UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to
 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 o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



MIDWAY GAMES INC.
 INDEX
 PAGE NO.Part I. Financial Information:Item 1.Financial Statements:Consolidated Balance Sheets  September 30, 2008 (Unaudited) and December 31, 2007


    
    
    
    3Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)


    
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2008 and 2007 (Unaudited)


    
    
    
    5Notes to Consolidated Financial Statements (Unaudited)

    
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations

    
    
    
    11Item 3.Quantitative and Qualitative Disclosures About Market Risk


    
    
    
    25Item 4.Controls and Procedures

    
    
    
    26Part II. Other Information:Item 1.Legal Proceedings

    
    
    
    26Item 5.Other Information

    
    
    
    26Item 6.Exhibits



    
    
    
    27Signature


    
    
    
    28
  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)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,353
    
    
    $
    27,524Restricted cash
    
    
    231
    
    
    
    Receivables, less allowances of $24,561 and $32,510 at September 30, 2008 and
December 31, 2007, respectively
    
    
    21,644
    
    
    
    44,527Inventories
    
    
    8,586
    
    
    
    3,772Capitalized product development costs
    
    
    48,628
    
    
    
    51,252Prepaid expenses and other current assets
    
    
    17,843
    
    
    
    13,362Total current assets
    
    
    107,285
    
    
    
    140,437Restricted cash
    
    
    888
    
    
    
    Assets held for sale
    
    
    2,793
    
    
    
    Capitalized product development costs
    
    
    60
    
    
    
    2,947Property and equipment, net
    
    
    10,937
    
    
    
    19,298Goodwill
    
    
    41,109
    
    
    
    41,307Other assets
    
    
    4,451
    
    
    
    9,372Total assets
    
    $
    167,523
    
    
    $
    213,361Liabilities and Stockholders Equity (Deficit)Current liabilities:Accounts payable
    
    $
    22,360
    
    
    $
    29,642Accrued compensation and related benefits
    
    
    6,512
    
    
    
    6,134Accrued royalties
    
    
    21,213
    
    
    
    12,769Accrued selling and marketing
    
    
    4,041
    
    
    
    5,645Deferred revenue
    
    
    3,421
    
    
    
    2,940Current portion of long-term debt
    
    
    59,975
    
    
    
    Convertible senior notes, less unamortized discount of $19,206 at September 30, 2008
    
    
    55,794
    
    
    
    Other accrued liabilities
    
    
    15,890
    
    
    
    14,190Total current liabilities
    
    
    189,206
    
    
    
    71,320Convertible senior notes, less unamortized discount of $24,361 and $67,802 at
September 30, 2008 and December 31, 2007, respectively
    
    
    50,639
    
    
    
    82,198Long-term debt
    
    
    28,952
    
    
    
    19,167Deferred income taxes
    
    
    11,700
    
    
    
    10,715Other noncurrent liabilities
    
    
    536
    
    
    
    880Stockholders equity (deficit):Common stock, $0.01 par value, 200,000,000 shares authorized; 93,540,355 and
93,268,699 shares issued at September 30, 2008 and December 31, 2007, respectively
    
    
    935
    
    
    
    933Additional paid-in capital
    
    
    522,337
    
    
    
    521,031Accumulated deficit
    
    
    (625,215
    )
    
    
    (480,474
    )Accumulated translation adjustment
    
    
    (1,784
    )
    
    
    (2,629
    )Treasury stock, at cost, 1,410,430 and 1,165,430 shares at September 30, 2008 and
December 31, 2007, respectively
    
    
    (9,783
    )
    
    
    (9,780
    )Total stockholders equity (deficit)
    
    
    (113,510
    )
    
    
    29,081Total liabilities and stockholders equity (deficit)
    
    $
    167,523
    
    
    $
    213,361
  3




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##### 



MIDWAY GAMES INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    51,359
    
    
    $
    36,747
    
    
    $
    104,711
    
    
    $
    79,618Cost of sales:Product costs and distribution
    
    
    20,554
    
    
    
    13,472
    
    
    
    46,398
    
    
    
    31,141Royalties and product development
    
    
    49,822
    
    
    
    24,196
    
    
    
    80,453
    
    
    
    36,643Total cost of sales
    
    
    70,376
    
    
    
    37,668
    
    
    
    126,851
    
    
    
    67,784Gross profit (loss)
    
    
    (19,017
    )
    
    
    (921
    )
    
    
    (22,140
    )
    
    
    11,834Research and development expense
    
    
    9,244
    
    
    
    6,245
    
    
    
    22,055
    
    
    
    20,250Selling and marketing expense
    
    
    15,282
    
    
    
