WMS INDUSTRIES INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2002

COMMISSION FILE NUMBER 1-8300

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

DELAWARE 36-2814522
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

800 SOUTH NORTHPOINT BLVD., WAUKEGAN, ILLINOIS 60085
(Address of principal executive offices) (Zip Code)

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.

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

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

The aggregate market value of the 30,622,635 shares of common stock held by
non-affiliates of the registrant on September 12, 2002 was $480,775,370. Solely
for purposes of this calculation, all shares held by directors and executive
officers of the registrant have been excluded. This exclusion should not be
deemed an admission that these individuals are affiliates of the registrant. On
that date, the number of shares of common stock outstanding (excluding 1,395,312
shares held as treasury shares) was 30,956,707 shares.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement to be filed on or about September 25, 2002 with the Securities
and Exchange Commission are incorporated by reference in Part III of this
Report.
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As used in this Annual Report on Form 10-K, the terms "we," "us," "our" and
"WMS" mean WMS Industries Inc., a Delaware corporation, and its subsidiaries,
unless the context indicates a different meaning, and the term "common stock"
means our common stock, $.50 par value per share.

WMS Gaming(R), Classic TV Game Show Series(TM), Reel 'Em In(R), Puzzle
Pays(TM) and 3RV(TM) are trademarks of our subsidiary WMS Gaming Inc. Our
product names mentioned in "Item 1. Business -- Products" in this report are
trademarks of WMS Gaming Inc., except where they are licensed. Williams(R), DCS
Sound System(TM) and Dotmation(R) are trademarks of our subsidiary Williams
Electronics Games, Inc. MONOPOLY(TM), SCRABBLE(TM), Advance to Boardwalk(TM),
Chance(TM) and Community Chest(TM) are trademarks of Hasbro used with
permission. PICTIONARY(TM) is a trademark of Pictionary Incorporated. JUMBLE(R)
is a trademark of Tribune Media Services, Inc. PAC-MAN(TM) is a trademark of
Namco Ltd.. HOLLYWOOD SQUARES(TM) is a trademark of King World Productions, Inc.
MATCH GAME(TM), PASSWORD(TM) and BEAT THE CLOCK(TM) are trademarks of
FreemantleMedia Operations BV. SURVIVOR(TM) is a trademark of Survivor
Productions LLC. YOU BET YOUR LIFE(TM) & (C) National Broadcasting Inc. used
with permission. All rights reserved. The other trademarks mentioned in this
report are the property of their respective owners.

This report contains "forward-looking statements," within the meaning of
the federal securities laws. These statements describe our plans, strategies and
goals and our beliefs concerning future business conditions and the outlook for
WMS based on currently available information. Wherever possible, we have
identified these forward looking statements by words such as "may," "will,"
"should," "expect," "anticipate," "believe," "estimate," "intend" and similar
expressions. Our actual results could differ materially from those described in
the forward-looking statements due to a number of risks and uncertainties,
including the risks set forth under "Item 1. Business -- Risk Factors". We do
not intend to update publicly any forward looking statements, whether as a
result of new information, future events or otherwise. Forward-looking
statements may be found in the materials set forth under "Item 1. Business" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations," among others.

PART I

ITEM 1. BUSINESS.

DEVELOPMENT OF OUR BUSINESS

WMS was incorporated in Delaware on November 20, 1974 under the name
Williams Electronics, Inc. and succeeded to the amusement game business that had
been conducted for almost 30 years by our predecessors. We are now focused
exclusively on the design, manufacture, marketing, lease and sale of video and
mechanical reel spinning gaming machines and video lottery terminals ("VLTs").

We conduct our gaming machine business through our subsidiary WMS Gaming
Inc., which markets its products under the WMS Gaming trademark. Our fiscal year
begins on July 1 and ends on June 30. For information about our revenues, net
income and assets, see our Consolidated Financial Statements included in this
report. See also "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."

During fiscal 2001, we discontinued the contract manufacturing of
coin-operated video games. During fiscal 2000, we discontinued our former
pinball game business and cabinet manufacturing operations. The financial
position, results of operations and cash flows of these businesses are reported
as discontinued operations in our Consolidated Financial Statements included in
this report.

Our principal executive offices are located at 800 South Northpoint Blvd.,
Waukegan, Illinois 60085, and our telephone number is (847) 785-3000. Our
website is located at www.wmsgaming.com.

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COMPANY OVERVIEW

We are a designer, manufacturer and marketer of innovative video and
mechanical reel spinning gaming machines and VLTs. We seek to develop gaming
machines that offer high entertainment value and generate greater revenues for
casinos and other gaming machine operators than the gaming devices of our
competitors. Most of our gaming machines incorporate secondary bonus rounds,
advanced graphics, digital sound and engaging game themes, some of which include
popular songs and recognized trademarks. Our gaming machines are installed in
all of the major gaming jurisdictions in the United States and in numerous
foreign jurisdictions.

We market our gaming machines in two principal ways. First, we sell some of
our gaming machines and conversion kits to casinos and other gaming machine
operators (a) under normal credit terms of 90 days, or (b) as a sale with
financing with payments up to 3 years. Second, we lease gaming machines to
casinos and other gaming machine operators for lease payments based upon 1) a
percentage of the net win of the gaming machines, or 2) fixed daily fees, or 3)
in the case of wide-area progressive games, a percentage of the amount wagered
("coin in"). These leased gaming machines feature themes based on brands we
license from third parties. Typically, the leases are cancelable by either party
with 30 days notice. We can place games on a lease basis if the popularity of
the licensed brand and the game results in substantially higher coin in and net
win for these games than typical gaming machines. The percentage of net win and
coin in arrangements allow us to share in the earnings of these gaming machines,
and all three types of lease arrangements permit us to generate a recurring
revenue stream. When we refer to "participation games," we mean any of these
kinds of lease arrangements. We periodically refresh our installed base of
participation games with new versions of game themes to improve or maintain the
net win of the gaming machines.

In 1997, we introduced Reel 'Em In(R), our first single-themed, multi-coin,
multi-line video gaming machine that incorporates a secondary bonus game.
Secondary bonusing creates a "game-within-a-game" that rewards players by
offering them a chance to advance from the primary game to a secondary game. The
secondary game also gives the players additional payoff opportunities and allows
them to interact with the game by choosing from various entertaining options in
the bonus round. The success of Reel 'Em In led to our introduction of a series
of video gaming machines based on this design, each featuring a unique and
entertaining theme. See "Products." The multi-coin, multi-line and secondary
bonus features and our highly entertaining themes are designed to attract new
players, encourage repeat play and increase the average wager per play.

In fiscal 1999, we introduced the first of our participation games, a
series of four MONOPOLY(TM) themed gaming machines, under our exclusive license
of the widely-recognized MONOPOLY trademark for use on casino-style gaming
machines. Since then, we have continued to introduce additional MONOPOLY themed
gaming machines. See "Products". Since their introduction, these games have
typically generated average daily win in excess of the average daily win of the
casinos' other non-participation games. We have been able to offer these games
to casino operators exclusively as participation games based on the higher
earnings of these games.

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

In fiscal 2002, we launched three new participation series: HOLLYWOOD
SQUARES(TM) games in the winter of 2001; PAC-MAN(TM) games based on the popular
classic arcade game, in the spring of 2002; and SURVIVOR(TM) games based on the
popular television show in the spring of 2002. The SURVIVOR game was our first
game commercialized in association with International Game Technology ("IGT"),
which places these games on its MegaJackpots(TM) wide-area progressive system.
We currently do not have a proprietary wide-area progressive system. Wide-area
progressive systems are electronically linked, intercasino systems that connect
gaming machines in various casinos to a central computer. These systems allow a
progressive jackpot to increase with every wager made on gaming devices linked
to the system, until a player achieves the top award winning combination.
Wide-area progressive systems are designed to increase gaming machine play
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for participating casinos by giving the players the opportunity to win a larger
jackpot than on a non-linked, stand alone gaming machine. Net win per gaming
machine on wide-area progressive systems are generally higher than on non-linked
gaming machines on a casino floor.

In the summer of 2001, we implemented software changes in all of our games
installed in casinos that we believed resolved certain software anomalies in the
operating system software that runs our game themes that permitted player
cheating. In the fall of 2001, however, we experienced further anomalies in a
new version of our operating system software that we were required to install in
two jurisdictions: Mississippi and Nevada. As a result of these anomalies and
the publicity concerning them, we experienced a delay in receiving regulatory
approvals for new games by some regulators pending completion of their review of
upgrades to our existing operating system software. Customers, aware of the
software anomalies, purchased fewer new gaming devices from us. This resulted in
both lower game sales and lower participation game revenues because we were
unable to refresh our installed base of participation games on our planned
six-month schedule. To address the software anomaly issues and to revitalize our
technology foundation, we announced in January 2002 that we would embark on a
three part technology improvement plan to improve the stability of the operating
system software. This plan is discussed in detail under "Business Strategy" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."

INDUSTRY OVERVIEW

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

- Video gaming machines that simulate a mechanical reel spinning slot
machine on a video screen are predominantly multi-coin, multi-line gaming
machines that offer multiple distinct pay lines and allow up to 200 or
more coins to be wagered on a single play. This tends to increase the
average wager per play.

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

- Various forms of cashless gaming reduce casino operators' costs and
machine downtime as coins are no longer dispensed from the gaming device
when a casino patron wants to cash out. Instead the gaming device prints
tickets or, through casino systems, banks the payout for the casino
patron. Our products currently support only some versions of cashless
gaming.

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

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

Another revenue-sharing model that has been employed by some manufacturers
with casino operators is a wide-area progressive system. A wide-area progressive
system enables gaming machines in multiple casinos within a gaming jurisdiction
to contribute to and compete for large system-wide progressive jackpots. We
expect the demand for wide-area progressive jackpot games to continue to
increase modestly.

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

BUSINESS STRATEGY

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

- Stabilize our existing operating system and revitalize our technology
foundation: We announced in January 2002 that we would concurrently
execute the following three part technology improvement plan:

- In the near-term, we are rewriting critical operating code segments,
securing third-party critiques of our design process, and performing
code audits and other software tests. This is being done to improve the
stability of the operating system by introducing two upgrades to our
existing operating system. Mississippi, Nevada and Ontario, Canada have
mandated a complete upgrade of the operating system of all of our games
in their respective jurisdictions. Other jurisdictions could require a
complete upgrade in the future. By June 30, 2002, we had successfully
completed the first upgrade in Mississippi, and expect to start the
first upgrade in Nevada in September 2002 and Ontario after that time.

- In the mid-term, we plan to develop, license or acquire a new operating
system for our newly developed hardware platform. After extensive
technical diligence, we entered into an agreement with Sierra Design
Group ("SDG") to develop a new computer circuit board and operating
system, which we expect will begin to be approved by gaming regulators
in the summer of 2003. In addition, we have continued internal
development of a new operating system on a parallel path with the SDG
system as an alternative plan to the SDG system.

- In the long-term, we plan to develop a next generation system, which we
believe will integrate leading technologies for the gaming industry. We
contracted with an independent specialist to develop the design
specification for our next generation system. We received the completed
design specification and were able to have several of the components of
this specification included in the operating system SDG is currently
designing for us.

For additional discussion of our three part technology improvement plan,
see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."

- Expand product offerings: We expect to expand our product lines to be
able to fully serve casino operators' gaming device requirements. We are
developing new mechanical reel spinning products that will utilize
extended-odds technology, which is now available to us because of the
recent expiration of the Telnaes patent. In July 2001, we acquired Big
Foot Software Research and Development, LLC, a company with extensive
experience in developing wide-area progressive systems, and we now expect
to be able to offer our own wide-area progressive system in fiscal 2004.
In fiscal 2002, we licensed a new poker game from a third party. In the
summer of 2002, we introduced a new product which we call
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3RV -- short for three-reel video -- that has the look and feel of a
mechanical reel spinning product but is actually a video based product.
We also have in development several experimental games to bring new,
innovative concepts to casino floors. To capture additional market share,
we have added and will continue to add resources to our game development
group with the intent of commercializing a much greater number of new
games in fiscal 2004 and fiscal 2005 than in prior years. By developing a
more diverse product line, we intend to become a full service supplier to
casinos. We expect to be able to leverage our 50+ years of game design
experience and our existing sales and distribution organization over a
higher volume of activity. Subject to regulatory approval in fiscal 2004,
we expect to have all of these products and new games available to serve
all of our customers' gaming device needs.

- Maximize the potential of our participation games and exclusive licenses
for use of well-known themes on gaming machines: As the exclusive
licensee of the MONOPOLY brand for use with gaming machines, we converted
a popular trademark into a successful line of superior-earning gaming
machines. The name recognition and creative game design of these games
and of our other participation games have allowed us to lease them to
casino operators, generating a high-margin recurring revenue stream for
us. To date, we have launched a total of 18 participation themes. See
"Products". We will continue to pursue new licensed brands and additional
themes based on the guidance of focus group testing of casino patrons.

