##### 



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 June 30, 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
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



MIDWAY GAMES INC.
 INDEX
 PAGE NO.Part I. Financial Information:Item 1.Financial Statements:Consolidated Balance Sheets  June 30, 2006 and December 31, 2005
    
    3Consolidated Statements of Operations  Three and Six Months Ended June 30, 2006 and 2005
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2006 and 2005
    
    5Notes to Consolidated Financial Statements
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    15Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    30Item 4.Controls and Procedures
    
    30Part II. Other Information:Item 1A.Risk Factors
    
    31Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 4.   Submission of Matters to a Vote of Security Holders
    
    33Item 6.   Exhibits
    
    35Signature
    
    36
 2




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##### 



Part I. Financial Information
 Item 1. Financial Statements
 MIDWAY GAMES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    128,463
    
    
    $
    98,376Receivables, less allowances of $11,701 at June 30, 2006 and $16,130 at December 31, 2005
    
    
    9,788
    
    
    
    30,835Inventories
    
    
    2,924
    
    
    
    5,811Capitalized product development costs
    
    
    37,660
    
    
    
    27,570Prepaid expenses and other current assets
    
    
    13,031
    
    
    
    16,134Total current assets
    
    
    191,866
    
    
    
    178,726Capitalized product development costs
    
    
    2,660
    
    
    
    25Property and equipment, net
    
    
    20,718
    
    
    
    19,049Goodwill
    
    
    41,143
    
    
    
    41,108Other assets
    
    
    11,230
    
    
    
    9,355Total assets
    
    $
    267,617
    
    
    $
    248,263Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    7,359
    
    
    $
    12,431Accrued compensation and related benefits
    
    
    3,649
    
    
    
    4,060Accrued royalties
    
    
    3,077
    
    
    
    3,938Accrued selling and marketing
    
    
    3,334
    
    
    
    4,418Deferred revenue
    
    
    2,085
    
    
    
    384Current portion of long-term debt
    
    
    3,333
    
    
    
    3,333Other accrued liabilities
    
    
    14,577
    
    
    
    13,440Total current liabilities
    
    
    37,414
    
    
    
    42,004Convertible senior notes, less unamortized discount of $9,095 at June 30, 2006
    
    
    140,905
    
    
    
    75,000Long-term debt
    
    
    5,278
    
    
    
    6,944Deferred income taxes
    
    
    8,742
    
    
    
    8,086Other noncurrent liabilities
    
    
    355
    
    
    
    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; 92,438,203 and 92,233,807
shares issued at June 30, 2006 and December 31, 2005, respectively
    
    
    924
    
    
    
    922Additional paid-in capital
    
    
    441,487
    
    
    
    431,273Accumulated deficit
    
    
    (356,705
    )
    
    
    (303,099
    )Accumulated translation adjustment
    
    
    (1,016
    )
    
    
    (439
    )Deferred compensation
    
    
    
    
    
    
    (3,610
    )Treasury stock, at cost, 1,114,000 and 1,093,627 shares at June 30, 2006 and December
31, 2005, respectively
    
    
    (9,767
    )
    
    
    (9,602
    )Total stockholders equity
    
    
    74,923
    
    
    
    115,445Total liabilities and stockholders equity
    
    $
    267,617
    
    
    $
    248,263
  3




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    25,922
    
    
    $
    36,926
    
    
    $
    41,318
    
    
    $
    50,741Cost of sales:Product costs and distribution
    
    
    10,289
    
    
    
    13,904
    
    
    
    17,859
    
    
    
    18,970Royalties and product development
    
    
    17,009
    
    
    
    21,165
    
    
    
    24,124
    
    
    
    24,695Total cost of sales
    
    
    27,298
    
    
    
    35,069
    
    
    
    41,983
    
    
    
    43,665Gross profit (loss)
    
    
    (1,376
    )
    
    
    1,857
    
    
    
    (665
    )
    
    
    7,076Research and development expense
    
    
    10,715
    
    
    
    10,444
    
    
    
    21,377
    
    
    
    19,410Selling and marketing expense
    
    
    12,937
    
    
    
    15,779
    
    
    
    19,390
    
    
    
    23,059Administrative expense
    
    
    5,446
    
    
    
    4,469
    
    
    
    10,792
    
    
    
    8,649Restructuring and other charges
    
    
    (161
    )
    
    
    
    
    
    
    (161
    )
    
    
    Operating loss
    
    
    (30,313
    )
    
    
    (28,835
    )
    
    
    (52,063
    )
    
    
    (44,042
    )Interest income
    
    
    1,143
    
    
    
    490
    
    
    
    2,138
    
    
    
    1,118Interest expense
    
    
    (2,192
    )
    
    
    (371
    )
    
    
    (3,883
    )
    
    
    (724
    )Other income and (expense), net
    
    
    782
    
    
    
    (806
    )
    
    
    976
    
    
    
    (1,439
    )Loss before income taxes
    
    
    (30,580
    )
    
    
    (29,522
    )
    
    
    (52,832
    )
    
    
    (45,087
    )Provision for income taxes
    
    
    427
    
    
    
    328
    
    
    
    774
    
    
    
    656Net loss
    
    
    (31,007
    )
    
    
    (29,850
    )
    
    
    (53,606
    )
    
    
    (45,743
    )Preferred stock dividends:Distributed
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    126Imputed
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    3Loss applicable to common stock
    
    $
    (31,007
    )
    
    $
    (29,914
    )
    
    $
    (53,606
    )
    