    14,173
    
    
    
    33,894
    
    
    
    29,174Administrative expense
    
    
    5,181
    
    
    
    5,000
    
    
    
    16,976
    
    
    
    15,936Other charges (benefits)
    
    
    11,661
    
    
    
    
    
    
    
    11,661
    
    
    
    (783
    )Operating loss
    
    
    (60,385
    )
    
    
    (26,339
    )
    
    
    (106,726
    )
    
    
    (52,743
    )Interest income
    
    
    81
    
    
    
    498
    
    
    
    340
    
    
    
    2,075Interest expense
    
    
    (13,256
    )
    
    
    (8,429
    )
    
    
    (35,494
    )
    
    
    (17,600
    )Other income (expense), net
    
    
    (2,129
    )
    
    
    1,160
    
    
    
    (1,353
    )
    
    
    2,003Loss before income taxes
    
    
    (75,689
    )
    
    
    (33,110
    )
    
    
    (143,233
    )
    
    
    (66,265
    )Provision for income taxes
    
    
    256
    
    
    
    417
    
    
    
    1,509
    
    
    
    1,381Net loss
    
    $
    (75,945
    )
    
    $
    (33,527
    )
    
    $
    (144,742
    )
    
    $
    (67,646
    )Basic and diluted loss per share of common stock
    
    $
    (0.83
    )
    
    $
    (0.37
    )
    
    $
    (1.58
    )
    
    $
    (0.74
    )Basic and diluted weighted average number of shares outstanding
    
    
    91,641
    
    
    
    91,180
    
    
    
    91,554
    
    
    
    91,095
  4




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##### 



MIDWAY GAMES INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (144,742
    )
    
    $
    (67,646
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    59,752
    
    
    
    27,724Depreciation and amortization
    
    
    4,944
    
    
    
    5,633Receivables provision
    
    
    35,637
    
    
    
    23,111Deferred income taxes
    
    
    1,312
    
    
    
    985Stock-based compensation expense
    
    
    515
    
    
    
    2,022Amortization of debt issuance costs
    
    
    1,364
    
    
    
    1,041Amortization of convertible senior notes discount
    
    
    24,235
    
    
    
    8,004(Gain) loss on disposal of property and equipment
    
    
    (769
    )
    
    
    56Changes in operating assets and liabilities:Receivables
    
    
    (13,809
    )
    
    
    524Inventories
    
    
    (5,137
    )
    
    
    (225
    )Capitalized product development costs
    
    
    (53,928
    )
    
    
    (60,243
    )Prepaid expenses and other current assets
    
    
    (5,690
    )
    
    
    (616
    )Accounts payable, accruals and deferred revenue
    
    
    2,646
    
    
    
    12,047Other assets and liabilities
    
    
    5,613
    
    
    
    (2,229
    )Net cash used in operating activities
    
    
    (88,057
    )
    
    
    (49,812
    )Investing activities:Purchases of property and equipment
    
    
    (2,130
    )
    
    
    (4,713
    )Proceeds from the sale of property and equipment
    
    
    5,100
    
    
    
    Restricted cash
    
    
    (1,119
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    1,851
    
    
    
    (4,713
    )Financing activities:Borrowings under former credit facility
    
    
    
    
    
    
    14,722Repayment of borrowings from former credit facility
    
    
    (19,167
    )
    
    
    (2,150
    )Borrowings under secured facility  term loan
    
    
    20,000
    
    
    
    Borrowings under secured facility  revolver
    
    
    13,452
    
    
    
    Repayment of borrowings from secured facility  revolver
    
    
    (4,500
    )
    
    
    Borrowings under unsecured facility  revolver
    
    
    41,300
    
    
    
    Repayment of borrowings from unsecured facility  revolver
    
    
    (1,300
    )
    
    
    Borrowings under subordinated facility  revolver
    
    
    19,975
    
    
    
    Payment of debt issuance costs
    
    
    (515
    )
    
    
    Payment of software license financing arrangements
    
    
    
    
    
    
    (1,156
    )Cash received from exercise of common stock options
    
    
    59
    
    
    
    133Net cash provided by financing activities
    
    
    69,304
    
    
    
    11,549Effect of exchange rate changes on cash and cash equivalents
    
    
    (269
    )
    
    
    698Decrease in cash and cash equivalents
    
    
    (17,171
    )
    
    
    (42,278
    )Cash and cash equivalents at beginning of period
    
    
    27,524
    
    
    
    73,422Cash and cash equivalents at end of period
    
    $
    10,353
    
    
    $
    31,144
  5




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##### 



MIDWAY GAMES INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Financial Statements
  2. Comprehensive Loss
 Reporting Comprehensive Income
 3. Loss per Common Share
  September 30,2008
    