- Continue expansion into international markets: We have continued our
efforts to obtain regulatory licenses to market our games in foreign
markets, and we are now authorized to conduct business in most Canadian
provinces and over 35 other foreign jurisdictions. We began direct sales
of our gaming machines outside of North America for the first time in
fiscal 2001. We conduct most of our international sales through our
subsidiary in Barcelona, Spain, however in fiscal 2002, we opened a sales
office in Johannesburg, South Africa to compete in the South African
casino and newly authorized low-payout machine markets. In addition, we
license our game themes to Stargames Corporation Pty Ltd. for sale on
their PC3 hardware platform. We receive a royalty payment from Stargames
for each game sold. See "Sales and Marketing." The Australian market
represents the largest international market for us, as its gaming market
is largely video, our area of strength in game design.

PRODUCTS

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

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

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GAMES FOR SALE

We offer the following product lines for sale:

- Multi-coin, multi-line video gaming machines. Our line of multi-coin,
multi-line, themed gaming machines combine advanced graphics, DCS sound
effects and music, and secondary bonus rounds. In the primary round, the
video screen of these gaming machines simulates traditional mechanical
reel spinning slot machines. Depending on the machine, the player can
wager up to 200 coins per play.

- Mechanical reel spinning slot machines. These mechanical reel spinning
slot machines feature secondary bonusing through the use of our Dotmation
feature and also include DCS sound. Recently, the Telnaes extended odds
technology patent expired, so we can now use that technology, which
enhances the design flexibility and entertainment value of the games. As
a result, we expect to introduce more mechanical reel spinning slot
machines and increase our presence in this market starting in fiscal
2004.

- 3RV gaming machines -- Beginning in the September 2002 quarter, we began
to sell these video based gaming devices, which feature mini-bonuses,
symbol animation and DCS sound. This gaming device looks like a
traditional three reel mechanical slot machine and includes a handle to
activate play. We have developed a proprietary front screen glass over a
video monitor and by integrating realistic, reel spinning graphics we
have created a unique gaming device.

During fiscal 2002 and 2001, we released the following new games for sale:

Our sales of gaming machines, primarily video gaming machines, grew from
17,789 units in fiscal 2000 to 19,070 units in fiscal 2001. In fiscal 2002,
however, we sold only 6,916 units as regulators and customers scrutinized our
efforts to implement our three part technology improvement plan to stabilize our
operating system software. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."

In fiscal 2003, we expect to launch 15 new games for sale, subject to
regulatory approval.

PARTICIPATION GAMES

In fiscal 1999, we introduced the first four MONOPOLY themed gaming
machines in Las Vegas under an exclusive license from Hasbro. In October 2001,
we introduced Party Train, the ninth game in the MONOPOLY series, and we intend
to introduce two new MONOPOLY branded games per year to keep the brand fresh and
entertaining. Our game designers use secondary bonus rounds in combination with
the actual elements of the MONOPOLY board game to create the highly entertaining
games. These elements include Mr. MONOPOLY(TM), Chance(TM), Community Chest(TM)
and the distinctive game board and tokens, set to a background of a big band
theme song. Most of these games are multi-coin, multi-line video games; however,
some games are mechanical reel spinning gaming machines.

In fiscal 2001, we introduced a second series of participation games
entitled Puzzle Pays. Each gaming machine in this series is based on a popular
licensed puzzle game theme. These games include JUMBLE(R), Bee Bucks(R), the
sequel to JUMBLE, and SCRABBLE(TM), based on the popular board game. We expect
to introduce a sequel to SCRABBLE, entitled Winning Recipe(TM), and our fifth
licensed game theme for the Puzzle Pays series, PICTIONARY(TM), in the December
2002 quarter.

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In fiscal 2002, we launched three new participation series: HOLLYWOOD
SQUARES(TM) in the winter of 2001; PAC-MAN(TM), based upon the classic arcade
game, in the spring of 2002; and our first wide-area progressive game,
SURVIVOR(TM), in the spring of 2002. In fiscal 2003, we expect to launch one
sequel each to PAC-MAN and HOLLYWOOD SQUARES branded games.

During fiscal 2002 and 2001, we released the following new games on
participation:

In fiscal 2003 we expect to launch 9 new participation games, subject to
regulatory approval.

Our installed base of participation games increased from 5,857 units at
June 30, 2001 to 6,162 units at June 30, 2002. The average installed base
increased from 4,850 units for fiscal 2001 to 5,790 units in fiscal 2002. Net
win per day per gaming device decreased from $43.76 in fiscal 2001 to $40.05 in
fiscal 2002 which we believe resulted primarily from a delay in new game
approvals by some regulators pending completion of their review of upgrades to
our existing operating system software. As a result, we were unable to refresh
our installed base of participation games on our planned six-month schedule. See
"Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations."

ADDITIONAL PRODUCTS

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

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

- Parts Sales, Game Conversions and Used Games. In addition to our product
line of gaming machines, we also offer sales of replacement parts and
game theme conversions of our gaming machines. We also sell used games
which are acquired on a trade-in basis or which were previously placed on
a participation basis. We expect that our revenues from these sources
will increase in the future as our installed base of gaming machines sold
has expanded.

DESIGN, RESEARCH AND PRODUCT DEVELOPMENT

In designing our gaming machines, our designers, engineers and artists
build upon the more than 50 years of experience that WMS and our predecessors
have in designing and developing fun, humorous and exciting games. We are
continually developing new games in order to introduce new technologies and
enhance player appeal. Our gaming machines and games are usually designed and
programmed by our internal gaming design studios. In some cases, we may
outsource certain testing and graphic design functions to independent designers
under contract to us. Gaming machines must be approved and may be tested by
certain regulatory authorities before being marketed in a particular gaming
jurisdiction. Our game design teams operate in a studio environment that
encourages creativity, productivity and cooperation among design teams. Each
studio works concurrently on multiple games and is staffed with software
developers, graphic artists, mathematicians and game developers.

During the fiscal years ended June 30, 2002, 2001 and 2000, we spent
approximately $26.0 million, $16.4 million and $11.7 million, respectively, on
design, research and product development. In fiscal 2002, we finished the
renovation of our existing Chicago research and design facility to create a
state-of-the-art
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technology campus. As of September 1, 2002, we employed about 267 persons in our
design, research and development teams. We substantially increased our staff in
fiscal 2002 to execute the technology improvement plan, and also to increase the
number of game developers and game design studios to position the Company to
introduce a greater number of games in the future and begin product development
to expand our product offerings. We intend to continue to increase our game
development staff. In fiscal 2004, we intend to expand our product offerings to
include new mechanical reel spinning games using extended odds technology, a new
poker game, a proprietary wide-area progressive system and some experimental
games. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity."

Some of our gaming machines are based on popular brands licensed from third
parties, such as Hasbro, CBS Consumer Products, Namco and Tribune Media
Services. Typically, WMS is obligated to make minimum guaranteed royalty
payments over the term of the license and to advance payment against those
guarantees. The licensor typically must inspect and approve any use of the
licensed property. In addition, each license typically provides that the
licensor retains the right to exploit the licensed property for all other
purposes, including the right to license the property for use with other
non-slot-machine related products.

SALES AND MARKETING

We are authorized to sell or lease our gaming machines to casinos in 136
tribal jurisdictions and 66 other gaming jurisdictions worldwide. See
"Government Regulation-General." Generally, we sell our gaming machines
directly, rather than through the use of distributors, in order to maximize
customer service and to enhance profitability. In some instances, our gaming
machines are installed in casinos on a trial basis, and only after a successful
trial period are the machines purchased by the customers. In addition, we offer
our gaming machines on a participation basis. We sell or lease VLTs, depending
on the jurisdictions where they are placed.

We sell and lease our gaming machines through 28 salespeople in offices in
several United States locations, and six salespeople in our international
offices: three in a sales office in Spain, two in a sales office in South
Africa, and one in Canada. Our salespeople earn a salary and commissions. Our
gaming machines are primarily marketed through direct sales, trade shows,
promotional videotapes, our proprietary website and advertising in trade
journals. No single customer accounted for 10% or more of our revenues in fiscal
2002 or fiscal 2001. Harrah's Entertainment, Inc. accounted for about 10.3% of
our revenues in fiscal 2000.

Our international game sales continued to increase in fiscal 2002 with over
2,784 games sold compared to 2,109 in fiscal 2001. We have translated our most
popular domestic game themes into Spanish, Portuguese, French and/or Italian.
Export sales and leases of our products were approximately $30.7 million, or
17.6% of revenues, for fiscal 2002, compared with $21.0 million, or 8.0% of
revenues, for fiscal 2001, and $17.7 million, or 8.1% of revenues, for fiscal
2000. These figures do not include export sales with respect to discontinued
operations. Substantially all foreign sales are made in United States dollars.
Revenue contributions from leases of our products were primarily limited to
North America.

At the end of fiscal 2001, we announced the first installations of our
Jackpot Party games in Australia. These games are manufactured under our
cross-license agreement with Stargames Corporation Pty. Ltd. using their PC3
hardware platform. We have also received approval from the Australian testing
authorities for other WMS games, including several versions of MONOPOLY themed
games. We estimate that the Australian gaming device market currently operates
almost 200,000 gaming machines, making it the largest gaming market outside of
the United States.

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COMPETITION

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

- create games with high earnings performance;

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

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

- adapt our products for use with new technologies.

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

- engineering innovation and reliability;

- mechanical reliability;

- brand recognition;

- marketing and customer support; and

- price or lease terms.

We estimate that over 25 companies in the world manufacture gaming machines
and VLTs for legalized gaming markets. Of these companies, we believe that a
majority of this worldwide market is controlled by IGT, Alliance Gaming,
Aristocrat Technologies and WMS. Our competitors vary in size from very small
companies with limited resources to a few large corporations with greater
financial, marketing and product development resources than ours. The larger
competitors have an advantage in being able to spend large amounts to develop
new technologies and features that are attractive to players and customers. In
addition, some of our competitors have developed, sell or otherwise provide to
customers security, centralized player tracking and accounting systems which
allow casino operators to accumulate slot accounting and performance data about
the operation of gaming devices. We do not currently offer these systems. In the
video and mechanical reel spinning gaming machine market, we compete with market
leader IGT, as well as Alliance Gaming, Sigma Game, Atronic Casino Technology,
Mikohn Gaming, Shuffle Master, Konami, Franco, Unidesa and Aristocrat
Technologies. In the VLT market, we compete primarily with IGT, G-Tech Holdings,
Scientific Games and Spielo Gaming International.

MANUFACTURING

In fiscal 2001, we consolidated our manufacturing, Chicago regional
distributing, warehousing and corporate headquarters in our modern facility in
Waukegan, Illinois. Combined with new manufacturing processes, this facility has
allowed us to achieve greater operating efficiencies. In addition, we have
reduced our product lead times to 6-8 weeks, which is lower than the industry
average.

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

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

With respect to participation games at September 1, 2002, we had back
orders of over 800 units and at September 1, 2001, we had a backlog of about 500
units. We believe that it is not meaningful to compare our

10

year-to-year back order amounts, however, since the amount of back orders vary
during the on-going production period for certain models of gaming machines. The
popularity of the game theme can extend over a period of years. In addition, our
participation game revenues are unrelated to sales back orders.

PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION

Each gaming machine may embody a number of separately protected
intellectual property rights, including trademarks, copyrights and patents. We
generally seek to obtain trademark protection for the names or symbols under
which we market and license our products and patent protection of our
proprietary software and other game innovations. We also rely on our copyrights,
trade secrets and proprietary know-how. See "Risk Factors -- We rely on our
intellectual property and proprietary rights." In addition, some of our most
popular gaming machines are based on trademarks and other intellectual
properties licensed from third parties. See "Risk Factors -- Our revenues depend
in part upon our ability to obtain licenses to use intellectual properties and
licensors' approvals of new products on a timely basis."

GOVERNMENT REGULATION

GENERAL

The manufacture and distribution of gaming equipment is subject to
extensive federal, state, tribal, local and foreign regulation. Although the
laws and regulations of the various jurisdictions in which we operate vary in
their technical requirements and are subject to amendment from time to time,
virtually all of these jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
machines as well as for the officers, directors, major stockholders and key
personnel of those companies.

We have obtained the required licenses or are otherwise authorized to
manufacture and sell our products to customers in domestic gaming jurisdictions
in 27 states and the Commonwealth of Puerto Rico as well as 136 Native American
tribal jurisdictions.

We have also obtained the required licenses or are otherwise authorized to
manufacture and sell our products in the following additional gaming
jurisdictions: ten Canadian provinces; Argentina; Aruba; Victoria, New South
Wales in Australia; the Bahamas; Catalonia, Spain; Chile; Colombia; Curacao, the
Dominican Republic; Ecuador; Estonia; France; Greece; Italy; Latvia; Lesotho;
Malaysia; Nambidu; Panama; Paraguay; Peru; Philippines; Portugal; Russia; the
Slovak Republic; Slovenia; Guateng, Eastern Cape, KwaZulu-Natal, Northern Cape,
Northern Province, Northwest Province, and Western Cape provinces in South
Africa; Swaziland; Sweden; Switzerland; Uruguay and Venezuela. We also have
pending applications in the provinces of Mpumalanga and Free State in South
Africa.

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

NEVADA REGULATIONS

The manufacture, sale and distribution of gaming machines for use or play
in Nevada or for distribution outside of Nevada and the operation of slot
machine routes are subject to the Nevada Gaming Control Act and the regulations
promulgated under that act (collectively, the "Nevada Act"). The license as an
operator of a slot machine route permits a licensee to place slot machines and
gaming devices on the premises of other licensees on a participation basis. Our
manufacturing, distributing and slot route operations are subject to licensing
and regulatory control of the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada Gaming Control Board (the "Nevada Board") and, with
respect to the operation of slot machine

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routes, various other local regulatory authorities (all of these authorities are
collectively referred to as the "Nevada Gaming Authorities").

