##### 



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 September 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
  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  September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 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
    
    
    29Item 4.Controls and Procedures
    
    
    29Part II. Other Information:Item 1A.Risk Factors
    
    
    30Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 6.Exhibits
    
    
    33Signature
 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 31,2006
    
    
    2005(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    91,494
    
    
    $
    98,376Receivables, less allowances of $9,502 at September 30, 2006 and $16,130 at December 31, 2005
    
    
    11,892
    
    
    
    30,835Inventories
    
    
    2,452
    
    
    
    5,811Capitalized product development costs
    
    
    39,607
    
    
    
    27,570Prepaid expenses and other current assets
    
    
    21,007
    
    
    
    16,134Total current assets
    
    
    166,452
    
    
    
    178,726Capitalized product development costs
    
    
    9,206
    
    
    
    25Property and equipment, net
    
    
    20,242
    
    
    
    19,049Goodwill
    
    
    41,203
    
    
    
    41,108Other assets
    
    
    11,587
    
    
    
    9,355Total assets
    
    $
    248,690
    
    
    $
    248,263Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    9,629
    
    
    $
    12,431Accrued compensation and related benefits
    
    
    2,453
    
    
    
    4,060Accrued royalties
    
    
    3,124
    
    
    
    3,938Accrued selling and marketing
    
    
    2,604
    
    
    
    4,418Deferred revenue
    
    
    2,385
    
    
    
    384Current portion of long-term debt
    
    
    3,333
    
    
    
    3,333Other accrued liabilities
    
    
    16,083
    
    
    
    13,440Total current liabilities
    
    
    39,611
    
    
    
    42,004Convertible senior notes, less unamortized discount of $8,545 at September 30, 2006
    
    
    141,455
    
    
    
    75,000Long-term debt
    
    
    4,445
    
    
    
    6,944Deferred income taxes
    
    
    9,070
    
    
    
    8,086Other noncurrent liabilities
    
    
    507
    
    
    
    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; 92,479,587 and 92,233,807
shares issued at September 30, 2006 and December 31, 2005, respectively
    
    
    925
    
    
    
    922Additional paid-in capital
    
    
    442,874
    
    
    
    431,273Accumulated deficit
    
    
    (378,857
    )
    
    
    (303,099
    )Accumulated translation adjustment
    
    
    (1,573
    )
    
    
    (439
    )Deferred compensation
    
    
    
    
    
    
    (3,610
    )Treasury stock, at cost, 1,114,000 and 1,093,627 shares at September 30, 2006 and December
31, 2005, respectively
    
    
    (9,767
    )
    
    
    (9,602
    )Total stockholders equity
    
    
    53,602
    
    
    
    115,445Total liabilities and stockholders equity
    
    $
    248,690
    
    
    $
    248,263
  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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenues
    
    $
    27,392
    
    
    $
    29,527
    
    
    $
    68,710
    
    
    $
    80,268Cost of sales:Product costs and distribution
    
    
    12,541
    
    
    
    11,470
    
    
    
    30,400
    
    
    
    30,440Royalties and product development
    
    
    14,774
    
    
    
    20,469
    
    
    
    38,898
    
    
    
    45,164Total cost of sales
    
    
    27,315
    
    
    
    31,939
    
    
    
    69,298
    
    
    
    75,604Gross profit (loss)
    
    
    77
    
    
    
    (2,412
    )
    
    
    (588
    )
    
    
    4,664Research and development expense
    
    
    7,147
    
    
    
    8,756
    
    
    
    28,525
    
    
    
    28,166Selling and marketing expense
    
    
    8,059
    
    
    
    12,538
    
    
    
    27,448
    
    
    
    35,597Administrative expense
    
    
    5,142
    
    
    
    4,475
    
    
    
    15,934
    
    
    
    13,124Restructuring and other charges
    
    
    1
    
    
    
    
    
    
    
    (160
    )
    