    
    2007Stock options
    
    
    2,106
    
    
    
    4,579Contingent shares
    
    
    404
    
    
    
    1,416Convertible senior notes
    
    
    18,864
    
    
    
    18,864Total common stock equivalents
    
    
    21,374
    
    
    
    24,859
  4. Restricted Cash
  5. Factoring Agreement
   6




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##### 



6. Inventories
  7. Capitalized Product Development Costs and Research and Development Costs
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    73,171
    
    
    $
    73,532
    
    
    $
    54,199
    
    
    $
    41,613Additions
    
    
    16,663
    
    
    
    21,201
    
    
    
    54,241
    
    
    
    60,243Amortization
    
    
    (15,715
    )
    
    
    (15,819
    )
    
    
    (28,169
    )
    
    
    (22,793
    )Project cancellation (see Note 9)
    
    
    (10,242
    )
    
    
    
    
    
    
    (10,242
    )
    
    
    Writedowns
    
    
    (15,189
    )
    
    
    (4,782
    )
    
    
    (21,341
    )
    
    
    (4,931
    )Ending balance
    
    $
    48,688
    
    
    $
    74,132
    
    
    $
    48,688
    
    
    $
    74,132
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Gross research and development costs
    
    $
    25,907
    
    
    $
    27,446
    
    
    $
    76,296
    
    
    $
    80,493Research and development costs capitalized
    
    
    (16,663
    )
    
    
    (21,201
    )
    
    
    (54,241
    )
    
    
    (60,243
    )Research and development expense
    
    $
    9,244
    
    
    $
    6,245
    
    
    $
    22,055
    
    
    $
    20,250
  8. Debt
 Credit Facility
  7




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##### 



8




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##### 



Convertible Senior Notes
  9. Other Charges
  10. Sale and Leaseback Agreement
     11. Management and Business Developments
   9




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##### 



12. Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 13. Legal Proceedings
   10




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 Financing Activities Challenges with Respect to Liquidity
  Previous-Generation Home Consoles
    
    Next-Generation Home Consoles- Sonys PlayStation 2(PS2)
    
    - Sonys PlayStation 3(PS3)- Nintendos GameCube(NGC)
    
    - Nintendos Wii- Microsofts Xbox
    
    - Microsofts Xbox 360
 PS3 Xbox 360, Wii.
  11




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##### 



New Console Platform Cycle and Increasing Costs to Develop Video Games
 New Console Platform Cycle PS2 GameCube Xbox, Xbox 360 Wii PS3 Mortal
Kombat vs. DC Universe Xbox 360 PS3 Wheelman Xbox 360 PS3 This Is
Vegas Xbox 360 PS3
 Increasing Costs to Develop Video Games
 Handheld Market
 DS. PSP. PSP PSP DS
 12




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##### 



PSP Hot Brain, DS The Bee Game Touchmaster Ultimate Mortal Kombat Fosters Home for Imaginary
Friends: Imagination Invaders Touchmaster 2 Mechanic Master DS
 PC Market
 The Lord of the Rings Online: Shadows of Angmar Stranglehold Unreal Tournament
3 Sins of a Solar Empire Wheelman This Is Vegas Defender Joust Spy Hunter Mahki
 Majority Stockholder
  Results of Operations
 Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
  Three Months Ended September 30,2008
    
    
    2007Net revenues
    
    $
    51,359
    
    
    
    100.0
    %
    
    $
    36,747
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    20,554
    
    
    
    40.0
    %
    
    
    13,472
    
    
    
    36.7
    %Royalties and product development
    
    
    49,822
    
    
    
    97.0
    %
    
    
    24,196
    
    
    
    65.8
    %Total cost of sales
    
    
    70,376
    
    
    
    137.0
    %
    
    
    37,668
    
    
    
    102.5
    %Gross profit (loss)
    
    
    (19,017
    )
    
    
    (37.0
    )%
    
    
    (921
    )
    
    
    (2.5
    )%Research and development expense
    
    
    9,244
    
    
    
    18.0
    %
    
    
    6,245
    
    
    
    17.0
    %Selling and marketing expense
    
    
    15,282
    
    
    
    29.8
    %
    
    
    14,173
    
    
    
    38.6
    %Administrative expense
    
    
    5,181
    
    
    
    10.1
    %
    
    
    5,000
    
    
    
    13.6
    %Other charges
    
    
    11,661
    
    
    
    22.7
    %
    
    
    
    
    
    
    0.0
    %Operating loss
    
    
    (60,385
    )
    
    
    (117.6
    )%
    
    
    (26,339
    )
    
