##### 



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, 2007
 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
  o þ 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, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations  Three and Six Months Ended June 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.Controls and Procedures
    
    
    24Part II. Other Information:Item 1.Legal Proceedings
    
    
    25Item 1A.Risk Factors
    
    
    25Item 4.Submission of Matters to a Vote of Security Holders
    
    
    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)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    57,301
    
    
    $
    73,422Receivables, less allowances of $14,459 at June 30, 2007 and $19,408 at December 31, 2006
    
    
    19,384
    
    
    
    51,366Inventories
    
    
    3,007
    
    
    
    2,891Capitalized product development costs
    
    
    72,774
    
    
    
    35,213Prepaid expenses and other current assets
    
    
    10,964
    
    
    
    12,792Total current assets
    
    
    163,430
    
    
    
    175,684Capitalized product development costs
    
    
    758
    
    
    
    6,400Property and equipment, net
    
    
    20,789
    
    
    
    20,407Goodwill
    
    
    41,311
    
    
    
    41,273Other assets
    
    
    9,578
    
    
    
    10,297Total assets
    
    $
    235,866
    
    
    $
    254,061Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    8,240
    
    
    $
    7,864Accrued compensation and related benefits
    
    
    5,790
    
    
    
    4,541Accrued royalties
    
    
    5,164
    
    
    
    8,097Accrued selling and marketing
    
    
    3,037
    
    
    
    4,935Deferred revenue
    
    
    3,845
    
    
    
    2,000Current portion of long-term debt and revolving line of credit
    
    
    1,983
    
    
    
    3,333Other accrued liabilities
    
    
    13,915
    
    
    
    15,164Total current liabilities
    
    
    41,974
    
    
    
    45,934Convertible senior notes, less unamortized discount of $51,036 at June 30, 2007 and
$7,990 at December 31, 2006
    
    
    98,964
    
    
    
    142,010Long-term debt
    
    
    18,167
    
    
    
    3,611Deferred income taxes
    
    
    10,059
    
    
    
    9,402Other noncurrent liabilities
    
    
    830
    
    
    
    397Stockholders equity:Common stock, $0.01 par value, 200,000,000 shares authorized; 92,504,998 and 92,487,105
shares issued at June 30, 2007 and December 31, 2006, respectively
    
    
    925
    
    
    
    925Additional paid-in capital
    
    
    491,828
    
    
    
    444,115Accumulated deficit
    
    
    (415,001
    )
    
    
    (380,882
    )Accumulated translation adjustment
    
    
    (2,100
    )
    
    
    (1,671
    )Treasury stock, at cost, 1,115,430 shares
    
    
    (9,780
    )
    
    
    (9,780
    )Total stockholders equity
    
    
    65,872
    
    
    
    52,707Total liabilities and stockholders equity
    
    $
    235,866
    
    
    $
    254,061
  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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    31,801
    
    
    $
    25,922
    
    
    $
    42,871
    
    
    $
    41,318Cost of sales:Product costs and distribution
    
    
    11,075
    
    
    
    10,289
    
    
    
    17,669
    
    
    
    17,859Royalties and product development
    
    
    9,748
    
    
    
    17,009
    
    
    
    12,446
    
    
    
    24,124Total cost of sales
    
    
    20,823
    
    
    
    27,298
    
    
    
    30,115
    
    
    
    41,983Gross profit (loss)
    
    
    10,978
    
    
    
    (1,376
    )
    
    
    12,756
    
    
    
    (665
    )Research and development expense
    
    
    6,399
    
    
    
    10,715
    
    
    
    14,005
    
    
    
    21,377Selling and marketing expense
    
    
    8,806
    
    
    
    12,937
    
    
    
    15,001
    
    
    
    19,390Administrative expense
    
    
    5,189
    
    
    
    5,446
    
    
    
    10,936
    
    
    
    10,792Restructuring and other charges (benefits)
    
    
    
    
    
    
    (161
    )
    
    
    (783
    )
    
    
    (161
    )Operating loss
    
    
    (9,416
    )
    
    
    (30,313
    )
    
    
    (26,403
    )
    
    
    (52,063
    )Interest income
    
    
    633
    
    
    
    1,143
    
    
    
    1,577
    
    
    
    2,138Interest expense
    
    
    (5,602
    )
    
