10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2003

Commission file number: 1-8300

WMS INDUSTRIES INC.

(Exact Name of Registrant as Specified in Its Charter)

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

800 South Northpoint Blvd., Waukegan, IL 60085

(Address of Principal Executive Offices) (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  [X]    NO [   ]

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

YES  [X]    NO [   ]

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

TABLE OF CONTENTS

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

WMS INDUSTRIES INC.

INDEX

			Page
			Number
PART I. FINANCIAL INFORMATION:
	ITEM 1. Financial Statements:
		Condensed Consolidated Statements of Operations - Three months and six months ended December 31, 2003 and 2002		3
		Condensed Consolidated Balance Sheets - December 31, 2003 and June 30, 2003		4
		Condensed Consolidated Statements of Cash Flows - Six months ended December 31, 2003 and 2002		6
		Notes to Condensed Consolidated Financial Statements		7
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			23
	ITEM 4. Controls and Procedures			23
PART II. OTHER INFORMATION:
	ITEM 4. Submission of Matters to a Vote of Security Holders			24
	ITEM 6. Exhibits and Reports on Form 8-K			24
SIGNATURES				26

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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

See notes to condensed consolidated financial statements.

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WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

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

See notes to condensed consolidated financial statements.

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WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

		December 31,			June 30,
		2003			2003
		(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	14,345		$	10,717
	Accrued compensation and related benefits		3,336			3,065
	Other accrued liabilities		14,847			16,009
	Total current liabilities		32,528			29,791
2.75% Convertible subordinated notes due 2010			115,000			100,000
Commitments and contingencies (See note 8 and 9)
Stockholders’ equity:
	Preferred stock (5,000,000 shares authorized, none issued)		—			—
	Common stock (100,000,000 shares authorized and 32,358,315 shares issued)		16,179			16,179
	Additional paid-in capital		202,909			197,009
	Retained earnings		41,713			43,958
	Accumulated other comprehensive income		1,292			1,107
	Unearned restricted stock (29,912 shares)		(491	)		(298	)
	Treasury stock, at cost (2,546,706 shares and 2,882,995 shares, respectively)		(33,437	)		(36,770	)
	Total stockholders’ equity		228,165			221,185
Total liabilities and stockholders’ equity		$	375,693		$	350,976

See notes to condensed consolidated financial statements.

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WMS INDUSTRIES INC.

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

		Six Months Ended
		December 31,
		2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(2,245	)	$	(1,177	)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
	Depreciation and amortization		12,414			14,045
	Receivables provision		185			10
	Deferred income taxes		(1,349	)		(1,971	)
	Non-cash expenses		575			992
	Tax benefit from exercise of stock options		3,710			120
	Non-cash write off of licensed technology		—			2,750
	Decrease from changes in operating assets and liabilities		(30,934	)		(4,600	)
Net cash (used) provided by operating activities			(17,644	)		10,169
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment			(6,021	)		(5,686	)
Additions to gaming operations machines			(6,476	)		(12,676	)
Net change in short-term investments			2,653			8,518
Net cash used by investing activities			(9,844	)		(9,844	)
CASH FLOWS FROM FINANCING ACTIVITIES
Gross proceeds from the issuance of convertible notes			15,000			—
Debt issuance costs			(743	)		—
Cash received on exercise of common stock options			6,023			195
Purchase of treasury stock			(5,009	)		(13,464	)
Net cash provided (used) by financing activities			15,271			(13,269	)
EFFECT OF EXCHANGE RATES ON CASH			185			754
Decrease in cash and cash equivalents			(12,032	)		(12,190	)
Cash and cash equivalents at beginning of period			99,640			31,421
Cash and cash equivalents at end of period		$	87,608		$	19,231

See notes to condensed consolidated financial statements.

6

WMS INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.	FINANCIAL STATEMENTS
	The accompanying unaudited condensed consolidated financial statements of WMS Industries Inc., (“WMS”, “we”, “us” or “the Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included.
	Sales of our gaming machines to casinos are generally strongest in the spring and slowest in the summer months. In addition, quarterly revenues and net income may increase when we receive a larger number of approvals for new games from regulators than in other quarters, when a game that achieves significant player appeal is introduced or if gaming is permitted in a significant new jurisdiction. Operating results for the quarter ended December 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2003.
2.	BASIS OF PRESENTATION
	Our condensed consolidated financial statements include the accounts of WMS and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. We account for our joint operating agreement with International Game Technology (IGT) for the SURVIVOR™ wide-area progressive (WAP) systems, for which no legal entity exists, in our consolidated financial statements by recording our proportionate share of revenues and expenses from operating activities and the full value of all of the assets we own and liabilities we owe related to this agreement. The purpose of the joint operating agreement is to combine our licensing rights and game design expertise with the proprietary WAP system of IGT. Under the agreement, we designed and marketed specified games, which were manufactured by IGT and placed in casinos on IGT’s WAP system. In January 2004, the remaining SURVIVOR WAP was shut down.
	Certain prior period balances have been reclassified to conform to the current period presentation.
3.	STOCK OPTION COMPENSATION AND EARNINGS (LOSS) PER SHARE
	We have elected to continue to follow APB Opinion No. 25 to account for stock options granted to employees and directors, as allowed by SFAS No. 123, “Accounting for Stock Based Compensation.” Under APB No. 25, we do not recognize compensation expense because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date.
	The following table presents a comparison of the reported net loss, loss per share and compensation cost of options granted to employees to the pro forma amounts that would have been reported if stock option compensation expense had been determined using the fair value method allowed by SFAS No. 123 (in thousands of dollars, except per share amounts):

				Three Months Ended						Six Months Ended
				December 31,						December 31,
				2003			2002			2003			2002
As Reported:
	Net loss			$	(370	)	$	(1,837	)	$	(2,245	)	$	(1,177	)
		Loss per share:
			Basic	$	(0.01	)	$	(0.06	)	$	(0.08	)	$	(0.04	)
			Diluted	$	(0.01	)	$	(0.06	)	$	(0.08	)	$	(0.04	)
Stock based employee compensation cost, net of related tax effects, included in the determination of net loss				$	—		$	—		$	—		$	—

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

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

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

At December 31, 2003 and 2002, the Company had approximately 3,761,000 and 3,405,000 stock options and warrants outstanding, respectively.

Effective March 1, 2002, we issued a restricted stock grant of 250,000 shares of common stock held in treasury to Mr. Louis J. Nicastro, Chairman of our Board of Directors and a non-employee director. On May 7, 2003, we purchased Mr. Nicastro’s rights to the 250,000 restricted shares for a purchase price of $14.00 per share. The diluted loss per share calculation for the three and six months ended December 31, 2002 does not include the 250,000 shares under the restricted stock grant.

On June 11, 2003, the Board of Directors approved a grant of restricted stock of 7,478 shares to each of four officers in lieu of any cash bonuses for fiscal 2003. The restricted shares will vest on June 11, 2004, subject to the individual’s continued employment with WMS. The 29,912 shares of unearned restricted stock were not included in the computation of diluted loss per share for the three and six months ended December 31, 2003.

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

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

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

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

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

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

5.	COMPREHENSIVE INCOME (LOSS)
	Comprehensive loss consists of net loss and foreign currency translation adjustments and totaled a loss of $11,000 and $1.0 million for the three months ended December 31, 2003 and 2002, respectively, and totaled a loss of $2.1 million and $423,000 for the six months ended December 31, 2003 and 2002, respectively.
6.	CONVERTIBLE SUBORDINATED NOTES
	In June 2003, we issued $100 million of convertible subordinated notes bearing interest at 2.75% maturing on July 15, 2010. In July 2003, we issued an additional $15 million of convertible subordinated notes under identical terms to cover an over- allotment option granted to the initial purchasers of the notes. The notes are convertible at any time into an aggregate of 5,813,953 shares of our common stock at a conversion price of $19.78 per share, subject to adjustment. The notes are subordinated in right of payment to all existing and future senior debt and are effectively subordinated to all of the indebtedness and liabilities of our subsidiaries. The notes are not callable. We pay interest on the notes semi-annually on January 15 and July 15 of each year, which commenced on January 15, 2004.
	We have no maturities of debt or sinking fund requirements through June 30, 2008.

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7.	STOCKHOLDERS’ EQUITY
	Common Stock Repurchase Program
	In January 2002, our Board of Directors authorized a $20 million plan to repurchase our common stock in open market transactions from time to time. In the six months ended December 31, 2002, 1,022,500 shares were repurchased under this plan for $11.4 million. By July 31, 2002, this repurchase program was completed. In total, we repurchased 1,568,000 shares, or approximately 5% of the previously outstanding shares under this $20 million plan.
	In September 2002, our Board of Directors authorized a twelve-month plan to repurchase up to an additional $10 million of our common stock in open market transactions. As of December 31, 2002, repurchases of 151,500 shares at a cost of $2.1 million had been made under this plan. As of March 31, 2003, this repurchase plan was completed with 681,700 shares purchased for a cost of $7.9 million during the March 2003 quarter.
	In April 2003, our Board of Directors authorized a new twelve-month plan to repurchase up to an additional $10 million of our common stock from time to time in open market or privately negotiated transactions. In June 2003, in conjunction with the completion of our private placement of convertible subordinated notes due 2010 to qualified institutional buyers, our Board of Directors authorized the expansion of this repurchase plan to $25 million. During the fiscal year ended June 30, 2003, we repurchased 493,200 shares for an aggregate price of $7.5 million under this plan. During the six months ended December 31, 2003, we purchased 299,100 shares of our common stock on the open market for $5.0 million at an average price of $16.75 per share.
	Since the initial buyback program was authorized in January 2002, we have repurchased 3,193,500 shares, or 9.9% of the previous number of shares outstanding, for a total expenditure of $42.5 million at an average price of $13.31 per share. At December 31, 2003, we had 29.8 million shares outstanding and $12.5 million remaining on the $25 million share buyback plan approved by our Board of Directors in April 2003 and expanded in June 2003. The timing and actual number of shares to be purchased in the future will depend on market conditions.
	Warrant Grant
	In September 2003, our Board of Directors, as part of the inducement to a licensor to extend their license agreement with us, approved a grant of 250,000 common stock purchase warrants valued at $3.9 million. The warrants’ exercise price is $35.04 per share of our common stock, subject to adjustment. The warrants are non-cancelable and vest with respect to 20% of the underlying shares in each year commencing on January 1, 2007 until fully vested on January 1, 2011, subject to earlier vesting under specified circumstances. The warrants expire on September 14, 2013.
	In valuing the warrants, we used the Black-Scholes model and incorporated the following assumptions: risk free rate - 4.15%; expected volatility - .54; expected life - 10 years; and expected dividend - zero. The risk-free rate is determined based on the interest rate of U.S. Government treasury obligations with a maturity date comparable to the life of the warrants issued. Other assumptions, relating to the warrant’s life, strike price and our common stock price, were determined at the date the warrants were issued. We will recognize expense based on the terms of the underlying license agreement.
8.	COMMITMENTS AND CONTINGENCIES
	We routinely enter into license agreements with others for the use of their intellectual properties in our products. These agreements generally provide for royalty advances when the agreements are signed, and provide for minimum guaranteed royalty payments as well as additional contingent payments based on future events. In the September 2003 quarter, we amended licensing agreements and entered into new licensing agreements, which significantly increased our total potential royalty commitments. The total potential royalty commitments at December 31, 2003 increased to $69.2 million from $29.6 million at June 30, 2003. The total potential future royalty payments at December 31, 2003 increased to $40.2 million from $13.0 million at June 30, 2003.

10

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

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

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

As of December 31, 2003, we estimate that potential future royalty payments in each fiscal year will be as follows:

					Total
	Guaranteed		Contingent		Potential
Year Ended June 30,	Minimums		Payments		Payments
	(in thousands)
2004	$	1,110	$	2,649	$	3,759
2005		6,166		1,250		7,416
2006		6,025		525		6,550
2007		4,900		—		4,900
2008		4,400		—		4,400
Thereafter		13,200		—		13,200
Total	$	35,801	$	4,424	$	40,225

	As part of the third phase of our technologies improvement plan, we have licensed technologies from third parties. At December 31, 2003, we had incurred guaranteed minimum payments related to such technologies aggregating $4.1 million, all of which had been paid as advances. An additional $1.4 million of contingent payments may become payable based on future events. These amounts are included in the table above. If we determine that we will not realize the value of a particular licensed technology, we will record an immediate charge against earnings at the time of such determination. If all of the contingent payments became due and all of the technologies were to have no further value to us, we would record a charge of up to $5.5 million.
9.	LITIGATION
	On May 18, 2001, La Societe de Loteries du Quebec (Loto-Quebec) was served with a class action lawsuit alleging that the members of the class developed a pathological gambling addiction by using Loto-Quebec’s video lottery terminals (VLTs) and that Loto-Quebec, as owner, operator and distributor of VLTs, failed to warn players of the alleged dangers associated with VLTs. Class status was granted by the Superior Court, Province of Quebec, District of Quebec on May 6, 2002, authorizing Jean Brochu to act as the representative plaintiff. The class of 119,000 members is requesting damages totaling almost $700 million Canadian dollars, plus interest.
	On October 2, 2003, Loto-Quebec filed a claim against us and Video Lottery Consultants Inc., a subsidiary of IGT (VLC), alleging that, in the event that the class action plaintiffs are successful in the pending class action lawsuit against Loto-Quebec, Loto-Quebec is entitled to be indemnified by the manufacturers of the VLTs, specifically us and VLC. We filed our appearance on October 16, 2003 and are currently proceeding with discovery. We intend to vigorously defend ourselves against the allegations. At this time, we are unable to predict the outcome of these actions, or a reasonable estimate of the range of possible loss, if any, given the status of the litigation.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this quarterly report on Form 10-Q, the terms “we”, “us”, “our”, and “WMS” mean WMS Industries Inc., a Delaware corporation, and its subsidiaries, and the term “common stock” means our common stock, $0.50 par value per share, unless the context indicates a different meaning. “Gaming operations,” as used throughout this report, includes the gaming machines that we lease, based upon any of the following payment methods: (1) a percentage of the net win of the gaming machines, (2) fixed daily fees, or (3) in the case of wide-area progressive games, a percentage of the amount wagered.

OVERVIEW

Our historical product sales strength has been in the multi-line, multi-coin video product line, which, together with our VLT product, accounted for substantially all of our new unit sales for the past three fiscal years. Our strategy is to become a full service gaming device provider to casinos by developing and obtaining regulatory approval for three additional product lines:

• mechanical reel games,

• video poker games and

• wide-area progressive (WAP) systems.

We believe these new product lines account for approximately 75% of the typical casino slot floor and represent a significant market share growth opportunity for us.

As a result of software anomalies that were present in our legacy operating system that ran our gaming devices, in January 2002, we began to execute a three-part technology improvement plan to first stabilize and then modernize our operating system software. Customers were apprised of this technology improvement plan and our intention to introduce our new Bluebird™ gaming cabinet and new CPU-NXT™ computer circuit board and operating system that would provide features and functionality that our existing products lacked. As a result, since January 2002, our product sales revenues have declined from levels experienced in fiscal 2000 and 2001. We expect that as we receive regulatory approvals throughout fiscal 2004 for our new CPU-NXT, computer circuit board and operating system, new Bluebird cabinet and new games from each of the six North American gaming labs, our product sales revenues will grow. In fiscal 2005, with all of the approvals in hand for all of our product lines, we’ll look to achieve growing market share with our new product lines: mechanical reel, video poker and wide area progressive jackpots.

Technology Improvement Plan

In the first phase of this plan, we improved the stability of our operating system by introducing two upgrades, version 2.57 for hopper-based games and version 2.59 for printer-based games. Version 2.57 has now been approved by all six of the North American gaming labs, and we were required to and completed an upgrade of our hopper game operating system to version 2.57 in four jurisdictions. Other jurisdictions may require upgrades in the future. We are making version 2.57 available in other jurisdictions as an optional upgrade. Gaming Laboratories, Inc. (GLI) approved version 2.59, our printer upgrade version, in March 2003. The GLI lab tests product for all of the Native American casinos and the Midwest Riverboat casinos where in the aggregate we believe about 50% of our existing gaming devices are deployed. The Nevada gaming authorities approved version 2.59 in September 2003. We have installed version 2.59 in several riverboat and Native American casinos, which use GLI, and will be upgrading our printer gaming machines installed in casinos in Nevada to version 2.59. Nevada is currently the only jurisdiction requiring all printer games be upgraded to version 2.59. Other jurisdictions may require upgrades in the future, and we are making version 2.59 available in other approved jurisdictions as an optional upgrade.

The second phase of our technology improvement plan is to introduce our new CPU-NXT computer circuit board and operating system and this phase of the plan continues on schedule. The commercial version of CPU-NXT was approved by Gaming Laboratories, Inc. (GLI) in September 2003 when we also received GLI approval for nine game themes on this new system. In January 2004, we received Nevada and Mississippi lab approval for CPU-NXT and we are on track for the approvals we expect to receive from Michigan, New Jersey and Ontario regulators over the next twelve weeks. In Nevada, Mississippi, New Jersey and Ontario, we need to complete a field trial for ticket-in-ticket-out printer devices.

