------------------------------------- | --------------------------- | ------ | ------------------ | ------ | -------- | ------ | ---------- | ------ | -------- | ----- | ------ | ------ |  | ----- | ----- | ---- | 
|                            |                                                |                             |        | Three Months Ended |        |          |        |            |        |          |       |       
|                            |                                                |                             |        | December 31,       |        |          |        |            |        |          |       |       
|                            |                                                |                             |        |                    |        | Increase |        |            |        |         
|                            |                                                |                             |        | 2003               |        | 2002     |        | (Decrease) |        | % Change
|                            |                                                |                             |        |                    |        |          |        |            |        |         
|Product Sales:              |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|                            | New unit sales revenue                         |                             | $      | 24,136             |        |          | $      | 12,310     |        |          | $     | 11,826 |        |  |       | 96.1  | %   
|                            | Parts, used games, conversions and OEM revenue |                             |        | 6,710              |        |          |        | 8,366      |        |          |       | (1,656 | )      |  |       | (19.8 | )   
|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|                            |                                                | Total product sales revenue |        | $                  | 30,846 |          |        | $          | 20,676 |          |       | $      | 10,170 |  |       |       | 49.2 | 
|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|                            | Total new units sold                           |                             |        | 2,873              |        |          |        | 1,513      |        |          |       | 1,360  |        |  |       | 89.9  |     
|                            | Average sales price per new unit               |                             | $      | 8,401              |        |          | $      | 8,136      |        |          | $     | 265    |        |  |       | 3.3   |     
|                            | Gross profit on product sales revenue          |                             | $      | 12,003             |        |          | $      | 9,177      |        |          | $     | 2,826  |        |  |       | 30.8  |     
|                            | Gross margin on product sales revenue          |                             |        | 38.9               | %      |          |        | 44.4       | %      |          |       | (5.5   | )%     |  |       | (12.4 | )   
|Gaming Operations Revenues: |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|                            | Total gaming operations revenue                |                             | $      | 20,659             |        |          | $      | 22,966     |        |          | $     | (2,307 | )      |  |       | (10.0 | )   
|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|                            | Average installed base                         |                             |        | 4,549              |        |          |        | 5,605      |        |          |       | (1,056 | )      |  |       | (18.8 | )   
|                            | Installed base at period end                   |                             |        | 4,538              |        |          |        | 5,577      |        |          |       | (1,039 | )      |  |       | (18.6 | )   
|                            | Net revenue per day per machine                |                             | $      | 38.43              |        |          | $      | 37.81      |        |          | $     | 0.62   |        |  |       | 1.6   |     
|                            | Gross profit on gaming operations revenue      |                             | $      | 17,334             |        |          | $      | 18,522     |        |          | $     | (1,188 | )      |  |       | (6.4  | )   
|                            | Gross margin on gaming operations revenue      |                             |        | 83.9               | %      |          |        | 80.6       | %      |          |       | 3.3    | %      |  |       | 4.1   |     
|Total Revenues              |                                                | $                           | 51,505 |                    |        | $        | 43,642 |            |        | $        | 7,863 |        |        |  | 18.0  |      
|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|Total
Gross Profit          |                                                | $                           | 29,337 |                    |        | $        | 27,699 |            |        | $        | 1,638 |        |        |  | 5.9   |      
|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      
|Total
Gross Margin          |                                                |                             | 57.0   | %                  |        |          | 63.5   | %          |        |          | (6.5  | )%     |        |  | (10.2 | )    
|                            |                                                |                             |        |                    |        |          |        |            |        |          |       |        |        |  |       |      



| |  | The increase in total revenues in the December 2003 quarter compared to the
December 2002 quarter was due to $11.8 million in higher new gaming machine
sales partially offset by a $1.7 million decrease in parts, used games,
conversion and OEM revenues, and a $2.3 million reduction in gaming
operations revenues.                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | New unit sales increased by 90% to 2,873 units as we shipped the first units
of our new Bluebirdvideo gaming devices after receiving regulatory approvals
from GLI in November 2003 and as we offered a
higher number of new game themes. In the December 2003 quarter, revenues
from parts, used games, conversions and OEM revenues declined 20% compared to
the prior year quarter due to no sales under OEM agreements in the current
quarter, partially offset by higher levels of game conversion revenues as we
received an increased number of new game approvals over the last several
months. The average sales price per new unit increased 3% as higher priced
Bluebirdunits more than offset lower priced video lottery