    
    (2,192
    )
    
    
    (9,170
    )
    
    
    (3,883
    )Other income, net
    
    
    481
    
    
    
    782
    
    
    
    841
    
    
    
    976Loss before income taxes
    
    
    (13,904
    )
    
    
    (30,580
    )
    
    
    (33,155
    )
    
    
    (52,832
    )Provision for income taxes
    
    
    401
    
    
    
    427
    
    
    
    964
    
    
    
    774Net loss
    
    $
    (14,305
    )
    
    $
    (31,007
    )
    
    $
    (34,119
    )
    
    $
    (53,606
    )Basic and diluted loss per share of common stock
    
    $
    (0.16
    )
    
    $
    (0.34
    )
    
    $
    (0.37
    )
    
    $
    (0.59
    )Basic and diluted weighted average number of shares outstanding
    
    
    91,103
    
    
    
    90,651
    
    
    
    91,051
    
    
    
    90,531
  4




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (34,119
    )
    
    $
    (53,606
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    7,123
    
    
    
    21,244Depreciation and amortization
    
    
    3,762
    
    
    
    3,683Receivables provision
    
    
    11,960
    
    
    
    12,199Deferred income taxes
    
    
    657
    
    
    
    656Stock-based compensation expense
    
    
    1,609
    
    
    
    3,643Amortization of debt issuance costs
    
    
    696
    
    
    
    506Amortization of convertible senior notes discount
    
    
    3,005
    
    
    
    24Loss on disposal of property and equipment
    
    
    28
    
    
    
    16Changes in operating assets and liabilities:Receivables
    
    
    20,229
    
    
    
    8,930Inventories
    
    
    (89
    )
    
    
    2,922Capitalized product development costs
    
    
    (39,042
    )
    
    
    (33,969
    )Prepaid expenses and other current assets
    
    
    1,861
    
    
    
    (2,147
    )Accounts payable, accruals and deferred revenue
    
    
    (2,418
    )
    
    
    (4,665
    )Other assets and liabilities
    
    
    (5
    )
    
    
    (1,533
    )Net cash provided by (used in) operating activities
    
    
    (24,743
    )
    
    
    (42,097
    )Investing activities:Purchases of property and equipment
    
    
    (4,790
    )
    
    
    (5,141
    )Financing activities:Proceeds from issuance of convertible senior notes
    
    
    
    
    
    
    75,000Proceeds from issuance of long-term debt
    
    
    14,722
    
    
    
    Payment of convertible senior notes issuance costs
    
    
    
    
    
    
    (2,283
    )Payment of long-term debt
    
    
    (1,667
    )
    
    
    (1,667
    )Payment of software license financing arrangement
    
    
    
    
    
    
    (374
    )Cash received from exercise of common stock options
    
    
    54
    
    
    
    6,183Net cash provided by financing activities
    
    
    13,109
    
    
    
    76,859Effect of exchange rate changes on cash
    
    
    303
    
    
    
    466Increase (decrease) in cash and cash equivalents
    
    
    (16,121
    )
    
    
    30,087Cash and cash equivalents at beginning of period
    
    
    73,422
    
    
    
    98,376Cash and cash equivalents at end of period
    
    $
    57,301
    
    
    $
    128,463
  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
  June 30,2007
    
    
    2006Stock options
    
    
    3,724
    
    
    
    4,673Contingent shares
    
    
    923
    
    
    
    1,276Convertible senior notes
    
    
    16,023
    
    
    
    12,747Total common stock equivalents
    
    
    20,670
    
    
    
    18,696
  4. Inventories
  5. Capitalized Product Development Costs and Research and Development Costs
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance
    
    $
    57,173
    
    
    $
    35,657
    
    
    $
    41,613
    
    
    $
    27,595Additions
    
    
    21,954
    
    
    
    20,108
    
    
    
    39,042
    
    
    
    33,969Amortization
    
    
    (5,503
    )
    
    
    (14,635
    )
    
    
    (6,974
    )
    
    
    (19,548
    )Writedowns
    
    
    (92
    )
    
    
    (810
    )
    
    
    (149
    )
    
    
    (1,696
    )Ending balance
    
    $
    73,532
    
    
    $
    40,320
    
    
    $
    73,532
    
    
    $
    40,320
 6




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##### 



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross research and development costs
    