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We are evaluating specifications and requirements for an even more advanced gaming system that will be developed over the long-term, third phase of the technology improvement plan. We continue to refine the design and specifications to incorporate additional features we desire for this platform and continue to allocate resources to this longer-term effort.

Bluebird and CPU-NXT Commercialization

Our focus in the near term is to refresh our existing installed base of video gaming devices in casinos through either replacement with Bluebird video gaming devices or through CPU-NXT upgrade kits. We received approval from GLI for the marketable version of the Bluebird video cabinet at the end of November 2003. The Bluebird video cabinet was approved by the labs in Nevada and Mississippi in January 2004, and we are on track to receive lab approvals from Michigan, New Jersey and Ontario over the next twelve weeks. We expect to sell and ship our first new video Bluebird gaming devices to casinos in Nevada, New Jersey and Detroit, Michigan in the March 2004 quarter and begin shipments to Ontario and Mississippi early in the June 2004 quarter after completion of the field trials.

Customer acceptance of Bluebird and our new games continues to appear very favorable. From the initial performance data we have received through January 2004 for Bluebird installations, WMS’ new games at a majority of casinos were performing at two times house average win per day. Since we started selling Bluebird, we have corporate agreements or sales orders for over 6,900 Bluebird video gaming devices, of which 896 were delivered in the December 2003 quarter with most of the balance deliverable over the next two quarters. These agreements are with multi-jurisdictional casino operators such as Harrah’s, Argosy, Ameristar, Stations, Pinnacle and Isle of Capri, along with a number of tribal and individual casino properties. We expect order levels to continue at a strong pace now that we have the first Bluebird video gaming devices and new games generating strong performance data, coupled with additional jurisdictional approvals.

Since we started selling CPU-NXT upgrade kits, we have corporate agreements or sales orders for almost 3,800 CPU-NXT upgrade kits of which 585 were delivered in December 2003 with most of the balance deliverable over the next two quarters. Each jurisdictional approval of the CPU-NXT operating system allows us to submit new games written to that system to the regulators for approval, which enables us to sell and ship additional CPU-NXT upgrade kits. We expect strength in game conversion revenues over the next several months as operators see the value and performance benefits of our CPU-NXT upgrade kits and printer upgrades.

Product Line Expansion Plan

In January 2004, we received Nevada regulatory approval for our mechanical reel product and three new game themes: two for our wide area progressive system and one “for sale” game theme. The timing of these approvals is ahead of schedule, and we are beginning to sell this product line in advance of our June 2004 quarter launch date. We plan to submit additional mechanical reel game themes, on which we expect to receive approval in time for our product launch date. The other five regulators are on track for our planned approval schedule for the mechanical reel product.

We expect to submit our first video poker product to the regulators in the March 2004 quarter and anticipate first approvals and first product shipments in the June 2004 quarter.

The field trials of our WAP system began the first week of February 2004 in Nevada and should begin in the coming weeks for the Native American wide area progressive link in GLI territories. We continue to expect to receive Nevada and GLI approval for our new progressive jackpot system in June 2004 with product launch in July 2004.

Brand Licenses

During the September 2003 quarter, we extended our agreement with Hasbro, Inc. for the use of their MONOPOLY® brand through calendar year 2011. We expect to introduce two new MONOPOLY™ themed participation games by June 2004 and to launch our proprietary wide-area progressive systems featuring the MONOPOLY Money™ progressive jackpot in July 2004.

In September 2003, we announced our agreement with Sony Pictures Consumer Products to develop, market and distribute MEN IN BLACK™ branded games. We plan to introduce this new series of participation games in our new Bluebird cabinet beginning in our last quarter of fiscal 2004.

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In October 2003, we entered into an exclusive agreement to develop, market and distribute games using the lottery brand POWERBALL® which we intend to develop as a wide-area progressive game. We look forward to debuting the first POWERBALL game on our Bluebird cabinet at the 2004 G2E trade show in October 2004.

CRITICAL ACCOUNTING POLICIES

During the quarter ended December 31, 2003, we added revenue recognition as a new critical accounting policy, in addition to those policies reported in our Annual Report on Form 10-K for the year ended June 30, 2003. We have not made any changes in the application of this or any other policy.

The application of revenue recognition policies has become more critical due to the variety of product sales contracts now being used. We record revenue on product sales, net of rebates, discounts and allowances, when persuasive evidence of an agreement exists, the sales price is fixed or determinable, the product is delivered and collectibility is reasonably assured. When multiple product deliverables are included under the sales contract, we allocate revenue to each product based upon their respective selling prices against total contract value and defer revenue recognition on those deliverables where we have not met all requirements of revenue recognition.

Gaming operations revenues under operating type lease agreements are estimated and recognized as earned. Lease agreements are based on either a pre-determined percentage of the daily net win of each gaming machine or a fixed daily rental fee. WAP revenues are recognized based upon a percentage of amounts wagered, or coin in, on each gaming machine and are recognized as earned. Royalties from licensees are recorded as earned.

The application of this policy affects the level of our sales revenue, cost of product sold, accounts receivable, deferred revenue and accrued expenses.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We are not dependent on off-balance sheet financing arrangements to fund our operations. We utilize financing arrangements for operating leases of equipment and facilities, none of which are in excess of our current needs. We also have minimum guaranteed royalty payments for intellectual property used in our gaming machines. Our obligations under these arrangements and under our convertible subordinated notes at December 31, 2003, were as follows:

			Payment Due by Period (in thousands)
			Less than						More than
Contractual Obligations	Total		1 Year		1-3 Years		3-5 Years		5 Years
Operating Leases	$	2,143	$	1,065	$	980	$	98	$	—
Convertible Subordinated Notes		115,000		—		—		—		115,000
Guaranteed Minimum Royalty Payments		35,801		1,110		12,191		9,300		13,200
Total	$	152,944	$	2,175	$	13,171	$	9,398	$	128,200

The total potential royalty commitments, including payments already made and those contingent upon future events, increased from $13.0 million at June 30, 2003 to $40.2 million at December 31, 2003 due to new and amended brand licensing agreements. Although potential royalty commitments could continue to increase in the future as we enter into new brand licensing agreements, we do not expect such increases to be as large as the increase in the six months ended December 31, 2003.

We do not have any special purpose entities for investment or the conduct of our operations. We have not entered into any derivative financial instruments, although we have granted stock options and restricted stock to our employees, officers, directors and consultants and warrants to a licensor. We do not currently have any significant firm purchase commitments for raw material inventory.

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LIQUIDITY AND CAPITAL RESOURCES

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

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

• Existing cash, cash equivalents and short-term investments,

• $15 million cash received from the issuance of additional 2.75% convertible subordinated notes in July 2003,

• Non-cash expenses of $11.8 million more than offsetting our net loss of $2.2 million, and

• Proceeds from stock option exercises of $6.0 million, excluding related tax related benefits.

We believe that cash and cash equivalents and short-term investments of $144.8 million at December 31, 2003, inclusive of $1.5 million of restricted cash, will be adequate to fund our anticipated level of expenses, capital expenditures, cash to be invested in gaming operations machines, and the levels of inventories and receivables required in the operation of our business. For the next twelve months, we do not expect to be dependent on cash flow from operations and we do not expect to borrow any money under our $50 million revolving credit line that expires May 2004.

Our short-term investments primarily consist of Auction Market Preferred Stocks stated at cost, which approximates market value. These investments generally have no fixed maturity date but most have dividend-reset dates every 49 days or longer. These investments can be liquidated under an auction process on the dividend-reset dates subject to a sufficient number of bids being submitted. Our policy is to invest cash with issuers that have high credit ratings and to limit the amount of credit exposure to any one issuer.

During the six months ended December 31, 2003, our net working capital increased primarily due to the issuance of $15.0 million proceeds from additional convertible notes placed under our June 2003 convertible note offering in July 2003. Accounts and notes receivable, net, increased by $14.7 million due to higher new unit sales levels and decreased collections during the six months ended December 31, 2003. Inventory increased by $9.5 million due to higher levels of raw materials as we prepare for an increasing volume of business. Royalty advances increased by $7.1 million due to new technology and brand license agreements we entered into or amended during the six months ended December 31, 2003. Income tax receivables decreased by $1.0 million primarily due to receipt of prior year tax refunds. Current liabilities increased by $2.7 million due to higher accounts payable reflecting higher inventory levels, partially offset by our payment to Midway Games Inc. of a $4.0 million tax advance. We have not experienced significant bad debt expense in any of the periods presented.

Due to our operating loss in fiscal 2003, we have recorded $6.7 million and $7.7 million of current income tax receivables on our balance sheets as of December 31, 2003 and at June 30, 2003, respectively. This tax receivable is based on our ability to receive tax refunds from applying our fiscal 2003 tax loss against prior years’ income and for refunds of tax payments made in fiscal 2003.

We also have $14.3 million of deferred tax assets on our balance sheet as of December 31, 2003, an increase of $5.1 million from June 30, 2003. These represent taxable temporary differences expected to reverse in future years, and tax credits and tax operating losses generated in fiscal 2003 and in the six months ended December 31, 2003, that can be claimed on future income tax returns to reduce current tax due in those years. We believe it is more likely than not that we will realize the benefits of these deferred tax assets. On this basis, we have not provided any valuation allowance related to realizability of

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such assets as of December 31, 2003. However, such valuation allowances could be recorded against these deferred tax assets in future periods if our future estimates of amounts realizable are reduced or if the timing of such realization extends beyond our current expectations.

We utilize financing arrangements for operating leases of regional office facilities and for some equipment. We have royalty commitments for brand and technology licenses that are not recorded in our balance sheet. Our total potential royalty commitments, including payments contingent upon future events, increased from $29.6 million at June 30, 2003 to $69.2 million at December 31, 2003, of which $29.0 million has been paid. Please refer to the table under “Off-Balance Sheet Arrangements and Contractual Obligations” above and Note 8 to our Condensed Consolidated Financial Statements in Item 1 above.

Capital Resources

The following table summarizes our sources and uses of cash for the periods shown (in thousands of dollars):

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

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

Components of the $30.9 million and $4.6 million invested in operating assets and liabilities for the six month periods ended December 31, 2003 and 2002, respectively, are as follows: (in thousands of dollars)

   Changes in Operating Assets and Liabilities:

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

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For the six months ended December 31, 2003, the increase in accounts and notes receivable reflects an increasing trend in new unit sales, while raw material inventories increased $9.1  million as we prepared for an increased volume of business. The decrease in income tax receivable was primarily due to receipt of prior year tax refunds. The increase in all other operating assets is due to $12.8 million of royalty advances for new technology and brand license agreements entered into or amended during the current six months ended December 2003. The increase of current liabilities is due to higher accounts payable reflecting higher inventory levels, partially offset by our payment to Midway Games Inc. of a $4.0 million tax advance.

For the six months ended December 31, 2002 the cash invested in all other operating assets was primarily due to a $2.2 million increase in long-term receivables, a $7.6 million increase in long-term royalty advances, a $2.0 million increase in short and long-term deferred taxes. The increase in royalty advances was due to new technology and brand license agreements entered into during the six months ended December 31, 2002. The reduction of current liabilities is due to a lower level of business. The decrease in income taxes receivable was due to receipt of prior years refunds. The decrease in inventories reflects lower sales levels and activity during the period.

Cash used by investing activities was $9.8 million for both the six months ended December 31, 2003 and 2002. Cash used for the purchase of property, plant and equipment for the six months ended December 31, 2003 was $6.0 million compared with $5.7 million for the comparable prior year period. Cash used for additions to gaming operation machines was $6.5 million and $12.7 million for the six months ended December 31, 2003 and 2002, respectively. The current period investment in gaming operation machines is lower because we have delayed investment until we receive regulatory approval for new games using our new Bluebird cabinet. We expect this investment to increase starting in March 2004 as we prepare for the initial rollout of new participation games installed in our Bluebird cabinet. Net cash of $2.7 million was provided by the redemption of short-term investments for the six months ended December 31, 2003, compared to $8.5 million provided by the redemption of such investments in the comparable prior year period.

Cash provided by financing activities was $15.3 million for the six months ended December 31, 2003 compared with cash used of $13.3 million for the comparable prior year period. We received net cash of $14.3 million in July 2003 from the exercise of the over-allotment option relating to our convertible subordinated notes. We also received $6.0 million and $0.2 million from the exercise of stock options in the six months ended December 31, 2003 and 2002, respectively. The amount we receive from the exercise of stock options is dependent on individuals’ choices to exercise options, which are dependent on the spread of the market price of our stock above the strike price of vested options.

In the six months ended December 31, 2003, we repurchased 299,100 shares of our common stock for an aggregate price of $5.0 million. Since the inception of the first common stock repurchase program in January 2002 through December 31, 2003, we purchased 3,193,500 or 9.9% of our previously outstanding shares for an aggregate price of $42.5 million. At December 31, 2003, we had $12.5 million remaining on the twelve month, $25 million share buyback program approved by our Board of Directors in April 2003 and expanded in June 2003. The timing and actual number of shares to be purchased in the future will depend on market conditions

During the six months ended December 31, 2002, we purchased $13.5 million of our common stock for treasury. We completed our twelve-month, $20 million common stock share repurchase program authorized by our Board of Directors in January 2002. In September 2002, our Board of Directors authorized an additional twelve-month, $10 million common stock share repurchase program. During the six months ended December 31, 2002, we repurchased 1,022,500 shares for an aggregate price of $11.4 million in completing the $20 million program, and repurchased 151,500 shares for an aggregate price of $2.1 million under the $10 million program.

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RESULTS OF OPERATIONS

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

• Product sales consisting of new gaming devices, game and printer conversion kits, used gaming devices, related parts and original equipment manufacturing (OEM) revenues, and

• Gaming operations, consisting of the placement of participation games, gaming equipment leasing revenues and royalties from licensing of our games to third parties.

THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 2002

Revenues, Gross Margins and Key Performance Indicators (in thousands of dollars, except unit data):

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

The increase in total revenues in the December 2003 quarter compared to the December 2002 quarter was due to $11.8 million in higher new gaming machine sales partially offset by a $1.7 million decrease in parts, used games, conversion and OEM revenues, and a $2.3 million reduction in gaming operations revenues.

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

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terminal sales during the December 2003 quarter. We expect continued growth in the average selling price over the next two quarters, as the number of Bluebird units sold becomes a higher percentage of our sales mix.

The average installed base of participation gaming devices decreased to 4,549 units in the December 2003 quarter from 5,605 units in the December 2002 quarter, while the net revenue per day increased by $0.62 per day from the prior year quarter to $38.43 per day as we continue to refresh the installed base with new games. The installed base decline from the December 2002 quarter was due to the fact our legacy operating system does not support dual port cashless gaming technology and the performance of certain of our older participation series has decreased. Subsequent to the December 2003 quarter, the last SURVIVOR wide area progressive jackpot was shut down. We expect growth in our installed base of participation games when we begin to install two new participation series, complete with cashless technology – MEN IN BLACK and MATCH GAME™ on our new Bluebird cabinet in the coming months, followed in early fiscal 2005 with the launch of our first wide area progressive games, subject to regulatory approval.

Total gross profit increased to $29.3 million for the December 2003 quarter from $27.7 million in the December 2002 quarter

while total gross margin was 57% in the December 2003 quarter compared to 64% in the December 2002 quarter. Higher margin gaming operations revenues were only 40% of total revenues in the December 2003 quarter, compared to 53% in the December 2002 quarter due to the increase of product sales revenue in the current year quarter and an overall decline of gaming operations revenues. The gross margin on product sales was 39% for the December 2003 quarter, down from 44% in the prior year quarter, reflecting lower margin on the mix of products sold. We expect that the gross margin on the Bluebird gaming devices will improve as production volume increases because we should be able to obtain larger volume discounts from our suppliers, and we anticipate the cost of electrical components will decrease over time. The gross profit margin on gaming operations increased to 84% in the December 2003 quarter compared to 81% in the prior year quarter, due to an increase in the average net revenue per day, higher royalties received from licensees and the sale of RAPID ROULETTE™ assets previously fully reserved, partially offset by higher royalty rates payable to licensors.

Operating Expenses (in thousands of dollars):

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

Research and development expenses decreased $1.4 million, or 12% to $10.2 million in the December 2003 quarter compared to $11.6 million in the prior year quarter, which included a $2.8 million write-off of an operating system license. Excluding this write-off, research and development expenses increased in the December 2003 quarter by $1.4 million due to ongoing execution of our technology improvement plan, product approval costs, product line expansion costs and increased game offerings. With higher regulatory approval costs throughout fiscal 2004, we expect quarterly research and development expenses to continue to exceed levels in the comparable prior year quarters.

Selling and administrative expenses increased $1.3 million, or 11%, to $13.5 million in the December 2003 quarter compared to $12.2 million in the December 2002 quarter, due to the ongoing execution of our re-emergence plan and the implementation of an Oracle Enterprise Resource Planning (ERP) system. We expect that selling and administration expenses will increase as we continue to commercialize the CPU-NXT operating system and Bluebird cabinet, and continue our multiple product line expansion.

Depreciation and amortization expense decreased by $1.3 million, as the level of investment in gaming devices for gaming operations has been lower than in prior quarters as we await regulatory approvals for new games on Bluebird cabinets. We expect such investment to increase starting in March 2004 as we prepare for the initial rollout of new participation games installed in our new Bluebird cabinet.