The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (1) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (2) the establishment and maintenance of responsible accounting
practices and procedures; (3) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs, and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (4) the prevention of cheating and
fraudulent practices; (5) providing a source of state and local revenues through
taxation and licensing fees; and (6) the strict regulation of all persons,
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture and distribution of gaming
devices and associated equipment. A change in these laws, regulations and
procedures could have an adverse effect on our future Nevada operations.

Our subsidiaries that manufacture and distribute gaming devices or operate
a slot machine route, or which hold stock of a subsidiary which does so (a
"Gaming Subsidiary"), are required to be licensed or registered by the Nevada
Gaming Authorities. The licenses require periodic payments of fees and taxes and
are not transferable. We are registered by the Nevada Commission as a publicly
traded corporation ("Registered Corporation"), and so we are required
periodically to submit detailed financial and operating reports to the Nevada
Commission and to furnish any other information, which the Nevada Gaming
Authorities may require. We have obtained from the Nevada Gaming Authorities the
various registrations, findings of suitability, approvals, permits and licenses
(collectively, "Licenses") required to engage in slot route operations, and the
manufacture, sale and distribution of gaming devices for use or play in Nevada
or for distribution outside of Nevada. We cannot assure you that these Licenses
will not be revoked, suspended, limited or conditioned by the Nevada Gaming
Authorities.

All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Gaming Authorities before sales, distribution or exposure for play. The
approval process for gaming devices includes rigorous testing by the Nevada
Board, a field trial and a determination as to whether the gaming machine meets
strict technical standards that are set forth in the regulations of the Nevada
Commission. Associated equipment (as defined in the Nevada Act) must be
administratively approved by the Chairman of the Nevada Board before it is
distributed for use in Nevada.

The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, us in order to determine
whether that individual is suitable or should be licensed as a business
associate of a licensee. Officers, directors and certain key employees of our
Gaming Subsidiaries must file license applications with the Nevada Gaming
Authorities. Our officers, directors and key employees who are actively and
directly involved in activities of our Gaming Subsidiaries may be required to be
licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming
Authorities may deny an application for licensing for any cause, which they deem
reasonable. A finding of suitability is comparable to licensing, and both
require submission of detailed personal financial information followed by a
thorough investigation. The applicant for licensing or a finding of suitability
must pay all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and, in addition to their authority
to deny an application for a finding of suitability or license, the Nevada
Gaming Authorities have jurisdiction to disapprove a change in a corporate
position.

If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us, the companies involved would have to sever all
relationships with that person. In addition, the Nevada Gaming Authorities may
require us to terminate the employment of any person who refuses to file
appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.

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

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

Any beneficial holder of our voting securities, regardless of the number of
shares owned, may be required to file applications, be investigated and have
his, her or its suitability as a beneficial holder of our voting securities
determined if the Nevada Commission has reason to believe that ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.

The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of our voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of
our voting securities apply to the Nevada Commission for a finding of
suitability within 30 days after the mailing of the written notice by the
Chairman of the Nevada Board requiring that filing. Under certain circumstances,
an "institutional investor," as defined in the Nevada Act, which acquires more
than 10% but not more than 15% of our voting securities may apply to the Nevada
Commission for a waiver of that finding of suitability if the institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of our board of directors, any change in our corporate charter, bylaws,
management, policies or operations, or those of any of our gaming affiliates, or
any other action which the Nevada Commission finds to be inconsistent with
holding our voting securities for investment purposes only. Activities which are
not deemed to be inconsistent with holding voting securities for investment
purposes only include: (1) voting on all matters voted on by stockholders; (2)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in our
management policies or operations; and (3) other activities that the Nevada
Commission may determine to be consistent with investment intent. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.

Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the voting securities of a Registered
Corporation beyond that period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. We are subject to disciplinary
action if, after we receive notice that a person is unsuitable to be a
stockholder or to have any other relationship with us, we: (1) pay that
unsuitable person any dividend or interest upon our voting securities; (2) allow
that person to exercise, directly or indirectly, any voting rights conferred
through securities held by that person; (3) pay remuneration in any form to that
person for services rendered or otherwise; or (4) fail to pursue all lawful
efforts to require the unsuitable person to relinquish voting securities
including, if necessary, the immediate repurchase of the voting securities for
cash at fair market value. See also "Item 12. Security Ownership of Certain
Beneficial Owners and Management -- Voting Proxy Agreement."

The Nevada Commission may, in its discretion, require holders of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that ownership of theses securities
would

13

otherwise be inconsistent with the declared policies of the State of Nevada. If
the Nevada Commission determines that a person is unsuitable to own that
security, then under the Nevada Act, the Registered Corporation can be
sanctioned, including with the loss of its approvals, if, without the prior
approval of the Nevada Commission, it: (1) pays to the unsuitable person any
dividend, interest or any distribution whatsoever; (2) recognizes any voting
right by the unsuitable person in connection with that security; (3) pays the
unsuitable person remuneration in any form; or (4) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.

We are required to maintain a current stock ledger in the State of Nevada,
which may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make this disclosure may be grounds for finding
the record holder unsuitable. We are also required to render maximum assistance
in determining the identity of the beneficial owner. The Nevada Commission has
the power to require that our stock certificates bear a legend indicating that
the securities are subject to the Nevada Act. However, to date, the Nevada
Commission has not imposed this requirement on us.

We may not make a public offering of our securities without the prior
approval of the Nevada Commission if the securities or the proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for these purposes. This
approval, if given, does not constitute a finding, recommendation or approval by
the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the
prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.

Changes in control of WMS through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Commission and the Nevada Board
in a variety of stringent standards prior to assuming control of the Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.

The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (1) assure the
financial stability of corporate licensees and their affiliates; (2) preserve
the beneficial aspects of conducting business in the corporate form; and (3)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada Commission
before we can make exceptional repurchases of voting securities above the
current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by our board of directors in response to a
tender offer made directly to the Registered Corporation's stockholders for the
purpose of acquiring control of the Registered Corporation.

License fees and taxes computed in various ways depending on the type of
gaming or activity involved are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either quarterly or annually. Annual fees are also payable to
the State of Nevada for renewal of licenses as a manufacturer, distributor and
operator of a slot machine route. In addition, Nevada law further requires that
persons providing gaming machines to casino customers on a revenue participation
basis pay their "full proportionate share" of the license fees and taxes imposed
on gaming revenues generated by these participation gaming machines.

14

Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with any such person, and who
proposes to become involved in a gaming venture outside of Nevada, is required
to deposit with the Nevada Board, and thereafter maintain, a revolving fund in
the amount of $10,000 to pay the expenses of investigation by the Nevada Board
of their participation in foreign gaming operations. The revolving fund is
subject to increase or decrease in the discretion of the Nevada Commission.
Thereafter, licensees are required to comply with certain reporting requirements
imposed by the Nevada Act. The Nevada Board may require a licensee to file an
application for a finding of suitability concerning an actual or intended
activity or association of the licensee in a foreign gaming operation. A
licensee is also subject to disciplinary action by the Nevada Commission if the
licensee knowingly violates any laws of the foreign jurisdiction pertaining to
the foreign gaming operation, fails to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada gaming
operations, engages in activities or enters into associations that are harmful
to the State of Nevada or its ability to collect gaming taxes and fees, or
employs, contracts with or associates with a person in the foreign operation who
has been denied a license or finding of suitability in Nevada on the ground of
personal unsuitability.

NEW JERSEY REGULATION

The manufacture, distribution, and operation of gaming machines in New
Jersey are regulated by the New Jersey Casino Control Commission (the "New
Jersey Commission") under the New Jersey Casino Control Act and the regulations
of the New Jersey Commission promulgated thereunder (collectively, the "New
Jersey Act"). Under the New Jersey Act, a company must be licensed as a gaming
related casino service industry ("CSI"), or fulfill other requirements, in order
to manufacture or distribute gaming machines. In order for a CSI license to be
issued or maintained, certain directors, officers, key employees and owners of a
company must be found by the New Jersey Commission to possess by clear and
convincing evidence good character, honesty, integrity and financial stability.

We have been issued a CSI license by the New Jersey Commission. This
license was issued for a two-year period and, upon proper application and
satisfaction of the same requirements for the initial issuance of a license, may
be renewed for four-year periods. However, the New Jersey Commission has the
discretion to suspend, revoke, or refuse to renew a license if a licensee fails
to continue to satisfy the requirements for licensure or violates the New Jersey
Act.

In addition, all gaming machines used in New Jersey casinos must be
approved by the New Jersey Commission. In determining whether to approve gaming
machines, the New Jersey Commission will consider various factors, including
design, integrity, fairness, and honesty and may require a field test of the
machine.

MISSISSIPPI

The manufacture, sale and distribution of gaming devices for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). These
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission. Although not identical, the Mississippi Act is similar to
the Nevada Act.

Our license to manufacture and distribute gaming equipment in Mississippi
is not transferable, is issued for a two-year period and must be renewed every
two years. As in Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, us, including, but not limited to, record or beneficial
holders of any of our voting securities and any other person whom the
Mississippi Commission determines exercises a significant influence upon our
management or affairs. We are required to maintain a current stock ledger in
Mississippi, which may be examined by the Mississippi Commission at any time.
Any applicant for a finding of suitability must pay all investigative fees and
costs of the Mississippi Commission in connection with the investigation.

The Mississippi Act requires any person who acquires beneficial ownership
of more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission, and that person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more than
15

10% of a Registered Corporation's voting securities apply to the Mississippi
Commission for a finding of suitability. The Mississippi Commission exercises
its discretion to require a finding of suitability of any beneficial owner of
more than 5% of a Registered Corporation's common stock. Under certain
circumstances, an "institutional investor," which acquires more than 5%, but not
more than 10%, of the Registered Corporation's voting securities may apply to
the Mississippi Commission for a waiver of the finding of suitability if the
institutional investor holds the voting securities for investment purposes only
and otherwise meets the regulatory requirements of the institutional investor
waiver provisions.

We may not make a public offering of our securities without the prior
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for these purposes. The
Mississippi Commission has the authority to grant a continuous approval of
securities offerings and has granted this approval to us, subject to an annual
renewal of this approval. All loans by us must be reported to the Mississippi
Commission and certain loans and other stock transactions must be approved in
advance.

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

FEDERAL REGISTRATION

Any of our subsidiaries that are involved in gaming activities are required
to register annually with the United States Department of Justice, Criminal
Division, in connection with the sale, distribution or operation of gaming. The
Federal Gambling Devices Act of 1962 makes it unlawful, in general, for a person
to manufacture, deliver or receive gaming machines and components across state
lines or to operate gaming machines unless that person has first registered with
the Attorney General of the United States. We are required to register and renew
our registration annually. We have complied with these registration
requirements. In addition, various record keeping and equipment identification
requirements are imposed by this act. Violation of the Federal Act may result in
seizure and forfeiture of the equipment, as well as other penalties.

NATIVE AMERICAN GAMING REGULATION

Numerous Native American tribes have become engaged in or have licensed
gaming activities on Indian lands as a means of generating tribal governmental
revenue. We manufacture and supply gaming equipment for Native American tribes.
Gaming on Native American lands, including the terms and conditions under which
gaming equipment can be sold or leased to Native American tribes, is or may be
subject to regulation under the laws of the tribes, the laws of the host state,
the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the
National Indian Gaming Commission (the "NIGC") and the Secretary of the U.S.
Department of the Interior (the "Secretary"), and also may be subject to the
provisions of certain statutes relating to contracts with Native American
tribes, which are administered by the Secretary. As a precondition to gaming
involving gaming machines, IGRA requires that the tribe and the state enter into
a written agreement (a "tribal-state compact") that specifically authorizes such
gaming, and that has been approved by the Secretary, with the notice of approval
published in the Federal Register. Tribal-state compacts vary from state to
state. Many require that equipment suppliers meet ongoing registration and
licensing requirements of the state and/or the tribe and some impose background
check requirements on the officers, directors and shareholders of gaming
equipment suppliers. Under IGRA, tribes are required to regulate all commercial
gaming under ordinances approved by the NIGC. These ordinances may impose
standards and technical requirements on main hardware and software and may
impose registration, licensing and background check requirements on gaming
equipment suppliers and their officers, directors and shareholders.

REGULATION IN FOREIGN JURISDICTIONS

Many foreign countries permit the importation, sale and/or operation of
gaming equipment. Where importation is permitted, some countries prohibit or
restrict the payout feature of the traditional slot machine

16

or limit the operation of slot machines to a controlled number of casinos or
casino-like locations. Some jurisdictions in which we operate require the
licensing of gaming machines, gaming machine operators and manufacturers. In
addition, each foreign jurisdiction may have specific gaming machine
requirements that differ from our traditional domestic gaming machines with
respect to payout features and hardware and software related to currency and
denomination. We, and our gaming machines have been properly licensed and
approved or have applied for licensure and approval in all jurisdictions where
our operations require licensure and approval.

SEASONALITY

Sales of WMS 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, when a game that achieves significant player appeal is
introduced or if gaming is permitted in a significant new jurisdiction.