    
    Operating loss
    
    
    (20,272
    )
    
    
    (28,181
    )
    
    
    (72,335
    )
    
    
    (72,223
    )Interest income
    
    
    1,360
    
    
    
    436
    
    
    
    3,497
    
    
    
    1,554Interest expense
    
    
    (3,678
    )
    
    
    (595
    )
    
    
    (7,561
    )
    
    
    (1,319
    )Other income and (expense), net
    
    
    781
    
    
    
    (292
    )
    
    
    1,757
    
    
    
    (1,731
    )Loss before income taxes
    
    
    (21,809
    )
    
    
    (28,632
    )
    
    
    (74,642
    )
    
    
    (73,719
    )Provision for income taxes
    
    
    342
    
    
    
    297
    
    
    
    1,116
    
    
    
    953Net loss
    
    
    (22,151
    )
    
    
    (28,929
    )
    
    
    (75,758
    )
    
    
    (74,672
    )Preferred stock dividends:Distributed
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    277Imputed
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    6Loss applicable to common stock
    
    $
    (22,151
    )
    
    $
    (29,083
    )
    
    $
    (75,758
    )
    
    $
    (74,955
    )Basic and diluted loss per share of common stock
    
    $
    (0.24
    )
    
    $
    (0.33
    )
    
    $
    (0.84
    )
    
    $
    (0.87
    )Basic and diluted weighted average number of shares outstanding
    
    
    90,812
    
    
    
    87,068
    
    
    
    90,626
    
    
    
    86,221
  4




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (75,758
    )
    
    $
    (74,672
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    32,849
    
    
    
    40,976Depreciation and amortization
    
    
    5,598
    
    
    
    5,394Receivables provision
    
    
    17,429
    
    
    
    16,746Deferred income taxes
    
    
    985
    
    
    
    1,004Stock-based compensation expense
    
    
    4,923
    
    
    
    1,658Amortization of debt issuance costs
    
    
    873
    
    
    
    206Amortization of convertible senior notes discount
    
    
    574
    
    
    
    Loss on disposal of property and equipment
    
    
    23
    
    
    
    55Changes in operating assets and liabilities:Receivables
    
    
    1,698
    
    
    
    (27,562
    )Inventories
    
    
    3,408
    
    
    
    (506
    )Capitalized product development costs
    
    
    (54,067
    )
    
    
    (53,853
    )Prepaid expenses and other current assets
    
    
    (9,898
    )
    
    
    (5,015
    )Accounts payable, accruals and deferred revenue
    
    
    (2,782
    )
    
    
    10,006Other assets and liabilities
    
    
    (3,175
    )
    
    
    1,370Net cash used in operating activities
    
    
    (77,320
    )
    
    
    (84,193
    )Investing activities:Purchases of property and equipment
    
    
    (6,469
    )
    
    
    (4,849
    )Acquisitions, net of cash acquired
    
    
    
    
    
    
    (332
    )Net cash used in investing activities
    
    
    (6,469
    )
    
    
    (5,181
    )Financing activities:Proceeds from issuance of convertible senior notes
    
    
    75,000
    
    
    
    75,000Payment of convertible senior notes issuance costs
    
    
    (2,283
    )
    
    
    (2,542
    )Payment of long-term debt
    
    
    (2,499
    )
    
    
    (2,500
    )Payment of capital lease obligation
    
    
    (374
    )
    
    
    (530
    )Cash dividends on preferred stock
    
    
    
    
    
    
    (205
    )Cash received from exercise of common stock options
    
    
    6,247
    
    
    
    7,596Net cash provided by financing activities
    
    
    76,091
    
    
    
    76,819Effect of exchange rate changes on cash
    
    
    816
    
    
    
    (550
    )Decrease in cash and cash equivalents
    
    
    (6,882
    )
    
    
    (13,105
    )Cash and cash equivalents at beginning of period
    
    
    98,376
    
    
    
