##### 



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 March 31, 2006
 Commission file number 001-12367
 MIDWAY GAMES INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2906244(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)2704 W. Roscoe Street, Chicago, IL
    
    60618(Address of Principal Executive Offices)
    
    (Zip Code)
 (773) 961-2222
 R £
  £ R £
 £ R




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##### 



MIDWAY GAMES INC.
 INDEX
 PAGENO.Part I. Financial Information:Item 1.
    
    Financial Statements:Consolidated Balance Sheets   March 31, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations  Three Months Ended March 31, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows  Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II. Other Information:Item 6.
    
    Exhibits
    
    
    25Signature
    
    
    26
  2




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##### 



Part I. Financial Information
 
 Item 1. Financial Statements
 
 CONSOLIDATED BALANCE SHEETS MIDWAY GAMES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    87,006
    
    
    $
    98,376Receivables, less allowances of $11,811 at March 31, 2006 and $16,130 at December 31, 2005
    
    
    7,863
    
    
    
    30,835Inventories
    
    
    3,769
    
    
    
    5,811Capitalized product development costs
    
    
    34,951
    
    
    
    27,570Prepaid expenses and other current assets
    
    
    13,583
    
    
    
    16,134Total current assets
    
    
    147,172
    
    
    
    178,726Capitalized product development costs
    
    
    706
    
    
    
    25Property and equipment, net
    
    
    19,458
    
    
    
    19,049Goodwill
    
    
    41,074
    
    
    
    41,108Other assets
    
    
    9,325
    
    
    
    9,355Total assets
    
    $
    217,735
    
    
    $
    248,263Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    7,180
    
    
    $
    12,431Accrued compensation and related benefits
    
    
    2,826
    
    
    
    4,060Accrued royalties
    
    
    3,245
    
    
    
    3,938Accrued selling and marketing
    
    
    2,483
    
    
    
    4,418Deferred revenue
    
    
    2,255
    
    
    
    384Current portion of long-term debt
    
    
    3,333
    
    
    
    3,333Other accrued liabilities
    
    
    11,312
    
    
    
    13,440Total current liabilities
    
    
    32,634
    
    
    
    42,004Convertible senior notes
    
    
    75,000
    
    
    
    75,000Long-term debt
    
    
    6,111
    
    
    
    6,944Deferred income taxes
    
    
    8,414
    
    
    
    8,086Other noncurrent liabilities
    
    
    658
    
    
    
    784Stockholders equity:Preferred stock, $0.01 par value, 4,995,250 shares authorized and undesignated
    
    
    
    
    
    
    Common stock, $0.01 par value, 200,000,000 shares authorized; 92,428,599 and 92,233,807
shares issued at March 31, 2006 and December 31, 2005, respectively
    
    
    924
    
    
    
    922Additional paid-in capital
    
    
    429,876
    
    
    
    431,273Accumulated deficit
    
    
    (325,698
    )
    
    
    (303,099
    )Accumulated translation adjustment
    
    
    (525
    )
    
    
    (439
    )Deferred compensation
    
    
    
    
    
    
    (3,610
    )Treasury stock, at cost, 1,100,110 and 1,093,627 shares at March 31, 2006 and December
31, 2005, respectively
    
    
    (9,659
    )
    
    
    (9,602
    )Total stockholders equity
    
    
    94,918
    
    
    
    115,445Total liabilities and stockholders equity
    
    $
    217,735
    
    
    $
    248,263
  3




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##### 



CONSOLIDATED STATEMENTS OF OPERATIONS MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Net revenues
    
    $
    15,396
    
    
    $
    13,815Cost of sales:Product costs and distribution
    
    
    7,570
    
    
    
    5,066Royalties and product development
    
    
    7,114
    
    
    
    3,530Total cost of sales
    
    
    14,684
    
    
    
    8,596Gross profit
    
    
    712
    
    
    
    5,219Research and development expense
    
    
    10,662
    
    
    