18



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| |  | terminal sales during the December 2003 quarter. We expect continued growth
in the average selling price over the next two quarters, as the number of
Bluebirdunits sold becomes a higher percentage of our sales mix.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The average installed base of participation gaming devices decreased to 4,549
units in the December 2003 quarter from 5,605 units in the December 2002
quarter, while the net revenue per day increased by $0.62 per day from the
prior year quarter to $38.43 per day as we continue to refresh the installed
base with new games. The installed base decline from the December 2002
quarter was due to the fact our legacy operating system does not support dual
port cashless gaming technology and
the performance of certain of our older participation series has
decreased. Subsequent to the December 2003 quarter, the last SURVIVOR wide
area progressive jackpot was shut down. We expect growth in our installed
base of participation games when we begin to install two new participation
series, complete with cashless technology  MEN IN BLACKand MATCH GAME on
our new Bluebirdcabinet in the coming months, followed in early fiscal 2005
with the launch of our first wide area progressive games, subject to
regulatory approval.                                                                                                                                                           
|
| |  | Total gross profit increased to $29.3 million for the December 2003
quarter from $27.7 million in the December 2002 quarter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | while total gross margin was 57% in the December 2003 quarter compared to
64% in the December 2002 quarter. Higher margin gaming operations revenues were only 40% of total revenues in the
December 2003 quarter, compared to 53% in the
December 2002 quarter due to the increase of product sales revenue in the
current year quarter and an overall decline of
gaming operations revenues. The gross margin on product sales was 39% for
the December 2003 quarter, down from 44% in
the prior year quarter, reflecting lower margin on the mix of products
sold. We expect that the gross margin on the Bluebird
gaming devices will improve as production volume increases because we
should be able to obtain larger volume discounts
from our suppliers, and we anticipate the cost of electrical components
will decrease over time. The gross profit margin on
gaming operations increased to 84% in the December 2003 quarter compared
to 81% in the prior year quarter, due to an
increase in the average net revenue per day, higher royalties received
from licensees and the sale of RAPID ROULETTE
assets previously fully reserved, partially offset by higher royalty rates
payable to licensors.
|
| |  | Operating Expenses (in thousands of dollars):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                              |       |   |                    |        |         |  |         |      |         |   |            |        |          |  |          |      |   |   |        |        |   |  |       |      |   
|----------------------------- | ----- | - | ------------------ | ------ | ------- |  | ------- | ---- | ------- | - | ---------- | ------ | -------- |  | -------- | ---- | - | - | ------ | ------ | - |  | ----- | ---- | --
|                              |       |   | Three Months Ended |        |         |  |         |      |         |   |           
|                              |       |   | December 31,       |        |         |  |         |      |         |   |           
|                              |       |   |                    |        |         |  |         |      |         |   |           
|                              |       |   | 2003               |        | 2002    |  |         |      |         |   |            |        |         
|                              |       |   |                    |        |         |  |         |      |         |   |            |        |         
|                              |       |   |                    |        |         |  | As % of |      |         |   |            |        | As % of  |  | Increase |      |   |   |       
|                              |       |   | $                  |        | Revenue |  | $       |      | Revenue |   | (Decrease) |        | % Change
|                              |       |   |                    |        |         |  |         |      |         |   |            |        |         
|Research and development      |       | $ | 10,177             |        |         |  | 19.8    | %    |         | $ | 11,601     |        |          |  | 26.6     | %    |   | $ | (1,424 | )      |   |  | (12.3 | )%  
|Selling and administrative    |       |   | 13,524             |        |         |  | 26.3    |      |         |   | 12,181     |        |          |  | 27.9     |      |   |   | 1,343  |        |   |  | 11.0  |     
|Depreciation and
amortization |       |   | 6,063              |        |         |  | 11.8    |      |         |   | 7,326      |        |          |  | 16.8     |      |   |   | (1,263 | )      |   |  | (17.2 | )   
|                              |       |   |                    |        |         |  |         |      |         |   |            |        |          |  |          |      |   |   |        |        |   |  |       |     
|                              | Total |   | $                  | 29,764 |         |  |         | 57.8 | %       |   | $          | 31,108 |          |  |          | 71.3 | % |   | $      | (1,344 | ) |  |       | (4.3 | )%
|                              |       |   |                    |        |         |  |         |      |         |   |            |        |          |  |          |      |   |   |        |        |   |  |       |     