    118,313Cash and cash equivalents at end of period
    
    $
    91,494
    
    
    $
    105,208
  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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##### 



Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards
 Stock-Based Compensation Under SFAS No. 123R
    Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005Reported loss applicable to common stock
    
    $
    (29,083
    )
    
    $
    (74,955
    )Deduct stock-based compensation expense
included in reported loss applicable to
common stock (a)
    
    
    492
    
    
    
    1,658Add stock-based compensation expense
determined under the fair value based method
for all awards (a)
    
    
    (1,475
    )
    
    
    (4,731
    )Pro forma loss applicable to common stock
    
    $
    (30,066
    )
    
    $
    (78,028
    )Basic and diluted loss per share:As reported
    
    $
    (0.33
    )
    
    $
    (0.87
    )Pro forma
    
    $
    (0.35
    )
    
    $
    (0.90
    )
 
 (a)
    
    These amounts reflect a $0 income tax effect.  7




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##### 



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.
  Three Months
    
    Three MonthsEnded
    
    EndedSeptember 30, 2006
    
    September 30, 2005Expected term (in years)
    
    
    4.8
    
    
    
    3.6Expected stock price volatility
    
    
    70
    %
    
    
    73
    %Risk-free interest rate
    
    
    4.5
    %
    
    
    4.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Estimated fair value per option granted
    
    $
    5.30
    
    
    $
    7.37
 Nine Months
    
    Nine MonthsEnded
    
    EndedSeptember 30, 2006
    
    September 30, 2005Expected term (in years)
    
    
    4.8
    
    
    
    3.9Expected stock price volatility
    
    
    70
    %
    
    
    75
    %Risk-free interest rate
    
    
    4.5
    %
    
    
    3.7
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Estimated fair value per option granted
    
    $
    5.37
    
    
    $
    5.74
 8




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##### 



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
    
    
    104
    
    
    
    8.88Exercised
    
    
    (234
    )
    
    
    4.30Cancelled
    
    
    (3
    )
    
    
    5.23Forfeited
    
    
    (11
    )
    
    
    4.32Outstanding at September 30, 2006
    
    
    4,733
    
    
    
    9.92
    
    
    4.7 years
    
    $
    10,744Exercisable at December 31, 2005
    
    
    3,206
    
    
    
    11.74
    
    
    4.4 years
    
    $
    24,101Exercisable at September 30, 2006
    
    
    3,781
    
    
    
    10.91
    
    
    4.1 years
    
    $
    7,560
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average grant date exercise price of options granted
    
    
    $  8.77
    
    
    
    $ 13.56
    
    
    
    $     8.88
    
    
    
    $ 10.11Intrinsic value of options exercised (in thousands)
    
    
    $   178
    
    
    
    $ 4,964
    
    
    
    $   2,808
    
    
    
    $ 6,109
   WeightedAverageRemainingWeighted Average
    
    
    ContractualShares Covered by Options
    
    
    Exercise Price
    
    
    LifeExercise Prices
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding
    
    
    Exercisable
    
    
    Outstanding$2.32  $3.45
    
    
    650
    
    
    
    435
    
    
    $
    2.64
    
    
    $
    2.67
    
    
    
    6.83.57  5.20
    
    
    1,181
    
    
    
    837
    
    
    
    3.61
    
    
    
    3.61
    
    
    
    6.65.24  7.75
    
    
    184
    
    
    
    173
    
    
    
    5.87
    
    
    
    5.83
    
    
    
    5.67.90  11.75
    
    
    781
    
    
    
    430
    
    
    
    9.81
    
    
    
    9.89
    
    
    
    7.111.79  16.83
    
    
    1,029
    
    
    
    998
    
    
    
    13.67
    
    
    
    13.69
    
    
    
    3.520.00
    
    
    908
    
    
    
    908
    
    
    
    20.00
    
    
    
    20.00
    
    
    
    0.14,733
    
    
    
    3,781
    
    
    
    9.92
    
    
    