    $
    (45,872
    )Basic and diluted loss per share of common stock
    
    $
    (0.34
    )
    
    $
    (0.35
    )
    
    $
    (0.59
    )
    
    $
    (0.53
    )Basic and diluted weighted average number of shares outstanding
    
    
    90,651
    
    
    
    85,941
    
    
    
    90,531
    
    
    
    85,792
  4




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (53,606
    )
    
    $
    (45,743
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    21,244
    
    
    
    20,722Depreciation and amortization
    
    
    3,683
    
    
    
    3,470Receivables provision
    
    
    12,199
    
    
    
    9,750Deferred income taxes
    
    
    656
    
    
    
    656Stock-based compensation expense
    
    
    3,643
    
    
    
    1,166Amortization of debt issuance costs
    
    
    506
    
    
    
    127Amortization of convertible senior notes discount
    
    
    24
    
    
    
    Loss on disposal of property and equipment
    
    
    16
    
    
    
    27Changes in operating assets and liabilities:Receivables
    
    
    8,930
    
    
    
    (7,085
    )Inventories
    
    
    2,922
    
    
    
    1,298Capitalized product development costs
    
    
    (33,969
    )
    
    
    (34,241
    )Prepaid expenses and other current assets
    
    
    (2,147
    )
    
    
    931Accounts payable, accruals and deferred revenue
    
    
    (4,665
    )
    
    
    (3,717
    )Other assets and liabilities
    
    
    (1,533
    )
    
    
    (1,306
    )Net cash used in operating activities
    
    
    (42,097
    )
    
    
    (53,945
    )Investing activities:Purchases of property and equipment
    
    
    (5,141
    )
    
    
    (3,476
    )Financing activities:Proceeds from issuance of convertible senior notes
    
    
    75,000
    
    
    
    Payment of convertible senior notes issuance costs
    
    
    (2,283
    )
    
    
    Payment of long-term debt
    
    
    (1,667
    )
    
    
    (1,667
    )Payment on capital lease obligation
    
    
    (374
    )
    
    
    (530
    )Cash dividends on preferred stock
    
    
    
    
    
    
    (127
    )Cash received on exercise of common stock options
    
    
    6,183
    
    
    
    1,077Net cash provided by (used in) financing activities
    
    
    76,859
    
    
    
    (1,247
    )Effect of exchange rate changes on cash
    
    
    466
    
    
    
    (424
    )Increase (decrease) in cash and cash equivalents
    
    
    30,087
    
    
    
    (59,092
    )Cash and cash equivalents at beginning of period
    
    
    98,376
    
    
    
    118,313Cash and cash equivalents at end of period
    
    $
    128,463
    
    
    $
    59,221
  5




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##### 



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
 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
 Share-Based Payment
 6




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##### 



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
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Reported loss applicable to common stock
    
    $
    (29,914
    )
    
    $
    (45,872
    )Deduct stock-based compensation expense
included in reported loss applicable to
common stock (a)
    
    
    513
    
    
    
    1,166Add stock-based compensation expense
determined under the fair value based method
for all awards (a)
    
    
    (1,554
    )
    
    
    (3,256
    )Pro forma net loss applicable to common stock
    
    $
    (30,955
    )
    
    $
    (47,962
    )Basic and diluted loss per share:As reported
    
    $
    (0.35
    )
    
    $
    (0.53
    )Pro forma
    
    $
    (0.36
    )
    
    $
    (0.56
    )
 
 (a)
    
    These amounts reflect a $0 income tax effect.   Determining Fair Value of Stock Options Under SFAS No. 123R
 Valuation Method.
 Expected Term
 Expected Volatility
 Risk-Free Interest Rate.
 Expected Dividend Yield.
 Expected Forfeitures.
 8




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##### 



Three Months
    
    Three MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2005Expected term (in years)
    
    
    4.8
    
    
    
    3.9Expected stock price volatility
    
    
    70
    %
    
    
    74
    %Risk-free interest rate
    
    
    5.0
    %
    
    
    3.6
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Estimated fair value per option granted
    
    $
    4.25
    
    
    $
    5.42
 Six Months
    
    Six MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2005Expected term (in years)
    
    
    4.8
    
    
    
    3.9Expected stock price volatility
    
    
    71
    %
    
    
    75
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    3.7
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Estimated fair value per option granted
    
    $
    6.21
    
    
    $
    5.45
 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
    
    
    8
    
    
    
    10.22Exercised
    
    
    (202
    )
    
    
    4.44Cancelled
    
    
    (4
    )
    
    
    5.22Forfeited
    
    
    (6
    )
    
    
    6.00Outstanding at June 30, 2006
    
    
    4,673
    
    
    
    9.89
    
    
    4.9 years
    
    $
    9,419Exercisable at December 31, 2005
    
    
    3,206
    
    
    
    11.74
    
    
    4.4 years
    
    $
    24,101Exercisable at June 30, 2006
    
    
    3,431
    
    
    
    11.54
    
    
    4.1 years
    
    $
    5,202
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Weighted average grant date exercise price of options granted
    
    $
    6.98
    
    
    $
    9.53
    
    
    $
    10.22
    
    
    $
    9.49Intrinsic value of options exercised (in thousands)
    
    $
    
    
    
    $
    911
    
    
    $
    2,631
    
    
    $
    1,145
  9




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##### 



WeightedAverageRemainingWeighted Average
    
    
    ContractualShares Covered by Options
    
    
    Exercise Price
    
    
    LifeExercise Prices
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding$2.32  $3.45
    