    $
    28,353
    
    
    $
    30,823
    
    
    $
    53,047
    
    
    $
    55,346Research and development costs capitalized
    
    
    (21,954
    )
    
    
    (20,108
    )
    
    
    (39,042
    )
    
    
    (33,969
    )Research and development expense
    
    $
    6,399
    
    
    $
    10,715
    
    
    $
    14,005
    
    
    $
    21,377
 6. Restructuring
   Lease andLong-TermCommitmentsand OtherCostsBalances at December 31, 2006
    
    $
    911Provision (benefits)
    
    
    (783
    )Other
    
    
    (128
    )Balances at June 30, 2007
    
    $
    0
  7. New Accounting Pronouncement
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement
No. 109 Accounting for Income Taxes.
   7




---



##### 



8. Convertible Senior Notes  Conversion Rate Adjustment
   9. Credit Facility
      8




---



##### 



10. Legal Proceedings
  Rosenbaum Capital, LLC, Derivatively and on Behalf of Midway Games Inc., Plaintiff, vs.
David F. Zucker, Thomas E. Powell, Deborah K. Fulton, Steven M. Allison, James R. Boyle, Miguel
Iribarren, Kenneth D. Cron, Shari E. Redstone, William C. Bartholomay, Peter C. Brown, Joseph A.
Califano, Jr., Ira S. Sheinfeld and Robert N. Waxman, Defendants, and Midway Games Inc., a Delaware
corporation, Nominal Defendant and Murray Zucker, Derivatively and on Behalf of Midway Games Inc.,
Plaintiff, v. Thomas E. Powell, David F. Zucker, Deborah K. Fulton, Steven M. Allison, James R.
Boyle, Miguel Iribarren, Kenneth D. Cron, Shari E. Redstone, William C. Bartholomay, Peter C.
Brown, Joseph A. Califano, Jr., Ira S. Sheinfeld, and Robert N. Waxman, Defendants, and Midway
Games Inc., a Delaware corporation, Nominal Defendant
  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  9




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##### 



Overview
 PlayStation 2 PS2 PlayStation Portable PSP Xbox Xbox 360; GameCube NGC Wii Game Boy Advance GBA , Nintendo DS DS PlayStation 3 PS3 Xbox 360 Wii. Blitz: The League Xbox 360 Wii. PS3 PS3
 New Console Platform Cycle and Increasing Costs to Develop Video Games
 New Console Platform Cycle PS2 NGC Xbox, Xbox 360, Wii, PS3
 Increasing Costs to Develop Video Games
 Handheld Market
 DS. PSP. PSP PSP DS
 10




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##### 



PC Market
 The Lord of the Rings Online:
Shadows of Angmar Unreal Tournament 3
 Childrens Market
 Ed, Edd n
Eddy The Ant Bully The Grim Adventures of Billy & Mandy Happy Feet
 Product Development Resources
  Majority Stockholder
  11




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##### 



Results of Operations
 Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006
  Three Months Ended June 30,2007
    
    
    2006Net revenues
    
    $
    31,801
    
    
    
    100.0
    %
    
    $
    25,922
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    11,075
    
    
    
    34.8
    %
    
    
    10,289
    
    
    
    39.7
    %Royalties and product development
    
    
    9,748
    
    
    
    30.7
    %
    
    
    17,009
    
    
    
    65.6
    %Total cost of sales
    
    
    20,823
    
    
    
    65.5
    %
    
    
    27,298
    
    
    
    105.3
    %Gross profit (loss)
    
    
    10,978
    
    
    
    34.5
    %
    
    
    (1,376
    )
    
    
    (5.3
    )%Research and development expense
    
    
    6,399
    
    
    
    20.1
    %
    
    
    10,715
    
    
    
    41.3
    %Selling and marketing expense
    
    
    8,806
    
    
    
    27.7
    %
    
    
    12,937
    
    
    
    49.9
    %Administrative expense
    
    
    5,189
    
    
    
    16.3
    %
    
    
    5,446
    
    
    
    21.0
    %Restructuring and other charges (benefits)
    
    
    
    
    
    
    0.0
    %
    
    
    (161
    )
    
    
    (0.6
    )%Operating loss
    
    
    (9,416
    )
    