| |  | Research and development expenses decreased $1.4 million, or 12% to $10.2
million in the December 2003 quarter compared to $11.6 million in the prior
year quarter, which included a $2.8 million write-off of an operating system
license. Excluding this write-off, research and development expenses
increased in the December 2003 quarter by $1.4 million due to ongoing
execution of our technology improvement plan, product approval costs, product
line expansion costs and increased game offerings. With higher regulatory
approval costs throughout fiscal 2004, we expect quarterly research and
development expenses to continue to exceed levels in the comparable prior
year quarters.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Selling and administrative expenses increased $1.3 million, or 11%, to $13.5
million in the December 2003 quarter compared to $12.2 million in the
December 2002 quarter, due to the ongoing execution of our re-emergence plan
and the implementation of an Oracle Enterprise Resource Planning
(ERP) system. We
expect that selling and administration expenses will increase as we continue
to commercialize the CPU-NXToperating system and Bluebirdcabinet, and
continue our multiple product line expansion.                                                                                                                                                                                    
|
| |  | Depreciation and amortization expense decreased by $1.3 million, as the level
of investment in gaming devices for gaming operations has been lower than in
prior quarters as we await regulatory approvals for new games on Bluebird
cabinets. We expect such investment to increase starting in March 2004 as we
prepare for the initial rollout of new participation games installed in our
new Bluebirdcabinet.                                                                                                                                                                                                                                                                                    

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| |  | We incurred an operating loss of $427,000 in the December 2003 quarter,
compared to an operating loss of $3.4 million in the December 2002 quarter.
The improved operating performance in the fiscal 2004 second quarter resulted
from the $1.6 million increase in gross profit and decreases of $1.3 million
in research and development expenses and $1.3 million in depreciation and
amortization expenses, partially offset by a $1.3 million increase in selling
and administrative expenses.                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We incurred interest expense of $945,000 in the December 2003 quarter related
to our 2.75% convertible subordinated notes issued in Summer 2003. This was
partially offset by $780,000 of other income, primarily interest and
investment income earned on cash and short-term investments, which at
December 31, 2003 amounted to $144.8 million. Due to the issuance of our
2.75% convertible subordinated notes, interest expense will increase in
comparison to prior years quarters for the remainder of fiscal year 2004.
|
| |  | The 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 36.9% rate in the December 2002 quarter due to
higher expected foreign income in 2004.                                                                                                                                                                                                                                                            
|
| |  | Net loss was $0.4 million or $0.01 loss per share for the current quarter
compared to net loss of $1.8 million, or $0.06 per share, for the prior year
quarter.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Revenues, Gross Margins and Key Performance Indicators (in thousands of
dollars, except unit data):                                                                                                                                                                                                                                                                                                                                                                                                                             