    
    675
    
    
    
    283
    
    
    $
    2.63
    
    
    $
    2.79
    
    
    
    7.03.57  5.20
    
    
    1,184
    
    
    
    742
    
    
    
    3.62
    
    
    
    3.62
    
    
    
    6.95.24  7.75
    
    
    192
    
    
    
    160
    
    
    
    5.85
    
    
    
    5.76
    
    
    
    6.07.90  11.75
    
    
    685
    
    
    
    348
    
    
    
    9.96
    
    
    
    10.03
    
    
    
    7.011.79  16.83
    
    
    1,029
    
    
    
    990
    
    
    
    13.67
    
    
    
    13.70
    
    
    
    3.720.00
    
    
    908
    
    
    
    908
    
    
    
    20.00
    
    
    
    20.00
    
    
    
    0.34,673
    
    
    
    3,431
    
    
    
    9.89
    
    
    
    11.54
    
    
    
    4.9
   Restricted Stock
  Restricted stock  non-performance-based awards
  WeightedAverageGrantShares
    
    
    PriceOutstanding at December 31, 2005
    
    
    430
    
    
    $
    9.89Granted
    
    
    
    
    
    
    Vested
    
    
    (233
    )
    
    
    7.88Forfeited
    
    
    (18
    )
    
    
    9.33Outstanding at June 30, 2006
    
    
    179
    
    
    
    11.70
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Restricted stock shares vested
    
    
    233
    
    
    
    27
    
    
    
    233
    
    
    
    74Weighted average grant date fair value of restricted stock shares vested
    
    $
    7.88
    
    
    $
    7.38
    
    
    $
    7.88
    
    
    $
    9.33Total fair value of restricted stock shares vested (in thousands)
    
    $
    1,835
    
    
    $
    202
    
    
    $
    1,835
    
    
    $
    691
   10




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##### 



Restricted stock  performance-based awards
  Total restricted stock
  NumberVesting Period
    
    of SharesJuly 1, 2006 to December 31, 2006
    
    
    712007
    
    
    832008
    
    
    685Total
    
    
    839
 4. Comprehensive Loss
 Reporting Comprehensive Income
 5. Loss per Common Share
  June 302006
    
    
    2005Stock options
    
    
    4,673
    
    
    
    7,376Warrants
    
    
    
    
    
    
    679Contingent shares
    
    
    1,276
    
    
    
    843Redeemable convertible preferred stock, Series D
    
    
    
    
    
    
    1,115Convertible senior notes
    
    
    12,747
    
    
    
    Total common stock equivalents
    
    
    18,696
    
    
    
    10,013
  11




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##### 



6. Inventories
  7. Capitalized Product Development Costs and Research and Development Costs
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    35,657
    
    
    $
    43,688
    
    
    $
    27,595
    
    
    $
    28,659Additions
    
    
    20,108
    
    
    
    16,232
    
    
    
    33,969
    
    
    
    34,241Amortization
    
    
    (14,635
    )
    
    
    (15,698
    )
    
    
    (19,548
    )
    
    
    (18,678
    )Writedowns
    
    
    (810
    )
    
    
    (2,044
    )
    
    
    (1,696
    )
    
    
    (2,044
    )Ending balance
    
    $
    40,320
    
    
    $
    42,178
    
    
    $
    40,320
    
    
    $
    42,178
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross research and development costs
    
    $
    30,823
    
    
    $
    26,676
    
    
    $
    55,346
    
    
    $
    53,651Research and development costs capitalized
    
    
    (20,108
    )
    
    
    (16,232
    )
    
    
    (33,969
    )
    
    
    (34,241
    )Research and development expense
    
    $
    10,715
    
    
    $
    10,444
    
    
    $
    21,377
    
    
    $
    19,410
 8. Convertible Senior Notes
   
    
    Our controlling stockholder and his affiliates become the beneficial owner, directly or
indirectly, of 90% or more of the aggregate fair value of our outstanding capital stock. In
this event, the conversion rate will increase by 7.2495 shares per $1,000 principal amount
of the notes. This conversion rate increase is subject to future adjustment in accordance
with the provisions of the indenture governing the notes.
    
    On any date prior to May 31, 2008, if (1) the arithmetic average of the daily
volume-weighted average price of our common stock for any 20 trading days within a period of
30 consecutive trading days ending on such date, is less than $8.00, as may be adjusted for
capital changes, and (2) 110% of the closing sale price is less than or equal to $8.80, as
may be adjusted, then the conversion rate will increase on that date such that the
conversion price would be $8.80 per share of common stock ($8.80 reset feature).
    
    On any date prior to May 31, 2008, if (1) the arithmetic average of the daily
volume-weighted average price of our common stock for any 20 trading days within a period of
30 consecutive trading days ending on such date, is less than $6.00, as may be adjusted for
capital changes, and (2) 110% of the closing sale price is less than or equal to $6.60, as
may be adjusted, then the conversion rate will increase on that date such that the
conversion price would be $6.60 per share of common stock.
 12




---



##### 




    
    On May 31, 2008 or May 31, 2009, if 110% of the arithmetic average of the daily
volume-weighted average price of our common stock for any 20 trading days within a period of
30 consecutive trading days ending on such dates is less than the conversion price in effect
at that time, then the conversion rate will be increased so that the conversion price would
be 110% of the daily volume-weighted average price calculated at these respective dates. The
conversion rate will not be adjusted on these dates if 110% of the daily volume-weighted
average price for such 20 trading days within such period of 30 consecutive trading days
ending on such dates is equal to or greater than the conversion price in effect at that
time. In no event shall the conversion rate be adjusted such that the conversion price
would be less than $6.60 per share, as may be adjusted for capital changes.
    