    8,966Selling and marketing expense
    
    
    6,453
    
    
    
    7,280Administrative expense
    
    
    5,347
    
    
    
    4,180Operating loss
    
    
    (21,750
    )
    
    
    (15,207
    )Interest income
    
    
    995
    
    
    
    628Interest expense
    
    
    (1,691
    )
    
    
    (353
    )Other income and (expense), net
    
    
    194
    
    
    
    (633
    )Loss before income taxes
    
    
    (22,252
    )
    
    
    (15,565
    )Provision for income taxes
    
    
    347
    
    
    
    328Net loss
    
    
    (22,599
    )
    
    
    (15,893
    )Preferred stock dividends:Distributed
    
    
    
    
    
    
    63Imputed
    
    
    
    
    
    
    2Loss applicable to common stock
    
    $
    (22,599
    )
    
    $
    (15,958
    )Basic and diluted loss per share of common stock
    
    $
    (0.25
    )
    
    $
    (0.19
    )Basic and diluted weighted average number of shares outstanding
    
    
    90,410
    
    
    
    85,642
  4




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##### 



CONSOLIDATED STATEMENTS OF CASH FLOWS MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months EndedMarch 31,2006
    
    
    2005Operating activities:Net loss
    
    $
    (22,599
    )
    
    $
    (15,893
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    5,799
    
    
    
    2,981Depreciation and amortization
    
    
    1,902
    
    
    
    1,565Receivables provision
    
    
    3,793
    
    
    
    1,154Deferred income taxes
    
    
    328
    
    
    
    328Stock-based compensation expense
    
    
    1,259
    
    
    
    652Loss on disposal of property and equipment
    
    
    11
    
    
    
    15Changes in operating assets and liabilities:Receivables
    
    
    19,162
    
    
    
    7,449Inventories
    
    
    2,047
    
    
    
    902Capitalized product development costs
    
    
    (13,861
    )
    
    
    (18,010
    )Prepaid expenses and other current assets
    
    
    (2,734
    )
    
    
    (1,790
    )Accounts payable and accruals
    
    
    (9,087
    )
    
    
    (286
    )Other assets and liabilities
    
    
    (221
    )
    
    
    (1,340
    )Net cash used in operating activities
    
    
    (14,201
    )
    
    
    (22,273
    )Investing activities:Purchases of property and equipment
    
    
    (2,221
    )
    
    
    (1,923
    )Financing activities:Payment of long-term debt
    
    
    (833
    )
    
    
    (834
    )Payment on capital lease obligation
    
    
    (374
    )
    
    
    Cash dividends on preferred stock
    
    
    
    
    
    
    (65
    )Cash received on exercise of common stock options
    
    
    6,183
    
    
    
    316Net cash provided by (used in) financing activities
    
    
    4,976
    
    
    
    (583
    )Effect of exchange rate changes on cash
    
    
    76
    
    
    
    (184
    )Decrease in cash and cash equivalents
    
    
    (11,370
    )
    
    
    (24,963
    )Cash and cash equivalents at beginning of period
    
    
    98,376
    
    
    
    118,313Cash and cash equivalents at end of period
    
    $
    87,006
    
    
    $
    93,350
  5




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MIDWAY GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Financial Statements
  2. Reclassifications
  3. Stock-Based Compensation
 2005 Long-Term Incentive Plan
  Adoption of SFAS No. 123R
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation Accounting for Stock-Based
Compensation  Transition and Disclosure  An Amendment of FASB No. 123 Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services
 6




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##### 



Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards
 Stock-Based Compensation Under SFAS No. 123R
   7




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##### 



Three Months Ended March 31, 2006As Reported
    
    Pro Forma - If ReportedFollowing
SFAS No. 123R
    
    Following APB 25Consolidated statement of operations:Operating loss
    
    $
    (21,750
    )
    
    $
    (20,947
    )Loss before income taxes
    
    
    (22,252
    )
    