    10.91
    
    
    
    4.7
   9




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##### 



Restricted Stock
  Restricted stock  non-performance-based awards
   WeightedAverageGrantShares
    
    
    PriceOutstanding at December 31, 2005
    
    
    430
    
    
    $
    9.89Granted
    
    
    
    
    
    
    Vested
    
    
    (249
    )
    
    
    8.05Forfeited
    
    
    (18
    )
    
    
    9.33Outstanding at September 30, 2006
    
    
    163
    
    
    
    11.82
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restricted stock shares vested
    
    
    16
    
    
    
    28
    
    
    
    249
    
    
    
    102Weighted average grant date fair value of restricted stock shares vested
    
    
    $  10.47
    
    
    
    $ 9.91
    
    
    
    $   8.05
    
    
    
    $ 9.49Total fair value of restricted stock shares vested (in thousands)
    
    
    $     169
    
    
    
    $  282
    
    
    
    $ 2,004
    
    
    
    $  973
   Restricted stock  performance-based awards
  10




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##### 



Total restricted stock
  NumberVesting Period
    
    of SharesOctober 1, 2006 to December 31, 2006
    
    
    552007
    
    
    832008
    
    
    670Total
    
    
    808
 4. Comprehensive Loss
 Reporting Comprehensive Income
 5. Loss per Common Share
  September 30,2006
    
    
    2005Stock options
    
    
    4,733
    
    
    
    6,379Warrants
    
    
    
    
    
    
    679Contingent shares
    
    
    1,144
    
    
    
    1,059Redeemable convertible preferred stock, Series D
    
    
    
    
    
    
    75Convertible senior notes
    
    
    12,747
    
    
    
    4,225Total common stock equivalents
    
    
    18,624
    
    
    
    12,417
  6. Inventories
  11




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##### 



7. Capitalized Product Development Costs and Research and Development Costs
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance
    
    $
    40,320
    
    
    $
    42,178
    
    
    $
    27,595
    
    
    $
    28,659Additions
    
    
    20,098
    
    
    
    19,611
    
    
    
    54,067
    
    
    
    53,853Amortization
    
    
    (11,605
    )
    
    
    (13,693
    )
    
    
    (31,153
    )
    
    
    (32,372
    )Writedowns
    
    
    
    
    
    
    (6,560
    )
    
    
    (1,696
    )
    
    
    (8,604
    )Ending balance
    
    $
    48,813
    
    
    $
    41,536
    
    
    $
    48,813
    
    
    $
    41,536
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross research and development costs
    
    $
    27,245
    
    
    $
    28,367
    
    
    $
    82,592
    
    
    $
    82,019Research and development costs capitalized
    
    
    (20,098
    )
    
    
    (19,611
    )
    
    
    (54,067
    )
    
    
    (53,853
    )Research and development expense
    
    $
    7,147
    
    
    $
    8,756
    
    
    $
    28,525
    
    
    $
    28,166
 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 market value, as defined, 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 7.125% 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.
    
    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
 12




---



##### 



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




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##### 



9. Restructuring
   Lease andLong-TermCommitmentsand OtherCostsBalances at December 31, 2005
    
    $
    1,286Provision
    
    
    (160
    )Usage/payouts
    
    
    (269
    )Balances at September 30, 2006
    
    $
    857
  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 Blitz: The League Xbox
360
 New Console Cycle, Recent Trends and Uncertainties
  New Console Cycle PS2 GameCube Xbox, Game Boy Advance, Xbox 360,
 15




---



##### 



Decreasing Revenues and Selling Prices on Video Games for the Older Generation of Consoles
  Increasing Costs to Develop Video Games
 Handheld Market
 Nintendo DS. PSP. PSP PSP DS DS PSP DS
 PC Market
 The Lord of the Rings Online Shadows of Angmar Unreal Tournament
 Childrens Market
 Ed, Edd n Eddy: The Mis-Edventures The Ant Bully The Grim Adventures of Billy & Mandy Happy Feet
 Strategic Alliances
 L.A.
RUSH PS2 Xbox The Wheelman
 16