    
    (71.7
    )%Interest income
    
    
    81
    
    
    
    0.2
    %
    
    
    498
    
    
    
    1.4
    %Interest expense
    
    
    (13,256
    )
    
    
    (25.8
    )%
    
    
    (8,429
    )
    
    
    (22.9
    )%Other income (expense), net
    
    
    (2,129
    )
    
    
    (4.1
    )%
    
    
    1,160
    
    
    
    3.2
    %Loss before income taxes
    
    
    (75,689
    )
    
    
    (147.3
    )%
    
    
    (33,110
    )
    
    
    (90.0
    )%Provision for income taxes
    
    
    256
    
    
    
    0.5
    %
    
    
    417
    
    
    
    1.1
    %Net loss
    
    $
    (75,945
    )
    
    
    (147.8
    )%
    
    $
    (33,527
    )
    
    
    (91.1
    )%
 13




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##### 



Three Months EndedSee
    
    September 30,
    
    Increase /
    
    PercentExplanation
    
    2008
    
    2007
    
    (Decrease)
    
    ChangeNet revenues:
    
    A
    
    $
    51,359
    
    
    $
    36,747
    
    
    $
    14,612
    
    
    
    39.8
    %North American net revenues
    
    B
    
    
    36,146
    
    
    
    18,814
    
    
    
    17,332
    
    
    
    92.1
    %International net revenues
    
    B
    
    
    15,213
    
    
    
    17,933
    
    
    
    (2,720
    )
    
    
    (15.2
    )%Cost of sales:Product costs and distribution
    
    C
    
    
    20,554
    
    
    
    13,472
    
    
    
    7,082
    
    
    
    52.6
    %Royalties and product development
    
    D
    
    
    49,822
    
    
    
    24,196
    
    
    
    25,626
    
    
    
    105.9
    %Research and development expense
    
    E
    
    
    9,244
    
    
    
    6,245
    
    
    
    2,999
    
    
    
    48.0
    %Selling and marketing expense
    
    
    
    
    15,282
    
    
    
    14,173
    
    
    
    1,109
    
    
    
    7.8
    %Administrative expense
    
    
    
    
    5,181
    
    
    
    5,000
    
    
    
    181
    
    
    
    3.6
    %Other charges
    
    F
    
    
    11,661
    
    
    
    
    
    
    
    11,661
    
    
    
    100.0
    %Interest income
    
    G
    
    
    81
    
    
    
    498
    
    
    
    (417
    )
    
    
    (83.7
    )%Interest expense
    
    H
    
    
    (13,256
    )
    
    
    (8,429
    )
    
    
    4,827
    
    
    
    57.3
    %Other income (expense), net
    
    I
    
    
    (2,129
    )
    
    
    1,160
    
    
    
    (3,289
    )
    
    
    (283.5
    )%Provision for income taxes
    
    
    
    
    256
    
    
    
    417
    
    
    
    (161
    )
    
    
    38.6
    %
 A. Net Revenues
  Three Months Ended September 30,2008
    
    
    2007Sony PlayStation 3(PS3)
    
    $
    7,870
    
    
    
    15.3
    %
    
    $
    
    
    
    
    
    %Microsoft Xbox 360
    
    
    19,005
    
    
    
    37.0
    %
    
    
    25,655
    
    
    
    69.8
    %Nintendo Wii
    
    
    9,794
    
    
    
    19.1
    %
    
    
    2,137
    
    
    
    5.8
    %Sony PlayStation 2(PS2)
    
    
    8,023
    
    
    
    15.6
    %
    
    
    1,946
    
    
    
    5.3
    %Microsoft Xbox
    
    
    (38
    )
    
    
    (0.1
    )%
    
    
    (55
    )
    
    
    (0.1
    )%Nintendo GameCube(NGC)
    
    
    (1
    )
    
    
    (0.0
    )%
    
    
    103
    
    
    
    0.3
    %Sony PlayStation Portable(PSP)
    
    
    579
    
    
    
    1.1
    %
    
    
    1,239
    
    
    
    3.4
    %Nintendo DS (DS)
    
    
    2,264
    
    
    
    4.4
    %
    
    
    1,806
    
    
    
    4.9
    %Nintendo Game Boy Advance(GBA)
    
    
    4
    
    
    
    0.0
    %
    
    
    164
    
    
    
    0.4
    %Personal Computer (PC)
    
    
    1,310
    
    
    
    2.6
    %
    
    
    3,729
    
    
    
    10.1
    %Royalties and other
    
    
    2,549
    
    
    
    5.0
    %
    
    
    23
    
    
    
    0.1
    %Net revenues
    
    $
    51,359
    
    
    
    100.0
    %
    
    $
    36,747
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryThree Months Ended September 30, 2008Midway Arcade.com
    
    PC
    
    North AmericaMortal Kombat Kollection
    
    PS2
    
    North AmericaTNA iMPACT!
    