    We effect certain business combinations, asset sales or changes in ownership where the
consideration paid to the common stockholders includes securities (or other property) that
are neither traded on a U.S. national securities exchange nor quoted on the Nasdaq National
Market nor scheduled to be so traded or quoted immediately after such transaction. In these
events, the conversion rate will increase at varying amounts with a maximum increase of 9.23
shares per $1,000 principal amount of the notes.
    
    Issuance of additional shares of common stock, convertible securities, rights to holders
of our common stock, such as stock splits, declaration of dividends and certain other
distributions and capital changes.
     Earnings per
Share,
   13




---



##### 



9. Restructuring
   Lease andLong-TermCommitmentsand OtherCostsBalances at December 31, 2005
    
    $
    1,286Provision
    
    
    (161
    )Usage/payouts
    
    
    (296
    )Balances at June 30, 2006
    
    $
    829
  14




---



##### 



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 DS Nintendo DS
 New Console Cycle, Recent Trends and Uncertainties
  New Console Cycle PS2 GameCube Xbox, Game Boy Advance, Xbox 360,
 15




---



##### 



Decreasing Revenues and Selling Prices
 Increasing Costs to Develop Video Games
 Handheld Market
 Nintendo DS. PSP. PSP PSP DS
 PC Market
 The Lord of the Rings Online Shadows of Angma Unreal Tournament Rise and
Fall: Civilizations at War
 Childrens Market
 Ed, Edd n Eddy: The Mis-Edventures The Ant Bully Happy Feet
 Strategic Alliances
 L.A. RUSH PS2 Xbox The Wheelman
 16




---



##### 



The Lord of the Rings Online: Shadows of Angma  The Lord of the
Rings Online
  Expansion of Product Development Resources
  Stock-based Compensation
 Share-Based Payment ,
 Accounting for Stock Issued to Employees
   17




---



##### 



Majority Stockholder
  Issuance of Convertible Senior Notes
  18




---



##### 



Results of Operations
 Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005
  Three Months Ended June 30,2006
    
    
    2005Net revenues
    
    $
    25,922
    
    
    
    100.0
    %
    
    $
    36,926
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    10,289
    
    
    
    39.7
    %
    
    
    13,904
    
    
    
    37.7
    %Royalties and product development
    
    
    17,009
    
    
    
    65.6
    %
    
    
    21,165
    
    
    
    57.3
    %Total cost of sales
    
    
    27,298
    
    
    
    105.3
    %
    
    
    35,069
    
    
    
    95.0
    %Gross profit
    
    
    (1,376
    )
    
    
    (5.3
    )%
    
    
    1,857
    
    
    
    5.0
    %Research and development expense
    
    
    10,715
    
    
    
    41.3
    %
    
    
    10,444
    
    
    
    28.3
    %Selling and marketing expense
    
    
    12,937
    
    
    
    49.9
    %
    
    
    15,779
    
    
    
    42.7
    %Administrative expense
    
    
    5,446
    
    
    
    21.0
    %
    
    
    4,469
    
    
    
    12.1
    %Restructuring and other charges
    
    
    (161
    )
    
    
    (0.6
    )%
    
    
    
    
    
    
    0.0
    %Operating loss
    
    
    (30,313
    )
    
    
    (116.9
    )%
    
    
    (28,835
    )
    
    
    (78.1
    )%Interest income
    
    
    1,143
    
    
    
    4.4
    %
    
    
    490
    
    
    
    1.3
    %Interest expense
    
    
    (2,192
    )
    
    
    (8.5
    )%
    
    
    (371
    )
    
    
    (1.0
    )%Other income and (expense), net
    
    
    782
    
    
    
    3.0
    %
    
    
    (806
    )
    
    
    (2.1
    )%Loss before income taxes
    
    
    (30,580
    )
    
    
    (118.0
    )%
    
    
    (29,522
    )
    
    
    (79.9
    )%Provision for income taxes
    
    
    427
    
    
    
    1.6
    %
    
    
    328
    
    
    
    0.9
    %Net loss
    
    
    (31,007
    )
    
    
    (119.6
    )%
    
    
    (29,850
    )
    
    
    (80.8
    )%Preferred stock dividends:Distributed
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    0.2
    %Imputed
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    0.0
    %Loss applicable to common stock
    
    $
    (31,007
    )
    
    
    (119.6
    )%
    
    $
    (29,914
    )
    
    
    (81.0
    )%
  Three Months EndedSee
    
    June 30,
    
    Increase /
    
    Percentexplanation
    
    2006
    
    2005
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    25,922
    
    
    $
    36,926
    
    
    $
    (11,004
    )
    
    
    (29.8
    )%North American net revenues
    
    
    B
    
    
    
    19,836
    
    
    
    24,798
    
    
    
    (4,962
    )
    
    
    (20.0
    )%International net revenues
    
    
    C
    
    
    
    6,086
    
    
    
    12,128
    
    
    
    (6,042
    )
    
    
    (49.8
    )%Cost of sales:Product cost and distribution
    
    
    D
    
    
    
    10,289
    
    
    
    13,904
    
    
    
    (3,615
    )
    
    
    (26.0
    )%Royalties and product development
    
    
    E
    
    
    
    17,009
    
    
    