    
    (29.6
    )%
    
    
    (30,313
    )
    
    
    (116.9
    )%Interest income
    
    
    633
    
    
    
    2.0
    %
    
    
    1,143
    
    
    
    4.4
    %Interest expense
    
    
    (5,602
    )
    
    
    (17.6
    )%
    
    
    (2,192
    )
    
    
    (8.5
    )%Other income, net
    
    
    481
    
    
    
    1.5
    %
    
    
    782
    
    
    
    3.0
    %Loss before income taxes
    
    
    (13,904
    )
    
    
    (43.7
    )%
    
    
    (30,580
    )
    
    
    (118.0
    )%Provision for income taxes
    
    
    401
    
    
    
    1.3
    %
    
    
    427
    
    
    
    1.6
    %Net loss
    
    $
    (14,305
    )
    
    
    (45.0
    )%
    
    $
    (31,007
    )
    
    
    (119.6
    )%
  Three Months EndedSee
    
    June 30,
    
    Increase /
    
    PercentExplanation
    
    2007
    
    2006
    
    (Decrease)
    
    ChangeNet revenues
    
    
    A
    
    
    $
    31,801
    
    
    $
    25,922
    
    
    $
    5,879
    
    
    
    22.7
    %North American net revenues
    
    
    B
    
    
    
    23,025
    
    
    
    19,836
    
    
    
    3,189
    
    
    
    16.1
    %International net revenues
    
    
    C
    
    
    
    8,776
    
    
    
    6,086
    
    
    
    2,690
    
    
    
    44.2
    %Cost of sales:Product costs and distribution
    
    
    D
    
    
    
    11,075
    
    
    
    10,289
    
    
    
    786
    
    
    
    7.6
    %Royalties and product development
    
    
    E
    
    
    
    9,748
    
    
    
    17,009
    
    
    
    (7,261
    )
    
    
    (42.7
    )%Research and development expense
    
    
    F
    
    
    
    6,399
    
    
    
    10,715
    
    
    
    (4,316
    )
    
    
    (40.3
    )%Selling and marketing expense
    
    
    G
    
    
    
    8,806
    
    
    
    12,937
    
    
    
    (4,131
    )
    
    
    (31.9
    )%Administrative expense
    
    
    H
    
    
    
    5,189
    
    
    
    5,446
    
    
    
    (257
    )
    
    
    (4.7
    )%Restructuring and other charges (benefits)
    
    
    I
    
    
    
    
    
    
    
    (161
    )
    
    
    161
    
    
    
    100.0
    %Interest income
    
    
    J
    
    
    
    633
    
    
    
    1,143
    
    
    
    (510
    )
    
    
    (44.6
    )%Interest expense
    
    
    K
    
    
    
    (5,602
    )
    
    
    (2,192
    )
    
    
    3,410
    
    
    
    155.6
    %Other income, net
    
    
    L
    
    
    
    481
    
    
    
    782
    
    
    
    (301
    )
    
    
    (38.5
    )%Provision for income taxes
    
    
    M
    
    
    
    401
    
    
    
    427
    
    
    
    (26
    )
    
    
    (6.1
    )%
 12




---



##### 



A. Net Revenues
  Three Months Ended June 30,2007
    
    
    2006Microsoft Xbox 360
    
    $
    7,094
    
    
    
    22.3
    %
    
    $
    
    
    
    
    Nintendo Wii
    
    
    6,323
    
    
    
    19.9
    %
    
    
    
    
    
    
    Sony PlayStation 2(PS2)
    
    
    3,065
    
    
    
    9.6
    %
    
    
    13,835
    
    
    
    53.4
    %Microsoft Xbox
    
    
    306
    
    
    
    1.0
    %
    
    
    1,327
    
    
    
    5.1
    %Nintendo GameCube(NGC)
    
    
    231
    
    
    
    0.7
    %
    
    
    1,864
    
    
    
    7.2
    %Sony PlayStation Portable(PSP)
    
    
    1,343
    
    
    
    4.2
    %
    
    
    2,144
    
    
    
    8.3
    %Nintendo DS
    
    
    2,195
    
    
    
    6.9
    %
    
    
    
    
    
    
    Nintendo Game Boy Advance(GBA)
    
    
    468
    
    
    
    1.5
    %
    
    
    41
    
    
    