    
    (21,449
    )Net loss
    
    
    (22,599
    )
    
    
    (21,796
    )Net loss per share:Basic and diluted
    
    
    (0.25
    )
    
    
    (0.24
    )Consolidated statement of cash flows:Net cash used in operating activities
    
    
    (14,201
    )
    
    
    (14,201
    )Net cash provided by financing activities
    
    
    4,976
    
    
    
    4,976
   Three MonthsEndedMarch 31, 2005Reported loss applicable to common stock
    
    $
    (15,958
    )Deduct stock-based compensation expense included in
reported loss applicable to common stock (a)
    
    
    652Add stock-based compensation expense determined under
the fair value based method for all awards (a)
    
    
    (1,703
    )Pro forma net loss applicable to common stock
    
    $
    (17,009
    )Basic and diluted loss per share:As reported
    
    $
    (0.19
    )Pro forma
    
    $
    (0.20
    )
 
 (a)
    
    These amounts reflect a $0 income tax effect.   Determining Fair Value of Stock Options Under SFAS No. 123R
 Valuation Method.
 8




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##### 



Expected Term
 Expected Volatility
 Risk-Free Interest Rate.
 Expected Dividend Yield.
 Expected Forfeitures.
  Three Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2006
    
    March 31, 2005Expected term (in years)
    
    
    4.8
    
    
    
    3.9Expected stock price volatility
    
    
    71
    %
    
    
    76
    %Risk-free interest rate
    
    
    4.4
    %
    
    
    3.7
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Estimated fair value per option granted
    
    $
    7.38
    
    
    $
    5.51
 Stock Option Activity
 Weighted
    
    
    Weighted
    
    
    AggregateAverage
    
    
    Average
    
    
    IntrinsicOptions
    
    
    Exercise
    
    
    Remaining
    
    
    Value(in thousands)
    
    
    Price
    
    
    Contractual Life
    
    
    (in thousands)Outstanding at December 31, 2005
    
    
    4,877
    
    
    $
    9.65Granted with an exercise price equal to the market price
    
    
    5
    
    
    
    12.16Exercised
    
    
    (202
    )
    
    
    4.44Cancelled
    
    
    (4
    )
    
    
    5.22Forfeited
    
    
    (6
    )
    
    
    6.00Outstanding at March 31, 2006
    
    
    4,670
    
    
    
    9.89
    
    
    5.2 years
    
    $
    11,925Exercisable at December 31, 2005
    
    
    3,206
    
    
    
    11.74
    
    
    4.4 years
    
    $
    24,101Exercisable at March 31, 2006
    
    
    3,212
    
    
    
    11.88
    
    
    4.2 years
    
    $
    5,931
 9




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##### 



Three Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2006
    
    March 31, 2005Weighted average grant date exercise price of options granted
    
    $
    12.16
    
    
    $
    9.44Intrinsic value of options exercised (in thousands)
    
    $
    2,631
    
    
    $
    234
   WeightedAverageRemainingWeighted Average
    
    
    ContractualShares Covered by Options
    
    
    Exercise Price
    
    
    LifeExercise Prices
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding$  2.32
    
    
    
    $3.45
    
    
    675
    
    
    
    264
    
    
    $
    2.63
    
    
    $
    2.79
    
    
    
    7.33.57
    
    
    
    5.20
    
    
    1,184
    
    
    
    646
    
    
    
    3.62
    
    
    
    3.62
    
    
    
    7.15.24
    
    
    
    7.75
    
    
    189
    
    
    
    160
    
    
    
    5.84
    
    
    
    5.75
    
    
    
    6.17.90
    
    
    
    11.75
    
    
    685
    
    
    
    249
    
    
    
    9.96
    
    
    
    10.17
    
    
    
    7.211.79
    
    
    
    16.83
    
    
    1,029
    
    
    
    985
    
    
    
    13.67
    
    
    
    13.70
    
    
    