    PS3, Xbox 360, Wii, PS2
    
    North AmericaUnreal Tournament 3
    
    Xbox 360
    
    North AmericaTNA iMPACT!
    
    PS3, Xbox 360, Wii, PS2
    
    InternationalThree Months Ended September 30, 2007Big Buck Hunter
    
    PC
    
    North AmericaStranglehold
    
    PC
    
    North AmericaStranglehold
    
    Xbox 360, PC
    
    International
  14




---



##### 



Game Party Wii
 B. Net Revenues by Geography
 North American Net Revenues
 TNA iMPACT!, Unreal Tournament 3, Game Party Stranglehold Mortal Kombat: Armageddon, Happy Feet
 International Net Revenues
 TNA iMPACT!, Unreal Tournament 3 Game Party Stranglehold Touchmaster Happy Feet
 C. Cost of Sales  Product Costs and Distribution
  D. Cost of Sales Royalties and Product Development
 Unreal
Tournament 3 TNA iMPACT!
   Three Months EndedSeptember 30,Description
    
    2008
    
    
    2007Amortization of capitalized product development costs
    
    $
    15,715
    
    
    $
    15,819Writedowns related to future releases
    
    
    15,189
    
    
    
    4,782Expenses incurred subsequent to product release
    
    
    310
    
    
    
    25Total
    
    $
    31,214
    
    
    $
    20,626
 15




---



##### 



E. Research and Development Expense
  F. Other Charges
  G. Interest Income
  H. Interest Expense
  I. Other Income (Expense), Net
  16




---



##### 



Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007
  Nine Months Ended September 30,2008
    
    
    2007Net revenues
    
    $
    104,711
    
    
    
    100.0
    %
    
    $
    79,618
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    46,398
    
    
    
    44.3
    %
    
    
    31,141
    
    
    
    39.1
    %Royalties and product development
    
    
    80,453
    
    
    
    76.8
    %
    
    
    36,643
    
    
    
    46.0
    %Total cost of sales
    
    
    126,851
    
    
    
    121.1
    %
    
    
    67,784
    
    
    
    85.1
    %Gross profit (loss)
    
    
    (22,140
    )
    
    
    (21.1
    )%
    
    
    11,834
    
    
    
    14.9
    %Research and development expense
    
    
    22,055
    
    
    
    21.1
    %
    
    
    20,250
    
    
    
    25.4
    %Selling and marketing expense
    
    
    33,894
    
    
    
    32.4
    %
    
    
    29,174
    
    
    
    36.6
    %Administrative expense
    
    
    16,976
    
    
    
    16.2
    %
    
    
    15,936
    
    
    
    20.0
    %Other charges (benefits)
    
    
    11,661
    
    
    
    11.1
    %
    
    
    (783
    )
    
    
    (1.0
    )%Operating loss
    
    
    (106,726
    )
    
    
    (101.9
    )%
    
    
    (52,743
    )
    
    
    (66.1
    )%Interest income
    
    
    340
    
    
    
    0.3
    %
    
    
    2,075
    
    
    
    2.6
    %Interest expense
    
    
    (35,494
    )
    
    
    (33.9
    )%
    
    
    (17,600
    )
    
    
    (22.1
    )%Other income (expense), net
    
    
    (1,353
    )
    
    
    (1.3
    )%
    
    
    2,003
    
    
    
    2.5
    %Loss before income taxes
    
    
    (143,233
    )
    
    
    (136.8
    )%
    
    
    (66,265
    )
    
    
    (83.1
    )%Provision for income taxes
    
    
    1,509
    
    
    
    1.4
    %
    
    
    1,381
    
    
    
    1.7
    %Net loss
    
    $
    (144,742
    )
    
    
    (138.2
    )%
    
    $
    (67,646
    )
    
    
    (84.8
    )%
  Nine Months EndedSee
    
    September 30,
    
    Increase /
    
    PercentExplanation
    
    2008
    
    2007
    
    (Decrease)
    
    ChangeNet revenues:
    
    A
    
    $
    104,711
    
    
    $
    79,618
    
    
    $
    25,093
    
    
    
    31.5
    %North American net revenues
    
    B
    
    
    58,607
    
    
    
    48,792
    
    
    
    9,815
    
    
    
    20.1
    %International net revenues
    
    B
    
    
    46,106
    
    
    
    30,826
    
    
    
    15,280
    
    
    