    21,165
    
    
    
    (4,156
    )
    
    
    (19.6
    )%Research and development expense
    
    
    F
    
    
    
    10,715
    
    
    
    10,444
    
    
    
    271
    
    
    
    2.6
    %Selling and marketing expense
    
    
    G
    
    
    
    12,937
    
    
    
    15,779
    
    
    
    (2,842
    )
    
    
    (18.0
    )%Administrative expense
    
    
    H
    
    
    
    5,446
    
    
    
    4,469
    
    
    
    977
    
    
    
    21.9
    %Restructuring and other charges
    
    
    I
    
    
    
    (161
    )
    
    
    
    
    
    
    (161
    )
    
    
    (100.0
    )%Interest income
    
    
    J
    
    
    
    1,143
    
    
    
    490
    
    
    
    653
    
    
    
    133.3
    %Interest expense
    
    
    K
    
    
    
    (2,192
    )
    
    
    (371
    )
    
    
    (1,821
    )
    
    
    490.8
    %Other income and (expense), net
    
    
    L
    
    
    
    782
    
    
    
    (806
    )
    
    
    1,588
    
    
    
    (197.0
    )%Provision for income taxes
    
    
    M
    
    
    
    427
    
    
    
    328
    
    
    
    99
    
    
    
    30.2
    %Preferred stock dividends
    
    
    N
    
    
    
    
    
    
    
    64
    
    
    
    (64
    )
    
    
    (100.0
    )%
 19




---



##### 



A. Consolidated Net Revenues
  Three Months Ended June 30,2006
    
    
    2005Net revenues by platformSony PlayStation 2(PS2)
    
    $
    13,835
    
    
    
    53.4
    %
    
    $
    13,801
    
    
    
    37.4
    %Microsoft Xbox
    
    
    1,327
    
    
    
    5.1
    %
    
    
    18,087
    
    
    
    49.0
    %Nintendo GameCube(NGC)
    
    
    1,864
    
    
    
    7.2
    %
    
    
    210
    
    
    
    0.6
    %Nintendo Game Boy Advance(GBA)
    
    
    41
    
    
    
    0.2
    %
    
    
    174
    
    
    
    0.5
    %Sony PlayStation Portable(PSP)
    
    
    2,144
    
    
    
    8.3
    %
    
    
    
    
    
    
    Personal Computer (PC)
    
    
    4,978
    
    
    
    19.2
    %
    
    
    2,153
    
    
    
    5.8
    %License and royalty
    
    
    1,616
    
    
    
    6.2
    %
    
    
    1,746
    
    
    
    4.7
    %Other
    
    
    117
    
    
    
    0.4
    %
    
    
    755
    
    
    
    2.0
    %Total net revenues
    
    $
    25,922
    
    
    
    100.0
    %
    
    $
    36,926
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryThree Months Ended June 30, 2006MLB Slugfest 2006
    
    PS2, Xbox
    
    North AmericaNBA Ballers: Phenom
    
    PS2
    
    North AmericaNBA Ballers: Rebound
    
    PSP
    
    North AmericaRampage: Total Destruction
    
    PS2, NGC
    
    North AmericaRise & Fall: Civilizations At War
    
    PC
    
    North AmericaRampage: Total Destruction
    
    PS2
    
    InternationalRise & Fall: Civilizations At War
    
    PC
    
    InternationalThree Months Ended June 30, 2005Area 51
    
    PS2, Xbox, PC
    
    North AmericaUnreal Championship 2
    
    Xbox
    
    North AmericaArea 51
    
    PS2, Xbox, PC
    
    InternationalNARC
    
    Xbox
    
    InternationalUnreal Championship 2
    
    Xbox
    
    International
  B. North American Net Revenues
 NBA
Ballers: Phenom Rampage: Total Destruction MLB Slugfest 2006 Area 51, Unreal Championship 2 NARC,
 20




---



##### 



C. International Net Revenues
 Rise & Fall: Civilizations at War Rampage: Total Destruction Midway Arcade Treasures: Extended Play . Area 51 Unreal Championship 2 Mortal Kombat: Deception
 D. and E. Cost of Sales
  Unreal Championship 2
  Three Months EndedJune 30,Description
    
    2006
    
    
    2005Amortization of capitalized product development costs
    
    $
    14,635,000
    
    
    $
    15,698,000Writedown related to a future release
    
    
    810,000
    
    
    
    2,044,000Total
    
    $
    15,445,000
    
    
    $
    17,742,000
 F. Research and Development Expense
  Three Months EndedJune 30,Description
    
    2006
    
    
    2005Gross research and development costs
    
    $
    30,823,000
    
    
    $
    26,676,000Research and development costs capitalized
    
    
    (20,108,000
    )
    
    
    (16,232,000
    )Research and development expense
    
    $
    10,715,000
    
    
    $
    10,444,000
 21




---



##### 



L.A. RUSH L.A. RUSH
 G. Selling and Marketing Expense
 NBA Ballers: Phenom NBA Ballers:
Rebound Rise & Fall: Civilizations at War. Mortal Kombat: Deception NARC,
 H. Administrative Expense
  I. Restructuring and Other Charges
  J. Interest Income
  K. Interest Expense
   22




---



##### 



L. Other Income and (Expense), net
  M. Provision for Income Taxes
  N. Preferred Stock Dividends
  23




---



##### 



Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005
  Six Months Ended June 30,2006
    
    
    2005Net revenues
    
    $
    41,318
    
    
    