    4.020.00
    
    
    
    23.13
    
    
    908
    
    
    
    908
    
    
    
    20.00
    
    
    
    20.00
    
    
    
    0.64,670
    
    
    
    3,212
    
    
    
    9.89
    
    
    
    11.88
    
    
    
    5.2
   Restricted Stock
  10




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##### 



Restricted stock  non-performance-based awards
  WeightedAverageGrantShares
    
    
    PriceOutstanding at December 31, 2005
    
    
    430
    
    
    $
    9.89Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    (14
    )
    
    
    8.97Outstanding at March 31, 2006
    
    
    416
    
    
    
    9.92
 Three Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2006
    
    March 31, 2005Restricted stock shares vested
    
    
    
    
    
    
    47Weighted average grant date fair value of restricted stock shares vested
    
    $
    
    
    
    $
    10.47Total fair value of restricted stock shares vested (in thousands)
    
    $
    
    
    
    $
    489
  Restricted stock  performance-based awards
  Total restricted stock
  NumberVesting Period
    
    of SharesApril 1, 2006 to December 31, 2006
    
    
    2332007
    
    
    1492008
    
    
    689Total
    
    
    1,071
 11




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##### 



4. Comprehensive Loss
 Reporting Comprehensive Income
 5. Loss per Common Share
  March 31,2006
    
    
    2005Stock options
    
    
    4,670
    
    
    
    7,568Warrants
    
    
    555
    
    
    
    679Contingent shares
    
    
    1,564
    
    
    
    1,089Convertible senior notes
    
    
    4,224
    
    
    
    Redeemable convertible preferred stock, Series D
    
    
    
    
    
    
    1,115Total common stock equivalents
    
    
    11,013
    
    
    
    10,451
  6. Inventories
  7. Capitalized Product Development Costs and Research and Development Costs
  Three Months EndedMarch 31,2006
    
    
    2005Beginning balance
    
    $
    27,595
    
    
    $
    28,659Additions
    
    
    13,861
    
    
    
    18,010Amortization
    
    
    (4,913
    )
    
    
    (2,981
    )Writedowns
    
    
    (886
    )
    
    
    Ending balance
    
    $
    35,657
    
    
    $
    43,688
  Three Months EndedMarch 31,2006
    
    
    2005Gross research and development costs
    
    $
    24,523
    
    
    $
    26,976Research and development costs capitalized
    
    
    (13,861
    )
    
    
    (18,010
    )Research and development expense
    
    $
    10,662
    
    
    $
    8,966
 12




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##### 



8. Restructuring
   Lease andLong-TermCommitmentsand OtherCostsBalances at December 31, 2005
    
    $
    1,286Provision
    
    
    Usage/payouts
    
    
    (63
    )Balances at March 31, 2006
    
    $
    1,223
  13




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 PlayStation 2 PS2 PlayStation Portable PSP Xbox GameCube Game Boy Advance PlayStation 3 Xbox 360 Wii
 New
Console Cycle, Recent Trends and Uncertainties
  New
Console Cycle PS2 GameCube Xbox, Game Boy Advance,
 14




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##### 



Xbox 360,
 Decreasing Revenues and Selling Prices
 Increasing Costs to Develop Video Games
 Handheld Market
 Nintendo DS. PSP. PSP PSP
 PC Market
 Rise and Fall: Civilizations at War The Lord of the Rings Online TM Shadows of Angma TM Unreal Tournament
 Childrens Market
 Ed, Edd n Eddy: The Mis-Edventures
 15




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##### 



Strategic Alliances
 L.A. RUSH PS2 Xbox The Wheelman
  The Lord of the Rings Online TM : Shadows of Angma TM The Lord of the Rings Online TM
  Expansion of Product Development Resources
  Stock-based Compensation
 Share-Based Payment ,
 Accounting for Stock Issued to Employees
 16