    49.6
    %Cost of sales:Product costs and distribution
    
    C
    
    
    46,398
    
    
    
    31,141
    
    
    
    15,257
    
    
    
    49.0
    %Royalties and product development
    
    D
    
    
    80,453
    
    
    
    36,643
    
    
    
    43,810
    
    
    
    119.6
    %Research and development expense
    
    
    
    
    22,055
    
    
    
    20,250
    
    
    
    1,805
    
    
    
    8.9
    %Selling and marketing expense
    
    E
    
    
    33,894
    
    
    
    29,174
    
    
    
    4,720
    
    
    
    16.2
    %Administrative expense
    
    
    
    
    16,976
    
    
    
    15,936
    
    
    
    1,040
    
    
    
    6.5
    %Other charges (benefits)
    
    F
    
    
    11,661
    
    
    
    (783
    )
    
    
    12,444
    
    
    
    1,589.3
    %Interest income
    
    G
    
    
    340
    
    
    
    2,075
    
    
    
    (1,735
    )
    
    
    (83.6
    )%Interest expense
    
    H
    
    
    (35,494
    )
    
    
    (17,600
    )
    
    
    17,894
    
    
    
    101.7
    %Other income (expense), net
    
    I
    
    
    (1,353
    )
    
    
    2,003
    
    
    
    3,356
    
    
    
    167.5
    %Provision for income taxes
    
    
    
    
    1,509
    
    
    
    1,381
    
    
    
    128
    
    
    
    9.3
    %
 17




---



##### 



A. Net Revenues
  Nine Months Ended September 30,2008
    
    
    2007Sony PlayStation 3(PS3)
    
    $
    23,997
    
    
    
    22.9
    %
    
    $
    
    
    
    
    
    %Microsoft Xbox 360
    
    
    25,201
    
    
    
    24.1
    %
    
    
    33,544
    
    
    
    42.1
    %Nintendo Wii
    
    
    29,288
    
    
    
    28.0
    %
    
    
    10,128
    
    
    
    12.7
    %Sony PlayStation 2(PS2)
    
    
    10,532
    
    
    
    10.1
    %
    
    
    8,971
    
    
    
    11.3
    %Microsoft Xbox
    
    
    (13
    )
    
    
    (0.0
    )%
    
    
    730
    
    
    
    0.9
    %Nintendo GameCube(NGC)
    
    
    (9
    )
    
    
    (0.0
    )%
    
    
    841
    
    
    
    1.1
    %Sony PlayStation Portable(PSP)
    
    
    2,153
    
    
    
    2.0
    %
    
    
    2,779
    
    
    
    3.5
    %Nintendo DS (DS)
    
    
    6,732
    
    
    
    6.4
    %
    
    
    5,342
    
    
    
    6.7
    %Nintendo Game Boy Advance(GBA)
    
    
    26
    
    
    
    0.0
    %
    
    
    1,403
    
    
    
    1.8
    %Personal Computer (PC)
    
    
    1,362
    
    
    
    1.3
    %
    
    
    13,865
    
    
    
    17.4
    %Royalties and other
    
    
    5,442
    
    
    
    5.2
    %
    
    
    2,015
    
    
    
    2.5
    %Net revenues
    
    $
    104,711
    
    
    
    100.0
    %
    
    $
    79,618
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryNine Months Ended September 30, 2008NBA Ballers: Chosen One
    
    PS3, Xbox 360
    
    North AmericaMidway Arcade.com
    
    PC
    
    North AmericaMortal Kombat Kollection
    
    PS2
    
    North AmericaTNA iMPACT
    
    PS3, Xbox 360, Wii, PS2
    
    North AmericaStranglehold: Expansion Pack
    
    PS3, Xbox 360
    
    North AmericaUnreal Tournament 3
    
    Xbox 360
    
    North AmericaBlacksite: Area 51
    
    PS3
    
    InternationalCruisn
    
    Wii
    
    InternationalFosters Home for Imaginary Friends: Imagination Invaders
    
    DS
    
    InternationalGame Party
    
    Wii
    
    InternationalHour of Victory
    
    PC
    
    InternationalNBA Ballers: Chosen One
    
    PS3, Xbox 360
    
    InternationalSins of a Solar Empire
    
    PC
    
    InternationalTNA iMPACT!
    