|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |       |      | 
|------------------ | ----------------------------------------------- | --------------------------- | ------ | ---------------- | ------ | -------- | ------ | ---------- | ------ | -------- | ------ | ------ | ------ |  | ---- | ----- | ---- | 
|                   |                                                 |                             |        | Six Months Ended |        |          |        |            |        |          |        |       
|                   |                                                 |                             |        | December 31,     |        |          |        |            |        |          |        |       
|                   |                                                 |                             |        |                  |        | Increase |        |            |        |         
|                   |                                                 |                             |        | 2003             |        | 2002     |        | (Decrease) |        | % Change
|                   |                                                 |                             |        |                  |        |          |        |            |        |         
|Product Sales:     |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|                   | New unit sales revenue                          |                             | $      | 42,598           |        |          | $      | 23,349     |        |          | $      | 19,249 |        |  |      | 82.4  | %   
|                   | Parts, used games, conversions, and OEM revenue |                             |        | 13,132           |        |          |        | 13,476     |        |          |        | (344   | )      |  |      | (2.6  | )   
|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|                   |                                                 | Total product sales revenue |        | $                | 55,730 |          |        | $          | 36,825 |          |        | $      | 18,905 |  |      |       | 51.3 | 
|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|                   | Total new units sold                            |                             |        | 5,093            |        |          |        | 2,805      |        |          |        | 2,288  |        |  |      | 81.6  |     
|                   | Average sales price per new unit                |                             | $      | 8,364            |        |          | $      | 8,324      |        |          | $      | 40     |        |  |      | 0.5   |     
|                   | Gross profit on product sales revenue           |                             | $      | 21,682           |        |          | $      | 14,512     |        |          | $      | 7,170  |        |  |      | 49.4  |     
|                   | Gross margin on product sales revenue           |                             |        | 38.9             | %      |          |        | 39.4       | %      |          |        | (0.5   | )%     |  |      | (1.3  | )   
|Gaming Operations: |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|                   | Total gaming operations revenues                |                             | $      | 42,491           |        |          | $      | 49,211     |        |          | $      | (6,720 | )      |  |      | (13.7 | )   
|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|                   | Average installed base                          |                             |        | 4,701            |        |          |        | 5,820      |        |          |        | (1,119 | )      |  |      | (19.2 | )   
|                   | Installed base at period end                    |                             |        | 4,538            |        |          |        | 5,577      |        |          |        | (1,039 | )      |  |      | (18.6 | )   
|                   | Net revenue per day per machine                 |                             | $      | 39.61            |        |          | $      | 39.16      |        |          | $      | 0.45   |        |  |      | 1.1   |     
|                   | Gross profit on gaming operations               |                             | $      | 35,094           |        |          | $      | 39,602     |        |          | $      | (4,508 | )      |  |      | (11.4 | )   
|                   | Gross margin on gaming operations               |                             |        | 82.6             | %      |          |        | 80.5       | %      |          |        | 2.1    | %      |  |      | 2.6   |     
|Total Revenues     |                                                 | $                           | 98,221 |                  |        | $        | 86,036 |            |        | $        | 12,185 |        |        |  | 14.2 |      
|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|Total
Gross Profit |                                                 | $                           | 56,776 |                  |        | $        | 54,114 |            |        | $        | 2,662  |        |        |  | 4.9  |      
|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      
|Total
Gross Margin |                                                 |                             | 57.8   | %                |        |          | 62.9   | %          |        |          | (5.1   | )%     |        |  | (8.1 | )    
|                   |                                                 |                             |        |                  |        |          |        |            |        |          |        |        |        |  |      |      



| |  | The increase in total revenues was due to $19.2 million in higher new gaming
machine sales partially offset by a $0.3 million decrease in parts, used
games, conversion and OEM revenues, and a $6.7 million reduction in gaming
operations revenues.                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | New unit sales in the December 2003 six-month period increased by 82% to
5,093 units as we shipped the first units of our new Bluebirdvideo gaming
devices after receiving regulatory approvals from GLI in November 2003 and as we offered a higher number of new game themes.
Revenues from parts, used games, conversions and OEM