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##### 



Majority Stockholder
  17




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##### 



Results of Operations
 Three Months Ended March 31, 2006 Compared with Three Months Ended March 31, 2005
  Three Months Ended March 31,2006
    
    
    2005Net revenues
    
    $
    15,396
    
    
    
    100.0
    %
    
    $
    13,815
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    7,570
    
    
    
    49.2
    %
    
    
    5,066
    
    
    
    36.7
    %Royalties and product development
    
    
    7,114
    
    
    
    46.2
    %
    
    
    3,530
    
    
    
    25.5
    %Total cost of sales
    
    
    14,684
    
    
    
    95.4
    %
    
    
    8,596
    
    
    
    62.2
    %Gross profit
    
    
    712
    
    
    
    4.6
    %
    
    
    5,219
    
    
    
    37.8
    %Research and development expense
    
    
    10,662
    
    
    
    69.3
    %
    
    
    8,966
    
    
    
    64.9
    %Selling and marketing expense
    
    
    6,453
    
    
    
    41.9
    %
    
    
    7,280
    
    
    
    52.7
    %Administrative expense
    
    
    5,347
    
    
    
    34.7
    %
    
    
    4,180
    
    
    
    30.3
    %Operating loss
    
    
    (21,750
    )
    
    
    (141.3
    )%
    
    
    (15,207
    )
    
    
    (110.1
    )%Interest income
    
    
    995
    
    
    
    6.5
    %
    
    
    628
    
    
    
    4.5
    %Interest expense
    
    
    (1,691
    )
    
    
    (11.0
    )%
    
    
    (353
    )
    
    
    (2.6
    )%Other income and (expense), net
    
    
    194
    
    
    
    1.3
    %
    
    
    (633
    )
    
    
    (4.5
    )%Loss before income taxes
    
    
    (22,252
    )
    
    
    (144.5
    )%
    
    
    (15,565
    )
    
    
    (112.7
    )%Provision for income taxes
    
    
    347
    
    
    
    2.3
    %
    
    
    328
    
    
    
    2.3
    %Net loss
    
    
    (22,599
    )
    
    
    (146.8
    )%
    
    
    (15,893
    )
    
    
    (115.0
    )%Preferred stock dividends:Distributed
    
    
    
    
    
    
    0.0
    %
    
    
    63
    
    
    
    0.5
    %Imputed
    
    
    
    
    
    
    0.0
    %
    
    
    2
    
    
    
    0.0
    %Loss applicable to common stock
    
    $
    (22,599
    )
    
    
    (146.8
    )%
    
    $
    (15,958
    )
    
    
    (115.5
    )%
  Three Months EndedMarch 31,See
    
    
    
    
    
    
    
    
    
    Increase /
    
    Percentexplanation
    
    2006
    
    2005
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    15,396
    
    
    $
    13,815
    
    
    $
    1,581
    
    
    
    11.4
    %North American net revenues
    
    
    B
    
    
    
    11,467
    
    
    
    10,723
    
    
    
    744
    
    
    
    6.9
    %International net revenues
    
    
    C
    
    
    
    3,929
    
    
    
    3,092
    
    
    
    837
    
    
    
    27.1
    %Cost of Sales:Product cost and distribution
    
    
    D
    
    
    
    7,570
    
    
    
    5,066
    
    
    
    2,504
    
    
    
    49.4
    %Royalties and product development
    
    
    E
    
    
    
    7,114
    
    
    
    3,530
    
    
    
    3,584
    
    
    
    101.5
    %Research and development expense
    
    
    F
    
    
    
    10,662
    
    
    
    8,966
    
    
    
    1,696
    
    
    
    18.9
    %Selling and marketing expense
    
    
    G
    
    
    
    6,453
    
    
    
    7,280
    
    
    
    (827
    )
    
    
    (11.4
    )%Administrative expense
    
    
    H
    
    
    
    5,347
    
    
    
    4,180
    
    
    
    1,167
    
    
    