    PS3, Xbox 360, Wii, PS2
    
    InternationalUnreal Tournament 3
    
    PS3, Xbox 360, PC
    
    InternationalNine Months Ended June 30, 2007Big Buck Hunter
    
    PC
    
    North AmericaHot Brain
    
    PSP
    
    North AmericaHour of Victory
    
    Xbox 360
    
    North AmericaThe Lord of the Rings Online: Shadows of Angmar
    
    PC
    
    North AmericaMortal Kombat: Armageddon
    
    Wii
    
    North AmericaStranglehold
    
    Xbox 360, PC
    
    North AmericaTouchmaster
    
    DS
    
    North AmericaThe Ant Bully
    
    Wii
    
    InternationalThe Grim Adventures of Billy & Mandy
    
    Wii
    
    InternationalBlitz: The League
    
    Xbox 360
    
    InternationalHot Brain
    
    PSP
    
    InternationalHour of Victory
    
    Xbox 360
    
    InternationalStranglehold
    
    Xbox 360, PC
    
    InternationalMortal Kombat: Armageddon
    
    Wii
    
    InternationalTouchmaster
    
    DS
    
    International
 18




---



##### 



TNA
iMPACT! Unreal Tournament 3 Xbox 360 NBA Ballers: Chosen One Stranglehold The Lord of the
Rings: Shadows of Angmar Hour of Victory
 B. Net Revenues by Geography
 North American Net Revenues
 Game Party TNA iMPACT! Unreal
Tournament 3 Stranglehold, The Lord
of the Rings Online: Shadows of Angmar Mortal Kombat: Armageddon.
 International Net Revenues
 Unreal Tournament 3 TNA iMPACT! Game Party Stranglehold, Hour of
Victory Mortal Kombat: Armageddon.
 C. Cost of Sales  Product Costs and Distribution
  D. Cost of Sales  Royalties and Product Development
  NBA Ballers: Chosen One TNA iMPACT! Unreal Tournament 3 Xbox 360
  Nine Months EndedSeptember 30,Description
    
    2008
    
    
    2007Amortization of capitalized product development costs
    
    $
    28,169
    
    
    $
    22,793Writedowns related to current releases
    
    
    2,415
    
    
    
    43Writedowns related to future releases
    
    
    18,926
    
    
    
    4,888Expenses incurred subsequent to product release
    
    
    1,372
    
    
    
    490Total
    
    $
    50,882
    
    
    $
    28,214
 19




---



##### 



E. Selling and Marketing Expense
 NBA Ballers: Chosen One TNA iMPACT!
 F. Other Charges (Benefits)
  G. Interest Income
  H. Interest Expense
   I. Other Income (Expense), Net
  Liquidity and Capital Resources
  20




---



##### 



Operating Activities
   TNA iMPACT! Game Party 2 Blitz: The League II Touchmaster 2 Game Party
2
 Investing Activities
  Financing Activities
  21




---



##### 



22




---



##### 



23




---



##### 



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)
    
    $
    28,952
    
    
    $
    
    
    
    $
    
    
    
    $
    28,952
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    10,013
    
    
    
    2,203
    
    
    
    6,008
    
    
    
    1,802
    
    
    
    Short-term debt obligations(3)
    
    
    59,975
    
    
    
    40,000
    
    
    
    19,975
    
    
    
    
    
    
    
    Interest payable and interest in-kind on short-term debt(4)
    
    
    6,506
    
    
    
    4,417
    
    
    
    2,089
    
    
    
    
    
    
    
    Convertible senior notes(5)
    
    
    150,000
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    
    
    
    
    Interest on convertible senior notes(6)
    
    
    11,532
    
    
    
    7,969
    
    
    
    3,563
    
    
    
    
    
    
    
    Operating lease obligations(7)
    
    
    12,605
    
    
    
    3,156
    
    
    
    5,128
    
    
    
    3,974
    
    
    
    347Purchase obligations(8)
    
    
    16,023
    
    
    
    15,998
    
    
    
    25
    
    
    
    
    
    
    
    Other liabilities(9)
    
    
    436
    
    
    
    436
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    296,042
    
    
    $
    149,179
    
    
    $
    111,788
    
    
    $
    34,728
    
    
    $
    347
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet as long-term debt at
September 30, 2008 and include amounts borrowed under the
secured facility.(2)
    
    Assumes debt is carried to full term. Debt bears interest at variable rates. The amounts
above assume future interest will be incurred at 8.30% (three month LIBOR rate as of October
15, 2008, plus 3.75%) from October 1, 2008 through June 29, 2012, the maturity date of the
long-term debt obligation. These obligations for future interest payments are not reflected on
our consolidated balance sheet at September 30, 2008.(3)
    
    These obligations are reflected on our consolidated balance sheet as short-term debt at
September 30, 2008 and include amounts borrowed under the
unsecured and subordinated facilities.(4)
    