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We incurred an operating loss of $427,000 in the December 2003 quarter, compared to an operating loss of $3.4 million in the December 2002 quarter. The improved operating performance in the fiscal 2004 second quarter resulted from the $1.6 million increase in gross profit and decreases of $1.3 million in research and development expenses and $1.3 million in depreciation and amortization expenses, partially offset by a $1.3 million increase in selling and administrative expenses.

We incurred interest expense of $945,000 in the December 2003 quarter related to our 2.75% convertible subordinated notes issued in Summer 2003. This was partially offset by $780,000 of other income, primarily interest and investment income earned on cash and short-term investments, which at December 31, 2003 amounted to $144.8 million. Due to the issuance of our 2.75% convertible subordinated notes, interest expense will increase in comparison to prior years’ quarters for the remainder of fiscal year 2004.

The benefit for income taxes, which includes both current and deferred taxes, is based on our annual estimated effective tax rate of 37.5%, which is slightly higher than the 36.9% rate in the December 2002 quarter due to higher expected foreign income in 2004.

Net loss was $0.4 million or $0.01 loss per share for the current quarter compared to net loss of $1.8 million, or $0.06 per share, for the prior year quarter.

SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH SIX MONTHS ENDED DECEMBER 31, 2002

Revenues, Gross Margins and Key Performance Indicators (in thousands of dollars, except unit data):

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

The increase in total revenues was due to $19.2 million in higher new gaming machine sales partially offset by a $0.3 million decrease in parts, used games, conversion and OEM revenues, and a $6.7 million reduction in gaming operations revenues.

New unit sales in the December 2003 six-month period increased by 82% to 5,093 units as we shipped the first units of our new Bluebird video gaming devices after receiving regulatory approvals from GLI in November 2003 and as we offered a higher number of new game themes. Revenues from parts, used games, conversions and OEM

20

revenues declined 3% compared to the prior six-month period due to no sales under OEM agreements in the current six-month period, partially offset by higher levels of game conversion kits sold as we received an increased number of new game theme approvals over the last several months.

The average installed base of participation gaming devices decreased to 4,701 units in the December 2003 six-month period from 5,820 units in the December 2002 six-month period, while the net revenue per day increased by $0.45 per day from the prior year six-month period to $39.61 per day as we continue to refresh the installed base with new games. The installed base decline from the December 2002 six-month period was due to the fact our legacy operating system does not support dual port cashless gaming technology, and the performance of certain of our older series has decreased. Subsequent to December 2003, the last SURVIVOR wide area progressive jackpot was shut down. We expect growth in our installed base of participation games when we begin to install two new participation series, complete with cashless technology – MEN IN BLACK and MATCH GAME on our new Bluebird cabinet in the coming months, followed in early fiscal 2005 with the launch of our first wide area progressive games, subject to regulatory approval.

Total gross profit increased to $56.8 million for the December 2003 six-month period from $54.1 million in the December 2002 six-month period while total gross margin was 58% in the December six-month period compared to 63% in the December 2002 six-month period. Higher margin gaming operations revenues were only 43% of total revenues in the December 2003 six-month period, compared to 57% in the December 2002 six-month period due to the increase of product sales revenue in the current year six-month period and an overall decline of gaming operations revenues. The gross margin on product sales were 39% for both the December 2003 and December 2002 six-month periods. The gross margin on gaming operations increased to 83% in the December 2003 six-month period compared to 81% in the prior year six-month period, due to an increase in the average net revenue per day, higher royalties received from licensees and the sale of RAPID ROULETTE assets previously fully reserved, partially offset by higher royalty rates payable to licensors.

Operating Expenses (in thousands of dollars):

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

Research and development expenses increased $1.1 million, or 6%, to $20.5 million in the December 2003 six-month period compared to $19.4 million in the prior year six-month period, which included a $2.8 million write-off of an operating system license. Excluding this write-off, research and development expenses increased in the December 2003 six-month period by $3.8 million due to ongoing execution of our technology improvement plan, product approval costs, product line expansion costs and increased game offerings. With higher regulatory approval costs throughout fiscal 2004, we expect quarterly research and development expenses to continue to exceed levels in the comparable prior year quarters.

Selling and administrative expenses increased $3.6 million, or 15%, to $27.1 million in the December 2003 six-month period compared to $23.5 million in the December 2002 six-month period, due to the ongoing execution of our re-emergence plan and the implementation of an Oracle ERP system. We expect that selling and administration expenses will increase as we continue to commercialize the CPU-NXT operating system and Bluebird cabinet, and continue our multiple product line expansion.

Depreciation and amortization expense decreased by $1.6 million, as the level of investment in gaming devices for gaming operations has been lower than in prior comparable periods. We expect this investment to increase starting in March 2004 as we prepare for the initial rollout of new participation games installed in our new Bluebird cabinet.

We incurred an operating loss of $3.2 million in the December 2003 six-month period, compared to an operating loss of $2.8 million in the December 2002 six-month period. The reduced operating performance in the fiscal 2004 six-month period resulted from the $1.1 million increase in research and development expenses and the $3.6 million increase in selling and

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administrative expenses, partially offset by the $2.7 million increase in gross profit and the decrease of $1.6 million in depreciation and amortization expenses described above.

We incurred interest expense of $1.9 million in the December 2003 six-month period related to our 2.75% convertible subordinated notes issued in Summer 2003. These amounts were partially offset by $1.5 million of other income, primarily interest and investment income earned on cash and short-term investments, which at December 31, 2003 amounted to $144.8 million. Due to the issuance of our 2.75% convertible subordinated notes, interest expense will increase in comparison to prior years’ quarters for the remainder of fiscal year 2004.

The benefit for income taxes, which includes both current and deferred taxes, is based on our annual estimated effective tax rate of 37.5%, which is slightly higher than the 37.2% rate in the December 2002 six-month period due to higher expected foreign income in 2004.

Net loss was $2.2 million or $0.08 loss per share for the current year six-month period compared to a net loss of $1.2 million, or $0.04 per share, for the prior year six-month period.

FORWARD LOOKING STATEMENTS AND RISK FACTORS

This report contains forward-looking statements concerning our future business performance, strategy, outlook, plans, liquidity, pending regulatory matters and outcomes of contingencies including legal proceedings, among others. Forward-looking statements may be typically identified by such words as “may,” “will,” “should,” “expect,” “anticipate,” “seek,” “believe,” “estimate,” and “intend,” among others. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the expectations expressed in the forward-looking statements. Although we believe that, the expectations reflected in our forward-looking statements are reasonable, any or all of our forward-looking statements may prove to be incorrect. Consequently, no forward-looking statements may be guaranteed.

Factors which could cause our actual results to differ from expectations include:

• a delay or refusal by regulators to approve our new gaming platforms, cabinet designs, game themes and related hardware and software;

• a failure to obtain and maintain our gaming licenses and regulatory approvals;

• an inability to introduce in a timely manner new games themes and gaming machines or product lines that achieve and maintain market acceptance;

• a software anomaly or fraudulent manipulation of our gaming machines and software;

• a failure to obtain the right to use, or an inability to adapt to the rapid development of new technologies; and

• an infringement claim seeking to restrict our use of material technologies.

These factors and other factors that could cause actual results to differ from expectations are more fully described under “Item 1. Business – Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2003.

We make no commitment to update any forward-looking statements, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in our recent Form 10-Q and 8-K reports filed with the Securities and Exchange Commission.

MONOPOLY is a trademark of Hasbro Inc. ©2004 Hasbro. All rights reserved. Used with permission.

MEN IN BLACK™ & ©2004 Columbia Pictures Industries, Inc.

POWERBALL is a trademark of the Multi-State Lottery Association. Used with permission.

SURVIVOR™ is a trademark of Survivor Productions LLC.

MATCH GAME™ is a trademark of FremantleMedia Operations BV. All rights reserved. Used with permission.

RAPID ROULETTE™ is a trademark of Stargames Corporation Limited and Crown Limited.

CPU-NXT and Bluebird are trademarks of WMS Gaming Inc. All rights reserved.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks in the ordinary course of our business, primarily associated with equity price, interest rate and foreign currency fluctuations. We do not currently hedge any of these risks, or utilize financial instruments for trading or other speculative purposes.

Interest Rate Risk

We have exposure to interest rate risk from our 2.75% convertible subordinated notes and short-term line of credit. The notes bear interest at a fixed rate and the short-term line of credit bears interest at a variable rate.

As of December 31, 2003, we had $115 million of convertible fixed-rate debt with an interest rate of 2.75% with a fair value of $179.4 million due to the increase in the market value of our common stock underlying the conversion provisions. Using a discounted cash flow model, we currently estimate that a 50 basis point change in the prevailing market interest rates would impact the fair value of our convertible fixed rate debt by approximately $3.7 million, assuming our stock price is held constant. This change in fair value would have no effect on our cash flows or future results of operations.

Equity Price Risk

The fair value of our convertible fixed-rate debt will also fluctuate with changes in the price of our common stock. Based on the number of shares underlying our convertible debt, we currently estimate that a 10% change in our stock price, assuming the prevailing market interest rates are held constant, would impact the fair value of our convertible fixed rate debt by approximately $14.8 million. This change in fair value would have no effect on our cash flows or future results of operations.

Foreign Currency Risk

During the quarter ended December 31, 2003, we had no changes in our foreign currency risk.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15 under the Securities Exchange of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that material information about us and our subsidiaries, including the material information required to be disclosed in our filings under the Exchange Act, is recorded, processed, summarized and communicated to them as appropriate to allow timely decisions regarding required disclosure.

As a part of the ongoing implementation of an Oracle ERP system, we have updated our internal controls over financial reporting as necessary to accommodate any modifications to our business processes or accounting procedures. There have not been any other changes in our internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect these controls as of the end of the period covered by this report.

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PART II
OTHER INFORMATION

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

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

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

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

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

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Exhibit No.	Description
4.2	Indenture dated June 25, 2003 between WMS and BNY Midwest Trust Company, and Form of Note incorporated by reference to Report on Form 8-K filed June 25, 2003
10.1	License and Development Agreement between WMS Gaming Inc. (“WGI”) and Sierra Design Group (“SDG”), dated as of April 24, 2002. Portions of this exhibit have been omitted under a request for confidential treatment filed separately with the Securities Exchange Commission.
10.2	First Amendment to License and Development Agreement between WGI and SDG, dated June 12, 2003. Portions of this exhibit have been omitted under a request for confidential treatment filed separately with the Securities Exchange Commission.
10.3	Second Amendment to License and Development Agreement between WGI and SDG, dated July 15, 2003.
10.4	Third Amendment to License and Development Agreement between WGI and SDG, dated November 7, 2003. Portions of this exhibit have been omitted under a request for confidential treatment filed separately with the Securities Exchange Commission.
31	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

(1) Current report on Form 8-K filed October 30, 2003, under items 12 and 7.

25

SIGNATURES

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

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

EXHIBIT INDEX

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of WMS dated February 17, 1987; Certificate of Amendment dated January 28, 1993; and Certificate of Correction dated May 4, 1994, incorporated by reference to our Annual Report on Form 10-K for the year ended June 30, 1994.
3.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of WMS, as filed with the Secretary of the State of Delaware on February 25, 1998, incorporated by reference to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
3.3	Form of Certificate of Designations of Series A Preferred Stock, incorporated by reference to our Registration Statement on Form 8-A (File No. 1-8300) filed March 25, 1998 (“the Form 8-A”).
3.4	By-Laws of WMS, as amended and restated through June 26, 1996, incorporated by reference to our Annual Report on Form 10-K for the year ended June 30, 1996.
4.1	Rights Agreement dated as of March 5, 1998 between WMS and The Bank of New York, as Rights Agent, incorporated by reference to the Form 8-A.
4.2	Indenture dated June 25, 2003 between WMS and BNY Midwest Trust Company, and Form of Note incorporated by reference to Report on Form 8-K filed June 25, 2003
10.1	License and Development Agreement between WMS Gaming Inc. (“WGI”) and Sierra Design Group (“SDG”), dated as of April 24, 2002. Portions of this exhibit have been omitted under a request for confidential treatment filed separately with the Securities Exchange Commission.
10.2	First Amendment to License and Development Agreement between WGI and SDG, dated June 12, 2003. Portions of this exhibit have been omitted under a request for confidential treatment filed separately with the Securities Exchange Commission.
10.3	Second Amendment to License and Development Agreement between WGI and SDG, dated July 15, 2003.
10.4	Third Amendment to License and Development Agreement between WGI and SDG, dated November 7, 2003. Portions of this exhibit have been omitted under a request for confidential treatment filed separately with the Securities Exchange Commission.
31	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.1 3 c82839exv10w1.htm LICENSE AND DEVELOPEMENT AGREEMENT

Exhibit 10.1

LICENSE AND DEVELOPMENT AGREEMENT

THIS LICENSE AND DEVELOPMENT AGREEMENT (“Agreement”) is made as of the 24th day of April, 2002, by and between SIERRA DESIGN GROUP, a Nevada corporation with offices at 300 Sierra Manor Drive, Reno, NV 89511 (“LICENSOR”) and WMS GAMING INC., a Delaware corporation with offices at 800 S. Northpoint Blvd., Waukegan, IL 60085 (“LICENSEE”).

RECITALS:

A.	LICENSOR is a licensed developer and manufacturer of gaming and related system and platform technologies, and is developing an independent gaming platform known as the “Alpha Platform,” and herein defined as the “SDG Platform Rev A.”
B.	LICENSEE is engaged in the business of manufacturing, distributing, selling and leasing gaming devices and games for use in the gaming industry.
C.	The parties have previously entered into a letter agreement, dated March 5, 2002 (the “Letter Agreement”), pursuant to which LICENSEE was entitled to conduct a due diligence review of LICENSOR’s SDG Platform Rev A, and at LICENSEE’s discretion cause the parties to negotiate in good faith as to a development and license agreement substantially containing the terms set forth in the Letter Agreement.
D.	Licensee having completed its due diligence review, the parties now wish to enter into this Agreement as provided for in the Letter Agreement whereby LICENSOR shall grant to LICENSEE a license to LICENSOR’S Alpha Game Platform, both in its current state and as further developed pursuant to this Agreement, which further developed platform is more specifically defined herein as the “SDG Platform Rev B” and the parties will agree to procedures to confirm the development without use of or reliance upon unauthorized third party proprietary and/or confidential information.

For the reasons recited above, and in consideration of the mutual promises and covenants set forth in this Agreement, LICENSOR and LICENSEE agree as follows:

1. Definitions: The following terms will have the following meanings:

a. “Acceptance Criteria,” as it applies to Deliverables (defined below) shall mean that (i) each Deliverable meets the Specifications (as defined below), (ii) each Deliverable exhibits no “Critical Defects” (as defined below) in LICENSEE’s Acceptance Testing and (iii) any “Serious

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

1

	Defects” (as defined below) discovered in LICENSEE’s Acceptance Testing are subject to a mutually-agreed upon action plan for resolution.
b.	“Acceptance Testing” shall mean the procedures set forth in Section 4.f.
c.	“Affiliate” of an entity shall mean any person or entity which controls, is controlled by or is under common control of such entity, where “control” means the power to elect a majority of the board of directors or similar managing body of the entity in question.
d.	“Critical Defect,” as it relates to a particular Deliverable (as defined below) or to the SDG Platform Rev B, shall mean that one or more of the following conditions exists as to a particular Deliverable (as defined below):
	[*]
e.	“Deliverables” shall mean the items to be delivered by LICENSOR to LICENSEE in connection with each Milestone, as set forth in Exhibit C. Each Deliverable will include the Design Documentation (defined below) for that Deliverable.
f.	“Derivative Work” shall mean [*].
g.	“Design Documentation” shall include, without limitation, all source code, internally developed tool kits, compiling scripts, data, written specifications describing Deliverables, technical documentation, drawings, flow charts, and any other material necessary to allow a reasonably competent software engineer to understand, compile, modify, support and maintain the particular item.
h.	“End-user” as it relates to SDG Platform Rev B shall mean (i) an operator or owner of a gaming establishment which provides the SDG Platform

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

2

	Rev B for the use by its patrons in that operator’s or owner’s gaming establishment or (ii) patrons of a gaming establishment.
i.	“Game Developer” shall mean a person or entity who develops games to be used with SDG Platform Rev B and uses the SDG Platform Rev B solely for that purpose.
j.	“Game Manufacturer” shall mean any person or entity that manufactures, assembles, produces, programs, or makes modifications to any gaming device for use or play.
k.	“Gaming Regulatory Approval Date” shall mean the date that the first of LICENSEE’s gaming devices utilizing the SDG Platform Rev B has been approved by all appropriate gaming regulators in each of Nevada, New Jersey and Mississippi.
l.	“Initial Correction Cycle” shall have the meaning ascribed to such term in Section 4.f of this Agreement.
m.	“Intellectual Property” means any and all rights existing now or in the future, including but not limited to patents, copyrights, trademarks, trade secrets, ideas, designs, concepts, techniques, discoveries or improvements including any and all devices and computer software, whether or not patentable and all similar proprietary rights.
n.	“Licensed Property” shall have the meaning ascribed to such term in Section 2.a of this Agreement.
o.	“LICENSEE’s Material” shall mean all tangible items which LICENSEE provides to LICENSOR in connection with the development of SDG Platform Rev B.
p.	“LICENSOR Technology” shall mean [*].
q.	“Milestone” shall mean each development milestone, requiring various Deliverables, identified by number and letter in Exhibit C, for example “Milestone 1,” “Milestone 2A,” Milestone 2B,” etc.
r.	“Milestone Date” shall mean the dates on which the Deliverables for the various Milestones are due as set forth in Exhibit C.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

3

s.	“Minor Defect,” as it relates to a particular Deliverable or to the SDG Platform Rev B, shall mean that one or more of the following conditions (to the extent applicable) exists:
	[*]
t.	“SDG Platform Rev A” shall mean the Alpha Platform as described in Exhibit A and all related LICENSOR Technology and Intellectual Property, including all source code, object code, firmware, hardware, circuit and board design, architecture and executable code, excluding any SDG platform interfaces to existing [*] hardware.
u.	“SDG Platform Rev A Extensions” shall mean the modifications, extensions and enhancements to SDG Platform Rev A as are identified in Exhibit B and all related LICENSOR Technology and Intellectual Property, including all source code, object code, firmware, hardware, circuit and board design, architecture and executable code.
v.	“SDG Platform Rev B” shall mean SDG Platform Rev A as modified, extended and enhanced in accordance with the SDG Platform Rev A Extensions and all related LICENSOR Technology and/or Intellectual Property, including all source code, object code, firmware, hardware, circuit and board design, architecture and executable code, in all of its stages of development under this Agreement.
w.	“Serious Defect,” as it relates to a particular Deliverable or to the SDG Platform Rev B, shall mean that one or more of the following conditions (to the extent applicable) exists:
	[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

4

x.	“Specifications” shall mean, as set forth in Exhibit B, the technical, functional, regulatory and other specifications provided by LICENSEE to LICENSOR, including the requirements for the Deliverables.
y.	“Statement of Defects” shall have the meaning ascribed to such term in Section 4.f of this Agreement.
z.	“Third Party Tools” shall have the meaning ascribed to such term in Section 4.e of this Agreement.