20



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| |  | revenues declined 3% compared to the prior six-month period due to no sales
under OEM agreements in the current six-month period, partially offset by
higher levels of game conversion kits sold as we received an increased number
of new game theme approvals over the last several months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The average installed base of participation gaming devices decreased to 4,701
units in the December 2003 six-month period from 5,820 units in the December
2002 six-month period, while the net revenue per day increased by $0.45 per
day from the prior year six-month period to $39.61 per day as we continue to
refresh the installed base with new games. The installed base decline from
the December 2002 six-month period was due to the fact our legacy operating
system does not support dual port cashless gaming technology, and the
performance of certain of our older series has decreased. Subsequent to
December 2003, the last SURVIVORwide area progressive jackpot was shut down.
We expect growth in our installed base of participation games when we begin
to install two new participation series, complete with cashless technology 
MEN IN BLACKand MATCH GAMEon our new Bluebirdcabinet in the coming months,
followed in early fiscal 2005 with the launch of our first wide area
progressive games, subject to regulatory approval.               
|
| |  | Total gross profit increased to $56.8 million for the December 2003
six-month period from $54.1 million in the December
2002 six-month period while total gross margin was 58% in the December
six-month period compared to 63% in the
December 2002 six-month period. Higher margin gaming operations revenues
were only 43% of total revenues in the
December 2003 six-month period, compared to 57% in the December 2002
six-month period due to the increase of product
sales revenue in the current year six-month period and an overall decline
of gaming operations revenues. The gross margin on
product sales were 39% for both the December 2003 and December 2002
six-month periods. The gross margin on gaming
operations increased to 83% in the December 2003 six-month period compared
to 81% in the prior year six-month period, due
to an increase in the average net revenue per day, higher royalties
received from licensees and the sale of RAPID ROULETTE
assets previously fully reserved, partially offset by higher royalty rates
payable to licensors.
|
| |  | Operating Expenses (in thousands of dollars):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                              |       |   |                  |        |         |  |         |      |         |   |            |        |          |  |          |      |   |   |        |       |  |  |       |     |  
|----------------------------- | ----- | - | ---------------- | ------ | ------- |  | ------- | ---- | ------- | - | ---------- | ------ | -------- |  | -------- | ---- | - | - | ------ | ----- |  |  | ----- | --- | -
|                              |       |   | Six Months Ended |        |         |  |         |      |         |   |           
|                              |       |   | December 31,     |        |         |  |         |      |         |   |           
|                              |       |   |                  |        |         |  |         |      |         |   |           
|                              |       |   | 2003             |        | 2002    |  |         |      |         |   |            |        |         
|                              |       |   |                  |        |         |  |         |      |         |   |            |        |         
|                              |       |   |                  |        |         |  | As % of |      |         |   |            |        | As % of  |  | Increase |      |   |   |       
|                              |       |   | $                |        | Revenue |  | $       |      | Revenue |   | (Decrease) |        | % Change
|                              |       |   |                  |        |         |  |         |      |         |   |            |        |         
|Research and development      |       | $ | 20,482           |        |         |  | 20.9    | %    |         | $ | 19,390     |        |          |  | 22.5     | %    |   | $ | 1,092  |       |  |  | 5.6   | %  
|Selling and administrative    |       |   | 27,080           |        |         |  | 27.6    |      |         |   | 23,527     |        |          |  | 27.3     |      |   |   | 3,553  |       |  |  | 15.1  |    
|Depreciation and
amortization |       |   | 12,414           |        |         |  | 12.6    |      |         |   | 14,045     |        |          |  | 16.3     |      |   |   | (1,631 | )     |  |  | (11.6 | )  
|                              |       |   |                  |        |         |  |         |      |         |   |            |        |          |  |          |      |   |   |        |       |  |  |       |    
|                              | Total |   | $                | 59,976 |         |  |         | 61.1 | %       |   | $          | 56,962 |          |  |          | 66.2 | % |   | $      | 3,014 |  |  |       | 5.3 | %
|                              |       |   |                  |        |         |  |         |      |         |   |            |        |          |  |          |      |   |   |        |       |  |  |       |    