---



##### 



The Lord of the Rings Online: Shadows of Angmar 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
  Results of Operations
 Three Months Ended September 30, 2006 Compared with Three Months Ended September 30, 2005
  Three Months Ended September 30,2006
    
    
    2005Net revenues
    
    $
    27,392
    
    
    
    100.0
    %
    
    $
    29,527
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    12,541
    
    
    
    45.8
    %
    
    
    11,470
    
    
    
    38.9
    %Royalties and product development
    
    
    14,774
    
    
    
    53.9
    %
    
    
    20,469
    
    
    
    69.3
    %Total cost of sales
    
    
    27,315
    
    
    
    99.7
    %
    
    
    31,939
    
    
    
    108.2
    %Gross profit (loss)
    
    
    77
    
    
    
    0.3
    %
    
    
    (2,412
    )
    
    
    (8.2
    )%Research and development expense
    
    
    7,147
    
    
    
    26.1
    %
    
    
    8,756
    
    
    
    29.6
    %Selling and marketing expense
    
    
    8,059
    
    
    
    29.4
    %
    
    
    12,538
    
    
    
    42.5
    %Administrative expense
    
    
    5,142
    
    
    
    18.8
    %
    
    
    4,475
    
    
    
    15.2
    %Restructuring and other charges
    
    
    1
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Operating loss
    
    
    (20,272
    )
    
    
    (74.0
    )%
    
    
    (28,181
    )
    
    
    (95.5
    )%Interest income
    
    
    1,360
    
    
    
    5.0
    %
    
    
    436
    
    
    
    1.5
    %Interest expense
    
    
    (3,678
    )
    
    
    (13.4
    )%
    
    
    (595
    )
    
    
    (2.0
    )%Other income and (expense), net
    
    
    781
    
    
    
    2.8
    %
    
    
    (292
    )
    
    
    (1.0
    )%Loss before income taxes
    
    
    (21,809
    )
    
    
    (79.6
    )%
    
    
    (28,632
    )
    
    
    (97.0
    )%Provision for income taxes
    
    
    342
    
    
    
    1.3
    %
    
    
    297
    
    
    
    1.0
    %Net loss
    
    
    (22,151
    )
    
    
    (80.9
    )%
    
    
    (28,929
    )
    
    
    (98.0
    )%Preferred stock dividends:Distributed
    
    
    
    
    
    
    0.0
    %
    
    
    151
    
    
    
    0.5
    %Imputed
    
    
    
    
    
    
    0.0
    %
    
    
    3
    
    
    
    0.0
    %Loss applicable to common stock
    
    $
    (22,151
    )
    
    
    (80.9
    )%
    
    $
    (29,083
    )
    
    
    (98.5
    )%
 18




---



##### 



Three Months EndedSee
    
    September 30,
    
    Increase /
    
    PercentExplanation
    
    2006
    
    2005
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    27,392
    
    
    $
    29,527
    
    
    $
    (2,135
    )
    
    
    (7.2
    )%North American net revenues
    
    
    B
    
    
    
    21,370
    
    
    
    24,507
    
    
    
    (3,137
    )
    
    
    (12.8
    )%International net revenues
    
    
    C
    
    
    
    6,022
    
    
    
    5,020
    
    
    
    1,002
    
    
    
    20.0
    %Cost of sales:Product cost and distribution
    
    
    D
    
    
    
    12,541
    
    
    
    11,470
    
    
    
    1,071
    
    
    
    9.3
    %Royalties and product development
    
    
    E
    
    
    
    14,774
    
    
    
    20,469
    
    
    
    (5,695
    )
    
    
    (27.8
    )%Research and development expense
    
    
    F
    
    
    
    7,147
    
    
    
    8,756
    
    
    