EMPLOYEES

At September 1, 2002, we employed approximately 838 persons. Approximately
175 of those employees were represented by the International Brotherhood of
Electrical Workers (the "IBEW"). We have a collective bargaining agreement with
the IBEW related to our Waukegan, Illinois manufacturing facility, which expires
on June 30, 2003. We believe that our relations with our employees are
satisfactory.

RIGHTS AGREEMENT

We adopted a rights plan under the Rights Agreement, dated as of March 5,
1998, between us and The Bank of New York, as rights agent. The Rights Agreement
provides that one preferred stock purchase right attaches to each share of our
common stock. The rights will expire at the close of business on April 6, 2007,
unless we previously redeem them for nominal consideration prior to
exercisability. The rights become exercisable if a person or group announces a
tender or exchange offer without the consent of our Board of Directors, which,
if consummated, would result in that person or group beneficially owning 15% or
more of our common stock. Each right, other than rights owned by the person
acquiring 15% or more, would then entitle the holder to purchase a number of
shares of our common stock having a market value of twice the exercise price.

RISK FACTORS

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

SOFTWARE ANOMALIES AND FRAUDULENT MANIPULATION OF OUR GAMING MACHINES AND
SOFTWARE MAY COST US MONEY, BURDEN OUR ENGINEERING AND MARKETING RESOURCES,
INVOLVE US IN LITIGATION AND ADVERSELY AFFECT OUR GAMING LICENSES.

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

17

tests. Our gaming machines have in the past and could in the future be
susceptible to software anomalies and manipulation after the gaming software has
been widely distributed.

We have entered into several agreements to license intellectual property
related to alternative solutions for our technology improvement plan that have a
total potential commitment of $16.3 million. If we determine that we may not
realize the value of any of the commitments, we would record an immediate charge
against earnings up to the full amount of these commitments in the period in
which such determination is made.

In addition, the occurrence of anomalies in, or fraudulent manipulation of,
our machines and gaming software may give rise to claims for lost revenues and
related litigation, and may subject us to investigation or other action by
gaming regulatory authorities including suspension or revocation of a gaming
license. We cannot assure you that, in the event that such anomalies or
manipulations occur in our machines and software, any gaming authorities will
not subject us to disciplinary action. See also "Risk Factors -- Our gaming
machine business is heavily regulated, and we depend on our ability to obtain
and maintain our gaming licenses and regulatory approvals for our games to
operate our business" and "Risk Factors -- Customers and regulators may not
accept the upgraded operating systems we expect to introduce in the future."

CUSTOMERS AND REGULATORS MAY NOT ACCEPT THE UPGRADED AND NEW OPERATING SYSTEMS
WE EXPECT TO INTRODUCE IN THE FUTURE.

As part of our three part technology improvement plan, we expect to
introduce two upgraded versions of our existing operating system software. We
introduced the first version in the summer of 2002 and we expect to introduce
the second version in the winter of 2002. In addition, we expect to introduce a
totally new computer circuit board and operating system beginning in the summer
of 2003. If regulators do not find that the upgrades or the new system meet
their requirements, such systems will not be approved for sale. Regulators may
also rescind our current regulatory approvals, which may result in the shut down
of our games in casinos located in their jurisdictions.

Even if regulators approve the upgrades and new system, there is no
assurance that our customers will find the systems or new games acceptable.
Customers may decide not to purchase any new games or gaming devices from us or
let us install our participation games if they perceive that our operating
systems are unreliable.

OUR GAMING MACHINE BUSINESS IS HEAVILY REGULATED, AND WE MUST OBTAIN AND
MAINTAIN OUR GAMING LICENSES AND REGULATORY APPROVALS FOR OUR GAMES TO OPERATE
OUR BUSINESS.

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

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

18

Similarly, we cannot assure you that our current registrations, licenses,
approvals or findings of suitability will not be revoked, suspended or
conditioned. See "Government Regulation."

OUR PROFITABILITY DEPENDS HEAVILY ON RECURRING REVENUE PARTICIPATION GAMES THAT
MAY BECOME RESTRICTED OR PROHIBITED BY LAW IN SOME JURISDICTIONS OR FACE
INCREASED RESISTANCE BY OPERATORS.

Casinos in certain jurisdictions have sought and may continue to seek
legislation prohibiting or restricting participation and lease arrangements.
Approximately $99.1 million, or 56.7%, of our gaming revenues in fiscal 2002,
$90.2 million, or 34.2%, of our gaming revenues in fiscal 2001, and $67.6
million, or 31.1%, of our gaming revenues in fiscal 2000, were derived from
participation games. In addition, in fiscal 2002, our margins on participation
games were 84.8%, while our margins on machine sales were 33.8% indicating that
our level of revenue from participation games has a significant effect on our
profitability.

Participation games are replaced by the casinos operators if they do not
meet and sustain revenue and net win expectations. We cannot assure you that our
participation games will continue to meet the casino operators' revenue and net
win requirements. We believe that participation games need to be refreshed every
six months to improve or maintain the net win of the gaming machines. These
machines are at risk of replacement with 30 days notice from the casino operator
and are particularly susceptible to pressure from competitors, declining
popularity and changes in economic conditions. Further, casino operators have at
times challenged participation arrangements and some have reduced the number of
participation games in their casinos to reduce costs or in response to new,
higher tax rates on casino revenues or profits. We cannot assure you that the
various gaming jurisdictions will continue to permit recurring revenue
arrangements.

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

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

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

Some of our most popular gaming machines are based on trademarks and other
intellectual properties licensed from third parties. Our future success may
depend upon our ability to obtain and retain licenses for additional popular
intellectual properties. There is competition for these licenses, and we cannot
assure you that we will be successful in acquiring or retaining additional
intellectual property rights with significant commercial value on acceptable
terms. These intellectual properties are licensed for a fixed term. We cannot
assure you that we will be able to renew the intellectual properties, which we
currently license. In the event that we cannot renew these existing licenses, we
may be required to discontinue certain participation games bearing such licensed
marks.

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

WE RELY ON OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.

Our success may depend in part on our ability to obtain trademark
protection for the names or symbols under which we market our products and to
obtain copyright protection and patent protection of our proprietary software
and other game innovations. We cannot assure you that we will be able to build
and maintain goodwill in our trademarks or obtain trademark or patent
protection, that any trademark, copyright
19

or issued patent will provide competitive advantages for us or that our
intellectual properties will not be successfully challenged or circumvented by
competitors.

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

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

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

THE GAMING INDUSTRY IS SENSITIVE TO DECLINES IN THE PUBLIC ACCEPTANCE OF GAMING.

The gaming industry can be affected by public opinion of gaming. In the
event that there is a decline in public acceptance of gaming, this may affect
our ability to do business in some markets, either through unfavorable
legislation affecting the introduction of gaming into emerging markets, or
through legislative and regulatory changes in existing gaming markets which may
adversely affect our ability to continue to sell and lease our games in those
jurisdictions. We cannot assure you that public opinion will continue to support
legalized gaming.

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

The gaming machine business is intensely competitive and is characterized
by the rapid development of new technologies and the continuous introduction of
new products. We must continually adapt our products to incorporate
state-of-the-art technology. We cannot assure you that we will be able to
develop products using these emerging technologies. In addition, our competitors
are constantly introducing new products to the market. We cannot assure you that
we will be able to introduce new products into the market at a rate which is
comparable to our competitors or that we will be able to maintain our current
schedule of planned introductions.

Some of our competitors are large companies with greater financial,
marketing and product development resources than ours. In addition, new
competitors may enter our key markets. Obtaining space and favorable placement
on casino gaming floors is a competitive factor in our industry. Competitors
with a larger installed base of gaming machines than ours have an advantage in
retaining the most space and best positions in casinos. These competitors may
also have the advantage of being able to convert their installed machines to
newer models in order to maintain their share of casino floor space. In
addition, some of our competitors have developed and sell or otherwise provide
to customers wide-area progressive, centralized player tracking and accounting
systems which allow operators to accumulate accounting and performance data
about the operation of gaming devices. We do not currently offer a proprietary
wide-area progressive system; however, under our joint operating agreement with
IGT, we offer our SURVIVOR participation game on IGT's wide-area progressive
system. We expect to launch our own proprietary wide-area progressive system
being developed by Big Foot Software in fiscal 2004.

20

WE FACE RISKS ASSOCIATED WITH DOING BUSINESS IN INTERNATIONAL MARKETS.

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

WE MAY HAVE CONFLICTS OF INTEREST WITH MIDWAY GAMES INC.

Seven of our directors, including Louis J. Nicastro, our Chairman of the
Board, are directors of Midway Games Inc. ("Midway"), our former subsidiary.
Neil D. Nicastro, one of our directors and a consultant to WMS, is also the
Chairman of the Board, President, Chief Executive Officer and Chief Operating
Officer of Midway. Neil D. Nicastro is the son of Louis J. Nicastro. In
addition, there are several contractual arrangements in effect between Midway
and WMS. See "Item 13. Certain Relationships and Related Transactions."

SUMNER REDSTONE OWNS OR CONTROLS OVER 22% OF OUR COMMON STOCK AND, AS A RESULT
OF A SETTLEMENT OF DIVORCE, PHYLLIS REDSTONE OWNS OR CONTROLS 9.97% OF OUR
COMMON STOCK, AND EITHER OR BOTH OF THEM MAY DISPOSE OF ALL OR A PORTION OF
THEIR STOCK AT ANY TIME.

Sumner Redstone beneficially owns 6,973,400 shares, or over 22%, of our
common stock, based upon Amendment 27 to Schedule 13D, dated September 11, 2002,
filed by Mr. Redstone and National Amusements, Inc. and a Form 4 filed September
11, 2002 by Mr. Redstone. As a result of their recent settlement of divorce, his
former wife, Phyllis Redstone, beneficially owns 3,085,700 shares or
approximately 9.97% of our common stock based upon a Schedule 13D dated August
8, 2002, filed by Ms. Redstone with the SEC. Either Mr. or Ms. Redstone could
sell any or all of these shares at any time on the open market or to a person
who wishes to acquire control of WMS. We cannot assure you that any such person
would agree with our strategy and business goals described in this report. As
Ms. Redstone's holdings exceed 5% of our outstanding shares, she will be
required to apply to many gaming authorities for a finding of suitability as a
stockholder of WMS. We cannot assure you that she will make such filings or that
she will be approved by each of the regulators in these jurisdictions, and if
she is not approved, she may be required to sell her shares. The sale by Mr. or
Ms. Redstone of a large number of shares could have an adverse effect on the
market price of our common stock.

THE USE OF OUR RIGHTS PLAN OR BLANK CHECK PREFERRED STOCK WOULD INHIBIT THE
ACQUISITION OF WMS OR HAVE A DILUTIVE EFFECT ON OUR STOCK.

Rights plan. Under our rights plan, each share of our common stock has an
accompanying right to purchase convertible preferred stock that permits each
holder to purchase shares of our common stock at half price. The rights become
exercisable if any person or entity acquires beneficial ownership of 15% or more
of our common stock without approval of our board of directors. We can redeem
the rights at $.01 per right, subject to certain conditions, at any time. The
rights expire in April 2007. Our board of directors could use this agreement as
an anti-takeover device to discourage, delay or prevent a change in control of
WMS. The use of our rights plan may dilute our common stock.

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

21

commitments to issue any shares of preferred stock. The existence of the blank
check preferred stock, however, could adversely affect the market price of our
common stock.

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

We have 100 million authorized shares of common stock, of which
approximately 31.0 million shares were issued and outstanding as of September
12, 2002, excluding approximately 1.4 million treasury shares. On that date, we
also had outstanding options to purchase an aggregate of approximately 3.4
million shares of our common stock issuable at an average exercise price of
approximately $14.74 per share. If all of our issued and outstanding stock
options were exercised as of that date, approximately 34.4 million shares of our
common stock would be outstanding. Our board of directors has broad discretion
to issue authorized but unissued shares, including discretion to issue shares in
compensatory and acquisition transactions. In addition, if we seek financing
through the sale of our securities, our then current stockholders may suffer
dilution in their percentage ownership of our common stock. The future issuance,
or even the potential issuance, of shares at a price below the then current
market price may have a depressive effect on the future market price of our
common stock.

ITEM 2. PROPERTIES.

The following table sets forth our principal properties, principal use,
approximate floor space and the annual rental and lease expiration date, where
leased, at September 1, 2002.

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

(2) 288,000 South African rand, excluding VAT. Converted, for your convenience,
at an exchange rate of .092115 on August 23, 2002.

(3) 90,399 Euros. Converted, for your convenience, at an exchange rate of
.972602 on August 23, 2002.

(4) Monthly rent.

(5) 14,840 Australian dollars. Converted, for your convenience, at an exchange
rate of .543301 on August 23, 2002.

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

ITEM 3. LEGAL PROCEEDINGS.

On September 13, 2002, we filed a lawsuit against Shuffle Master Inc, in
the United States District Court for the District of Nevada in Las Vegas. The
suit alleges that Shuffle Master's promotion, sale and installation of kits to
convert WMS gaming machines into what appear to be Shuffle Master gaming
machines violates WMS' trademark rights protected by the Lanham Act and
constitutes intentional tortuous interference with WMS' contracts with its
customers. On the same date, Shuffle Master, filed suit against us in another
federal court seeking declaratory judgment that it has not violated any laws in
manufacturing and selling its upgrade kits for our Model 550 gaming machines. We
believe the outcome of these lawsuits will not have a material impact on our
financial position or results of operations.