| |  | Research and development expenses
increased $1.1 million, or 6%, to $20.5
million in the December 2003 six-month period compared to $19.4 million in
the prior year six-month period, which included a $2.8 million write-off of
an operating system license. Excluding this write-off, research and
development expenses increased in the December 2003 six-month period by $3.8
million due to ongoing execution of our technology improvement plan, product
approval costs, product line expansion costs and increased game offerings.
With higher regulatory approval costs throughout fiscal 2004, we expect
quarterly research and development expenses to continue to exceed levels in
the comparable prior year quarters.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Selling and administrative expenses increased $3.6 million, or 15%, to $27.1
million in the December 2003 six-month period compared to $23.5 million in
the December 2002 six-month period, due to the ongoing execution of our
re-emergence plan and the implementation of an Oracle ERP system. We expect that selling and administration expenses will
increase as we continue to commercialize the CPU-NXToperating system and
Bluebirdcabinet, and continue our multiple product line expansion.                                                                                                                                                                                                                            
|
| |  | Depreciation and amortization expense decreased by $1.6 million, as the level
of investment in gaming devices for gaming operations has been lower than in
prior comparable periods. We expect this investment to increase starting in
March 2004 as we prepare for the initial rollout of new participation games
installed in our new Bluebirdcabinet.                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We incurred an operating loss of $3.2 million in the December 2003 six-month
period, compared to an operating loss of $2.8 million in the December 2002
six-month period. The reduced operating performance in the fiscal 2004
six-month period resulted from the $1.1 million increase in research and
development expenses and the $3.6 million increase in selling and                                                                                                                                                                                                                                                                                                                                                        

21



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| |  | administrative expenses, partially offset by the $2.7 million increase in
gross profit and the decrease of $1.6 million in depreciation and
amortization expenses described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We incurred interest expense of $1.9 million in the December 2003 six-month
period related to our 2.75% convertible subordinated notes issued in Summer
2003. These amounts were partially offset by $1.5 million of other income,
primarily interest and investment income earned on cash and short-term
investments, which at December 31, 2003 amounted to $144.8 million. Due to
the issuance of our 2.75% convertible subordinated notes, interest expense
will increase in comparison to prior years quarters for the remainder of
fiscal year 2004.                                                                                                                                                                                                                                                                                                               
|
| |  | The 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 37.2% rate in the December 2002 six-month period due
to higher expected foreign income in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Net loss was $2.2 million or $0.08 loss per share for the current year
six-month period compared to a net loss of $1.2 million, or $0.04 per share,
for the prior year six-month period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | FORWARD LOOKING STATEMENTS AND RISK FACTORS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | This report contains forward-looking statements concerning our future
business performance, strategy, outlook, plans, liquidity, pending regulatory
matters and outcomes of contingencies including legal proceedings, among
others. Forward-looking statements may be typically identified by such
words as may, will, should, expect, anticipate, seek, believe,
estimate, and intend, among others. These forward-looking statements are
subject to risks and uncertainties that could cause our actual results to
differ materially from the expectations expressed in the forward-looking
statements. Although we believe that, the expectations reflected in our
forward-looking statements are reasonable, any or all of our forward-looking
statements may prove to be incorrect. Consequently, no forward-looking
statements may be guaranteed.
|
| |  | Factors which could cause our actual results to differ from expectations
include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |  |  | a delay or refusal by regulators to approve our new gaming
platforms, cabinet designs, game themes and related hardware and
software;          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a failure to obtain and maintain our gaming licenses and
regulatory approvals;                                                                 
|
| |  |  | an inability to introduce in a timely manner new games themes
and gaming machines or product lines that achieve and maintain market
acceptance;
|
| |  |  | a software anomaly or fraudulent manipulation of our gaming machines and software;                                                             
|
| |  |  | a failure to obtain the right to use, or an inability to adapt to the rapid development of new technologies; and                               
|
| |  |  | an infringement claim seeking to restrict our use of material technologies.                                                                    