    27.9
    %Interest income
    
    
    I
    
    
    
    995
    
    
    
    628
    
    
    
    367
    
    
    
    58.4
    %Interest expense
    
    
    J
    
    
    
    (1,691
    )
    
    
    (353
    )
    
    
    (1,338
    )
    
    
    379.0
    %Other income and (expense), net
    
    
    K
    
    
    
    194
    
    
    
    (633
    )
    
    
    827
    
    
    
    (130.6
    )%Provision for income taxes
    
    
    L
    
    
    
    347
    
    
    
    328
    
    
    
    19
    
    
    
    5.8
    %Preferred stock dividends
    
    
    M
    
    
    
    
    
    
    
    65
    
    
    
    (65
    )
    
    
    (100.0
    )%
 18




---



##### 



A. Consolidated Net Revenues
  Three Months Ended March 31,2006
    
    
    2005Net revenues by platformSony PlayStation 2(PS2)
    
    $
    6,923
    
    
    
    45.0
    %
    
    $
    6,391
    
    
    
    46.3
    %Microsoft Xbox
    
    
    4,280
    
    
    
    27.8
    %
    
    
    2,654
    
    
    
    19.2
    %Nintendo GameCube(NGC)
    
    
    331
    
    
    
    2.2
    %
    
    
    2,606
    
    
    
    18.9
    %Nintendo Game Boy Advance(GBA)
    
    
    192
    
    
    
    1.2
    %
    
    
    297
    
    
    
    2.1
    %Sony PlayStation Portable(PSP)
    
    
    1,867
    
    
    
    12.1
    %
    
    
    
    
    
    
    Personal Computer (PC)
    
    
    474
    
    
    
    3.1
    %
    
    
    
    
    
    
    License and royalty
    
    
    1,252
    
    
    
    8.1
    %
    
    
    1,785
    
    
    
    12.9
    %Other
    
    
    77
    
    
    
    0.5
    %
    
    
    82
    
    
    
    0.6
    %Total net revenues
    
    $
    15,396
    
    
    
    100.0
    %
    
    $
    13,815
    
    
    
    100.0
    %
  Video
Game Title
    
    Platform
   
    TerritoryThree Months Ended March 31, 2006L.A. RUSH
    
    PC
    
    North AmericaMidway Arcade Treasures: Deluxe Edition
    
    PC
    
    North AmericaNBA Ballers: Phenom
    
    Xbox
    
    North AmericaGauntlet: Seven Sorrows
    
    PS2, Xbox
    
    InternationalL.A. RUSH
    
    PC
    
    InternationalMidway Arcade Treasures: Extended Play
    
    PSP
    
    InternationalThree Months Ended March 31, 2005Mortal Kombat: Deception
    
    NGC
    
    North AmericaNARC
    
    PS2, Xbox
    
    North AmericaMaya the Bee
    
    GBA
    
    InternationalShadow Hearts: Covenant
    
    PS2
    
    International
  B. North American Net Revenues
 NBA Ballers: Phenom Xbox Blitz: The
League Ed, Edd n Eddy NARC Mortal Kombat: Deception NBA Ballers,
 19




---



##### 



C. International Net Revenues
 Gauntlet: Seven Sorrows Midway Arcade Treasures: Extended Play, L.A. RUSH. Shadow Hearts:
Covenant, Maya the Bee Mortal Kombat: Deception
 D. and E. Cost of Sales
    Three Months EndedMarch 31,Description
    
    2006
    
    
    2005Amortization of capitalized product development costs
    
    $
    4,913,000
    
    
    $
    2,981,000Writedown related to a future release
    
    
    886,000
    
    
    
    Total
    
    $
    5,799,000
    
    
    $
    2,981,000
  F. Research and Development Expense
  Three Months EndedMarch 31,Description
    
    2006
    
    
    2005Gross research and development costs
    
    $
    24,523,000
    
    
    $
    26,976,000Research and development costs capitalized
    
    
    (13,861,000
    )
    