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

Not applicable.

23

PART II

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

Our common stock, $.50 par value, is traded publicly on the New York Stock
Exchange under the symbol "WMS." The following table shows the high and low sale
prices of our common stock for the two most recent fiscal years, as reported on
the NYSE:

No cash dividends were declared or paid during fiscal 2002 or 2001. The
payment of future cash dividends will depend upon, among other things, our
earnings, anticipated expansion and capital requirements and financial
condition.

On September 12, 2002, there were approximately 997 holders of record of
our common stock.

24

ITEM 6. SELECTED FINANCIAL DATA.

- -------------------------
(1) Income from continuing operations for fiscal 2002 includes an after-tax
charge of $0.8 million, $0.03 per diluted share, for employee separation
costs.

(2) Income from continuing operations for fiscal 2001 includes an after-tax
charge of $13.0 million, $0.40 per diluted share, related to an executive
buyout agreement, and an after-tax charge of $2.3 million, $0.07 per diluted
share, for the costs of relocating our manufacturing and executive offices
to Waukegan, Illinois during the year.

25

(3) Income from continuing operations for fiscal 2000 includes an after-tax
reversal of an excess accrual of $9.7 million, $0.31 per diluted share,
related to patent litigation, and an after-tax charge of $1.2 million, $0.04
per diluted share, from our 1998 spin-off of Midway Games Inc. related to
the adjustment of compensatory stock options.

(4) Income from continuing operations for fiscal 1999 includes an after-tax
charge of $1.9 million, $0.06 per diluted share, from our 1998 spin-off of
Midway Games Inc. related to the adjustment of compensatory stock options.

(5) Loss from continuing operations for fiscal 1998 includes an after-tax charge
of $39.9 million, $1.51 per diluted share, from our 1998 spin-off of Midway
Games Inc. related to the adjustment of compensatory stock options.

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

FISCAL 2002 SIGNIFICANT EVENTS AND TRENDS

Technology Improvement Plan

In January 2002, we announced a three part technology improvement plan to
stabilize the operating system software in our gaming devices due to various
software anomalies experienced with the existing operating system software. We
had first reported in April 2001 that our gaming machines experienced software
anomalies that permitted fraudulent player manipulation. In the spring and
summer of 2001, we implemented software changes and upgraded our games on casino
floors to version 2.41B1 or 2.51 of our operating system software that we
believed resolved these particular anomalies. In November 2001, we identified
and reported to gaming regulators two other operating system software issues
with our games in Nevada and Mississippi. We believe these issues, which did not
permit fraudulent player manipulation but resulted in disappearing or excessive
credits, related to an upgrade of the operating system software to version 2.54
that we installed at the request of the regulators in these two jurisdictions in
October and November 2001.

As a result of these anomalies and the publicity concerning them, in the
December 2001, March 2002, and June 2002 quarters, we experienced delays in
receiving regulatory approvals for new games by some regulators pending
completion of the review of upgrades to our existing operating system software.
Customers, aware of the three part technology improvement plan, purchased fewer
new gaming devices from us. This resulted in lower game sales in these quarters.
The game approval delays also had a negative impact on participation game
revenue because we were unable to refresh our installed base of participation
games on our planned six-month schedule.

In January 2002, we announced that we would simultaneously execute the
following three part technology improvement plan:

- In the near-term, we are rewriting critical operating code segments,
securing third-party critiques of our design process, and performing code
audits and other software tests in order to improve the stability of the
operating system by introducing two upgrades to our existing operating
system.

- In the mid-term, we plan to develop, license or acquire a new operating
system for our newly developed hardware platform.

- In the long-term, we plan to develop a next generation system, which we
believe will integrate leading technologies for the gaming industry and
serve as our primary system in the future.

Also in January 2002, our Board of Directors established an Executive
Committee of the Board to oversee the execution of our technology improvement
plan. Mr. Louis J. Nicastro, our Chairman of the Board of Directors and a
non-employee director, was appointed Chairman of the Executive Committee of the
Board of Directors.

In March 2002, we completed the initial programming and testing of version
2.57 of the operating system software, the first of the two upgrades to our
existing operating system software to address the known causes of the software
anomalies we had experienced to date. In early June 2002, we received approval
from Mississippi

26

regulators for version 2.57 of our operating system software. We upgraded all of
our gaming devices in Mississippi to version 2.57 by June 30, 2002. As a result
of the improvements on version 2.57 of our operating system software, in early
August 2002, we received approval for our first new game theme in Mississippi in
ten months.

In August 2002, we received approval for version 2.57 of the operating
system software from the Nevada regulators. We expect to begin the upgrade of
all of our existing games in Nevada casinos in September 2002. In September 2002
we received our first game theme approval from Nevada regulators. All new game
approvals for all jurisdictions will now be on version 2.57 or higher of the
operating system software until the next version of the operating system
software is approved. At this time, only one other jurisdiction, Ontario, Canada
has required an upgrade of the operating system in our existing gaming devices
in their jurisdiction. Other jurisdictions could require an upgrade in the
future.

We have developed the second upgrade our operating system software, version
2.59, upon which we expect to begin receiving regulatory approvals in the winter
of 2002. This upgrade is currently being tested before submission to the
regulators. This second upgrade contains modest enhancements, modest robustness
improvements and some new functionality to our games.

With regard to the mid-term plan, in addition to an internal development
alternative, we have entered into a paid up licensing agreement for a
proprietary new computer circuit board and operating system from SDG, which we
expect will meet our requirements as to design, quality, architecture and
functionality. We expect to make our first submission of the operating system to
regulators in the March 2003 quarter and begin receiving regulatory approvals on
the mid-term solution in the summer of 2003 in conjunction with a new gaming
device platform we have developed. At the same time, we expect the computer
circuit board and operating system to be retrofittable into our installed base
of over 50,000 games already in casinos.

For the long-term plan, we contracted with an independent specialist to
develop the design specification for our next generation system. We received the
completed design specification and were able to have several of the components
of this specification included in the operating system that SDG is currently
designing for us. We currently intend to use the SDG system as the foundation
for our long-term solution.

To partially offset an anticipated reduction in revenues and an expected
increase in research and development expenses to implement the technology
improvement plan, we reduced our workforce in January 2002. We recorded a non
recurring, pre-tax charge of $1.3 million, or $0.03 per diluted share (after
tax), in the December 2001 quarter for employee separation costs.

While we have begun to receive approvals for new games in Mississippi and
in Nevada, we anticipate that our revenues from sales of new gaming devices in
fiscal 2003 will improve only modestly over the 6,916 units we sold in fiscal
2002. We believe customers will wait to purchase our gaming devices until the
mid-term solution is available beginning in the summer of 2003, as that system
is expected to be an improvement over the existing operating system, and it will
have a variety of features and functionality needed by our customers that the
upgrades to our existing system lack. We do expect that revenues from game
conversions will be stronger in fiscal 2003 as customers will refresh existing
WMS gaming devices with new games. We also expect to be able to refresh our
participation games with greater frequency in fiscal 2003, than in fiscal 2002,
which should improve the net win per day for those gaming devices.

Other Recent Matters

In fiscal 2002, we completed the renovation of our former manufacturing
facility in Chicago to a state-of-the-art technology campus for our game
development and engineering staff. The facility provides greater features and
functionality to our product development staff and contains room for expansion
as we increase our headcount in order to implement our business strategy to be
able to meet all of the gaming device needs of our casino customers.

The September 11 attack on America caused a reduction in overall levels of
business and leisure airline travel. The reduced travel had an adverse effect on
the casino and gaming industry particularly in Nevada. With the impact of the
September 11 attacks exacerbating the general economic slowdown, we believe
27

Nevada-based casino operators reassessed and lowered their capital spending and
leasing plans especially for the December 2001 and March 2002 quarters. We
experienced reduced game play on our participation games in the December 2001
quarter, particularly in Las Vegas casinos.

We elected to delay the launch of the ninth MONOPOLY branded participation
game, Party Train, from the September 2001 quarter to bring this product to
market when casino patronage levels would likely return to more normal levels in
Nevada. We launched the MONOPOLY Party Train game in Nevada in October 2001 and
in most other gaming jurisdictions later in the December 2001 quarter. The next
version in this series, Hot Properties, is scheduled for launch in October 2002,
with the eleventh version, Free Parking, expected to be launched in the spring
of 2003. We expect to see an increase in the MONOPOLY series installed base
subject to receipt of regulatory approvals following the upgrade of our
operating system software.

We also delayed the launch of the HOLLYWOOD SQUARES themed participation
games pending stabilization of casino patronage levels, introducing it in
January 2002 at four Harrah's properties. Harrah's has a limited exclusivity
period for the HOLLYWOOD SQUARES participation games in all jurisdictions in
which Harrah's operates. We received regulatory approvals to introduce the
product at additional Harrah's properties in the March 2002 quarter, with the
remaining regulatory approvals anticipated following implementation of the
upgrade to our existing operating system software. We expect to install this
game in most remaining jurisdictions during the September and December 2002
quarters, and we expect to have a new version of HOLLYWOOD SQUARES approved for
introduction in the March 2003 quarter.

In April 2002, we introduced SURVIVOR as a wide-area progressive game under
our agreement with IGT, which uses IGT's MegaJackpots wide-area progressive
operating system and gaming platform. By June 30, 2002, two wide-area
progressive links were established: Nevada and Native American. The game will be
distributed on a wide-area link in other jurisdictions as well as on a
stand-alone participation basis in those jurisdictions in which achieving a
critical mass of games on a wide-area link is unlikely. Approvals in all major
North American gaming jurisdictions are expected to be received by December
2002.

In May 2002, we introduced PAC-MAN as a new series of branded participation
games at four Park Place Entertainment, Inc. properties in Atlantic City. Park
Place has a limited exclusivity period for PAC-MAN participation games in all
jurisdictions in which Park Place operates. We have received additional
regulatory approvals to introduce the product in other jurisdictions with the
remaining regulatory approvals anticipated following the upgrade of our
operating system software. We expect to install this game in most of remaining
jurisdictions during the September and December 2002 quarters and expect to
release a new version of PAC-MAN, called MS. PAC-MAN, in the March 2003 quarter.

Effective March 1, 2002, we issued a restricted stock grant of 250,000
shares of our common stock held in treasury to Mr. Louis J. Nicastro, our
Chairman of the Board of Directors and a non-employee director. This grant was
issued in consideration for his agreeing to serve as Chairman of the Executive
Committee of the Board Directors, which was established to provide enhanced
oversight of the timely completion of our technology improvement plan. The
restricted stock grant vests on June 30, 2003, subject to the Board of
Directors' satisfaction of the fulfillment of specified performance conditions
relating to the Company's technology improvement plan. The tax effected market
value of the restricted stock grant at the date of the grant is recorded as
unearned restricted stock as a separate component of stockholders' equity and
adjusted to current market value as of the balance sheet date. Under terms of
the grant, the shares vest upon death, disability or change in control. When it
becomes probable that fulfillment of the performance conditions will be met, the
market value of the restricted stock at that time will be recorded as
compensation expense.

CRITICAL ACCOUNTING POLICIES

We value inventory based on estimates of potentially excess and obsolete
inventory after considering forecasted demand and forecasted average selling
prices. However, forecasts are subject to revisions, cancellations and
rescheduling. In fiscal 2004, we expect to introduce a new gaming platform,
which will likely accelerate the obsolescence of existing product lines. In
addition, demand for parts inventory is subject to technical obsolescence.
Inventory on hand in excess of forecasted demand is written down to market
value.

28

Actual demand may differ from anticipated demand, and such differences may have
a material effect on the financial statements.

We depreciate our participation gaming devices and top boxes for
participation games over a two-year useful life to a small salvage value. A
material impact could occur if the actual useful life of the participation
gaming devices or top boxes is less than what was used in estimating
depreciation expense, or if actual salvage value is less than the anticipated
salvage value.

We license intellectual property from third parties for certain of our
gaming machines. As part of our contracts with the licensors, we typically
provide a guaranteed minimum royalty and prepayment of royalties, usually at the
time the contract is signed even though the product may not be introduced until
months or years later. We capitalize the prepaid royalty as other assets. At
June 30, 2002, the minimum guaranteed royalty payments totaled $16.4 million of
which $12.4 million has been paid and the balance is payable over various
periods up to five years. In addition, the contracts provide for an additional
$13.2 million of contingent royalty payments based upon future events occurring.
Total prepaid royalties at June 30, 2002 were $11.6 million of which $6.2
million is in other current assets and $5.4 million is in other assets.
Subsequent to June 30, 2002, we entered into new license and distribution
agreements with guaranteed minimum royalties of $6.9 million, contingent royalty
payments of an additional $12.6 million and paid advanced royalty payments of
$3.5 million. We amortize prepaid royalties when the product is introduced,
based upon contractual terms of the license agreements or the term of the
license as revenue is earned. If we determine that the products we develop will
not fully recover the guaranteed minimum amounts, we would record an immediate
charge against earnings once such determination is made.