| |  | These factors and other factors that could cause actual results to differ
from expectations are 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. You are advised, however, to consult any further
disclosures we make on related subjects in our recent Form 10-Q and 8-K
reports filed with the Securities and Exchange Commission.
|
| |  | MONOPOLYis a trademark of Hasbro Inc. ©2004 Hasbro. All rights reserved.
Used with permission.                                                                                                                                                                                
|
| |  | MEN IN BLACK& ©2004 Columbia Pictures Industries, Inc.                                                                                                                                                                                                                       
|
| |  | POWERBALLis a trademark of the Multi-State Lottery Association. Used with
permission.                                                                                                                                                                                         
|
| |  | SURVIVORis a trademark of Survivor Productions LLC.                                                                                                                                                                                                                          
|
| |  | MATCH GAMEis a trademark of FremantleMedia Operations BV. All rights
reserved. Used with permission.                                                                                                                                                                         
|
| |  | RAPID ROULETTEis a trademark of Stargames Corporation Limited and Crown
Limited.                                                                                                                                                                                             
|
| |  | CPU-NXTand Bluebirdare trademarks of WMS Gaming Inc. All rights reserved.                                                                                                                                                                                                     

22



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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 equity price, interest rate and foreign currency
fluctuations. We do not currently hedge any 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 2.75% 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 December 31, 2003, we had $115 million of convertible fixed-rate debt
with an interest rate of 2.75% with a fair value of $179.4 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 convertible fixed rate debt by approximately $3.7
million, assuming our stock price is held constant. This change in fair
value would have no effect on our cash flows or future results of operations.
|
| |  | Equity Price Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The fair value of our convertible fixed-rate debt will also fluctuate with
changes in the price of our common stock. Based on the number of shares
underlying our convertible debt, we currently estimate that a 10% change in
our stock price, assuming the prevailing market interest rates are held
constant, would impact the fair value of our convertible fixed rate debt by
approximately $14.8 million. This change in fair value would have no effect
on our cash flows or future results of operations.                                                                                                         
|
| |  | Foreign Currency Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | During the quarter ended December 31, 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.
|
| |  | As a part of the ongoing implementation of an Oracle ERP system, we have
updated our internal controls over financial reporting as necessary to
accommodate any modifications to our business processes or accounting
procedures. There have not been any other changes in our internal controls over
financial reporting or in other factors that materially affected, or are
reasonably likely to materially affect these controls as of the end of the
period covered by this report.                                                                                                                                                                                                                                                                                   

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PART II
OTHER INFORMATION

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



|(a) |  | We held our Annual Meeting of Stockholders on December 11, 2003.
|--- |  | ----------------------------------------------------------------
|   
|(b) |  | The directors elected at the meeting were:                      

|                       |  |      |            |           |  |  |           | 
|---------------------- |  | ---- | ---------- | --------- |  |  | --------- | 
|Nominee:               |  | For: |            | Withheld:
|                       |  |      |            |          
|Harold H. Bach, Jr.    |  |      | 21,028,150 |           |  |  | 5,567,060 | 
|William C. Bartholomay |  |      | 21,085,434 |           |  |  | 5,509,776 | 
|Brian R. Gamache       |  |      | 23,786,795 |           |  |  | 2,808,415 | 
|William E. McKenna     |  |      | 23,790,213 |           |  |  | 2,804,997 | 
|Norman J. Menell       |  |      | 24,196,132 |           |  |  | 2,399,078 | 
|Donna B. More          |  |      | 23,727,722 |           |  |  | 2,867,488 | 
|Louis J. Nicastro      |  |      | 23,650,533 |           |  |  | 2,944,677 | 
|Neil D. Nicastro       |  |      | 21,257,299 |           |  |  | 5,337,911 | 
|Harvey Reich           |  |      | 24,621,974 |           |  |  | 1,973,236 | 
|David M. Satz, Jr.     |  |      | 24,658,724 |           |  |  | 1,936,486 | 
|Ira S. Scheinfeld      |  |      | 23,730,832 |           |  |  | 2,864,378 | 