2.   License: LICENSOR hereby grants to LICENSEE, under all of LICENSOR’S Technology and/or LICENSOR’s Intellectual Property rights, a perpetual, irrevocable, non-transferable (except as otherwise provided herein), worldwide, fully-paid (subject to the terms herein) and royalty-free, right and license (the “License”) to:

a.	Manufacture, have manufactured, use, copy, incorporate, integrate, embed, compile, link, market, advertise, sublicense to End Users and as otherwise provided herein, distribute (directly and through multiple levels of distribution), transmit, lease, lend, publicly perform, display, modify and create Derivative Works of (i) the SDG Platform Rev A (ii) the SDG Platform Rev B, (iii) each of the component parts of each of the foregoing (including, without limitation, source code, object code, firmware and hardware), (iv) Derivative Works provided by LICENSOR to LICENSEE pursuant to Section 5.f and (v) the Design Documentation to each of the foregoing (the items described in (i) through (v) are individually and collectively referred to herein as the “Licensed Property”); and
b.	Exercise all of the foregoing rights set forth in Section 2.a above, as to any Derivative Works of the Licensed Property created by LICENSEE. [*]
c.	[*].

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

5

	LICENSOR shall retain exclusive title to and ownership of the Licensed Property, subject to the rights of LICENSEE set forth in this Agreement and LICENSEE’s right in and to LICENSEE’s Material. Except as provided in this Agreement, there are no express or implied licenses to Derivative Works from one party to the other created under this Agreement, and nothing in this Agreement relating to Derivative Works shall affect the rights and restrictions of the parties with respect to the Licensed Property, Licensor’s Technology and Intellectual Property underlying the Derivative Works.
d.	The LICENSEE’s rights may be sub-licensed by LICENSEE to [*] (collectively, a “Permitted Sub-License”). Notwithstanding anything to the contrary in this Agreement, LICENSEE shall be entitled to provide source code and Design Documentation of the Licensed Property to state and/or federal gaming regulators as necessary or appropriate to obtain and maintain any required regulatory approval.
e.	This Agreement and the rights constituting the License are not transferable by LICENSEE except to Affiliates of LICENSEE or to any successor-in-interest to LICENSEE, or to the portion of LICENSEE’S business that exploits the Licensed Property whether by way of asset sale, merger, stock sale or otherwise. Notwithstanding anything to the contrary contained herein, the parties agree that neither LICENSEE nor its permitted

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

6

	successors or assigns shall themselves, or assist or license or otherwise authorize any other party to, convert any current LICENSOR games or terminals for use with the Licensed Property.
f.	The rights constituting the License shall be exclusive as to LICENSEE except that:

(i)	LICENSOR may itself directly exercise any rights with respect to the Licensed Property [*],
(ii)	LICENSOR may license the Licensed Property to [*], and
(iii)	LICENSOR may license the Licensed Property to [*].

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

7

(iv) Notwithstanding anything to the contrary in this Agreement, LICENSOR shall be entitled to provide source code and Design Documentation of the Licensed Property to state and/or federal gaming regulators as necessary or appropriate to obtain and maintain any required regulatory approval.

g.

This Agreement and the Licensed Property may not be sold, assigned or otherwise transferred by LICENSOR except to Affiliates of LICENSOR or to any successor-in-interest to LICENSOR, or to the portion of LICENSOR’s business that exploits the Licensed Property, whether by way of asset sale, merger, stock sale or otherwise. Notwithstanding anything to the contrary contained herein, the parties agree that neither LICENSOR nor its permitted successors or assigns shall themselves, or assist or license or otherwise authorize any other party to, convert any current LICENSEE games or terminals for use with the Licensed Property.

h.

[*]. Other than as explicitly set forth herein, this Agreement grants no licenses to any other Intellectual Property, and nothing herein shall require LICENSEE to provide or license to LICENSOR any modifications or Derivative Works to the Licensed Property created by LICENSEE.

3.       License Fee; Penalties: Subject to the terms contained herein, in consideration of the License and LICENSOR’s other agreements set forth herein, LICENSEE agrees to pay LICENSOR a one-time license fee(s) (including the Bonus License Fee(s) described below, the “License Fees”), and LICENSOR agrees to pay penalties to LICENSEE as follows:

a. LICENSEE will pay [*] to LICENSOR as an initial license fee, as follows: (i) [*] will be paid in via wire funds transfer on the later of signing this Agreement and delivery by LICENSOR to LICENSEE of a complete copy of the SDG Platform Rev A in both object and source code forms, along with Design Documentation thereof, (ii) [*] will be paid by applying the advance fee of [*] previously paid to LICENSOR under the terms of the Letter Agreement, and (iii) [*] will be paid upon receipt of Independent

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

8

	Confirmation or completion of the Expert’s Recommendations in the Independent Report (as said terms are defined in Section 4.c).
b.	Provided LICENSOR is not in breach of any of its representations and warranties set forth in this Agreement, LICENSOR will have the opportunity to earn additional Bonus License Fee(s), up to an aggregate of [*], based upon LICENSOR achieving certain agreed Milestones, including Milestones to be achieved by the applicable Milestone Dates, all as set forth in the attached Exhibits C and D and Section 4.
c.	LICENSOR shall pay penalties to LICENSEE as required by Exhibit D.

4. Independent Development:

a.	LICENSOR agrees to use its best efforts to develop the Deliverables in a professional and workman-like manner in accordance with the Specifications and task descriptions in Exhibit B, including, without limitation, completion of each Milestone, and delivery to LICENSEE of all applicable Deliverables, in accordance with Exhibit C.
b.	The parties acknowledge that it is their intent that the development of the Licensed Property by LICENSOR be wholly original and that no confidential, proprietary or trade secret information of any third party be used or relied upon in the development of the Licensed Property in breach of third party rights, it being understood that LICENSOR will be using certain open source programs and is entitled to use publicly available hardware components in the boards. LICENSOR has taken, and agrees to continue to take, certain measures to ensure such independent development, including but not limited to the following: (i) development of the core technology for SDG Platform Rev A and SDG Platform Rev B has been, and will continue to be, confined to LICENSOR’s [*] facility[*], (ii) no LICENSOR employee who has had access to [*] proprietary and/or confidential information, including source code, provided to LICENSOR for purposes of its game development for the [*] platform (“[*] Provided Information”), has been or will be involved in development of the Licensed Property, and (iii) to the best of LICENSOR’s knowledge, no employee who has been, or is currently expected to be, involved in development of the Licensed Property is bound by any agreement that would prohibit such person from developing the Licensed Property.
c.	To further ensure and confirm that the Licensed Property is not based on [*]Provided Information, within [*] after the date

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

9

hereof, the parties will engage, and share in the costs of, a recognized independent expert (the “Expert”) to review relevant publicly available information using such methods as the Expert deems appropriate and make a written determination (the “Independent Report”) as to the similarity of [*]Provided Information to LICENSOR’s Technology included in the Licensed Property. In performance of his engagement, the Expert will not be provided with access to [*]Provided Information. The Expert shall sign a written confidentiality and non-disclosure agreement, agree that in performance of the engagement he will not breach any third party agreement to which he is bound, and shall not provide to LICENSEE, in the Independent Report or otherwise, any [*]Provided Information. The Independent Report, which the parties shall endeavor to complete within [*] after the date hereof shall either (1) confirm, to the extent the Expert can and/or subject to such assumptions the Expert deems reasonable, that the Licensed Property is not based upon the [*]Provided Information (the “Independent Confirmation”), (2) suggest areas in which the Licensed Property may be similar to or based on the [*]Provided Information and recommendations for changes to the Licensed Property to preclude any such similarities (“Expert’s Recommendations”) or (3) determine that development of the Licensed Property seems likely to have used or been based on the [*]Provided Information (“Critical Problem”). In the event of Expert’s Recommendations, LICENSOR and LICENSEE shall mutually agree on the necessary changes in order to obtain an Independent Confirmation. LICENSOR will then implement the necessary changes in order to obtain Independent Confirmation. In the event of a Critical Problem, LICENSEE may elect to terminate this Agreement, in which case LICENSOR shall refund the License Fees then paid to date less LICENSOR’s demonstrable costs (not including any overhead or employee/consultant bonuses or benefits) in the development of the Licensed Property directly incurred under the terms of this Agreement or under the Letter Agreement; provided however, if it can be reasonably shown that LICENSOR acted in bad faith in using [*]Provided Information in the development of the Licensed Property, LIENSOR shall refund all the License Fees without any deductions for costs. The parties shall use their best efforts to cooperate with the Expert. If the anticipated terms of the Expert’s engagement prove impractical, the parties may agree to alternative arrangements designed to achieve as nearly as possible the same purposes.

d.

To the extent possible, and in an effort to expedite the development process, when the Deliverables for a given Milestone are suitable for LICENSOR’s Quality Assurance procedures (“QA”), LICENSOR shall provide a copy of the Deliverables to LICENSEE such that each party

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

10

	shall undertake QA in parallel. The parties will jointly determine a suitable QA period for the Deliverables in each Milestone, and each such period shall be divided in half (herein, the “First Half QA Period” and “Second Half QA Period”). LICENSEE shall as soon as reasonably possible, but no less frequently than weekly, notify LICENSOR of defects, non-conformities and other issues arising during its QA. If LICENSOR fixes defects or non-conformities discovered during its QA, it will to the extent practical, provide such fixes to LICENSEE. LICENSOR shall use its best efforts to correct defects and non-conformities and otherwise address issues which arise during the First Half QA Period by the end of the Second Half QA Period. LICENSOR shall use its best efforts to correct defects and non-conformities and otherwise address issues which arise during the Second Half QA Period as soon as possible.
e.	Upon completion of each Milestone, LICENSOR shall deliver to LICENSEE all applicable Deliverables, including Design Documentation thereof, along with a list of all third party tools used in the development of said Deliverables (“Third Party Tools”).
f.	Following the end of the Second Half QA Period for a Milestone, and separate and apart from the QA process, LICENSOR shall make a new delivery of the Deliverables for said Milestone, LICENSEE shall test and evaluate such Deliverables for conformity to the Acceptance Criteria. LICENSEE shall provide LICENSOR within [*] after delivery of such Deliverables with written notice that the Acceptance Criteria as to the Deliverables has been met, or a written statement of defects or other non-conformity to the Acceptance Criteria (“Statement of Defects”). Critical and Serious Defects will be promptly fixed by LICENSOR and, as to any Minor Defects, or as otherwise mutually agreed in writing by LICENSEE and LICENSOR the period for the fix on a case by case basis may be extended or deferred to a later date. The Acceptance Criteria shall also be deemed to have been met if written acceptance or a written Statement of Defects have not been made within said [*] period. Unless otherwise agreed to as provided for above, LICENSOR shall correct such defects and non-conformities and return the corrected Deliverables to LICENSEE within no more than [*] from receipt of LICENSEE’s Statement of Defects and LICENSEE shall then have up to an additional [*] to test and evaluate such Deliverable for conformity to the Acceptance Criteria (the “Initial Correction Cycle”). The foregoing process shall continue until the Deliverables are in conformity with the Acceptance Criteria.
g.	The Deliverables will not contain any “back door,” “time bomb,” “Trojan horse,” “worm,” “drop dead device” or “virus” (as these terms are commonly used in the computer software field), or other software routines

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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designed to permit unauthorized access, to disable or erase the software or data, or to perform any other similar type of function. LICENSOR also agrees that none of LICENSEE’s Materials will be included as part of SDG Platform Rev B. No government funding or college or university facilities will be used in the development of the SDG Platform Rev A Extensions, excluding from this sentence any open source Linux code, which originated in places unknown and unknowable to LICENSOR.

h.

In order for LICENSOR to claim that LICENSEE has not provided any LICENSEE’s Materials required in the development of the SDG Platform Rev B, LICENSOR must provide written notice to LICENSEE within [*] of the alleged failure. Any delay caused by LICENSEE’s failure to provide LICENSEE’s Materials in a timely fashion, or due to an inability, not caused by LICENSOR, to obtain a third party license needed for a feature included in the Specifications, shall cause a time extension for the applicable Milestone Date equal to the delay for the Milestone affected by that delay and all subsequent Milestone Dates, and establishes a new Milestone Date for each of the affected Milestones.

5.       LICENSOR Responsibilities: During the term of this Agreement, LICENSOR agrees that:

a.	LICENSOR shall use its best efforts to create the SDG Platform Rev A Extensions in accordance with the Milestones and Deliverables set forth in Exhibit C and otherwise perform its obligations under this Agreement.
b.	LICENSOR shall be responsible for providing the resources necessary for completing the SDG Platform Rev A Extensions, any host systems, tools or test harnesses required to verify that Specifications are being met, and shall provide secondary support in the form of training for LICENSEE’S game developers, QA assistance and assistance with suppliers and cause its personnel performing services at LICENSEE’S facilities to conform to LICENSEE’S reasonable and generally applicable office or facility policies.
c.	LICENSOR shall designate a Project Manager for the development of the SDG Platform Rev A Extensions. Among the Project Manager’s duties shall be responsibility for LICENSOR’S compliance with Exhibit E.
d.	LICENSOR shall provide LICENSEE’S project managers with access upon reasonable notice to LICENSOR’S development facilities and Design Documentation for the SDG Platform Rev A Extensions as they are being developed. LICENSOR will provide LICENSEE with weekly

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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	backups for all source code and Design Documentation created for the SDG Platform Rev A Extensions.
e.	For a period of [*] from the Gaming Regulatory Approval Date, LICENSOR will support and maintain the Licensed Property at its cost. Such support and maintenance shall include telephone support, and any correction or fixes necessary to cause the Licensed Property to continue to perform in accordance with the Specifications or as otherwise mutually agreed in writing by the parties. If Critical Defects are reported to LICENSOR, LICENSOR will use its best efforts to provide an initial call back within [*] if the report from LICENSEE is made during normal business hours (i.e. 8 a.m.-5 p.m. Pacific Time) or within [*] if the report is made outside of normal business hours, and, regardless of when the report is made, to begin corrective actions within [*] but in no event more than [*] after LICENSEE’S notice. If Serious Defects are reported to LICENSOR, LICENSOR will use its best efforts to provide an initial call back within [*], and to begin corrective actions within [*]. If Minor Defects are reported, LICENSOR will use its best efforts to provide an initial call back within [*], and begin corrective actions within [*]. For Critical and Serious Defects problem resolution efforts will be on-going (i.e. without material interruption in such efforts). LICENSOR’S resolution time is dependent on LICENSEE providing appropriate and sufficient data regarding the defects in question. Reports of defects and other communication between the parties regarding resolution of defects shall be made to the parties indicated in Exhibit F. Either party can change or add to the person(s) designated as their Support Contact on Exhibit F upon notice to the other party. LICENSOR shall only be responsible for correcting defects which can be reasonably shown to relate to code or other technology contained in the SDG Platform Rev B and any Derivative Works created by LICENSOR which has been licensed under Section 2.a(iv). Such support and maintenance shall not require on-site visits, unless the on-site visit is likely to significantly increase the chances for correction.
f.	For a period of [*] from the Gaming Regulatory Approval Date, LICENSOR will provide all updates, enhancements and revisions to the Licensed Property and all compatible technologies, systems and related features (including the Design Documentation therefor) which LICENSOR develops or has the right to use or market, at LICENSEE’S cost, all on reasonable terms to be negotiated in good faith, such terms to be no less favorable to LICENSEE than the terms LICENSOR provides to any third party.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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g.	For a period of [*] from the Gaming Regulatory Approval Date, LICENSOR will consider in good faith any additional proposals by LICENSEE to further enhance the Licensed Property beyond that contemplated by the Agreement. LICENSOR will agree that (i) the fees charged for such additional development shall not exceed those fees charged by LICENSOR to any other customer of LICENSOR for the same or similar services, (ii) LICENSOR will use its best efforts to schedule such development and assign such specific personnel as reasonably requested by LICENSEE, and (iii) the development will receive highest internal priority at LICENSOR and no such development will be “bumped downward” or given reduced priority, as to allocation of personnel or time schedule for meeting milestones without consent from LICENSEE.
h.	LICENSOR shall assist LICENSEE in achieving all certification requirements. LICENSOR shall provide, at its cost, [*] prototype units at each revision level. Additional prototypes to be displayed by LICENSEE at the [*] may be purchased by LICENSEE for an amount equal to LICENSOR’S cost thereof.
i.	LICENSOR will provide training for LICENSEE’S personnel with respect to the Licensed Property and comply with the vendor requirements as provided on Exhibit E.
j.	LICENSOR shall at all times employ development and engineering personnel needed to perform its obligations hereunder on a timely basis.
k.	Following the execution of this Agreement, if there arises litigation or a claim to the effect that the LICENSOR does not own the Licensed Property or that the exercise by LICENSEE of any rights granted hereunder with respect thereto will infringe on the Intellectual Property rights of any third party, LICENSOR will promptly notify LICENSEE.