As part of our technology improvement plan discussed above, we have pursued
alternative strategies for each phase of the plan, including licensing
technologies from third parties. At June 30, 2002, our minimum guaranteed
payments related to the technology alternatives totaled $3.0 million, which had
been paid as advances with an additional $8.0 million of contingent royalty
payments based on future events, and such amounts are included in the amounts
described above. In July 2002, we entered into another licensed technology
agreement with an additional minimum guarantee of $0.8 million, contingent
royalty payments of an additional $4.5 million and paid advance royalty payments
of $0.8 million and such amounts are included in the amounts described above as
subsequent to June 30, 2002. If we determine that we will not realize the value
of the guaranteed commitment for a particular licensed technology alternative,
we will record an immediate charge against earnings at the time of such
determination of up to $16.3 million if all of the alternatives were to have no
further value to us.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to all legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and normal operation of a long-lived
asset. This statement is effective for our 2003 fiscal year. We expect that
adopting SFAS No. 143 will not have a material impact on our financial position
or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This statement requires that the
same accounting model be used to recognize an impairment loss for long-lived
assets, whether they are to be held and used, disposed of by sale, or disposed
of other than by sale. This would apply to both previously held and used or
newly acquired assets. It also broadens the presentation of discontinued
operations to include more disposal transactions. This statement is effective
for our 2003 fiscal year. We expect that adopting SFAS No. 144 will not have a
material impact on our financial position or results of operations.
29

LIQUIDITY AND CAPITAL RESOURCES

We believe that cash and cash equivalents and short-term investments of
$104.3 million at June 30, 2002, exclusive of $1.3 million of restricted cash,
along with our $50.0 million bank revolving line of credit that extends to May
21, 2003, and cash flow from operations will be adequate to fund our anticipated
level of capital expenditures, cash to be invested in participation games,
working capital required in the operation of our business, and increased
research and development spending.

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 have dividend reset dates every 49
days or more. These investments can be liquidated under an auction process on
the dividend reset dates subject to a sufficient number of bids being submitted.
Our policy is to invest cash with issuers that have a high credit rating and to
limit the amount of credit exposure to any one issuer.

We expect that, to implement our technology improvement plan, our
expenditures on research and development over the next year will increase over
fiscal 2002 levels due to increased head counts and associated expenses. We
expect to add over 50 engineers and support staff for this effort, along with
additional game development staff to increase the number of game themes we
commercialize. We intend to maintain an increased level of research and
development expenditures over the long-term in order to execute our plan of
broadening our product line and developing our next-generation operating system.

We are not dependent on off-balance sheet financing arrangements to fund
our operations. We utilize financing arrangements for operating leases of
facilities and equipment and for minimum guaranteed royalty payments as follows:

We do not have any special-purpose entities for investment or the conduct
of our operations. We do have an agreement with IGT for the operation of a
wide-area progressive system. The purpose of this agreement is to combine our
licensing rights and game design expertise with IGT's wide-area progressive
system. Under this agreement, we record in our consolidated financial statements
our proportionate share of revenues and costs from operating activities, and the
full value of assets we own and liabilities we incur in connection with this
arrangement.

We have not entered into any derivative financial instruments. We do have a
restricted stock grant and stock options granted to employees, members of our
Board of Directors and consultants. We do not currently have any significant
firm purchase commitments for raw material inventory.

Cash provided by continuing operating activities before changes in
operating assets and liabilities was $34.2 million for fiscal 2002, as compared
to cash provided of $58.7 million for fiscal 2001. The decrease was due to $26.5
million of decreased net income and $6.8 million of lower tax benefits from the
exercise of common stock options in the current fiscal year, partially offset by
$5.4 million of greater depreciation and amortization.

The changes in operating assets and liabilities resulted in $27.2 million
of cash inflow for fiscal 2002, compared with a cash outflow of $34.7 million
during the prior fiscal year. Cash inflow for fiscal 2002 was primarily due to a
decrease in receivables, as a result of lower sales, and inventories, partially
offset by an increase in other current assets. The decrease in receivables and
inventories is due to a reduced level of overall business and our efforts to
reduce inventory levels. The cash outflow for fiscal 2001 was primarily due to
an increase in receivables, inventories, current refundable taxes, and other
assets, and a decrease in current

30

liabilities due to payments of liabilities of discontinued operations from
comparable balances at June 30, 2000, partially offset by a smaller increase in
accounts receivable.

Cash used by investing activities was $36.5 million for fiscal 2002,
compared with cash used of $37.7 million for fiscal 2001. Cash used for the
purchase of property, plant and equipment for fiscal 2002 was $16.3 million,
compared with $8.1 million for fiscal 2001. This increase resulted from the
final phases of improvements made to our Waukegan, Illinois headquarters and
manufacturing facility and the renovation and conversion of our Chicago facility
from a manufacturing facility to a technology campus. Cash used for additions to
participation games was $18.5 million and $18.8 million for fiscal 2002 and
2001, respectively. The increase in installed games was 1,901 units in fiscal
2001, and 305 units in fiscal 2002. The participation game expenditures in
fiscal 2002 reflect the relatively greater number of top box conversions and
higher component costs. We used $2.5 million of cash in fiscal 2002 for the
acquisition of Big Foot Software, which is engaged in the design and development
of our proprietary wide-area progressive system. We also received $2.3 million
of cash on the sale of land and a building to Midway Games Inc. which they had
previously been renting from us. Net cash of $1.4 million was used for the
purchase of short-term investments for fiscal 2002, compared to $10.7 million in
fiscal 2001.

Cash provided by financing activities, which was from the exercise of
common stock options, was $1.2 million for fiscal 2002 compared with $7.4
million for the prior fiscal year due to a lower number of option exercises. In
January 2002, our Board of Directors authorized a twelve-month, $20 million
common stock repurchase program. This allowed us to purchase our stock from time
to time in open market or privately negotiated transactions. During the year
ended June 30, 2002, we repurchased 545,500 shares for an aggregate price of
$8.6 million. By July 31, 2002, we had completed our $20 million repurchase
program purchasing a total of 1,568,000 shares or approximately 5% of
outstanding shares, at an average price of $12.75 per share. In September 2002,
our Board of Directors authorized an expansion of the stock repurchase program
by $10 million for the next twelve months.

RESULTS OF OPERATIONS

Fiscal 2002 Compared with Fiscal 2001

Consolidated revenues decreased 33.8% to $174.7 million in fiscal 2002 from
$263.8 million in fiscal 2001. Total revenue decreased $89.1 million: $98.0
million from decreased product sales partially offset by an $8.9 million
increase in participation game revenue. We shipped 6,916 video and mechanical
reel type gaming devices in the current fiscal year, resulting in product and
parts sales of $75.6 million versus 19,070 gaming devices shipped and $173.6
million of product and parts sales in the prior fiscal year. Gaming device sales
were lower due to our inability to sell into certain jurisdictions until the
summer of 2002 upgrade of our operating system software was approved. The
average sales price increased from $8,355 in the prior fiscal year to $8,419 in
the current fiscal year, primarily due to a change in our mix of products sold.

The increase in participation game revenue was due to an increase in the
installed base of participation games to a total of 6,162 units installed at
June 30, 2002, compared to 5,857 units installed at June 30, 2001. The installed
base increased due to the introduction of three new series of participation
games: HOLLYWOOD SQUARES, PAC-MAN, and SURVIVOR. Average net win per day per
machine decreased from $43.76 in fiscal 2001 to $40.05 in the current fiscal
year. This decrease resulted primarily from the lack of approvals for new game
titles to refresh the installed base of MONOPOLY and Puzzle Pays participation
games as regulators awaited approval of the summer of 2002 upgrade of our
operating system software. The back orders for our participation games stood at
over 1,000 units as of June 30, 2002.

Consolidated gross profit in fiscal 2002 decreased 29.4% to $109.6 million
from $155.2 million in fiscal 2001. The gross margin percentage increased from
58.9% in fiscal 2001 to 62.7% in fiscal 2002. The increase in the gross margin
percentage resulted from the impact of higher margin participation game revenues
being 56.7% of total revenue in fiscal 2002 versus 34.2% of total revenues in
fiscal 2001. The gross margin on product sales decreased from 44.8% in fiscal
2001 to 33.8% in fiscal 2002 due to lower overall sales of products. The gross
profit margin on participation game revenues decreased slightly from 85.8% in
fiscal 2001 to 84.8% in

31

fiscal 2002 due to higher replacement part and conversion costs on fully
depreciated machines still in service and the lower average net revenue per day
per machine.

Research and development expenses increased $9.6 million, or 58.0%, in the
current fiscal year to $26.0 million from $16.4 million in fiscal 2001 as we
continued to invest in people and technologies to develop new games, product
platforms and operating systems, to execute on our three part technology
improvement plan, and to pursue our business strategy to become a full service
gaming device provider to our customers. The increase was primarily due to
higher engineering expenditures and increased headcount, and included costs to
adapt our games for distribution to international markets. We anticipate that
higher staffing levels will allow us to increase the number of new games we
introduce in the coming years. During fiscal 2002, we introduced five new games
for sale and four new participation games.

Selling and administrative expenses decreased 35.0% from $72.4 million in
fiscal 2001 to $47.1 million in the current fiscal year. The fiscal 2001 amount
includes a $20.3 million pre-tax charge for an executive buyout agreement.
Excluding this nonrecurring charge and the $0.7 million charge in the December
2001 quarter to effect a reduction in force, selling and administration expenses
decreased 11.0% due to our effort to manage controllable expenses and the
headcount reductions.

Corporate relocation expenses of $3.7 million, or $0.07 per diluted share
after tax, in fiscal 2001 represents costs associated with the relocation and
centralization of our corporate headquarters, manufacturing, Chicago regional
distribution and warehousing facilities to Waukegan, Illinois.

Depreciation and amortization increased during the current fiscal year to
$23.9 million from $18.5 million in the prior fiscal year due to the increased
average installed base of participation games and higher top box costs. The
average installed base was 5,790 units for fiscal 2002 compared to 4,850 units
for fiscal 2001. The 29.2% increase in depreciation expense reflects the 19.4%
increase in the average installed base of participation games and more expensive
top box costs, partially offset by a reduction in depreciation on those
participation games originally installed in fiscal 1999 and 2000 that have been
depreciated to estimated salvage value.

Operating income was $12.6 million in the current fiscal year, compared to
$44.2 million in the prior fiscal year. The financial results of the prior
fiscal year reflect the pre-tax charge of $20.3 million from the costs
associated with an executive buyout agreement and $3.7 million of costs
associated with our relocation to Waukegan, Illinois, while the financial
results for fiscal 2002 reflect lower gross profits coupled with $1.3 million of
employee separation costs, higher research and development costs related to new
products and the three part technology improvement plan, as well as higher
depreciation costs related to participation games.

The provision for income taxes on continuing operations decreased to $5.6
million in the current fiscal year from $18.1 million in the prior fiscal year.
The decrease was due to lower pre-tax income in the current fiscal year. The
effective tax rate was 36.2% in fiscal 2002, compared to 36.1% in fiscal 2001.
This effective rate reflects the beneficial tax treatment of foreign sourced
income, dividend investment income and tax credits.

Income from continuing operations was $9.9 million, or $0.30 per diluted
share, in the current fiscal year, compared to $31.9 million, or $1.00 per
diluted share, in the prior fiscal year.

Net income, which includes continuing operations and discontinued
operations was $9.9 million in fiscal 2002, or $0.30 per diluted share, compared
to $36.3 million, or $1.13 per diluted share in fiscal 2001.

Fiscal 2001 Compared with Fiscal 2000

Consolidated revenues increased 21.2% to $263.8 million in fiscal 2001 from
$217.6 million in fiscal 2000. Total revenue increased $46.1 million: $23.5
million from increased product sales and $22.6 million from increased
participation game revenue. We shipped 19,070 video and mechanical reel type
gaming devices in fiscal 2001, resulting in product and parts sales of $173.6
million versus 17,789 gaming devices shipped and $150.0 million of product and
parts sales in fiscal 2000 due to the continued market acceptance of new themes,
the impact of the opening of the California market and the launch of product
sales outside of North America, partially offset by a decline in new casino
openings from the prior fiscal year. In addition, the average sales

32

price increased from $7,904 in the prior fiscal year to $8,355 in fiscal 2001
primarily due to a price increase implemented in August 2000 and a change in
sales mix to higher priced products.

The increase in participation game revenue was due to an increase in the
installed base of participation games to a total of 5,857 units installed at
June 30, 2001, compared to 3,956 units installed at June 30, 2000. The installed
base increased due to continued growth in MONOPOLY games and the introduction of
our second series of participation games in fiscal 2001 with JUMBLE and SCRABBLE
brand games as the first games in the Puzzle Pays series. We introduced Money
Grab, the eighth version of our MONOPOLY product, in February 2001. Average net
win per day per machine decreased from $47.32 in fiscal 2000 to $43.76 in fiscal
2001. This decrease resulted primarily from the higher mix of games in lower net
win jurisdictions in fiscal 2001. The backlog for our participation games stood
at over 550 units as of June 30, 2001.

Consolidated gross profit in fiscal 2001 rose 28.2% to $155.2 million from
$121.1 million in fiscal 2000. The gross margin percentage increased from 55.6%
in fiscal 2000 to 58.9% in fiscal 2001. The increase in gross margin percentage
resulted from higher gross profit margins on product sales and the impact of
higher margin participation game revenues being a slightly higher portion of
total revenues. The gross margin on gaming product sales increased from 41.2% in
fiscal 2000 fiscal year to 44.8% in fiscal 2001 due to the increase in average
sales price and the mix of products to higher margin products, including higher
game conversion revenues, coupled with realizing benefits from consolidating
manufacturing, warehousing and distribution operations in Waukegan, Illinois in
December 2000. The gross profit margin on participation game revenues decreased
slightly from 87.7% in fiscal 2000 to 85.8% in fiscal 2001 due to higher
replacement part costs on fully depreciated machines still in service and the
lower average net revenue per day per machine.