    0.2
    %Personal Computer (PC)
    
    
    10,026
    
    
    
    31.5
    %
    
    
    4,978
    
    
    
    19.2
    %Royalties and other
    
    
    750
    
    
    
    2.4
    %
    
    
    1,733
    
    
    
    6.6
    %Total net revenues
    
    $
    31,801
    
    
    
    100.0
    %
    
    $
    25,922
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryThree Months Ended June 30, 2007Hot 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 AmericaTouchmaster
    
    NDS
    
    North AmericaHot Brain
    
    PSP
    
    InternationalHour of Victory
    
    Xbox 360
    
    InternationalMortal Kombat: Armageddon
    
    Wii
    
    InternationalTouchmaster
    
    NDS
    
    InternationalThree 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
    
    International
 The Lord of the Rings Online: Shadows of Angmar Mortal
Kombat: Armageddon Wii Hour of Victory
 B. North American Net Revenues
 The Lord of the Rings Online: Shadows of Angmar Hour of Victory, Mortal Kombat:
Armageddon PS2 Xbox Wii NBA Ballers: Phenom Rampage:
Total Destruction MLB Slugfest 2006
 13




---



##### 



C. International Net Revenues
 Hour of Victory Touchmaster Mortal Kombat: Armageddon PS2 Wii Rise & Fall: Civilizations at War Rampage: Total Destruction Midway Arcade Treasures: Extended Play .
 D. Cost of Sales  Product Costs and Distribution
  E. Cost of Sales  Royalties and Product Development
   Three Months EndedJune 30,Description
    
    2007
    
    
    2006Amortization of capitalized product development costs
    
    $
    5,503,000
    
    
    $
    14,635,000Writedowns related to future releases
    
    
    92,000
    
    
    
    810,000Total
    
    $
    5,595,000
    
    
    $
    15,445,000
 The Lord of the Rings Online: Shadows of Angmar
 F. Research and Development Expense
  Three Months EndedJune 30,Description
    
    2007
    
    
    2006Gross research and development costs
    
    $
    28,353,000
    
    
    $
    30,823,000Research and development costs capitalized
    
    
    (21,954,000
    )
    
    
    (20,108,000
    )Research and development expense
    
    $
    6,399,000
    
    
    $
    10,715,000
  14




---



##### 



G. Selling and Marketing Expense
  H. Administrative Expense
  I. Restructuring and Other Charges (Benefits)
  J. Interest Income
  K. Interest Expense
       15




---



##### 



L. Other Income, Net
  M. Provision for Income Taxes
  16




---



##### 



Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006
  Six Months Ended June 30,2007
    
    
    2006Net revenues
    
    $
    42,871
    
    
    
    100.0
    %
    
    $
    41,318
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    17,669
    
    
    
    41.2
    %
    
    
    17,859
    
    
    
    43.2
    %Royalties and product development
    
    
    12,446
    
    
    
    29.0
    %
    
    
    24,124
    
    
    
    58.4
    %Total cost of sales
    
    
    30,115
    
    
    
    70.2
    %
    
    
    41,983
    
    
    
    101.6
    %Gross profit (loss)
    
    
    12,756
    
    
    
    29.8
    %
    
    
    (665
    )
    
    
    (1.6
    )%Research and development expense
    
    
    14,005
    
    
    
    32.7
    %
    
    
    21,377
    
    
    
    51.8
    %Selling and marketing expense
    
    
    15,001
    
    
    
    35.0
    %
    
    
    19,390
    
    
    
    46.9
    %Administrative expense
    
    
    10,936
    
    
    
    25.5
    %
    
    
    10,792
    
    
    
    26.1
    %Restructuring and other charges (benefits)
    
    
    (783
    )
    
    
    (1.8
    )%
    
    
    (161
    )
    
    
    (0.4
    )%Operating loss
    
    
    (26,403
    )
    
    
    (61.6
    )%
    
    
    (52,063
    )
    
    
    (126.0
    )%Interest income
    
    
    1,577
    
    
    
    3.7
    %
    
    
    2,138
    
    
    
    5.2
    %Interest expense
    
    
    (9,170
    )
    
    
    (21.4
    )%
    
    
    (3,883
    )
    
    
    (9.4
    )%Other income, net
    
    
    841
    
    
    