    100.0
    %
    
    $
    50,741
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    17,859
    
    
    
    43.2
    %
    
    
    18,970
    
    
    
    37.4
    %Royalties and product development
    
    
    24,124
    
    
    
    58.4
    %
    
    
    24,695
    
    
    
    48.7
    %Total cost of sales
    
    
    41,983
    
    
    
    101.6
    %
    
    
    43,665
    
    
    
    86.1
    %Gross profit (loss)
    
    
    (665
    )
    
    
    (1.6
    )%
    
    
    7,076
    
    
    
    13.9
    %Research and development expense
    
    
    21,377
    
    
    
    51.8
    %
    
    
    19,410
    
    
    
    38.3
    %Selling and marketing expense
    
    
    19,390
    
    
    
    46.9
    %
    
    
    23,059
    
    
    
    45.4
    %Administrative expense
    
    
    10,792
    
    
    
    26.1
    %
    
    
    8,649
    
    
    
    17.0
    %Restructuring and other charges
    
    
    (161
    )
    
    
    (0.4
    )%
    
    
    
    
    
    
    0.0
    %Operating loss
    
    
    (52,063
    )
    
    
    (126.0
    )%
    
    
    (44,042
    )
    
    
    (86.8
    )%Interest income
    
    
    2,138
    
    
    
    5.2
    %
    
    
    1,118
    
    
    
    2.2
    %Interest expense
    
    
    (3,883
    )
    
    
    (9.4
    )%
    
    
    (724
    )
    
    
    (1.4
    )%Other income and (expense), net
    
    
    976
    
    
    
    2.4
    %
    
    
    (1,439
    )
    
    
    (2.8
    )%Loss before income taxes
    
    
    (52,832
    )
    
    
    (127.8
    )%
    
    
    (45,087
    )
    
    
    (88.8
    )%Provision for income taxes
    
    
    774
    
    
    
    1.9
    %
    
    
    656
    
    
    
    1.3
    %Net loss
    
    
    (53,606
    )
    
    
    (129.7
    )%
    
    
    (45,743
    )
    
    
    (90.1
    )%Preferred stock dividends:Distributed
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    0.3
    %Imputed
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    0.0
    %Loss applicable to common stock
    
    $
    (53,606
    )
    
    
    (129.7
    )%
    
    $
    (45,872
    )
    
    
    (90.4
    )%
  Six Months EndedSee
    
    June 30,
    
    Increase /
    
    Percentexplanation
    
    2006
    
    2005
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    41,318
    
    
    $
    50,741
    
    
    $
    (9,423
    )
    
    
    (18.6
    )%North American net revenues
    
    
    B
    
    
    
    31,302
    
    
    
    35,521
    
    
    
    (4,219
    )
    
    
    (11.9
    )%International net revenues
    
    
    C
    
    
    
    10,016
    
    
    
    15,220
    
    
    
    (5,204
    )
    
    
    (34.2
    )%Cost of sales:Product cost and distribution
    
    
    D
    
    
    
    17,859
    
    
    
    18,970
    
    
    
    (1,111
    )
    
    
    (5.9
    )%Royalties and product development
    
    
    E
    
    
    
    24,124
    
    
    
    24,695
    
    
    
    (571
    )
    
    
    (2.3
    )%Research and development expense
    
    
    F
    
    
    
    21,377
    
    
    
    19,410
    
    
    
    1,967
    
    
    
    10.1
    %Selling and marketing expense
    
    
    G
    
    
    
    19,390
    
    
    
    23,059
    
    
    
    (3,669
    )
    
    
    (15.9
    )%Administrative expense
    
    
    H
    
    
    
    10,792
    
    
    
    8,649
    
    
    
    2,143
    
    
    
    24.8
    %Restructuring and other charges
    
    
    I
    
    
    
    (161
    )
    
    
    
    
    
    
    (161
    )
    
    
    (100.0
    )%Interest income
    
    
    J
    
    
    
    2,138
    
    
    
    1,118
    
    
    
    1,020
    
    
    
    91.2
    %Interest expense
    
    
    K
    
    
    
    (3,883
    )
    
    
    (724
    )
    
    
    (3,159
    )
    
    
    436.3
    %Other income and (expense), net
    
    
    L
    
    
    
    976
    
    
    
    (1,439
    )
    
    
    2,415
    
    
    
    (167.8
    )%Provision for income taxes
    
    
    M
    
    
    
    774
    
    
    
    656
    
    
    
    118
    
    
    
    18.0
    %Preferred stock dividends
    
    
    N
    
    
    
    
    
    
    
    129
    
    
    
    (129
    )
    
    
    (100.0
    )%
 24




---



##### 



A. Consolidated Net Revenues
  Six Months Ended June 30,2006
    
    
    2005Net revenues by platformSony PlayStation 2(PS2)
    
    $
    20,758
    
    
    
    50.2
    %
    
    $
    20,192
    
    
    
    39.8
    %Microsoft Xbox
    
    
    5,607
    
    
    
    13.6
    %
    
    
    20,740
    
    
    
    40.9
    %Nintendo GameCube(NGC)
    
    
    2,195
    
    
    
    5.3
    %
    
    
    2,817
    
    
    
    5.6
    %Nintendo Game Boy Advance(GBA)
    
    
    233
    
    
    
    0.6
    %
    
    
    471
    
    
    
    0.9
    %Sony PlayStation Portable(PSP)
    
    
    4,011
    
    
    
    9.7
    %
    
    
    
    
    