Research and development expenses increased $4.7 million, or 41.0%, in
fiscal 2001 to $16.4 million from $11.7 million in fiscal 2000 as we continued
to invest in people and technologies to develop new games, product platforms and
operating systems. The increase was primarily due to higher engineering
expenditures and increased headcount, and included costs to adapt our games for
distribution to international markets. During fiscal 2001, we introduced five
new games for sale and four new participation games, including SCRABBLE and our
latest version of MONOPOLY, Money Grab.

Selling and administrative expenses increased 69.5% from $42.7 million in
fiscal 2000 to $72.4 million in fiscal 2001. The fiscal 2001 amount includes a
$20.3 million pre-tax charge for an executive buyout agreement. Excluding this
nonrecurring charge, selling and administration expenses increased 22.1%, as we
increased our cost structure to support our 21.2% revenue growth.

Corporate relocation expenses of $3.7 million, or $0.07 per diluted share
after tax, in fiscal 2001 represent costs associated with the relocation and
centralization of our corporate headquarters, manufacturing, Chicago regional
distribution and warehousing facilities to Waukegan, Illinois.

Depreciation and amortization increased during fiscal 2001 to $18.5 million
from $14.3 million in fiscal 2001 due primarily to the increase in the installed
base of participation games. The average installed base was 4,850 units for
fiscal 2001, compared to 3,414 units for fiscal 2000. The 28.9% increase in
depreciation and amortization expense reflects the 42.1% increase in the average
installed base of participation games partially offset by a reduction in
depreciation on those participation games originally installed in fiscal 1999
that have been depreciated to estimated salvage value.

Operating income was $44.2 million in fiscal 2001, compared to $68.0
million in fiscal 2000. The financial results of fiscal 2001 reflect the pre-tax
charge of $20.3 million from the costs associated with an executive buyout
agreement and $3.7 million of costs associated with our relocation to Waukegan,
Illinois, while the financial results for fiscal 2000 include a $15.6 million
gain from reversal of an excess accrual due to settlement of patent litigation.
Excluding these items, operating income increased 30.2% from $52.4 million in
fiscal 2000 to $68.1 million in fiscal 2001 as revenue and gross profit
increases were partially offset by higher research and development, selling and
administrative and depreciation and amortization expenses.

The provision for income taxes on continuing operations decreased to $18.1
million in fiscal 2001 from $27.0 million in fiscal 2000. The decrease was due
to lower pre-tax income and a lower effective tax rate in fiscal 2001. The
effective tax rate was 36.1% in fiscal 2001, compared to 37.8% in fiscal 2000.
This lower
33

effective rate reflects the beneficial tax treatment of foreign sourced income,
dividend investment income and higher tax credits in fiscal 2001.

Income from continuing operations was $31.9 million, or $1.00 per diluted
share, in fiscal 2001, compared to $44.4 million, or $1.42 per diluted share, in
fiscal 2000. The financial results of fiscal 2001 reflect the after-tax charges
of $13.0 million, or $0.40 per diluted share, from the costs associated with an
executive buyout agreement and $2.3 million, or $0.07 per diluted share, for
costs associated with our relocation to Waukegan, Illinois, while the financial
results for fiscal 2000 include a one-time after-tax gain of $9.7 million, or
$0.31 per diluted share, from the reversal of the excess accrual related to the
settlement of patent litigation. Excluding these items, income from continuing
operations increased 36.2% from $34.7 million, or $1.11 per diluted share, in
fiscal 2000 to $47.2 million, or $1.47 per diluted share, in fiscal 2001 as
revenue and gross profit increases were partially offset by higher research and
development, selling and administrative and depreciation and amortization
expenses.

Net income, which includes continuing operations and discontinued
operations, was $36.3 million, or $1.13 per diluted share, for fiscal 2001,
compared to $29.8 million, or $0.95 per diluted share, for fiscal 2000.

IMPACT OF INFLATION

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

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

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

None.

34

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this item is incorporated by reference from our
definitive proxy statement to be filed on or about September 25, 2002 with the
Securities and Exchange Commission ("SEC").

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference from our
definitive proxy statement to be filed on or about September 25, 2002 with the
SEC.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The information required by this item is incorporated by reference from our
definitive proxy statement to be filed on or about September 25, 2002 with the
SEC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference from our
definitive proxy statement to be filed on or about September 25, 2002 with the
SEC.

ITEM 14. CONTROLS AND PROCEDURES.

Not Applicable.

35

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

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

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

(3) Exhibits.

(b) Reports on Form 8-K.

We did not file any reports on Form 8-K in the quarter ended June 30,
2002.

38

INDEX TO FINANCIAL INFORMATION

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

F-1

REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors
WMS Industries Inc.

We have audited the accompanying consolidated balance sheets of WMS
Industries Inc. and subsidiaries as of June 30, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for each of the three years in the period ended June 30, 2002.
Our audits also included the financial statement schedule listed in the Index on
page F-1. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and related schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WMS Industries Inc. and subsidiaries at June 30, 2002 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

/s/ ERNST & YOUNG LLP

Chicago, Illinois
August 7, 2002

F-2

WMS INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See notes to consolidated financial statements.

F-3

WMS INDUSTRIES INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See notes to consolidated financial statements.
F-4

WMS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See notes to consolidated financial statements.
F-5

WMS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements.
F-6

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BUSINESS OVERVIEW

WMS Industries Inc. ("WMS") is engaged in one business segment: the design,
manufacture and marketing of slot machines (video and mechanical reel type) and
video lottery terminals and the operation of participation gaming machines. WMS
principally serves the casino gaming industry in the United States. Since 2000,
however, WMS began expanding its business internationally to serve all
significant legalized gaming jurisdictions worldwide. Although production
remains exclusively in the United States, sales and services offices are located
in Canada, Australia, Spain and South Africa. Sales and participation and lease
revenue from customers in Europe, Canada, Latin America and Asia amounted to
approximately $30.7 million or 17.6%, $21.0 million or 8.0%, and $17.7 million
or 8.1% of total revenues for fiscal years 2002, 2001 and 2000, respectively.
Revenue from outside the United States is denominated in U.S. dollars. At June
30, 2002 and 2001, 19.2% and 5.5%, respectively, of trade accounts receivable
are from sales and participation and lease arrangements to the Company's
customers located outside of the United States.

WMS generates revenues from two sources: 1) the sale of new and used gaming
machines and related parts, conversion kits, and service, and 2) participation
and lease placements, which are arrangements whereby WMS participates in the
revenue or net win from a gaming device on a percentage or flat fee basis.
Participation and lease revenues include wide-area progressive ("WAP") systems,
which are electronically linked systems of gaming devices joined by a central
computer, allowing the system to build a progressive jackpot with every wager
made on the system. The current WAP systems are operated under an agreement with
a WAP system provider whereby the profits of the games on the WAP system are
shared equally.

On October 25, 1999, WMS announced the closing of its pinball and cabinets
segment, and on August 10, 2000, WMS announced the discontinuance of its
contract manufacturing segment with operations ceasing on September 30, 2000.
Accordingly, the financial position, results of operations and cash flows of
these segments have been reported as discontinued operations in the consolidated
financial statements.

NOTE 2: PRINCIPAL ACCOUNTING POLICIES

Consolidation Policy

The consolidated financial statements include the accounts of WMS and its
wholly-owned subsidiaries (the "Company"). All significant intercompany accounts
and transactions have been eliminated. The Company's joint operating agreement,
for which no legal entity exists, is accounted for by WMS in its consolidated
financial statements by recording its proportionate share of revenues and
expenses from operating activities and the full value of all of the assets it
owns and liabilities it owes related to this agreement. The purpose of the joint
operating agreement is to combine WMS' licensing rights and game design
expertise with the proprietary wide-area progressive computer system of another
gaming company. WMS designs and markets the games manufactured by the joint
operating agreement partner who places such games in casinos on its wide-area
progressive system.

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

Use of Estimates

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Such preparation requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.

F-7

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cash and Cash Equivalents

All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents. Cash and cash equivalents
includes restricted cash of $1.3 million required for funding wide-area
progressive systems jackpot payments.

Short-Term Investments

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

Inventories

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

Property, Plant and Equipment and Gaming Machines on Participation or Lease

Property, plant and equipment and gaming machines on participation or lease
are stated at cost and depreciated by the straight-line method over their
estimated useful lives. Significant replacements and improvements are
capitalized. Other maintenance and repairs are expensed.

WMS reviews the carrying amount of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. WMS has made no charges to income
for estimated impairment losses in the years presented related to continuing
operations.

Goodwill and Intangible Assets

The Company adopted Statement of Financial Accounting Standard (SFAS) No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, in the year ended June 30, 2002. SFAS No. 141 requires the purchase
method of accounting for all business combinations initiated after June 30,
2001, and eliminates the pooling-of-interests method. Goodwill, which represents
the excess of purchase price over fair value of net assets acquired, is recorded
under the purchase accounting method as required under SFAS No. 141. SFAS No.
142 changes the accounting for goodwill and indefinite lived intangible assets.
These assets are no longer amortized but are to be reviewed annually, or more
frequently if an event occurs or circumstances change, for indications that the
asset might be impaired. Amortization is still required for identifiable
intangible assets with finite lives, and any change in the lives assigned to
amortizable assets will impact the results of operations.

The application of SFAS No. 142 did not result in any changes to reported
results of operations for the year ended June 30, 2002. WMS did apply SFAS No.
141 to its acquisition of Big Foot Software Development & Research, LLC in July
2001, which resulted in $0.8 million of goodwill being recorded. In addition,
$1.5 million of contingent consideration has been deposited into an escrow
account and its payment is subject to the future fulfillment of specified
conditions in the purchase contract. WMS did not have any recorded goodwill as
of June 30, 2001 or 2000. WMS did not record any impairment charges related to
goodwill for fiscal 2002, 2001 or 2000 as part of continuing operations. In
fiscal 2000, WMS recorded a $1.0 million charge for goodwill impairment related
to its discontinued pinball and cabinets segment.

Included in other assets are royalty and licensing advances made in
connection with licensing agreements for the use of intellectual property. The
royalty and licensing advances will be amortized based on the contractual terms
or the life of the asset once the products are commercialized. At June 30, 2002,

F-8

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$11.6 million of advance payments of royalties are included in the balance
sheet. Estimated amortization expense, which is included in cost of
participation and lease revenue in the income statement, for years ended June
30, 2003, 2004, 2005 and 2006 is $6.2 million, $3.6 million, $1.4 million, and
$0.4 million, respectively. To the extent the products developed do not fully
recover the guaranteed minimum amounts, WMS would record an immediate charge
against earnings at the time of such determination.

Revenue Recognition

Product sales are made for cash, on normal credit terms of 90 days or less,
and over longer term payment plans. Revenue is recognized from product sales
when the title to the product and the risk and rewards of ownership transfer to
the customer. Participation and lease revenue under operating type lease
agreements are recognized when earned. Participation lease agreements are based
on either a pre-determined percentage of the daily net win of each machine or a
fixed daily rental fee. WAP revenues are based upon a predetermined percentage
of amounts wagered ("coin in") on each gaming machine and are recognized as
earned.

Advertising Expense

The cost of advertising is charged to earnings as incurred and for fiscal
2002, 2001 and 2000 was $0.8 million, $0.8 million, and $0.6 million,
respectively.

Research and Development

Research and development costs are expensed as incurred.

Foreign Currency Translation

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

Reconciliation of Numerators and Denominators of the Basic and Diluted
Earnings Per Share from Continuing Operations

F-9

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options to purchase 835,000 shares of common stock were outstanding during
the year ended June 30, 2002, but were not included in the computation of
diluted earnings per share because the option's exercise price was greater than
the average market price of the common shares for the year. The options expire
between 2007 and 2010. The 250,000 shares of unearned restricted stock were also
not included in the computation of diluted earnings per share.

Options to purchase 290,000 shares of common stock were outstanding during
the year ended June 30, 2000 but were not included in the computation of diluted
earnings per share because the option's exercise price was greater than the
average market price of the common shares for the year. The options expire on
June 30, 2010.

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to all legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and normal operation of a long-lived
asset. This statement is effective for our 2003 fiscal year, and early adoption
is permitted. We expect that adopting SFAS No. 143 will not have a material
impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This statement requires that the
same accounting model be used to recognize an impairment loss for long-lived
assets, whether they are to be held and used, disposed of by sale, or disposed
of other than by sale. This would apply to both previously held and used or
newly acquired assets. It also broadens the presentation of discontinued
operations to include more disposal transactions. This statement is effective
for our 2003 fiscal year, and early adoption is permitted. We expect that
adopting SFAS No. 144 will not have a material impact on our financial position
or results of operations.

F-10

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: DISCONTINUED OPERATIONS

As discussed in Note 1, on October 25, 1999, WMS announced the closing of
its pinball and cabinets segment and on August 10, 2000, WMS announced the
discontinuance of its contract manufacturing segment with operations ceasing
effective September 30, 2000. Accordingly, the financial position, results of
operations and cash flows of these businesses have been reported as discontinued
operations in the consolidated financial statements.