    2.0
    %
    
    
    976
    
    
    
    2.4
    %Loss before income taxes
    
    
    (33,155
    )
    
    
    (77.3
    )%
    
    
    (52,832
    )
    
    
    (127.8
    )%Provision for income taxes
    
    
    964
    
    
    
    2.2
    %
    
    
    774
    
    
    
    1.9
    %Net loss
    
    $
    (34,119
    )
    
    
    (79.5
    )%
    
    $
    (53,606
    )
    
    
    (129.7
    )%
  Six Months EndedSee
    
    June 30,
    
    Increase /
    
    Percentexplanation
    
    2007
    
    2006
    
    (Decrease)
    
    ChangeNet revenues
    
    
    A
    
    
    $
    42,871
    
    
    $
    41,318
    
    
    $
    1,553
    
    
    
    3.8
    %North American net revenues
    
    
    B
    
    
    
    29,978
    
    
    
    31,302
    
    
    
    (1,324
    )
    
    
    (4.2
    )%International net revenues
    
    
    C
    
    
    
    12,893
    
    
    
    10,016
    
    
    
    2,877
    
    
    
    28.7
    %Cost of sales:Product costs and distribution
    
    
    D
    
    
    
    17,669
    
    
    
    17,859
    
    
    
    (190
    )
    
    
    (1.1
    )%Royalties and product development
    
    
    E
    
    
    
    12,446
    
    
    
    24,124
    
    
    
    (11,678
    )
    
    
    (48.4
    )%Research and development expense
    
    
    F
    
    
    
    14,005
    
    
    
    21,377
    
    
    
    (7,372
    )
    
    
    (34.5
    )%Selling and marketing expense
    
    
    G
    
    
    
    15,001
    
    
    
    19,390
    
    
    
    (4,389
    )
    
    
    (22.6
    )%Administrative expense
    
    
    H
    
    
    
    10,936
    
    
    
    10,792
    
    
    
    144
    
    
    
    1.3
    %Restructuring and other charges (benefits)
    
    
    I
    
    
    
    (783
    )
    
    
    (161
    )
    
    
    (622
    )
    
    
    386.3
    %Interest income
    
    
    J
    
    
    
    1,577
    
    
    
    2,138
    
    
    
    (561
    )
    
    
    (26.2
    )%Interest expense
    
    
    K
    
    
    
    (9,170
    )
    
    
    (3,883
    )
    
    
    5,287
    
    
    
    136.2
    %Other income, net
    
    
    L
    
    
    
    841
    
    
    
    976
    
    
    
    (135
    )
    
    
    (13.8
    )%Provision for income taxes
    
    
    M
    
    
    
    964
    
    
    
    774
    
    
    
    190
    
    
    
    24.5
    %
 17




---



##### 



A. Net Revenues
  Six Months Ended June 30,2007
    
    
    2006Microsoft Xbox 360
    
    $
    7,889
    
    
    
    18.4
    %
    
    $
    
    
    
    
    Nintendo Wii
    
    
    7,991
    
    
    
    18.6
    %
    
    
    
    
    
    
    Sony PlayStation 2(PS2)
    
    
    7,025
    
    
    
    16.4
    %
    
    
    20,758
    
    
    
    50.2
    %Microsoft Xbox
    
    
    785
    
    
    
    1.8
    %
    
    
    5,607
    
    
    
    13.6
    %Nintendo GameCube(NGC)
    
    
    738
    
    
    
    1.7
    %
    
    
    2,195
    
    
    
    5.3
    %Sony PlayStation Portable(PSP)
    
    
    1,540
    
    
    
    3.6
    %
    
    
    4,011
    
    
    
    9.7
    %Nintendo DS
    
    
    3,536
    
    
    
    8.2
    %
    
    
    
    
    
    
    Nintendo Game Boy Advance(GBA)
    
    
    1,239
    
    
    
    2.9
    %
    
    
    233
    
    
    
    0.6
    %Personal Computer (PC)
    
    
    10,136
    
    
    
    23.6
    %
    
    
    5,452
    
    
    
    13.2
    %Royalties and other
    
    
    1,992
    
    
    
    4.8
    %
    
    
    3,062
    
    
    
    7.4
    %Total net revenues
    
    $
    42,871
    
    
    