6.       LICENSEE Responsibilities: During the term of this Agreement, LICENSEE agrees that:

a. LICENSEE shall be responsible for its own individual game development and shall provide secondary support for LICENSOR’S development efforts, and transitional personnel, all in the form of monitoring progress and preparing for the transition to LICENSEE of the SDG Platform Rev B. LICENSEE is solely responsible for its own game development, QA of its own development efforts, testing and regulatory submissions, with LICENSOR to provide support as provided in Section 5.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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b.	LICENSEE shall, at its own expense, be responsible for all laboratory testing, submissions, certifications and approvals, including all UL and CSA.
c.	LICENSEE shall, at its own cost, provide LICENSOR with gaming hardware, in fully operational form, for every configuration that LICENSOR is required to support. LICENSEE will provide [*] terminals with base configuration, and [*] additional terminal for each additional configuration LICENSOR will be supporting under the Agreement. Upon written demand, LICENSOR will return all equipment provided, with the exception of [*] units that it will keep for support purposes, upon final delivery of the SDG Platform Rev B.
d.	LICENSEE shall provide all other hardware and/or software utilized in testing, development and other related uses. LICENSEE shall retain all ownership rights in any such hardware and software.
e.	LICENSEE shall be responsible for all its own pilot and production runs of devices containing Licensed Products. LICENSEE shall provide LICENSOR with LICENSEE part numbers for preparation of schematics, spec sheets and as otherwise needed, and for all post-development supplier relationships.
f.	LICENSEE shall promptly notify LICENSOR if it discovers that the Licensed Property infringes any third party patent rights.

7.       LICENSOR Representations and Warranties: LICENSOR represents and warrants as follows (such representations and warranties to be deemed restated on each delivery of a Deliverable constituting Licensed Property or a portion or component thereof or Derivative Works provided under Section 5.f).

a.

LICENSOR has the right to enter into this Agreement, is a corporation duly organized, validly existing, and in good standing under the laws of Nevada, has the power and authority, corporate or otherwise, to execute and deliver this Agreement and to perform its obligations hereunder, and has by all necessary corporate action duly and validly authorized the execution and delivery of this Agreement and the performance of its obligations hereunder.

b.

To the best of LICENSOR’S present knowledge and belief, (i) LICENSOR is capable of creating the SDG Platform Rev A Extensions in accordance with the phases, Milestones and Deliverables set forth in Exhibit C; (ii) SDG Platform B will be capable of performing in accordance with the Specifications set forth in Exhibit B, and (iii)

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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c.	LICENSEE’S gaming machines utilizing SDG Platform Rev B will, in all material respects, perform in a commercially acceptable manner in accordance with applicable gaming regulations.
d.	(i) the Licensed Property is original to LICENSOR; (ii) no confidential or proprietary information of a third party was used or relied upon in developing the Licensed Property; (iii) LICENSOR is the owner and has all right, title and interest to the Licensed Property and is authorized to grant the rights and licenses to the Licensed Property as described herein, (iv) the Licensed Property does not infringe any third party copyright or trade secret and (v) to the best of LICENSOR’S knowledge, the Licensed Property does not infringe any third party patent (provided however, in connection with LICENSOR’s restatement of the representation in this subsection (v), in the event that, after the date hereof, LICENSOR first obtains knowledge that the Licensed Property infringes a patent issued before or after the date hereof, this subsection (v) shall not be breached if LICENSOR provides LICENSEE with prompt notice of such patent).
e.	There are no outstanding liens, encumbrances, third party rights, agreements or understandings of any kind, either written, oral or implied, regarding the Licensed Property which conflict with any provisions of this Agreement or with LICENSOR’S performance of its obligations hereunder.
f.	As of the date of this Agreement, there is no pending litigation or claim, nor has LICENSOR been advised of such, or other claim that the LICENSOR does not own the Licensed Property or that the exercise by LICENSEE of any rights granted hereunder with respect thereto will infringe on the Intellectual Property rights of any third party.
g.	LICENSOR is solvent and generally able to pay its debts as such debts become due, and has sufficient funds to carry on its business and engage in the transactions contemplated herein. LICENSOR is not in default or breach under any agreement by which LICENSOR is bound or obligated which would have material adverse effect on the ability of LICENSOR to perform its obligations under this Agreement.
h.	A substantially complete and correct copy of SDG Platform Rev A has been delivered to LICENSEE on or prior to the date hereof and such copy meets the specifications set forth in Exhibit A.
i.	All Third Party Tools are commercially available for purchase or license except as expressly set forth in this agreement.

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j. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, LICENSOR EXPRESSLY DISCLAIMS AND MAKES NO OTHER REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

8.       LICENSEE Representations and Warranties: LICENSEE has the right to enter into this Agreement, is a corporation duly organized, validly existing, and in good standing under the laws of Delaware, has the power and authority, corporate or otherwise, to execute and deliver this Agreement and to perform its obligations hereunder, and has by all necessary corporate action duly and validly authorized the execution and delivery of this Agreement and the performance of its obligations hereunder.

9.       Term: The term of this Agreement shall commence on the date first set forth above and shall continue thereafter in perpetuity unless or until terminated earlier by mutual agreement of the parties or pursuant to Sections 4.c, 10 or 14.c hereof.

10. Regulatory Compliance:

a.

Performance of this Agreement in each jurisdiction is contingent upon each party possessing or receiving any necessary initial and continuing approvals and licenses from the regulatory authorities in each of the jurisdictions where the parties operate and that have jurisdiction over the parties or the subject matter of this Agreement. Each party shall cooperate with any requests, inquiries or investigations of any regulatory authorities or law enforcement agencies. If any license or approval necessary for either party to perform under this Agreement is denied, suspended, or revoked, this Agreement shall terminate immediately, and the parties shall engage in good faith negotiations to provide for an appropriate fee proration, and neither party shall have any additional rights hereunder; provided, however, that if the denial, suspension, or revocation affects performance of this Agreement, in part only (e.g. in a jurisdiction), the parties shall continue to perform under this Agreement to the extent it is unaffected by the denial, suspension, or revocation.

b.

The parties acknowledge that each party operates under privileged licenses in a highly regulated industry, maintains a compliance program to protect and preserve its name, reputation, integrity, and good will through a thorough review and determination of the integrity and fitness, both initially and thereafter, of any person or company that performs work for the parties or their respective Affiliates, or with which those companies are otherwise associated, and to monitor compliance with the requirements established by gaming regulatory authorities in various jurisdictions around the world. Each party shall cooperate with the other party and its compliance committee as reasonably requested and provide the committee

17

with such information as it may reasonably request on appropriate notice. Either party may terminate this Agreement in the event that either party or its respective compliance committee discovers facts with respect to the other party or this Agreement that would, in the reasonable opinion of that party or its committee or both, jeopardize the gaming licenses, permits, or status of that party or any of its Affiliates, with any gaming commission, board, or similar regulatory or law enforcement authority. If reasonable and appropriate, the parties may provide notice of, and attempt to resolve, any problems and concerns, relating to such facts. In the event of such termination, the parties shall engage in good faith negotiations to provide for an appropriate fee proration.

c.

Where references are made in this Section 10 to “appropriate fee proration” it is intended that fees paid or payable by LICENSEE to LICENSOR would be reduced or refunded on a proportionate basis to reflect the relative reduction in revenues reasonably anticipated to be suffered by LICENSEE as a result of termination or revision of this Agreement and the licenses granted hereunder, in whole or in part, as compared to revenues reasonably anticipated had this Agreement or such license not been so terminated or revised. Appropriate fee proration shall also consider additional factors such as the basis of termination and the relative degree of fault of the parties.

11. Confidentiality:

a. In connection with this Agreement, either party may disclose Confidential Information to the other. In such event, the party receiving Confidential Information (“Receiving Party”) shall hold in confidence all Confidential Information disclosed to it by the other party (“Disclosing Party”) until such time, if ever, that such Confidential Information becomes available to the public without breach of this Agreement or the Receiving Party is authorized in writing by the Disclosing Party to disclose such Confidential Information as set forth in such writing. A Receiving Party shall not disclose any Confidential Information of the disclosing party to any third person, except to the Receiving Party’s employees, agents, consultants, or contractors or requesting regulatory authority or to Game Developers or Game Manufacturers, in each instance, who have a reasonable need to know such information and only to the extent necessary to exercise rights permitted in this Agreement and in connection with the performance of this Agreement. The Receiving Party shall be responsible to the Disclosing Party for any violation of the terms hereof by any of the employees, agents or consultants, contractors, Game Developers or Game Manufacturers of the Receiving Party. In addition to the foregoing, the Receiving Party shall safeguard the Confidential Information of the

18

Disclosing Party with the same degree of care that it utilizes to safeguard its own proprietary information of a similar character, and in any case shall use reasonable care to safeguard such Confidential Information. No Receiving Party shall use Confidential Information of the Disclosing Party except in the furtherance of this Agreement, unless otherwise expressly authorized to do so in writing by the Disclosing Party.

b.

“Confidential Information” means any information disclosed by the Disclosing Party to the Receiving Party pursuant to this Agreement in a context which would cause a reasonable person to believe the information is intended to be treated as confidential, including but not limited to, the Licensed Property and documents expressly designated as confidential, and information related to either party’s manufacturing processes, products, employees, facilities, equipment, security systems, information systems, finances, product plans, marketing plans, suppliers, or distributors; provided, however that “Confidential Information” shall not include information that: (i) is now available or becomes available to the public without breach of this Agreement; (ii) is explicitly approved for release by written authorization of the Disclosing Party; (iii) is lawfully obtained from a third party or parties without a duty of confidentiality to the Disclosing Party; (iv) is of a type typically disclosed to a third party by the Disclosing Party without a duty of confidentiality; (v) is known to the Receiving Party prior to disclosure; or (vi) is at any time developed by the Receiving Party independently of any such disclosure(s) from the Disclosing Party. Notwithstanding anything to the contrary herein, the Licensed Property shall be considered Confidential Information of each of the parties hereto and may only be disclosed pursuant to the terms contained herein.

12.      Insurance Obligations: Each party shall purchase and maintain (and shall pay all premiums and deductibles related to) commercial liability insurance, including products liability, for the Licensed Property from a recognized and qualified insurance company naming the other party as additional insured in the amount of at least [*] million per occurrence against any claims, suits, losses or damages, including attorneys’ fees, arising out of any alleged defects in or the packaging, manufacture, marketing, distribution, sale or use of the Licensed Property. The insurance purchased and maintained by LICENSOR shall include errors and omissions insurance. Such policies shall be non-cancelable except after thirty (30) days’ prior written notice to the other party.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

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13. Indemnification; Limitation of Liability:

a.	Each party hereto agrees to indemnify and hold the other (including officers, directors, agents and employees of such party or its Affiliates) harmless against any loss, damage, expense or cost, including reasonable attorneys’ fees (collectively, “Damages”) arising out of or in connection with, resulting from or relating to any breach of any of such party’s warranties or representations set forth in Sections 7 or 8 above, respectively (“Indemnified Claims”). Each party shall promptly inform the other in writing of any such Indemnified Claim.
b.	In connection with any Indemnified Claims, the party so indemnifying (the “Indemnitor”) agrees to defend, contest or otherwise protect the indemnified party (the “Indemnitee”) against any such suit, action, investigation, claim or proceeding at the Indemnitor’s own cost and expense. The Indemnitee shall have the right, but not the obligation to participate, at its own expense, in the defense thereof by counsel of its own choice. In the event that the Indemnitor fails to notify Indemnitee in writing that it will defend, contest or otherwise protect against any such Indemnified Claim within ten (10) days after written notice from the Indemnitee, the Indemnitee shall have the right upon five (5) days’ written notice to the Indemnitor to defend, contest or otherwise protect against the same and make any compromise or settlement thereof and recover the entire cost thereof from the Indemnitor, including without limitation, reasonable attorneys’ fees, disbursements and all reasonable amounts applied as a result of such suit, action, investigation, claim or proceeding or compromise or settlement thereof. The obligations hereunder shall survive any termination or expiration of this Agreement.
c.	Anything herein to the contrary notwithstanding, if LICENSEE’S use of the Licensed Property as permitted by this Agreement is enjoined due to an Indemnified Claim for which LICENSOR is required to indemnify LICENSEE (“LICENSOR’s Indemnified Claim”), LICENSOR will, at its sole expense, either: (i) procure for LICENSEE the right to continue to exercise its rights under the License, or (ii) replace the Licensed Property with non-infringing, substantially equivalent products or functionality, or (iii) suitably modify the Licensed Property so that it is not infringing; or, (iv) in the event (i), (ii) and (iii) are not achievable on commercially reasonable terms or in a commercially reasonable manner, at LICENSEE’s option, accept return of the Licensed Property and refund to LICENSEE all License Fees paid to LICENSOR under this Agreement. In the event that (1) LICENSEE’s use of the Licensed Property as permitted by this Agreement is enjoined other than due to a LICENSOR’s Indemnified Claim or (2) after the date hereof either party discovers that the Licensed

20

Property infringes a third party patent and there is at that time no injunction, the parties agree to work together to pursue the actions set forth in (i) or (iii) above and will share costs with respect to such actions in an equitable and good faith manner.

d.

Neither LICENSOR, LICENSEE nor their respective Affiliates shall be liable for any incidental, consequential, punitive or indirect damages of the other arising out of or in connection with this Agreement. Except with respect to LICENSOR’S Indemnified Claims, in any action arising out of contract, negligence, strict product liability, tort or warranty the maximum amount of any recovery against LICENSOR by LICENSEE shall be limited to the aggregate fees paid or payable to LICENSOR under Section 3 of this Agreement.

14.      Security Interest: In order to secure LICENSOR’S obligations to indemnify LICENSEE under Sections 13.a, and to return or refund License Fees paid as provided for in Section 4.c, 13.c or Exhibit D (the “Obligations”), LICENSOR hereby grants to LICENSEE a first priority security interest in and to (a) SDG Platform Rev A and SDG Platform Rev B, (b) all Intellectual Property and LICENSOR’S Technology embodied therein, (c) all of LICENSOR’s documentation relating to the foregoing, and (d) General Intangibles and Proceeds (as defined in the Uniform Commercial Code in effect in Nevada) relating to or of any of the foregoing, in all cases now existing or hereafter developed (all of the foregoing hereafter shall be collectively referred to as “Collateral”). Notwithstanding the foregoing, product(s) utilizing SDG Platform Rev A and SDG Platform Rev B shall not be deemed Collateral and shall be and remain the property of LICENSOR. LICENSOR shall have the sole and absolute right to sell, lease or license product(s) in the ordinary course of business utilizing SDG Platform Rev A and SDG Platform Rev B without any form of security interest attaching to either the product(s) or any proceeds generated from them. LICENSOR shall execute and/or deliver to LICENSEE, at any time at the request of LICENSEE, all agreements, instruments or documents that LICENSEE reasonably may request, including a more formal security agreement, in a form and substance acceptable to LICENSEE, to perfect and maintain perfected LICENSEE’s first priority security interest in the Collateral, including, without limitation, filings with the U.S. Patent and Trademark Office. LICENSOR hereby authorizes LICENSEE to file UCC-1 Financing Statements and to take any other steps necessary to perfect and maintain the perfection of LICENSEE’s first priority lien on the Collateral and hereby appoints LICENSEE as its agent and attorney-in-fact to execute and/or perform on its behalf all agreements, documents or instruments necessary to carry out the obligations of LICENSOR hereunder. LICENSOR shall not grant a security interest in or permit a lien, claim or encumbrance upon any of the Collateral after the date hereof, except with the prior written consent of LICENSEE. Upon LICENSOR’s default in performance of the Obligations, and subsequent failure to cure following 30 days prior written notice. LICENSEE may exercise any one or more of the rights and remedies accruing to a secured party under the Uniform Commercial Code under the laws of Nevada and any other applicable law upon default by a debtor. All of LICENSEE’s rights and remedies under this Agreement are cumulative and non-exclusive. Accordingly,

21

nothing herein shall be construed to limit LICENSEE from pursuing any other legal or equitable remedy which it may have against LICENSOR. In the event LICENSEE sells or otherwise disposes of the Collateral and applies the net proceeds thereof to the Obligations, LICENSOR will be liable to LICENSEE for the difference between the then outstanding amount of the Obligations and the net proceeds of such disposition applied to the Obligations, if any. LICENSOR, with LICENSEE’s approval, may elect to substitute different collateral for the Collateral, provided such new collateral is of equal or greater value, and in such event such new collateral shall become the “Collateral” as referred to in this Section, and the parties will amend any separate security agreement or UCC financing statement. Provided the Collateral has not been previously foreclosed upon, and there is then no claim, suit or demand which alleges facts which constitute a breach of LICENSOR’s representations or warranties set forth in Section 7, LICENSEE shall release the security interest provided by this Section [*] from the Gaming Regulatory Approval Date.