    
    (18,010,000
    )Research and development expense
    
    $
    10,662,000
    
    
    $
    8,966,000
 L.A. RUSH L.A. RUSH
 20




---



##### 



G. Selling and Marketing Expense
 NBA Ballers: Phenom Xbox, NARC, Area 51 Unreal Championship 2
 H. Administrative Expense
  I. Interest Income
  J. Interest Expense
    K. Other Income and (Expense), net
  L. Provision for Income Taxes
  21




---



##### 



M. Preferred Stock Dividends
  Liquidity and Capital Resources
      22




---



##### 



Off Balance Sheet Arrangements and Contractual Obligations
   Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations(1)
    
    $
    9,444
    
    
    $
    3,333
    
    
    $
    6,111
    
    
    $
    
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    1,067
    
    
    
    613
    
    
    
    454
    
    
    
    
    
    
    
    Convertible senior notes(3)
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    Interest on convertible senior notes(4)
    
    
    13,875
    
    
    
    4,500
    
    
    
    9,000
    
    
    
    375
    
    
    
    Operating lease obligations(5)
    
    
    11,702
    
    
    
    3,844
    
    
    
    4,441
    
    
    
    1,730
    
    
    
    1,687Purchase obligations(6)
    
    
    76,178
    
    
    
    44,324
    
    
    
    22,534
    
    
    
    8,160
    
    
    
    1,160Other liabilities(7)
    
    
    1,805
    
    
    
    1,513
    
    
    
    292
    
    
    
    
    
    
    
    Total
    
    $
    189,071
    
    
    $
    58,127
    
    
    $
    42,832
    
    
    $
    85,265
    
    
    $
    2,847
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet at March 31, 2006 in
current portion of long-term debt and long-term debt, as appropriate.(2)
    
    Assumes debt is carried to full term. Debt bears interest at variable rates. The amounts
above assume future interest will be incurred at the prime rate on March 31, 2006 (7.75%).
These obligations are not reflected on our consolidated balance sheet at March 31, 2006.(3)
    
    Assumes convertible senior notes are carried through the date the holders can first require
redemption of the notes, April 30, 2009. These obligations are reflected on our consolidated
balance sheet at March 31, 2006.(4)
    
    Assumes convertible senior notes are carried through the date the holders can first redeem
the notes, April 30, 2009. The debt bears interest at the fixed rate of 6.00% per annum. These
obligations are not reflected on our consolidated balance sheet at March 31, 2006.(5)
    
    These obligations are not reflected on our consolidated balance sheet at March 31, 2006.(6)
    
    Purchase obligations are agreements to purchase goods or services that are enforceable and
legally binding on us and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The amounts in the table above include inventory items, marketing
commitments, and minimum payments due under various licensing agreements and third party
developer agreements. The amounts disclosed above assume all transactions are carried to
contractual term and do not reflect cancellations within our control. Such cancellations could
result in amounts owed being less than those reflected above. These obligations are not
reflected on our consolidated balance sheet at March 31, 2006.(7)
    
    These items are reflected on our consolidated balance sheet at March 31, 2006 in current and
noncurrent liabilities, as appropriate. 23




---



##### 



Impact of Inflation
  Seasonality
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4. Controls and Procedures
   24




---



##### 



Part II. Other Information
 
 Item 6. Exhibits
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the
Registrant dated October 25, 1996, incorporated herein by
reference to the Registrants Registration Statement on Form S-1,
as amended, File No. 333-11919, initially filed on September 13,
1996 and effective October 29, 1996.3.2
    
    Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Registrant dated February 25, 1998,
incorporated herein by reference to the Registrants Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20, 1998.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Registrant dated August 5, 2003,
incorporated herein by reference to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.3.4
    
    Form of Certificate of Designations of Series A Preferred Stock
incorporated herein by reference to Exhibit A to the Third Amended
and Restated Rights Agreement filed as Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on October 15, 2003
(the 10/15/03 8-K).3.5
    
    Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of the Registrant dated February 17, 2004,
incorporated herein by reference to the Registrants Registration
Statement on Form S-3, File No. 333-113077, initially filed on
February 25, 2004.3.6
    
    Amended and Restated By-laws of the Registrant, incorporated
herein by reference to the Registrants Registration Statement on
Form S-3, File No. 333-116334, filed on June 10, 2004.4.1
    
    Third Amended and Restated Rights Agreement dated as of October
14, 2003, between the Registrant and The Bank of New York, as
Rights Agent, incorporated herein by reference to the 10/15/03
8-K.10.1
    
    Confidential License Agreement for Game Boy Advance (Western
Hemisphere) dated August 6, 2001 between Midway Home Entertainment
Inc. and Nintendo of America Inc. (Portions of this exhibit have
been omitted pursuant to a request for confidential treatment in
accordance with Rule 406 under the Securities Act of 1933, as
amended.)10.2
    
    First Amendment to Confidential License Agreement for Game Boy
Advance dated September 17, 2004 between Midway Home Entertainment
Inc. and Nintendo of America Inc.10.3
    
    PlayStation Portable (PSP) Licensed PSP Publisher Agreement
dated March 26, 2005 between Midway Home Entertainment Inc. and
Sony Computer Entertainment America Inc. (Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment in accordance with Rule 406 under the Securities Act of
1933, as amended.)31
    
    Certifications of 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 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.
 25




---



##### 



Signature
  MIDWAY GAMES INC.By:
    /s/ Thomas E. PowellThomas E. PowellDated: May 3, 2006
    
    Executive Vice PresidentFinance, Treasurer
and Chief Financial Officer
(Principal Financial Officer) 26




---



##### 



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the
Registrant dated October 25, 1996, incorporated herein by
reference to the Registrants Registration Statement on Form S-1,
as amended, File No. 333-11919, initially filed on September 13,
1996 and effective October 29, 1996.3.2
    
    Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Registrant dated February 25, 1998,
incorporated herein by reference to the Registrants Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20, 1998.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Registrant dated August 5, 2003,
incorporated herein by reference to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.3.4
    
    Form of Certificate of Designations of Series A Preferred Stock
incorporated herein by reference to Exhibit A to the Third Amended
and Restated Rights Agreement filed as Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on October 15, 2003
(the 10/15/03 8-K).3.5
    
    Certificate of Amendment of the Amended and Restated Certificate
of Incorporation of the Registrant dated February 17, 2004,
incorporated herein by reference to the Registrants Registration
Statement on Form S-3, File No. 333-113077, initially filed on
February 25, 2004.3.6
    
    Amended and Restated By-laws of the Registrant, incorporated
herein by reference to the Registrants Registration Statement on
Form S-3, File No. 333-116334, filed on June 10, 2004.4.1
    
    Third Amended and Restated Rights Agreement dated as of October
14, 2003, between the Registrant and The Bank of New York, as
Rights Agent, incorporated herein by reference to the 10/15/03
8-K.10.1
    
    Confidential License Agreement for Game Boy Advance (Western
Hemisphere) dated August 6, 2001 between Midway Home Entertainment
Inc. and Nintendo of America Inc. (Portions of this exhibit have
been omitted pursuant to a request for confidential treatment in
accordance with Rule 406 under the Securities Act of 1933, as
amended.)10.2
    
    First Amendment to Confidential License Agreement for Game Boy
Advance dated September 17, 2004 between Midway Home Entertainment
Inc. and Nintendo of America Inc.10.3
    
    PlayStation Portable (PSP) Licensed PSP Publisher Agreement
dated March 26, 2005 between Midway Home Entertainment Inc. and
Sony Computer Entertainment America Inc. (Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment in accordance with Rule 406 under the Securities Act of
1933, as amended.)31
    
    Certifications of 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 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.
 27