    100.0
    %
    
    $
    41,318
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritorySix Months Ended June 30, 2007Hot 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 AmericaTouchmaster
    
    NDS
    
    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
    
    InternationalMortal Kombat: Armageddon
    
    Wii
    
    InternationalTouchmaster
    
    NDS
    
    International
 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
  18




---



##### 



B. North American Net Revenues
 The Lord of the Rings Online: Shadows of Angmar Hour of Victory Mortal Kombat:
Armageddon PS2 Xbox Wii . NBA Ballers: Phenom Rampage:
Total Destruction MLB Slugfest 2006
 C. International Net Revenues
 Hour of Victory, Happy Feet Mortal Kombat:
Armageddon PS2 Wii Rise & Fall: Civilizations at War Midway
Arcade Treasures: Extended Play Gauntlet: Seven Sorrows.
 D. Cost of Sales  Product Costs and Distribution
  E. Cost of Sales  Royalties and Product Development
   Six Months EndedJune 30,Description
    
    2007
    
    
    2006Amortization of capitalized product development costs
    
    $
    6,974,000
    
    
    $
    19,548,000Writedowns related to future releases
    
    
    149,000
    
    
    
    1,696,000Total
    
    $
    7,123,000
    
    
    $
    21,244,000
 The Lord of the Rings Online: Shadows of Angmar
 19




---



##### 



F. Research and Development Expense
  Six Months EndedJune 30,Description
    
    2007
    
    
    2006Gross research and development costs
    
    $
    53,047,000
    
    
    $
    55,346,000Research and development costs capitalized
    
    
    (39,042,000
    )
    
    
    (33,969,000
    )Research and development expense
    
    $
    14,005,000
    
    
    $
    21,377,000
  G. Selling and Marketing Expense
  H. Administrative Expense
  I. Restructuring and Other Charge (Benefits)
  J. Interest Income
  K. Interest Expense
  20




---



##### 



L. Other Income, Net
  M. Provision for Income Taxes
  21




---



##### 



Liquidity and Capital Resources
       22




---



##### 



Off-Balance Sheet Arrangements and Contractual Obligations
   Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations(1)
    
    $
    20,000
    
    
    $
    1,833
    
    
    $
    4,000
    
    
    $
    14,167
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    6,114
    
    
    
    1,568
    
    
    
    2,596
    
    
    
    1,950
    
    
    
    Convertible senior notes(3)
    
    
    150,000
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    Interest on convertible senior notes(4)
    
    
    23,836
    
    
    
    9,844
    
    
    
    13,992
    
    
    
    
    
    
    
    Operating lease obligations(5)
    
    
    15,428
    
    
    
    3,935
    
    
    
    4,859
    
    
    
    4,190
    
    
    
    2,444Purchase obligations(6)
    
    
    54,309
    
    
    
    26,033
    
    
    
    22,286
    
    
    
    5,910
    
    
    
    80Other liabilities(7)
    
    
    1,882
    
    
    
    1,519
    
    
    
    363
    
    
    
    
    
    
    
    Total
    
    $
    271,569
    
    
    $
    44,732
    
    
    $
    198,096
    
    
    $
    26,217
    
    
    $
    2,524
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet at June 30, 2007 in current
portion of long-term debt and revolving line of credit, 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 9.75% (banks
base rate of 8.25% plus 1.5%) for July 2007, and 8.07% (one month
LIBOR rate plus 2.75%) from August 1, 2007 through June 1,
2012, the maturity date of the long-term debt obligation. These obligations are not reflected on our consolidated balance
sheet at June 30, 2007.(3)
    
    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 June 30, 2007, net of
unamortized discount.(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, 2007.(5)
    
    These obligations are not reflected on our consolidated balance sheet at June 30, 2007.(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, 2007.(7)
    
    This item represents the remaining obligations under software license financing arrangements
which are reflected on our consolidated balance sheet at June 30, 2007 in current and other
noncurrent liabilities. 23