15.      Assignment: Except as otherwise provided elsewhere in this Agreement, neither party may transfer or assign any of the rights or obligations under this Agreement without the prior written authorization of the other.

16.      Relationship of the Parties: The parties agree that the relationship between them is that of independent contractors. Neither LICENSOR nor LICENSEE shall have the right to enter into any commitments or relationships on behalf of the other, or to bind the other, except to the extent allowed under this Agreement. Each party shall be responsible for their own taxes, fees and costs.

17.      Entire Agreement: This Agreement constitutes the entire agreement of the parties and all prior rights, negotiations and representations, including the Letter Agreement, are merged herein.

18.      No Waiver: The failure of either party to this Agreement to insist upon the performance of any of the terms and conditions of this Agreement, or the waiver of any breach of any of the terms and conditions of this Agreement, shall not be construed as thereafter waiving any such terms and conditions, but the same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred.

19.      Effect of Partial Invalidity: The invalidity of any portion of this Agreement will not and shall not be deemed to affect the validity of any other provision. In the event that any provision of this Agreement is held to be invalid, the parties agree that the remaining provisions shall be deemed to be in full force and effect as if they had been executed by both parties subsequent to the removal of the invalid provision

20.      Public Announcements: The parties agree to make a mutually-agreeable public announcement concerning the transaction which is the subject of this Agreement within a reasonable and appropriate time period following execution hereof. Except for the

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

22

foregoing and for disclosures and announcements as are required by applicable law, gaming regulations or stock exchange rules (upon reasonable prior notice to the other party and opportunity to comment), each party agrees not to make any public announcements regarding this Agreement without prior written consent of the other party. In addition, except as required by applicable law, gaming regulations or stock exchange rules or as may be agreed between the parties, neither party shall disclose the terms and conditions hereof to any third party.

21.      Modification Of Agreement: Any modification of this Agreement or additional obligation assumed by either party in connection with this Agreement shall be binding only if evidenced in writing signed by each party or an authorized representative of each party.

22.      Jurisdiction and Applicable Law: This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of Illinois regardless of the choice of law rules of such state or any other jurisdiction. All disputes arising out of this Agreement shall be subject to the exclusive jurisdiction of either the state or federal courts located in Las Vegas or Reno, Nevada and the parties agree and submit to the personal and exclusive jurisdiction and venue of these courts.

23.      Notices: Any notice, consent, approval, request, waiver or statement to be given, made or provided for under this Agreement shall be in writing and deemed to have been duly given (i) by its delivery personally or by overnight air courier service; (ii) by its being sent by telefax; provided a copy is also sent contemporaneously by regular mail and the sender has received a machine generated automatic confirmation of successful transmission, or (iii) five days after its being mailed, registered or certified, return receipt requested in a U.S. Post Office addressed to LICENSOR’S or LICENSEE’S address as set forth on page one hereof (to the attention of President), or to such other address as either party may designate by notice given as aforesaid. A copy of any notice sent to LICENSOR or LICENSEE shall also be sent to the General Counsel of each company as set forth below:

To: Orrin J. Edidin	To: Lars Perry
c/o: WMS Gaming Inc.	c/o: Sierra Design Group
800 S. Northwest Blvd	300 Sierra Manor Drive
Waukegan, IL, 60085	Reno, NV 89511

24.      Remedies for Breach; Attorneys’ Fees and Costs: The parties agree that except in the case of fraud, remedies that may be sought by a party in the event of breach of this Agreement by the other party shall include claims for damages and equitable remedies, including specific performance, injunction and similar remedies, but shall not include termination of this Agreement or any of the provisions hereof. If any legal action is brought for the enforcement of this Agreement or because of an alleged breach of this Agreement, the successful or prevailing party shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, in addition to any other relief to which such party may be entitled.

23

25.      Counterparts: This Agreement may be executed in any number of counterparts, each which shall be deemed to constitute but one and the same instrument.

26.      Captions: Captions contained in this Agreement are inserted only as a matter of convenience and reference. Said captions shall not be construed to define, limit, extend or describe this agreement of the intent of any provision hereof.

27.      Execution of Additional Documents: Each party agrees to perform any further acts and to execute and deliver any documents which may be reasonably necessary to effectuate the provisions of this Agreement.

[signature page follows]

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IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written.

SIERRA DESIGN GROUP		WMS GAMING INC.
By:	/s/ Robert A. Luciano	By:	/s/ Orrin J. Edidin
	Robert A. Luciano		Orrin J. Edidin

Title: President Title:  Executive Vice President, General
Counsel and Chief Operating Officer

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EXHIBIT A

Description of SDG Platform Rev A (Alpha Game System)

[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

A-1

EXHIBIT B

Development Task and Specifications

and SDG Game System Rev A Extensions

[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

B-1

EXHIBIT C

Development Schedule, Deliverables

and Milestones

[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

C-1

EXHIBIT D

Bonus License Fees and Penalties

A. Bonus License Fees

1.

Subject to the provisions below in this Section A and those in Section B regarding Penalties, the Bonuses shall be determined as set forth in this paragraph 1. Bonuses for Milestones as set forth in Exhibit C may only be earned (in whole or in part) if (a) delivery of the applicable Deliverables are made no later than [*] after the applicable Milestone Date, and (b) the Acceptance Criteria has been met (or deemed met) by the end of the Initial Correction Cycle. Subject to (b) above, if delivery of the applicable Deliverable is made no later than [*] after the applicable Milestone Date, LICENSOR may earn the full Bonus for said Deliverable. Subject to (b) above, if such delivery is made on the [*] after the applicable Milestone Date, LICENSOR may earn only [*] of the full Bonus for said Deliverable. Subject to (b) above, in addition to the [*] reduction provided for in the prior sentence, for each additional [*] after the [*] that delivery is delayed, the amount of LICENSOR’s Bonus which it may earn will be reduced by an additional [*], such that if delivery is not made by the [*] after the applicable Milestone Date no Bonus may be earned.

2.

Notwithstanding the provisions of paragraph 1 above, if the Deliverables in the following Milestones have not been delivered by their respective Milestone Date, the Bonus for such Milestones shall not be earned:

(a)	Milestone 1A [*]
(b)	Milestone 2D [*]
(c)	Milestone 2E [*]

3.

Subject to the provisions of paragraph 2 above (which provisions shall continue to be in effect notwithstanding this paragraph), provided Milestone 2E [*] has been met by its Milestone Date, the Bonuses for Milestones 1A, 2A, 2B, 2C, 2D and 2E shall be paid within [*] of the Milestone Date.

4.

Notwithstanding the provisions of paragraph 1 above, but subject to the provisions of paragraph 2 above (which provisions shall continue to be in effect notwithstanding this paragraph), if the Milestone Dates for all of the Jurisdictions (defined below) in Milestone 4C [*] have been met with no delays, then all Bonuses for the previous Milestones shall be deemed to be [*] earned, it being understood that no submittals shall take place unless and until the Acceptance Criteria for all the prior Deliverables has been met.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

D-1

5. Subject to the provisions below on Penalties, Bonuses which are otherwise earned shall be paid within [*] after Milestone 4E has been met.

B. Penalties.

1.	The penalty shall consist of (a) a reduction of the Bonuses which were otherwise earned as set forth in Section A above and (b) LICENSOR’s payment of a refund of the License Fee paid pursuant to Section 3.a. not to exceed a refund of [*] (the “Refund”).
2.	The penalty, if any, will be determined in accordance with the following.

(a)	The maximum amount of the penalty is a [*] reduction in the earned Bonus plus a Refund of [*] (the “Maximum Penalty”).
(b)	The penalty which is actually assessed is based on the date, in relation to the Milestone Date, on which Milestone 4E [*] as it relates to approval by all applicable regulators in Nevada, New Jersey, Mississippi and Gaming Laboratory Inc. (“GLI”) (each herein a “Jurisdiction”), is met (in this Exhibit D, the “Approval Date”). Approval by GLI means the first GLI approval for any GLI jurisdiction.
(c)	Subject to (e) below, the Approval Date of each of the four Jurisdictions listed in (b) above determines [*] of the Maximum Penalty. For each of the Jurisdictions, considered separately, the following penalties shall be assessed on a cumulative basis:

Approval Date for each Jurisdiction	Penalty
On or before the Milestone Date	None
[*] after the Milestone Date	[*] reduction in earned Bonus
Each additional [*] up to (and including) [*] late	a pro rata portion of an additional [*] reduction in earned Bonus
[*] late	Additional [*] reduction in earned Bonus
Each additional [*] up to (and including) [*] late	a pro rata portion of an additional [*] reduction in earned Bonus
Each additional [*] up to exactly [*] late	an additional pro rata portion of a Refund of [*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

D-2

[By way of example, assume that the Approval Date for the Jurisdictions of New Jersey, Mississippi and GLI occurred on or before the Milestone Date for Milestone 4E, but that the Approval Date for Nevada occurs exactly [*] after the Milestone Date. The applicable penalty in this example would be a [*] reduction in earned Bonus plus a Refund of [*]. If, instead the Approval Date for New Jersey and Mississippi occurred on or before the Milestone Date, but the Approval Date for Nevada and GLI occurred exactly [*] after the Milestone Date, the applicable penalty would be a [*] reduction in earned Bonus plus a Refund of [*].]

(d) The following shall apply in determining the Approval Date:

     (i) If (1) submittal to a Jurisdiction has been met by its Milestone Date (i.e Milestone 4C), it being understood that no such submittal shall be made prior to the Acceptance Criteria for all the prior Deliverables having been met, and (2) Milestone 4E with respect to a Jurisdiction is ultimately met (A) without any issues relating to the Licensed Property having been raised by the Jurisdiction during field trials that result in delays to the Approval Date of the Licensed Property and (B) with respect to any issues relating to the Licensed Property raised prior to the start of the field trials by the Jurisdiction, LICENSOR has fixed the problem and delivered to LICENSEE such fix in an update to the Licensed Property such that such issues do not create a delay in the Approval Date of the Licensed Property; then regardless of the actual Approval Date, the Approval Date for the Jurisdiction for purposes of (c) above shall be deemed to be the Milestone Date.

     (ii) To the extent (d) (i) (1) or (2) above are not met, the Approval Date for a Jurisdiction shall be calculated as the earlier of the actual date regulatory approval is awarded, or the Approval Date as calculated below:

(1) The Approval Date shall be the Milestone Date for regulatory approval as set forth in Milestone 4E in Exhibit C for the Jurisdiction, plus

(2) Any delay incurred in delivery of the Licensed Product for Milestone 4C (Sell 1 Regulatory Submittal), it being understood that no such submittal shall be made prior to the Acceptance Criteria for all the prior Deliverables having been met, plus

(3) Any delay incurred as a result of Critical or Serious Defects arising with respect to the Licensed Property (excluding any such Defects solely caused by LICENSEE’s game development and Top Box development) after submittal to the Jurisdiction, and where such Defects must be fixed by LICENSOR to gain

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

D-3

regulatory approval, such delay being calculated as the time difference between when LICENSOR is notified of such defect and the fix for the Defect is provided to the LICENSEE.

[By way of example, the Milestone Date for Milestone 4E (Regulatory Approval) as it relates to GLI, as set forth on Exhibit C, is [*]. If Milestone 4C delivery is [*] late, and a problem is found during regulatory approval where the fix provided by the LICENSOR takes [*], the total delay would be calculated as [*], causing the calculated Approval Date to be [*] which would be [*], which would be calculated as a penalty of [*] late for purposes of (c) above.]

(e) Notwithstanding anything to the contrary herein, including (d) above, if the actual Approval Date for any of the Jurisdictions is more than [*] late, then the Maximum Penalty shall apply and, accordingly, the penalty shall be a [*] reduction in earned Bonus and a Refund of [*].

(f) The applicable Refund, if any, will be paid by LICENSOR as soon as it is determined. LICENSEE may offset the amount of the Refund to which it is entitled against the amount of Bonuses which are earned, due and payable.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

D-4

EXHIBIT E

Vendor Management Items

Vendor Management Items:

Initial Deliverables (provided by SDG unless otherwise noted) will be provided within 1 week of contract signing:

Requirements (provided by WMS)

Milestone schedule (milestone list)

Staffing and Planning (Microsoft project schedule)

Product Development Lifecycle

Product Development Process description

Change Control Process

Issue Management plan

Risk Management plan

Weekly status reports will be written by SDG & conference calls will be held between SDG and WMS to review (all material to be provided by SDG):

Schedule status – delivery of an updated detailed schedule, current variance and projected variance of detailed schedule, status (% complete) on items in progress and status on items expected to be complete, evidence of items complete.

Current list of project issues/actions, actions, owners, and progress (kept in excel or other format with action item #, description, originator, owner, due date, severity/priority, current status and date completed) (we can supply a template).

Status of risk items & risk management plan

Problem reports on product defects and plans for resolution (in excel or other format with Problem ID, severity, description, functional area affected, owner/developer responsible, date for resolution and current status) (we can supply a template)

Above items must be delivered 24 hours prior to each meeting.

Face-to-Face Program reviews will be held [*] to alternate between [*] and [*]:

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

E-1

SDG will present detailed schedule status, issues status, risk management status, problem report status as described above in the weekly conference calls.

SDG will present Schedule and Quality Metrics, including:

# of problems found, inspection rates, prep rates, # open defects, average time to fix, work & effort over time compared to plan, etc.

Site access to SDG [*] for our program manager in [*] will be provided as needed (this will be scheduled and coordinated with the SDG program manager).

QA audits will be performed as desired by WMS on each of the following SDG development phases and work products (these audits will be scheduled in advance with the SDG program manager):

Requirements

Design

Implementation (coding)

Unit test

Integration test

Config Mgmt (Loadbuilding)

System Test

Training material and Training program will be provided by SDG in advance of each submission to WMS QA testing. For each delivery, SDG will provide up to [*] of training on site at [*].

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

E-2

EXHIBIT F

Support Contacts

Licensor’s Support Contact

Name	Robert Crowder	Name
Telephone Number	[*]
Fax Number	[*]
Cellular Number	[*]
e-mail	[*]

Licensee’s Support Contact

Name	Laurie Lasseter	Name
Telephone Number	[*]
Fax Number	[*]
Cellular Number	[*]
e-mail	[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

F-1 EX-10.2 4 c82839exv10w2.htm 1ST AMENDMENT TO LICENSE & DEVELOPEMENT AGREEMENT

Exhibit 10.2

First Amendment to License & Development Agreement

               This Amendment, dated June 12, 2003 (“Amendment”), is the First Amendment to that certain License and Development Agreement, dated April 24, 2002 (the “Agreement”), between SIERRA DESIGN GROUP, a Nevada corporation with offices located at 300 Sierra Manor Drive, Reno, NV 89511 (“LICENSOR”), and WMS GAMING INC., a Delaware corporation with offices located at 800 S. Northpoint Boulevard, Waukegan, Illinois 60085 (“LICENSEE”).

          WHEREAS, the parties desire to amend the Agreement;

          THEREFORE, in consideration of the mutual promises and covenants set forth in this Amendment, the sufficiency and receipt of which is hereby acknowledged, LICENSOR and LICENSEE agree as follows:

1. Definitions

1.1	The term “Acceptance Criteria” in Section 1a of the Agreement is deleted and replaced with the following: “Acceptance Criteria”, as it applies to the Deliverables (defined below) shall mean that (i) each Deliverable meets the Specifications (as defined below), and (ii) each Deliverable exhibits no “Major Defects” in LICENSEE’s Acceptance Testing.
1.2	Section 1 of the Agreement is amended to add the following defined term: “Major Defect,” as it relates to a particular Deliverable or to the SDG Platform Rev B, shall mean one or more conditions exists that are deemed by the appropriate gaming regulators in any of Nevada, Mississippi or New Jersey or by GLI, as applicable, as preventing regulatory approval, including, without limitation: [*]. Major Defects shall specifically exclude those errors defined as “Minor Defects.”
1.3	Section 1 of the Agreement is amended to delete in their entirety the terms “Critical Defect” and “Serious Defect”. The Agreement, together with all of its Exhibits and Schedules, are further amended to substitute throughout the term “Major Defect” for all references, whether combined or singular, to “Critical Defect” and “Serious Defect” and all conforming changes necessary to effect such substitution are hereby deemed made as if set forth here in full.
1.4	Section 1 of the Agreement is amended to add the following term: “Final Load,” with respect to [*] (as defined below), shall mean [*].