    
    Personal Computer (PC)
    
    
    5,452
    
    
    
    13.2
    %
    
    
    2,153
    
    
    
    4.2
    %License and royalty
    
    
    2,867
    
    
    
    6.9
    %
    
    
    3,531
    
    
    
    7.0
    %Other
    
    
    195
    
    
    
    0.5
    %
    
    
    837
    
    
    
    1.6
    %Total net revenues
    
    $
    41,318
    
    
    
    100.0
    %
    
    $
    50,741
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritorySix Months Ended June 30, 2006L.A. RUSH
    
    PC
    
    North AmericaMidway Arcade Treasures: Deluxe Edition
    
    PC
    
    North AmericaMLB Slugfest 2006
    
    PS2, Xbox
    
    North AmericaNBA Ballers: Phenom
    
    PS2, Xbox
    
    North AmericaNBA Ballers: Rebound
    
    PSP
    
    North AmericaRampage: Total Destruction
    
    PS2, NGC
    
    North AmericaRise & Fall: Civilizations At War
    
    PC
    
    North AmericaGauntlet: Seven Sorrows
    
    PS2, Xbox
    
    InternationalL.A. RUSH
    
    PC
    
    InternationalMidway Arcade Treasures: Extended Play
    
    PSP
    
    InternationalRampage: Total Destruction
    
    PS2
    
    InternationalRise & Fall: Civilizations At War
    
    PC
    
    International
 Video Game Title
    
    Platform
    
    TerritorySix Months Ended June 30, 2005Area 51
    
    PS2, Xbox, PC
    
    North AmericaMortal Kombat: Deception
    
    NGC
    
    North AmericaNARC
    
    PS2, Xbox
    
    North AmericaUnreal Championship 2
    
    Xbox
    
    North AmericaArea 51
    
    PS2, Xbox, PC
    
    InternationalMaya the Bee
    
    GBA
    
    InternationalNARC
    
    Xbox
    
    InternationalShadow Hearts: Covenant
    
    PS2
    
    InternationalUnreal Championship 2
    
    Xbox
    
    International
  B. North American Net Revenues
 NBA Ballers: Phenom Rampage: Total Destruction MLB Slugfest 2006 Area 51 Unreal Championship 2 NARC
 25




---



##### 



C. International Net Revenues
 Rise & Fall: Civilizations at War Midway Arcade Treasures: Extended Play Gauntlet: Seven
Sorrows. Area 51 Unreal Championship 2 Shadow
Hearts: Covenant
 D. and E. Cost of Sales
  Unreal Championship 2
  Six Months EndedJune 30,Description
    
    2006
    
    
    2005Amortization of capitalized product development costs
    
    $
    19,548,000
    
    
    $
    18,678,000Writedown related to a future release
    
    
    1,696,000
    
    
    
    2,044,000Total
    
    $
    21,244,000
    
    
    $
    20,722,000
 F. Research and Development Expense
  Six Months EndedJune 30,Description
    
    2006
    
    
    2005Gross research and development costs
    
    $
    55,346,000
    
    
    $
    53,651,000Research and development costs capitalized
    
    
    (33,969,000
    )
    
    
    (34,241,000
    )Research and development expense
    
    $
    21,377,000
    
    
    $
    19,410,000
 L.A. RUSH
 26




---



##### 



G. Selling and Marketing Expense
 Mortal Kombat: Deception PS2 Xbox NGC
 H. Administrative Expense
  I. Restructuring and Other Charges
  J. Interest Income
  K. Interest Expense
      27




---



##### 



L. Other Income and (Expense), net
  M. Provision for Income Taxes
  N. Preferred Stock Dividends
  Liquidity and Capital Resources
     28




---



##### 



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)
    
    $
    8,611
    
    
    $
    3,333
    
    
    $
    5,278
    
    
    $
    
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    947
    
    
    
    584
    
    
    
    363
    
    
    
    
    
    
    
    Convertible senior notes(3)
    
    
    150,000
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    Interest on convertible senior notes(4)
    
    
    33,680
    
    
    
    9,844
    
    
    
    18,938
    
    
    
    4,898
    
    
    
    Operating lease obligations(5)
    
    
    9,434
    
    
    
    3,242
    
    
    
    3,329
    
    
    
    1,349
    
    
    
    1,514Purchase obligations(6)
    
    
    71,340
    
    
    
    35,614
    
    
    
    26,781
    
    
    
    8,160
    
    
    
    785Other liabilities(7)
    
    
    1,635
    
    
    
    1,439
    
    
    
    196
    
    
    
    
    
    
    
    Total
    
    $
    275,647
    
    
    $
    54,056
    
    
    $
    129,885
    
    
    $
    89,407
    
    
    $
    2,299
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet at June 30, 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 banks base rate on June 30, 2006
(8.25%). These obligations are not reflected on our consolidated balance sheet at June 30,
2006.(3)
    
    Assumes our two convertible senior note instruments are carried through the dates the holders
may first require redemption of the notes, which are April 30, 2009 and May 31, 2010,
respectively. These obligations are reflected on our consolidated balance sheet at June 30,
2006.(4)
    
    Assumes our convertible senior note instruments are carried through the date the holders may
first redeem the notes, which are April 30, 2009 and May 31, 2010, respectively. The
instruments bear interest at the fixed rate of 6.00% and 7.125% per annum, respectively. These
obligations are not reflected on our consolidated balance sheet at June 30, 2006.(5)
    
    These obligations are not reflected on our consolidated balance sheet at June 30, 2006. 29