|(c) |  | Other matters voted upon at the meeting and the results of those
votes were as follows:           
|--- |  | --------------------------------------------------------------------------------------------------
|   
|    |  | Approval of the appointment of Ernst & Young LLP as independent auditors
for the 2004 fiscal year.

|           |  |          |         |          |  |  |        | 
|---------- |  | -------- | ------- | -------- |  |  | ------ | 
|For:       |  | Against: |         | Abstain:
|           |  |          |         |         
|26,195,568 |  |          | 350,042 |          |  |  | 49,600 | 

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 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 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 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 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 the Form
8-A.                                                                                                                                     

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|            |  |                                                                                                                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                                               
|4.2         |  | Indenture dated June 25, 2003 between WMS and BNY
Midwest Trust Company, and Form of Note incorporated by reference to
Report on Form 8-K filed June 25, 2003                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                               
|10.1        |  | License and Development Agreement between WMS Gaming Inc. (WGI) and
Sierra Design Group (SDG), dated as of April 24, 2002. Portions of
this exhibit have been omitted under a request for confidential
treatment filed separately with the Securities Exchange Commission.
|            |  |                                                                                                                                                                                                                                                                               
|10.2        |  | First Amendment to License and Development Agreement between WGI and
SDG, dated June 12, 2003. Portions of this exhibit have been omitted
under a request for confidential treatment filed separately with the
Securities Exchange Commission.                                
|            |  |                                                                                                                                                                                                                                                                               
|10.3        |  | Second Amendment to License and Development Agreement between WGI and
SDG, dated July 15, 2003.                                                                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                               
|10.4        |  | Third Amendment to License and Development Agreement between WGI and
SDG, dated November 7, 2003. Portions of this exhibit have been
omitted under a request for confidential treatment filed separately
with the Securities Exchange 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 October 30, 2003, under items 12 and
7.
| | --- |  | ------------------------------------------------------------------------

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##### Table of Contents






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: February 13, 2004 |  | By:                                   |  | /s/ Scott D. Schweinfurth
|                         |  |                                       |  |                          
|                         |  | Scott D. Schweinfurth                
|                         |  | Executive Vice President,            
|                         |  | Chief Financial Officer and Treasurer
|                         |  | (Principal Financial and Accounting  
|                         |  | Officer)                             





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##### Table of Contents






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 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 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 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 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 the Form
8-A.                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                  
|4.2         |  | Indenture dated June 25, 2003 between WMS and BNY
Midwest Trust Company, and Form of Note incorporated by reference to
Report on Form 8-K filed June 25, 2003                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                  
|10.1        |  | License and Development Agreement between WMS Gaming Inc. (WGI) and
Sierra Design Group (SDG), dated as of April 24, 2002. Portions of
this exhibit have been omitted under a request for confidential
treatment filed separately with the Securities Exchange Commission.   
|            |  |                                                                                                                                                                                                                                                                                  
|10.2        |  | First Amendment to License and Development Agreement between WGI and
SDG, dated June 12, 2003. Portions of this exhibit have been omitted
under a request for confidential treatment filed separately with the
Securities Exchange Commission.                                   
|            |  |                                                                                                                                                                                                                                                                                  
|10.3        |  | Second Amendment to License and Development Agreement between WGI and
SDG, dated July 15, 2003.                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                  
|10.4        |  | Third Amendment to License and Development Agreement between WGI and
SDG, dated November 7, 2003. Portions of this exhibit have been
omitted under a request for confidential treatment filed separately
with the Securities Exchange 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.