In fiscal 2000, the Company recorded a $21.3 million pre-tax loss for the
closing of the pinball and cabinet operations, including cash expenses of $10.1
million, for projected operating losses through the disposal date, severance
pay, and shut down expenses. The loss on disposal included $11.2 million in
non-cash losses for the write-downs of receivables, inventory, plant and
equipment to net realizable value. Tax benefits related to the loss on disposal
were estimated to be $8.1 million.

In fiscal 2001, WMS recorded an after-tax gain of $1.3 million, which
reflects the final adjustments to the Company's fiscal 2000 estimated loss on
the disposal and the related tax expense. In addition, the Company recorded a
tax benefit of $3.1 million related to the write-off for tax purposes of $8.6
million of goodwill associated with the original acquisition of the pinball
business in 1969.

The condensed statement of operations for the pinball and cabinets segment
for the fiscal year ended June 30, 2000 is as follows:

In fiscal 2000, the Company recorded a $2.8 million pre-tax loss for the
closing of its contract manufacturing business, including cash expenses of $1.2
million, for severance pay and shut down expenses. The loss on disposal included
$1.6 million in non-cash losses for write-downs of receivables, inventory, plant
and equipment to net realizable value. Tax benefits related to the loss on
disposal were estimated to be $1.1 million.

The condensed statement of operations for the contract manufacturing
segment for the fiscal year ended June 30, 2000 is as follows:

F-11

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4: PROPERTY, PLANT AND EQUIPMENT AND GAMING MACHINES ON PARTICIPATION OR
LEASE

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

At June 30, net gaming machines on participation or lease were:

The Company reclassified $8.1 million of inventory to gaming machines on
participation or lease for the year ended June 30, 2001.

NOTE 5: OTHER ASSETS

At June 30, other assets were:

F-12

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6: OTHER ACCRUED LIABILITIES

At June 30, other accrued liabilities were:

NOTE 7: INCOME TAXES

The following is a summary of income from continuing operations before
income taxes of U.S. and international operations for the three years ended June
30, 2002:

Significant components of the provision (benefit) for income taxes for the
three years ended June 30, 2002 were:

F-13

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

No deferred tax provision has been made for United States taxes related to
approximately $0.9 million of undistributed earnings of foreign subsidiaries,
which are considered to be permanently reinvested. Determination of the deferred
income tax liability on these unremitted earnings is not practicable because
such liability, if any, is dependent on circumstances existing, if and when the
remittance occurs.

The provision for income taxes on continuing operations differs from the
amount computed using the statutory federal income tax rate for the three years
ended June 30, 2002, 2001 and 2000 as follows:

Taxes paid in the years ended June 30, 2002, 2001, and 2000 were $11.5
million, $20.3 million and $5.9 million, respectively. Refunds received in the
years ended June 30, 2002, 2001 and 2000 were $10.4 million, $1.0 million and
$2.1 million, respectively.

F-14

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: LINE OF CREDIT AND LONG-TERM DEBT

The Company has an unused line of credit for $50.0 million under a
revolving credit agreement for a one-year term to May 21, 2003, which contains
usual credit terms for a bank line. No borrowing occurred on the line in the
years ended June 30, 2002 and 2001.

NOTE 9: STOCKHOLDERS' EQUITY AND COMMON STOCK PLANS

Authorized common stock of the Company consists of 100,000,000 shares of
$.50 par value. At June 30, 2002, 3,823,788 shares of common stock were reserved
for possible issuance under stock option plans. Additionally, there are
5,000,000 shares of $.50 par value preferred stock authorized. The preferred
stock is issuable in series, and the relative rights and preferences and the
number of shares in each series are to be established by the Board of Directors.

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

Under the stock option plans, the Company may grant both incentive stock
options and nonqualified options on shares of common stock through the year
2012. Options may be granted to employees and under certain conditions to
non-employee directors and consultants. The stock option committee has the
authority to fix the terms and conditions upon which each option is granted, but
in no event shall the term exceed ten years or the strike price generally be
granted at less than 100% of the fair market value of the stock on the date of
grant.

WMS utilizes the Black-Scholes pricing model to determine the fair value of
options issued in exchange for services from consultants. During 2002, the
Company incorporated the following assumptions into the model: risk free
rate -- 4%, expected volatility -- .44 and expected dividend-zero. The risk-free
rate is determined based on the interest rate of U.S. Government treasury
obligations with a maturity date comparable to the life of the option issued.
Other assumptions, relating to option life, strike price and stock price, are
determined at the date the option is issued. The expense recognized is based on
the vesting schedule of the options granted. During fiscal 2002, WMS expensed
$0.3 million for the value of common stock options issued for services from
consultants.

On September 30, 1997, the Company entered into an agreement with each of
the holders of all of the common stock options then outstanding, which were
exercisable into 4,089,011 shares of WMS common stock, regarding an option
adjustment in connection with the Midway spin-off, to compensate the holders for
the lost opportunity value represented by the shares of Midway distributed in
the spin-off which option holders did not participate in. Expense related to the
adjustment of stock options that were not vested as of June 30, 1998 was
recorded and paid consistent with the options' vesting schedule. During fiscal
2001 and 2000, $0.2 million and $2.0 million of such expense was recorded,
respectively. As of June 30, 2001, all obligations under this agreement had been
paid.

In January 2002, the Board of Directors approved a twelve-month plan to
repurchase up to $20 million of the Company's common stock in open market or
privately negotiated transactions. As of June 30, 2002, the repurchases under
this plan were 545,500 shares at a cost of $8.6 million. In July 2002, the
Company completed its repurchase plan with an aggregate of 1,568,000 shares
repurchased or 5% of the amount previously outstanding. In September 2002, the
Board of Directors authorized an expansion of the stock repurchase program by
$10 million for the next twelve months.
F-15

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective March 1, 2002, WMS issued a restricted stock grant of 250,000
shares of the Company's common stock held in treasury to Mr. Louis J. Nicastro,
our Chairman of the Board of Directors and a non-employee director. This grant
was issued in consideration for his agreeing to serve as Chairman of the
Executive Committee of the Board of Directors, which was established to provide
enhanced oversight of the timely completion of the technology improvement plan.
The restricted stock grant vests on June 30, 2003, subject to the Board of
Directors' satisfaction of the fulfillment of specified performance conditions
relating to the Company's technology improvement plan. The tax effected market
value of the restricted stock grant at the date of the grant is recorded as
unearned restricted stock as a separate component of stockholders' equity and
adjusted to current market value as of the balance sheet date. Under terms of
the grant, the shares vest upon death, disability or change in control. When it
becomes probable that fulfillment of the performance conditions will be met, the
market value of the restricted stock at that time will be recorded as
compensation expense.

A summary of the status of the Company's stock option plans for the three
years ended June 30, 2002 was as follows:

The following table summarizes information about stock options outstanding
at June 30, 2002:

F-16

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At June 30, 2002, 430,000 shares were available for future grants under the
plans. At June 30, 2001, 476,000 options with a weighted average exercise price
of $7.51 per share were exercisable. At June 30, 2000, 1,386,000 options with a
weighted average exercise price of $5.38 per share were exercisable.

The Company has a Treasury Share Bonus Plan for key employees covering all
the shares of common stock held in the treasury. The vesting and other terms of
the awards are flexible. No awards of treasury stock were outstanding under this
plan at June 30, 2002 or 2001.

The Company has 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. Under APB No. 25, the Company does not recognize compensation expense upon
the issuance of its stock options because the option terms are fixed and the
exercise price equals the market price of the underlying stock on the grant
date.

The pro forma net income impact of the options, accounted for under SFAS
No. 123 amortizing the fair value of the granted options over their vesting
period, is as follows:

The pro forma fair value of each option grant is estimated on the date of
grant or modification using the Black-Scholes option pricing model with the
following weighted average assumptions used for modifications and grants in
fiscal 2002, 2001 and 2000: dividend yield 0% for all three years; expected
volatility of .44 in fiscal 2002, .60 in fiscal 2001 and .75 in fiscal 2000;
risk free interest rates of 4.00% in 2002, 5.00% in 2001 and 6.00% in 2000; and
expected life of the options of 6 years for all three years. The weighted
average pro forma fair value, using the Black-Scholes assumptions noted above,
of the options granted during fiscal 2002, 2001 and 2000 was $8.04, $11.25 and
$6.75, respectively.

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

Financial instruments which potentially subject the Company to
concentrations of credit and market risk consist primarily of cash equivalents,
short-term investments and trade notes and accounts receivable. By policy, the
Company places its cash equivalents and short-term investments only in high
credit quality securities and limits the amounts invested in any one security.
The accounts and notes receivable from the sale of gaming devices are generally
from a large number of customers with no significant concentration other than in
Nevada.

In fiscal year 2000, one domestic customer accounted for approximately
10.3% of consolidated sales. No customers accounted for more than 10% in fiscal
years 2002 and 2001.

The amount reported for cash equivalents and short-term investments is
considered to be a reasonable estimate of their fair value.

F-17

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11: COMMITMENTS AND CONTINGENCIES

The Company leases certain of its office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 2002 as follows:

Rent expense for fiscal 2002, 2001 and 2000 was $1.7 million, $1.7 million
and $1.3 million, respectively.

WMS routinely enters into license agreements with others for the use of
intellectual properties in its products. At June 30, 2002, these agreements
contain total potential commitments of $29.6 million: $16.4 million of
guaranteed minimum royalties and $13.2 million of royalties contingent upon
future events. Total advances and payments through June 30, 2002 were $12.4
million leaving $4.0 million of guaranteed minimums to be paid. At June 30,
2002, $11.6 million of advance payments on royalties are included in the balance
sheet: $6.2 million as other current assets and $5.4 million as long-term other
assets. At June 30, 2002, WMS has potential payments as follows:

Subsequent to June 30, 2002, the Company entered into new license and
distribution agreements with guaranteed minimum royalties of $6.9 million,
contingent royalty payments of an additional $12.6 million and paid advanced
royalty payments of $3.5 million.

The Company announced a three part technology improvement plan in January
2002 to stabilize the operating system software in its gaming devices. As part
of this technology improvement plan, the Company has pursued alternative
strategies for each phase of the plan, including licensing technologies from
third parties. At June 30, 2002, the Company had minimum guaranteed payments
related to the technology alternatives aggregating $3.0 million, which had been
paid as advances, with an additional $8.0 million of contingent royalty payments
based on future events, and these amounts are included in the table above. In
July 2002, the Company entered into another licensed technology agreement with
an additional minimum guarantee of $0.8 million, contingent royalty payments of
an additional $4.5 million and paid advance royalty payments of $0.8 million and
these amounts are included in the amounts described above as subsequent to June
30, 2002. If the Company determines that it will not realize the value of the
guaranteed commitment for

F-18

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a particular licensed technology alternative, it will record an immediate charge
against earnings at the time of such determination of up to $16.3 million if all
of the alternatives were to have no further value to the Company.

NOTE 12: RETIREMENT PLANS

The Company sponsors 401(k) defined contribution plans within the United
States. The plans cover full time employees and provide for Company
contributions of up to 3 percent of covered employees' compensation as defined
in the plan. The Company's expense for the defined contribution plans totaled
$0.6 million, $0.4 million and $0.4 million in fiscal years 2002, 2001 and 2000,
respectively.

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

NOTE 13: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial information for fiscal 2002 and 2001 is as
follows:

The December 2001 quarter includes an after-tax charge of $0.8 million,
$0.03 per diluted share, for employee separation costs.

F-19

WMS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The September 30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001
quarters include an after-tax charge of $0.3 million, $0.01 per diluted share,
$1.6 million, $0.04 per diluted share, $0.2 million, $0.01 per diluted share and
$0.2 million, $0.01 per diluted share, respectively, for the relocation of
manufacturing operations and corporate headquarters during the fiscal year. The
December 31, 2000 and June 30, 2001 quarters include after-tax earnings of $1.6
million, $0.05 per diluted share, and $2.8 million, $0.09 per diluted share,
respectively, for the final adjustments related to the discontinued pinball and
cabinet business. The June 30, 2001 quarter includes an after-tax charge of
$13.0 million, $0.40 per diluted share, for an executive buyout agreement.

F-20

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2002, 2001 AND 2000

- -------------------------
(1) Restated for effect of discontinued operations.

F-21

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
20th day of September, 2002.

WMS INDUSTRIES INC.

By: /s/ BRIAN R. GAMACHE
------------------------------------
Brian R. Gamache
President & Chief Executive Officer

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

CERTIFICATIONS

I, Brian R. Gamache, Chief Executive Officer of WMS Industries Inc., certify
that:

1. I have reviewed this annual report on Form 10-K of WMS Industries Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

Date: September 20, 2002

/s/ BRIAN R. GAMACHE
--------------------------------------
Brian R. Gamache
President and Chief Executive Officer

I, Scott D. Schweinfurth, Chief Financial Officer of WMS Industries Inc.,
certify that:

1. I have reviewed this annual report on Form 10-K of WMS Industries Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

Date: September 20, 2002

/s/ SCOTT D. SCHWEINFURTH
--------------------------------------
Scott D. Schweinfurth
Executive Vice President,
Chief Financial Officer and Treasurer

EXHIBIT INDEX