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##### 



(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 June 30, 2006.(7)
    
    These items are reflected on our consolidated balance sheet at June 30, 2006 in current and
noncurrent liabilities, as appropriate. Impact of Inflation
  Seasonality
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Item 4. Controls and Procedures
   30




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##### 



Part II. Other Information
 Item 1A. Risk Factors.
  The market price for our common stock may be highly volatile.
  Restrictive debt covenants in our credit facility and the indenture for our convertible senior
notes issued in May 2006 limit our operating flexibility, and all amounts outstanding under our
credit facility, including our term loan, and our convertible senior notes may become immediately
payable if we default under the facility or the indenture.
  
    
    make payments, including dividends or other distributions, on
our capital stock, except in shares of common stock;
    
    incur additional indebtedness;
    
    sell, lease, license or dispose of any of our assets;
    
    make loans or investments;
    
    acquire companies or businesses;
    
    cause or permit a change of control;
    
    repurchase or redeem any shares of our capital stock;
    
    issue or sell securities of our subsidiaries; and
    
    make capital expenditures.
   31




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##### 



Increased leverage may harm our results of operations and financial condition.
   
    
    it could affect our ability to satisfy our debt and capital lease obligations;
    
    a substantial portion of our cash flows from operations will be dedicated to interest and
principal payments on our debt and capital lease obligations, thereby reducing our ability to fund
operations, working capital, capital expenditures, expansion, acquisitions, or general corporate
or other purposes;
    
    it may impair our ability to obtain additional financing in the future;
    
    it may limit our flexibility in planning for, or reacting to, changes in our business and industry;
    
    it may place us at a competitive disadvantage compared to competitors that have less indebtedness;
and
    
    it may make us more vulnerable to downturns in our business, our industry or the economy in
general.
  
    
    seek additional financing in the debt or equity markets;
    
    refinance or restructure all or a portion of our indebtedness, including the Notes;
    
    sell assets; and/or
    
    reduce or delay planned expenditures on research and development and/or commercialization activities.
  Shares available for future issuance, conversion and exercise could have an adverse effect on the
earnings per share and the market price of our common stock.
  32




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##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   ISSUER (AFFILIATE) PURCHASES OF EQUITY SECURITIES
 (c) Total Number of Shares
    
    (d) Maximum Number (or(a) Total
    
    
    
    
    
    Purchased as Part of
    
    Approximate DollarNumber
    
    (b) Average
    
    Publicly Announced Plans
    
    Value) of Shares that May Yetof Shares
    
    Price Paid
    
    or
    
    Be Purchased Under the PlansPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    or Programs04/1/06-04/30/06
    
    
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/A05/01/06-05/31/06
    
    
    0
    
    
    $
    0
    
    
    
    N/A
    
    
    
    N/A06/01/06-06/30/06
    
    
    124,900
    
    
    $
    7.80
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    124,900
    
    
    $
    7.80
    
    
    
    N/A
    
    
    
    N/A
 Item 4. Submission of Matters to a Vote of Security Holders.
    33




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##### 



Nominee
    
    For
    
    WithheldKenneth D. Cron
    
    
    89,730,238
    
    
    
    146,092Shari E. Redstone
    
    
    89,488,302
    
    
    
    388,028William C. Bartholomay
    
    
    89,726,139
    
    
    
    150,191Peter C. Brown
    
    
    89,731,650
    
    
    
    144,680Joseph A. Califano, Jr.
    
    
    89,730,544
    
    
    
    145,786Ira S. Sheinfeld
    
    
    89,730,426
    
    
    
    145,904Robert J. Steele
    
    
    89,732,723
    
    
    
    143,607Robert N. Waxman
    
    
    89,733,038
    
    
    
    143,292
  For:
    
    89,750,856Against:
    
    76,669Abstentions:
    
    48,805Broker Non-Votes:
    
    0
 34




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##### 



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
    
    Indenture, dated as of May 30, 2006, between the Registrant and
Wells Fargo Bank, National Association, incorporated herein by
reference to the Registrants Current Report on Form 8-K filed on
May 30, 2006 (the 5/30/06 8-K).10.2
    
    Registration Rights Agreement, dated as of May 30, 2006, between the
Registrant and Banc of America Securities, LLC, incorporated herein by
reference to the 5/30/06 8-K.10.3
    
    Consent and Seventeenth Amendment to Loan and Security Agreement
among the Registrant, several of the Registrants subsidiaries and
Wells Fargo Foothill, Inc., incorporated herein by reference to the
5/30/06 8-K.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.
 35




---



##### 



Signature
  MIDWAY GAMES INC.By:
    
    /s/ Thomas E. PowellThomas E. PowellExecutive Vice PresidentFinance, Treasurer andChief Financial Officer(Principal Financial Officer)
  36




---



##### 



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
    
    Indenture, dated as of May 30, 2006, between the Registrant and
Wells Fargo Bank, National Association, incorporated herein by
reference to the Registrants Current Report on Form 8-K filed on
May 30, 2006 (the 5/30/06 8-K).10.2
    
    Registration Rights Agreement, dated as of May 30, 2006, between the
Registrant and Banc of America Securities, LLC, incorporated herein by
reference to the 5/30/06 8-K.10.3
    
    Consent and Seventeenth Amendment to Loan and Security Agreement
among the Registrant, several of the Registrants subsidiaries and
Wells Fargo Foothill, Inc., incorporated herein by reference to the
5/30/06 8-K.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.
 37