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 1 –

	With respect to [*] (as defined below), “Final Load” shall mean [*]. Such subsequent test plans will be comparable in scope and detail as the test plans for [*].
1.5	Section 1 of the Agreement is amended to add the following term: “[*]” shall mean [*], and such other functionality as the parties may mutually agree. LICENSOR agrees to use best commercial efforts to include [*] in [*], but it shall not constitute a Deliverable for [*].
1.6	Section 1 of the Agreement is amended to add the following term: "[*]” shall mean [*] and such other functionality as the parties may mutually agree.
1.7	“GLI” shall mean Gaming Laboratories Inc.
1.8	“New Bonus Amounts” shall mean, with respect to [*], the Bonus amounts as set forth in Annex 3.4 (which aggregate to [*]) and, with respect to [*], the Bonus amounts associated with all of the parts of Milestone 4D as set forth in Annex 3.4 (which aggregate to [*]).
1.9	“Original Bonus Amounts” shall mean the Bonus amounts associated with Milestones 1A, Milestones 2A-2E, Milestones 3A-3B, and Milestones 4A-4B (as modified) (which aggregate to [*]).
1.10	“Pre-Submission Milestones” shall mean, with respect to [*], Milestones 4C-1 through 4C-2 and, with respect to [*], Milestones 4D-1 through 4D-3.

2. Independent Development

2.1

Section 4d of the Agreement is deleted in its entirety and replaced with the following: “To the extent possible, and in an effort to expedite the development process, when the Deliverables for a given Milestone are suitable for LICENSOR’s Quality Assurance procedures (“QA”) before the Milestone date, LICENSOR shall provide a copy of the Deliverables to LICENSEE such that QA testing can be started.”

2.2

Section 4f of the Agreement is deleted in its entirety and replaced with the following:

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 2 –

“As part of the QA process, LICENSOR and LICENSEE will agree upon a QA test plan and test schedule. The test schedule will outline “ATR and blockage resolution” and “Regression Testing” phases. During these test phases, LICENSEE will promptly notify LICENSOR of defects discovered (“Statement of Defects”), and LICENSOR will promptly fix all Major Defects. Another drop will be delivered by LICENSOR fixing such Major Defects, and LICENSEE will then promptly verify that the Major Defects have been fixed. All Minor Defects shall be fixed and verified in a timely manner in accordance with a schedule to be mutually determined by the parties on a case-by-case basis. It is the intention of the parties to move forward with the QA process as quickly as possible. Notwithstanding this paragraph, in the event of conflict between the QA schedule and the Milestones set forth in Exhibit C, Exhibit C shall control. When verifying whether defects have been fixed, LICENSEE will consider in good faith input provided by LICENSOR on the regression suites required for such verification; provided, however, that LICENSEE shall make, in its sole judgment, the final determination of the regression suites to be used or whether full regression testing is required to verify the correction of a Deliverable.”

3. Milestones (Exhibit C)

3.1	The Bonus for Milestone 4B on Exhibit C is deleted and replaced with [*]
3.2	The Bonuses applicable to Milestones 1A, 2A, 2B, 2C, 2D, 2E, 3A, 3B, 4A, and 4B (as amended) are [*], subject to application of Paragraph B of Exhibit D (Penalties).
3.3	The Bonuses applicable to Milestones 3C and 3D are [*].
3.4	Milestones 4C and 4E on Exhibit C are deleted in their entirety and replaced by the Milestones for [*] and [*] set forth on Annex 3.4 hereto.
3.5	The aggregate Bonus of [*] for [*] and [*] set forth in Exhibit C remains allocated to [*] and [*]. LICENSOR and LICENSEE agree to negotiate in good faith to reach an agreement on or before [*] with respect to the functionality, deliverables, and milestones for [*] and [*].

4. Bonus License Fees and Penalties (Exhibit D)

4.1	Paragraph A.1 of Exhibit D is amended by deleting everything after the first sentence and adding the following: “Bonuses for Milestones as set forth in Exhibit C may only be earned (in whole or in part) if the Acceptance Criteria has been met (or deemed met) by the applicable Milestone Date set forth in Exhibit C.”
4.2	Paragraph A.4 of Exhibit D is deleted in its entirety and replaced with the following: “Subject to this Paragraph A and Paragraph B herein, Bonuses associated with Milestones 4C and 4D set forth in Exhibit C will be deemed earned as follows:

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 3 –

[*] GLI Approval

The Bonus associated with GLI approval for [*] shall consist of [*] of the Bonus associated with the [*] Milestones plus the Bonuses associated with each of Milestones 4C-3a (GLI submission) and 4C-4a (GLI approval) to the extent each such Milestone date is met without delay. In the event that either or both of the [*] Milestones and/or the regulatory submission Milestone for GLI (Milestone 4C-3a) are not met, but the GLI regulatory approval Milestone for [*] (Milestone 4C-4a) is met, there shall be no Bonus recovery for any portion of such pre-approval Milestones attributed to GLI for [*]. If the GLI approval letter for [*] is not received by the GLI approval Milestone (Milestone 4C-4a) for any reason, then the Bonus for such Milestone will not earned. For purposes of determining whether the GLI approval Milestone is met for [*], the provisions of the last sentence of Section 4.h of the Agreement and Paragraph B.2(d) of this Exhibit D shall not apply. LICENSOR and LICENSEE shall use best commercial efforts to gain approval for [*] from GLI.

[*] NV, MS and NJ Submissions

Notwithstanding the provisions of Paragraph A.1 above, if any of the Pre-Submission Milestones for [*] are not met, but the Milestone Date for regulatory submission of [*] to Nevada (Milestone 4C-3b), Mississippi (Milestone 4C-3c) or New Jersey (Milestone 4C-3d) is met with no delay, then [*] of the New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and the submittal Bonus for Nevada, Mississippi or New Jersey, as applicable, shall be deemed to be [*] earned with respect to Nevada, Mississippi or New Jersey, as applicable, it being understood that no submittals shall take place unless and until the Acceptance Criteria for all of the prior Deliverables has been met.

[*] New Jersey Approval

Notwithstanding the provisions of Paragraph A.1 above, if any of the Pre-Submission Milestones for [*] are not met, but the Milestone Date for regulatory submission of [*] to New Jersey (Milestone 4D-4a) is met with no delay, then [*] of the New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and the submittal Bonus for New Jersey shall be deemed to be [*] earned, it being understood that no submittals shall take place unless and until the Acceptance Criteria for all of the prior Deliverables has been met. If the New Jersey approval letter for [*] is received by LICENSEE on or before [*] following the New Jersey approval Milestone Date (Milestone 4D-5a), then the Bonus for such Milestone shall be deemed to be [*] earned; if the New Jersey approval letter for [*] is not received within [*] after the New Jersey approval Milestone Date (Milestone 4D-5a) for any reason, then the Bonus for such Milestone will not earned. For purposes of determining whether the New Jersey approval Milestone is met for [*], the provisions of the last sentence of Section 4.h of the Agreement and Paragraph B.2(d) of this Exhibit D shall not apply. LICENSOR and LICENSEE shall use best commercial efforts to gain approval for [*] from New Jersey.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 4 –

[*] GLI, NV and MS Submittals

Notwithstanding the provisions of Paragraph A.1 above, if any of the Pre-Submission Milestones for [*] are not met, but the Milestone Date for regulatory submission of [*] to GLI (Milestone 4D-4b), Nevada (Milestone 4D-4c), or Mississippi (Milestone 4D-4d) is met with no delay, then [*] of the New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and the submittal Bonus for GLI, Nevada, or Mississippi, as applicable, shall be deemed to be [*] earned with respect to Nevada, Mississippi or New Jersey, as applicable, it being understood that no submittals shall take place unless and until the Acceptance Criteria for all of the prior Deliverables has been met. LICENSOR and LICENSEE shall use best commercial efforts to gain approval for [*] from GLI, Nevada and Mississippi.”

4.3 Paragraph A.5 of Exhibit D is deleted in its entirety and replaced with the following:

“Subject to the provisions of Paragraph B of this Exhibit D, an amount equal to the sum of [*] of the Original Bonus Amounts, [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*], and, to the extent earned, the submittal Bonus for [*] to GLI (Milestone 4C-3a) and the GLI approval Bonus for [*] (Milestone 4C-4a) shall be paid to LICENSOR within [*] of completion of such GLI approval Milestone for [*].

Subject to the provisions of Paragraph B of this Exhibit D, an amount equal to the sum of [*] of the Original Bonus Amounts, [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and, to the extent earned, the submittal Bonus for [*] to Nevada or Mississippi, as applicable, shall be paid to LICENSOR within [*] of completion of the corresponding approval Milestone for [*] for Nevada or Mississippi (Milestone 4C-4b or Milestone 4C-4c). In the event that LICENSEE elects to substitute [*] for [*] in either or both Nevada or Mississippi, payment of any Bonuses earned in connection with [*] for such jurisdiction shall be paid within [*] of completion of the corresponding approval Milestone for [*] (Milestones 4D-5c and 4D-5d).

Subject to the provisions of Paragraph B of this Exhibit D, an amount equal to the sum of [*] of the Original Bonus Amounts, [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*], of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*], and, to the extent earned, the submittal Bonus for both [*] and [*] to New Jersey (Milestones 4C-3d and 4D-4a) and the New Jersey approval Bonus for [*] (Milestone 4D-5a) shall be paid to LICENSOR within [*] of completion of such New Jersey approval Milestone for [*].

Subject to the provisions of Paragraph B of this Exhibit D, an amount equal to the sum of [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and, to the extent earned, the submittal Bonus for [*] to GLI, Nevada or Mississippi, as applicable, shall be paid to LICENSOR within [*] of completion of the corresponding

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 5 –

approval Milestone for [*] for GLI, Nevada, and Mississippi (Milestones 4D-5b, 4D-5c and 4D-5d, as applicable).”

4.4 Paragraph B.2(a) of Exhibit D is deleted in its entirety and replaced with the following: “The maximum amount of the penalty is a [*] reduction in the applicable earned Bonus Pool (as defined below) plus a Refund of [*] (the “Maximum Penalty”). With respect to either the [*] or [*] Trigger Dates (as defined below), the applicable earned Bonus Pool shall be calculated as follows:

		Bonus Pool	Trigger
Sell Version	Jurisdiction(s)	(To the extent earned)	Date
[*]

4.5 Paragraph B.2(b) of Exhibit D is deleted in its entirety and replaced with the following:

In the event that the [*] for GLI approval (Milestone 4C-4a) is missed for any reason, the penalty, if any, which is actually assessed will be calculated using the original GLI approval Milestone Date of [*]. Approval by GLI means the first GLI approval for any GLI jurisdiction. In the event that the [*] regulatory submission to any of Nevada, Mississippi, and New Jersey is missed, the penalty, if any, which is actually assessed for any such jurisdiction, will be calculated based on the corresponding submittal Milestone Dates for [*] set forth in Exhibit C (Milestones 4C-3b, 4C-3c, and 4C-3d). The [*] GLI approval Milestone Date (Milestone 4C-4a) and the [*] submission Milestone Dates for Nevada, Mississippi and New Jersey are referred to as the “Trigger Dates”, applicable to [*].

In the event the [*] regulatory submission Milestone Dates for any of New Jersey, GLI, Nevada, and Mississippi (Milestones 4D-4a, 4D-4b, 4D-4c, and 4D-4d) is missed, the penalty, if any, which is actually assessed for any such jurisdiction, will be calculated based on such submittal Milestone Dates for [*] set forth in Exhibit C. The [*] submission Milestone Dates for New Jersey, GLI, Nevada and Mississippi are referred to as the “Trigger Dates for [*].”

The Agreement, together with all of its Exhibits and Schedules, are further amended to substitute throughout the term “Trigger Date” for all references to “Approval Date” and all conforming changes necessary to effect such substitution are hereby deemed made as if set forth here in full.

4.6 Paragraph B.2(c) of Exhibit D is deleted in its entirety and replaced with the following:

“With respect to each of the jurisdictions, considered separately, for each of [*] and [*],

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 6 –

the following penalties shall be assessed cumulatively, as described below, against the applicable Bonus Pool for each jurisdiction:

Delay after the applicable Trigger
Date for each Jurisdiction	Penalty
On or before the Trigger Date	None
[*] after the Trigger Date	[*]
Each additional [*] up to and including [*] late	[*]
[*] late	[*]
Each additional [*] up to and including [*] late	[*]
Each additional [*] up to exactly [*] late solely with respect to GLI approval for [*], and NJ, NV and MS submission for [*]	[*]

Notwithstanding the foregoing, upon substitution of [*] for [*] in New Jersey and, in the event that LICENSEE elects to substitute [*] for [*] in either or both Nevada or Mississippi, upon such substitution in Nevada or Mississippi, any delay incurred in submission (calculated pursuant to Paragraph B.2(d) below) shall be deemed locked as of the date of submission of the substitute [*] for purposes of calculating any penalty that may be charged against the applicable Bonus Pool for [*]. In the event of substitution of [*] for [*], it is the intention of the parties that any penalties resulting from delays incurred in submission of [*] (calculated pursuant to Paragraph B.2(d) below) only be charged against the applicable Bonus Pool for [*].

4.7 Paragraph B.2(d) of Exhibit D is deleted in its entirety and replaced with the following:

“The following shall apply in determining the amount of any penalty that may be assessed against the applicable Bonus Pool for any jurisdiction with respect to either [*] or [*]:

In the event that the actual receipt of the approval letter from GLI for [*] is after the Milestone Date of [*] for any reason, then penalties will be deemed to have begun accruing against the applicable Bonus Pool as of [*]. For example purposes only, if the actual receipt date of the [*] GLI approval letter is [*], the approval will be deemed to be [*] late for purposes of calculating the applicable penalty.

With respect to [*] submission for New Jersey, Nevada and Mississippi and with respect to [*] submission for all jurisdictions, the aggregate delay after the applicable Trigger Date shall be deemed to equal the sum of (i) the number of [*] after the applicable submission Milestone Date that [*] or [*], as applicable, is actually submitted to the

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 7 –

applicable jurisdiction, and (ii) any delay incurred as a result of Major Defects arising with respect to the Licensed Property (excluding Defects solely caused by LICENSEE’s game development and Top Box development) after such submission, such delay being calculated as the number of [*] from the time LICENSOR is notified of such Major Defect to the date the fix for such Defect is submitted to LICENSEE. For example purposes only, if the actual submission of [*] to Nevada is [*] and, following submission, LICENSOR is notified on [*] of a Major Defect, which LICENSOR fixes and such fix is submitted to LICENSEE on [*], and subsequently, Nevada approves [*] without further delay, the Nevada [*] submission will be deemed to have been [*] late.

4.8 Paragraph B.2(e) of Exhibit D is deleted in its entirety and replaced with the following: “Notwithstanding anything to the contrary herein, including (d) above, if the actual Trigger Date for any of the jurisdictions is [*] or more late, then the penalty shall be a [*] reduction in the applicable Bonus Pool for such Trigger Date and, with respect to [*] only, if the actual Trigger Date for any of the jurisdictions is [*] or more late, the Refund owed by LICENSOR to LICENSEE shall equal an amount from [*] for a single jurisdiction up to [*] for all jurisdictions.”

5. GLI Pre-Submission

5.1 LICENSOR and LICENSEE agree to pre-submit [*] to GLI by [*], which pre-submission will include set up, training, documentation and initiation base testing.

6. Miscellaneous

6.1	Except as specifically modified or amended by the Amendment, all of the terms and conditions of the Agreement are unmodified and shall remain in full force and effect. In the event of conflict between the terms of the Agreement and this Amendment, this Amendment shall control.
6.2	This Amendment may be executed in any number of counterparts, each of which shall be deemed to constitute but one and the same instrument.
6.3	Captions contained in this Amendment are inserted only as a matter of convenience and reference. Such captions shall not be construed to define, limit, extend or describe the intent of any provision of this amendment.

          IN WITNESS WHEREOF, the parties hereto, have by their duly authorized representatives executed this Agreement as of the day and year first above written.

SIERRA DESIGN GROUP		WMS GAMING INC.
By:	/s/ Robert A. Luciano, Jr.	By:	/s/ Brian R. Gamache
Name: Robert A. Luciano, Jr.		Name: Brian R. Gamache
Title: President		Title: President & CEO

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 8 –

ANNEX 3.4
MILESTONES

Number	Date	Milestone	Bonus
[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 9 – EX-10.3 5 c82839exv10w3.htm 2ND AMENDMENT TO LICENSE & DEVELOPEMENT AGREEMENT

Exhibit 10.3

SECOND AMENDMENT TO LICENSE & DEVELOPMENT AGREEMENT

          This Amendment, dated July 15, 2003, (“Second Amendment”) is the Second Amendment to that certain License and Development Agreement dated April 24, 2002 (“Agreement”) between SIERRA DESIGN GROUP, a Nevada corporation with offices at 300 Sierra Manor Drive, Reno, NV 89511 (“LICENSOR”) and WMS Gaming Inc., a Delaware corporations with offices at 800 S. Northpoint Boulevard, Waukegan, IL 60085 (“LICENSEE”), and as amended on June 12, 2003 (“First Amendment”).