    Assumes debt is carried to full term and bears interest at variable rates. The
amounts above assume future interest will be incurred at 9.55% for the unsecured
facility and 12.55% for the subordinated facility (three month LIBOR rate as of October 15,
2008, plus 5.0% and 8.0%, respectively) from October 1, 2008 through March 31, 2009 and May
31, 2010, the maturity date of the debt obligations. These obligations for future interest
payments on the unsecured facility and future interest in-kind on the
subordinated facility are not reflected on our consolidated balance sheet at September 30, 2008.(5)
    
    Assumes our two convertible senior note instruments are carried through the dates the holders
may first redeem the notes, which are April 30, 2009 and May 31, 2010, respectively. These
obligations are reflected on our consolidated balance sheet at September 30, 2008, net of the
unamortized discounts.(6)
    
    Assumes our two 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 rates of 6.00% and 7.125% per annum, respectively.
These obligations for future interest payments are not reflected on our consolidated balance
sheet at September 30, 2008.(7)
    
    These obligations are not reflected on our consolidated balance sheet at September 30, 2008.(8)
    
    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 24




---



##### 



result in amounts owed being less than those reflected above. These obligations are not reflected
on our consolidated balance sheet at September 30, 2008.(9)
    
    This item represents the remaining obligations under software license financing arrangements
which are reflected on our consolidated balance sheet in other accrued liabilities at
September 30, 2008. Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Impact of Inflation
  Seasonality
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  25




---



##### 



Item 4. Controls and Procedures
   
 Part II. Other Information
 
 Item 1. Legal Proceedings.
  
 Item 5. Other Information.
 Resignation of Chairperson of the Board of Directors and Appointment of New Chairman
  26




---



##### 



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
    
    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, 2004.3.5
    
    Composite Amended and Restated By-laws of the Registrant, dated June 13, 2007,
incorporated herein by reference to the Registrants Current Report on Form 8-K,
dated June 13, 2007.10.1
    
    Factoring Agreement dated as of September 15, 2008, incorporated herein by
reference to the Registrants Current Report on Form 8-K, dated September 18,
2008. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.10.2
    
    Amendment No. 2, dated as of September 15, 2008, to Loan and Security Agreement,
incorporated herein by reference to the Registrants Current Report on Form 8-K,
dated September 18, 2008. Portions of this exhibit have been omitted pursuant to a
request for confidential treatment in accordance with Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.10.3
    
    Amendment No. 2, dated as of September 15, 2008, to Unsecured Loan Agreement,
incorporated herein by reference to the Registrants Current Report on Form 8-K,
dated September 18, 2008. Portions of this exhibit have been omitted pursuant
to a request for confidential treatment in accordance with Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.10.4
    
    Amendment No. 2, dated as of September 15, 2008, to Unsecured Subordinated Loan
Agreement, incorporated herein by reference to the Registrants Current Report
on Form 8-K, dated September 18, 2008. Portions of this exhibit have been
omitted pursuant to a request for confidential treatment in accordance with
Rule 24b-2 under the Securities Exchange Act of 1934, 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




---



##### 



Signature
  MIDWAY GAMES INC.By:
    /s/ Ryan G. ODeskyRyan G. ODeskyChief Financial Officer and Treasurer
(Principal Financial Officer and      duly authorized officer)  28




---



##### 



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
    
    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, 2004.3.5
    
    Composite Amended and Restated By-laws of the Registrant, dated June 13,
2007, incorporated herein by reference to the Registrants Current Report
on Form 8-K, dated June 13, 2007.10.1
    
    Factoring Agreement dated as of September 15, 2008, incorporated herein by
reference to the Registrants Current Report on Form 8-K, dated September 18,
2008. Portions of this exhibit have been omitted pursuant to a request for
confidential treatment in accordance with Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.10.2
    
    Amendment No. 2, dated as of September 15, 2008,
to Loan and Security Agreement,
incorporated herein by reference to the Registrants Current Report on Form 8-K,
dated September 18, 2008. Portions of this exhibit have been omitted pursuant to a
request for confidential treatment in accordance with Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.10.3
    
    Amendment No. 2, dated as of September 15, 2008,
to Unsecured Loan Agreement,
incorporated herein by reference to the Registrants Current Report on Form 8-K,
dated September 18, 2008. Portions of this exhibit have been omitted pursuant
to a request for confidential treatment in accordance with Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.10.4
    
    Amendment No. 2, dated as of September 15, 2008,
to Unsecured Subordinated Loan
Agreement, incorporated herein by reference to the Registrants Current Report
on Form 8-K, dated September 18, 2008. Portions of this exhibit have been
omitted pursuant to a request for confidential treatment in accordance with
Rule 24b-2 under the Securities Exchange Act of 1934, 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.
 29