---



##### 



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




---



##### 



Part II. Other Information
 Item 1. Legal Proceedings.
 Rosenbaum Capital, LLC, Derivatively and on Behalf of Midway Games Inc., Plaintiff, vs.
David F. Zucker, Thomas E. Powell, Deborah K. Fulton, Steven M. Allison, James R. Boyle, Miguel
Iribarren, Kenneth D. Cron, Shari E. Redstone, William C. Bartholomay, Peter C. Brown, Joseph A.
Califano, Jr., Ira S. Sheinfeld and Robert N. Waxman, Defendants, and Midway Games Inc., a Delaware
corporation, Nominal Defendant and Murray Zucker, Derivatively and on Behalf of Midway Games Inc.,
Plaintiff, v. Thomas E. Powell, David F. Zucker, Deborah K. Fulton, Steven M. Allison, James R.
Boyle, Miguel Iribarren, Kenneth D. Cron, Shari E. Redstone, William C. Bartholomay, Peter C.
Brown, Joseph A. Califano, Jr., Ira S. Sheinfeld, and Robert N. Waxman, Defendants, and Midway
Games Inc., a Delaware corporation, Nominal Defendant
  Item 1A. Risk Factors.
  25




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders.
  1)
    
    To elect eight directors to serve until our next annual meeting and until their
successors are duly elected and shall qualify;2)
    
    To approve the Midway Games Inc. Employee Stock Purchase Plan; and3)
    
    To ratify the appointment of Ernst & Young LLP as our independent registered
public accounting firm for the year ending December 31, 2007.
  1)
    
    Our stockholders elected the eight nominated directors to serve until our next
annual meeting and until their successors are duly elected and shall qualify, as
follows:
 Nominee
    
    For
    
    WithheldKenneth D. Cron
    
    
    89,355,304
    
    
    
    290,717Shari E. Redstone
    
    
    89,100,170
    
    
    
    545,851William C. Bartholomay
    
    
    89,339,294
    
    
    
    306,727Peter C. Brown
    
    
    89,357,425
    
    
    
    288,596Joseph A. Califano, Jr.
    
    
    88,536,277
    
    
    
    1,109,744Ira S. Sheinfeld
    
    
    89,304,682
    
    
    
    341,339Robert J. Steele
    
    
    89,357,405
    
    
    
    288,616Robert N. Waxman
    
    
    89,356,303
    
    
    
    289,718
 2)
    
    Our stockholders approved the Midway Games Inc. Employee Stock Purchase Plan, as
follows:
 For:
    
    70,046,043Against:
    
    228,219Abstentions:
    
    24,263Broker Non-Votes:
    
    19,347,496
 3)
    
    Our stockholders ratified the appointment of Ernst & Young LLP as our independent
registered public accounting firm for the year ending December 31, 2007, as follows:
 For:
    
    89,416,052Against:
    
    94,410Abstentions:
    
    135,557Broker Non-Votes:
    
    0
 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
    
    Amended and Restated Loan and Security Agreement by and among the
Registrant, specified subsidiaries of the Registrant, the lenders
thereto, and Wells Fargo Foothill, Inc., dated as of June 29,
2007.10.2
    
    First Amendment to Amended and  Restated Loan and Security Agreement by and among the Registrant, specified subsidiaries of the Registrant, the lenders thereto and Wells Fargo Foothill, Inc., dated as of July 31, 2007.10.3
    
    Unreal® Engine 3 License Agreement by and between Epic
Games, Inc. (Epic) and Midway Home Entertainment Inc. (MHEI),
dated as of January 14, 2005. (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. 1 to Unreal® Engine 3 License Agreement
by and between Epic and MHEI, dated as of December 5, 2005.
(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/ Thomas E. PowellThomas E. PowellExecutive Vice PresidentFinance, Treasurer and Chief Financial Officer
(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
    
    Amended and Restated Loan and Security Agreement by and among the
Registrant, specified subsidiaries of the Registrant, the lenders
thereto, and Wells Fargo Foothill, Inc., dated as of June 29,
2007.10.2
    
    First Amendment to Amended and  Restated Loan and Security Agreement by and among the Registrant, specified subsidiaries of the Registrant, the lenders thereto and Wells Fargo Foothill, Inc., dated as of July 31, 2007.10.3
    
    Unreal® Engine 3 License Agreement by and between Epic
Games, Inc. (Epic) and Midway Home Entertainment Inc. (MHEI),
dated as of January 14, 2005. (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. 1 to Unreal® Engine 3 License Agreement
by and between Epic and MHEI, dated as of December 5, 2005.
(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