          WHEREAS, the parties desire to amend the Agreement;

          THEREFORE, in consideration of the terms and conditions and the covenants set forth in this Amendment, the sufficiency and receipt of which is hereby acknowledged, LICENSOR and LICENSEE agree as follows:

1.

The following is inserted in its entirety to the end of Section 4d within this section of the Agreement, as amended: “LICENSOR and LICENSEE agree that the development and QA process will require LICENSOR’s access to LICENSEE’s confidential Bluebird™ cabinet design (“Bluebird”). As such, during the development and QA process, LICENSOR agrees that LICENSOR shall not make any modifications or corrections to Bluebird hardware without (i) prior notification to an authorized employee of LICENSEE, and (ii) an authorized employee of LICENSEE present who shall be available within four business hours from SDG’s request thereof. LICENSEE shall also seal such confidential areas of Bluebird in a manner which shall prevent LICENSOR from learning of the confidential nature of Bluebird. LICENSEE shall provide access to Bluebird only to those LICENSOR employees who are reasonably required to have such access in connection with this Agreement and only to the extent necessary to perform the development and QA process hereunder. Notwithstanding the foregoing, LICENSOR further agrees that, in the event LICENSOR learns of the confidential nature of Bluebird, LICENSOR agrees to maintain the confidentiality of such information on the terms set forth in Section 11 herein.”

2.

Except as specifically modified or amended by the Second Amendment, all of the terms and conditions of the Agreement and First Amendment are unmodified and shall remain in full force and effect. In the event a discrepancy arises between the terms and conditions of the Agreement, First Amendment and the Second Amendment, this Second Amendment shall prevail.

IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written.

SIERRA DESIGN GROUP		WMS GAMING INC.
By:	/s/ Robert A. Luciano, Jr.	By:	/s/ Brian R. Gamache
Title: President		Title: President and CEO

1 EX-10.4 6 c82839exv10w4.htm 3RD AMENDMENT TO LICENSE & DEVELOPEMENT AGREEMENT

Exhibit 10.4

Third Amendment to License & Development Agreement

               This Amendment, dated November 7, 2003 (“Amendment”), is the Third Amendment to that certain License and Development Agreement, dated April 24, 2002, as amended by that certain First Amendment to License & Development Agreement dated as of June 10, 2003 (the “Agreement”), each between SIERRA DESIGN GROUP, a Nevada corporation with offices located at 300 Sierra Manor Drive, Reno, NV 89511 (“LICENSOR”), and WMS GAMING INC., a Delaware corporation with offices located at 800 S. Northpoint Boulevard, Waukegan, Illinois 60085 (“LICENSEE”).

          WHEREAS, the parties desire to amend the Agreement;

          THEREFORE, in consideration of the mutual promises and covenants set forth in this Amendment, the sufficiency and receipt of which is hereby acknowledged, LICENSOR and LICENSEE agree as follows:

1. Definitions

1.1.	Section 1 of the Agreement is amended to add the following term: “[*]” shall mean [*] and such other functionality as the parties may mutually agree. LICENSOR agrees to use best commercial efforts to include maximum bet game specific set-up in [*], but it shall not constitute a Deliverable for [*].
1.2.	Section 1 of the Agreement is amended to add the following term: “[*]” shall mean the version of SDG Platform Rev B that includes the additional functionality listed on Annex 1.2 attached hereto and incorporated herein and correction of identified defects in accordance with the Agreement.
1.3.	Section 1 of the Agreement is amended to add the following term: “[*]” shall mean [*]. [*] shall also include the additional functionality described on Annex 1.3 attached hereto and incorporated herein and such other functionality as the parties may mutually agree and correction of identified defects in accordance with the Agreement.
1.4.	The term “Final Load”, as defined with respect to [*], is deleted in its entirety and replaced with the following: “’Final Load’ shall mean [*].

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 1 -

1.5.	1.5 “New Bonus Amounts” shall mean, with respect to [*] or [*], the Bonus amounts as set forth in Annex 2.3 (which aggregate to [*]) and, with respect to [*], the Bonus amounts associated with all of the parts of Milestone 4D as set forth in Annex 2.3 (which aggregate to [*]).
1.6.	1.6 “Original Bonus Amounts” shall mean the Bonus amounts associated with Milestones 1A, Milestones 2A-2E, Milestones 3A-3B, and Milestones 4A-4B (as modified) (which aggregate to [*]).
1.7.	1.7 “Pre-Submission Milestones” shall mean, with respect to [*] for each of Nevada, New Jersey and Mississippi, Milestones 4C-1 through 4C-2 and, with respect to [*], Milestones 4D-1 through 4D-2.
1.8.	1.8 “All Tests Passed” shall mean delivery by LICENSOR of a Final Load for which no Major Defects are outstanding.

2. Additional Consideration

2.1. Section 3a of the Agreement is amended by adding the following sentences at the end of such Section: “In consideration of the additional functionality added to [*], an amount equal to [*] shall be paid to LICENSOR within [*] of [*]. In consideration of the additional functionality to be included in [*], an amount equal to [*] shall be paid to LICENSOR within [*] of completion of All Tests Passed for [*]. Such consideration for additional functionality is not subject to the penalty provisions of Section 3c or Exhibit D.

3. Milestones (Exhibit C)

3.1 The Bonuses applicable to Milestones [*] are [*]. The Bonus applicable to Milestone [*] is [*].

3.2 Milestone [*] is [*].

3.4 Milestones [*] on Exhibit C are [*] set forth on Annex 2.3 attached hereto and incorporated herein.

3.5 The aggregate Bonus of [*] for Sell 2 and Sell 3 set forth in Exhibit C remains allocated to Sell 2 and Sell 3, to the extent the parties reach agreement on Milestones for Sell 2 and Sell 3.

4. Bonus License Fees and Penalties (Exhibit D)

4.1 Paragraph A.4 of Exhibit D is deleted in its entirety and replaced with the following:

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 2 -

“Subject to this Paragraph A and Paragraph B herein, Bonuses associated with Milestones 4C and 4D set forth in Exhibit C will be deemed earned as follows:

[*] GLI Approval

The Bonus associated with GLI approval for [*] shall consist of the Bonuses associated with each of Milestones 4C-3a (GLI submission) and 4C-4a (GLI approval) to the extent each such Milestone date is met without delay.

[*] GLI, NV, MS and NJ Submissions

Notwithstanding the provisions of Paragraph A.1 above, if any of the Pre-Submission Milestones for [*] are not met, but [*] in each of Nevada, Mississippi and New Jersey (Milestone 4C-3c) is met with no delay, then [*] of the New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and [*] of the submittal Bonus for [*] in Nevada, Mississippi and New Jersey (Milestone 4C-3c) shall be deemed to be [*] earned for Nevada, Mississippi and New Jersey, respectively. If the Milestone Date for regulatory submission of [*] in GLI (Milestone 4C-3b) is met with no delay, then the submittal Bonus for GLI shall be deemed [*] earned.

[*] All Test Pass

Notwithstanding the provisions of Paragraph A.1 above, if any of the Pre-Submission Milestones for [*] are not met, but [*] (Milestone 4D-3) is met with no delay, then [*] of the New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and [*] of the All Tests Passed Bonus for [*] shall be deemed to be [*] earned with respect to GLI, Nevada, Mississippi and New Jersey.

[*] New Jersey Approval

If the New Jersey approval letter for [*] is received by LICENSEE on or before [*] following the New Jersey approval Milestone Date (Milestone 4D-5a), then the Bonus for such Milestone shall be deemed to be [*] earned; if the New Jersey approval letter for [*] is not received within [*] after the New Jersey approval Milestone Date (Milestone 4D-5a) for any reason, then the Bonus for such Milestone will not earned. For purposes of determining whether the New Jersey approval Milestone is met for [*], the provisions of the last sentence of Section 4.h of the Agreement and Paragraph B.2(d) of this Exhibit D shall not apply. LICENSOR and LICENSEE shall use best commercial efforts to gain approval for [*] from New Jersey.

[*] GLI, Nevada and Mississippi Approval

LICENSOR and LICENSEE shall use best commercial efforts to gain approval for [*] from GLI, Nevada and Mississippi.”

4.2 Paragraph A.5 of Exhibit D is deleted in its entirety and replaced with the following:

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 3 -

“Subject to the provisions of Paragraph B of this Exhibit D, an amount equal to the submittal Bonus for [*] for GLI (Milestone 4C-3b) shall be paid to LICENSOR within [*] of receipt of approval for [*] from GLI.

Subject to the provisions of Paragraph B of this Exhibit D, with respect to each of Nevada and Mississippi, an amount equal to the sum of [*] of the Original Bonus Amounts, [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and, to the extent earned, [*] of the submittal Bonus for [*] for Nevada, Mississippi and New Jersey (Milestone 4C-3c) shall be paid to LICENSOR within [*] of receipt of approval for [*] for Nevada or Mississippi. In the event that LICENSEE elects to substitute [*] for [*] in either or both Nevada or Mississippi, payment of any Bonuses earned in connection with [*] for such jurisdiction shall be paid within [*] of completion of the corresponding approval Milestone for [*] (Milestones 4D-4c and 4D-4d).

Subject to the provisions of Paragraph B of this Exhibit D, an amount equal to the sum of [*] of the Original Bonus Amounts, [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*], [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*], and, to the extent earned, [*] of the submittal Bonus for [*] in Nevada, Mississippi and New Jersey (Milestone 4C-3c), [*] of the [*] to (Milestones 4C-3b and 4D-3) and the New Jersey approval Bonus for [*] (Milestone 4D-4a) shall be paid to LICENSOR within [*] of receipt of such New Jersey approval for [*].

Subject to the provisions of Paragraph B of this Exhibit D, with respect to each of GLI, Nevada and Mississippi, an amount equal to the sum of [*] of any earned New Bonus Amounts attributed to the Pre-Submission Milestones for [*] and, to the extent earned, [*] of the [*] (Milestone 4D-3) shall be paid to LICENSOR within [*] of completion of the corresponding approval [*] for GLI, Nevada, and Mississippi (Milestones 4D-4b, 4D-4c and 4D-4d, as applicable).”

4.3 Paragraph B.2(a) of Exhibit D is deleted in its entirety and replaced with the following: “The maximum amount of the penalty is a [*] reduction in the applicable earned Bonus Pool (as defined below) plus a Refund of [*] (the “Maximum Penalty”). With respect to either the [*] or [*] Trigger Dates (as defined below), the applicable earned Bonus Pool shall be calculated as follows:

		Bonus Pool	Trigger
Sell Version	Jurisdiction(s)	(To the extent earned)	Date
[*]

4.4 Paragraph B.2 (b) of Exhibit D is deleted in its entirety and replaced with the following:

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 4 -

In the event that [*] for GLI approval (Milestone 4C-4a) is missed for any reason, the penalty, if any, which is actually assessed will be calculated using the original GLI approval Milestone Date of [*]. Approval by GLI means the first GLI approval for any GLI jurisdiction. In the event that [*] submittal Milestone for Nevada, Mississippi or New Jersey (Milestone 4C-3c) is missed, the penalty, if any, which is actually assessed for Nevada, Mississippi or New Jersey will be calculated based on [*] for such jurisdictions set forth in Exhibit C (Milestone 4C-3c). The [*] GLI approval Milestone Date (Milestone 4C-4a) and the [*] submittal Milestone Date for Nevada, Mississippi and New Jersey are referred to as the “Trigger Dates”, applicable to [*] or [*].

In the event the [*] All Tests Passed Milestone Date (Milestone 4D-3) is missed, the penalty, if any, which is actually assessed for each jurisdiction, will be calculated based on such All Tests Passed Milestone Date for [*] set forth in Exhibit C. The [*] All Tests Passed Milestone Date for New Jersey, GLI, Nevada and Mississippi is referred to as the “Trigger Date” for [*].”

4.5 Paragraph B.2(c) of Exhibit D is deleted in its entirety and replaced with the following:

“With respect to each of the jurisdictions, considered separately, for each of [*] or [*] and [*], the following penalties shall be assessed cumulatively, as described below, against the applicable Bonus Pool for each jurisdiction:

Delay after the applicable Trigger
Date for each Jurisdiction	Penalty
[*]

 

Notwithstanding the foregoing, upon substitution of [*] for [*] in New Jersey and, in the event that LICENSEE elects to substitute [*] for [*] in either or both Nevada or Mississippi, upon such substitution in Nevada or Mississippi, any delay incurred in submission (calculated pursuant to Paragraph B.2 (d) below) shall be deemed locked as of the date of successful completion of the All Tests Passed Milestone for the substitute

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 5 -

[*] for purposes of calculating any penalty that may be charged against the applicable Bonus Pool for [*]. In the event of substitution of [*] for [*], it is the intention of the parties that any penalties resulting from delays incurred in completion of the All Tests Passed for [*] (calculated pursuant to Paragraph B.2 (d) below) only be charged against the applicable Bonus Pool for [*].

4.6 Paragraph B.2 (d) of Exhibit D is deleted in its entirety and replaced with the following:

“The following shall apply in determining the amount of any penalty that may be assessed against the applicable Bonus Pool for any jurisdiction with respect to either [*] or [*]:

With respect to [*] submission for New Jersey, Nevada and Mississippi and with respect to completion of the [*] “all test pass” Milestone for all jurisdictions, the aggregate delay after the applicable Trigger Date shall be deemed to equal the sum of (i) the number of [*] after the applicable Trigger Date that submission of [*] occurs in any of Nevada, Mississippi or New Jersey or the “all test pass” Milestone for [*], as applicable, is actually completed, and (ii) any delay incurred as a result of Major Defects arising with respect to the Licensed Property (excluding Defects solely caused by LICENSEE’s game development and Top Box development) after submission to the applicable jurisdiction, such delay being calculated as the number of [*] from the time LICENSOR is notified of such Major Defect to the date the fix for such Defect is submitted to LICENSEE. For example purposes only, if the submission Milestone for [*] is met on [*] and, following submission, LICENSOR is notified on [*] of a Major Defect, which LICENSOR fixes and such fix is submitted to LICENSEE on [*], and subsequently, [*] approves [*] without further delay, the [*] submission will be deemed to have been [*] late.

4.7 Paragraph B.2 (e) of Exhibit D is deleted in its entirety and replaced with the following: “Notwithstanding anything to the contrary herein, including (d) above, if the actual Trigger Date for any of the jurisdictions is [*] or more late, then the penalty shall be a [*] reduction in the applicable Bonus Pool for such Trigger Date and, with respect to [*] only, if the actual Trigger Date for any of the jurisdictions is one year or more late, the Refund owed by LICENSOR to LICENSEE shall equal an amount from [*] for a single jurisdiction up to [*] for all jurisdictions.”

5. Miscellaneous

5.1 Except as specifically modified or amended by the Amendment, all of the terms and conditions of the Agreement are unmodified and shall remain in full force and effect. In the event of conflict between the terms of the Agreement and this Amendment, this Amendment shall control.

5.2 This Amendment may be executed in any number of counterparts, each of which shall be deemed to constitute but one and the same instrument.

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 6 -

5.3 Captions contained in this Amendment are inserted only as a matter of convenience and reference. Such captions shall not be construed to define, limit, extend or describe the intent of any provision of this amendment.

          IN WITNESS WHEREOF, the parties hereto, have by their duly authorized representatives executed this Agreement as of the day and year first above written.

SIERRA DESIGN GROUP		WMS GAMING INC.
By:	/s/ Robert A. Luciano, Jr.	By:	/s/ Brian R. Gamache
Name: Robert A. Luciano, Jr.		Name: Brian R. Gamache
Title: President		Title: President & CEO

- 7 -

ANNEX 1.2
[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 8 -

ANNEX 1.3
[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 9 -

ANNEX 2.3
MILESTONES
[*]

*Information has been omitted from this document and filed separately with the Securities and Exchange Commission under a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

- 10 - EX-31 7 c82839exv31.htm CERTIFICATIONS OF CEO AND CFO

EXHIBIT 31

CERTIFICATIONS

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

1.	I have reviewed this quarterly report on Form 10-Q of WMS Industries Inc.;
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 13, 2004

/s/ Brian R. Gamache

Brian R. Gamache

Chief Executive Officer

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

1.	I have reviewed this quarterly report on Form 10-Q of WMS Industries Inc.;
2.	Based on my knowledge, this 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 report;
3.	Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 13, 2004

/s/ Scott D. Schweinfurth

Scott D. Schweinfurth

Chief Financial Officer

EX-32 8 c82839exv32.htm CERTIFICATIONS OF CEO AND CFO

EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of the WMS Industries, Inc. (“the Company”) on Form 10-Q for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (“the Report”), I, Brian R. Gamache, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Brian R. Gamache

Brian R. Gamache
Chief Executive Officer
February 13, 2004

CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of the WMS Industries, Inc. (“the Company”) on Form 10-Q for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (“the Report”), I, Scott D. Schweinfurth, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Scott D. Schweinfurth

Scott D. Schweinfurth
Chief Financial Officer
February 13, 2004

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