    (1,609
    )
    
    
    (18.4
    )%Selling and marketing expense
    
    
    G
    
    
    
    8,059
    
    
    
    12,538
    
    
    
    (4,479
    )
    
    
    (35.7
    )%Administrative expense
    
    
    H
    
    
    
    5,142
    
    
    
    4,475
    
    
    
    667
    
    
    
    14.9
    %Restructuring and other charges
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    100.0
    %Interest income
    
    
    I
    
    
    
    1,360
    
    
    
    436
    
    
    
    924
    
    
    
    211.9
    %Interest expense
    
    
    J
    
    
    
    (3,678
    )
    
    
    (595
    )
    
    
    (3,083
    )
    
    
    518.2
    %Other income and (expense), net
    
    
    K
    
    
    
    781
    
    
    
    (292
    )
    
    
    1,073
    
    
    
    (367.5
    )%Provision for income taxes
    
    
    L
    
    
    
    342
    
    
    
    297
    
    
    
    45
    
    
    
    15.2
    %Preferred stock dividends
    
    
    M
    
    
    
    
    
    
    
    154
    
    
    
    (154
    )
    
    
    (100.0
    )%
 A. Consolidated Net Revenues
  Three Months Ended September 30,2006
    
    
    2005Net revenues by platformSony PlayStation 2(PS2)
    
    $
    15,561
    
    
    
    56.8
    %
    
    $
    17,271
    
    
    
    58.5
    %Microsoft Xbox
    
    
    2,202
    
    
    
    8.0
    %
    
    
    10,982
    
    
    
    37.2
    %Nintendo GameCube(NGC)
    
    
    4,035
    
    
    
    14.7
    %
    
    
    216
    
    
    
    0.7
    %Nintendo Game Boy Advance(GBA)
    
    
    2,185
    
    
    
    8.0
    %
    
    
    137
    
    
    
    0.5
    %Sony PlayStation Portable(PSP)
    
    
    744
    
    
    
    2.7
    %
    
    
    
    
    
    
    0.0
    %Personal Computer (PC)
    
    
    1,666
    
    
    
    6.1
    %
    
    
    109
    
    
    
    0.4
    %License and royalty
    
    
    1,063
    
    
    
    3.9
    %
    
    
    663
    
    
    
    2.2
    %Other
    
    
    (64
    )
    
    
    (0.2
    )%
    
    
    149
    
    
    
    0.5
    %Total net revenues
    
    $
    27,392
    
    
    
    100.0
    %
    
    $
    29,527
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryThree Months Ended September 30, 2006SpyHunter: Nowhere to Run
    
    PS2, Xbox
    
    North AmericaThe Ant Bully
    
    PS2, NGC,PC, GBA
    
    North AmericaThe Grim Adventures of Billy & Mandy
    
    PS2, NGC
    
    North AmericaSpyHunter: Nowhere to Run
    
    PS2
    
    InternationalThe Ant Bully
    
    PS2,PC, GBA
    
    InternationalThree Months Ended September 30, 2005Midway Arcade Treasures 3
    
    PS2, Xbox
    
    North AmericaMortal Kombat: Shaolin Monks
    
    PS2, Xbox
    
    North AmericaThe Suffering: Ties that Bind
    
    PS2, Xbox,PC
    
    North AmericaMortal Kombat: Shaolin Monks
    
    PS2, Xbox
    
    International
  19




---



##### 



B. North American Net Revenues
 The
Ant Bully SpyHunter: Nowhere to Run Rampage: Total Destruction Moral
Kombat: Shaolin Monks, The Suffering: Ties that Bind Midway Arcade Treasures 3,
 C. International Net Revenues
 The Ant Bully SpyHunter: Nowhere to Run Rise & Fall:
Civilizations at War Mortal Kombat: Shaolin Monks, Mortal Kombat:
Deception Mortal Kombat: Deadly Alliance.
 D. and E. Cost of Sales
  The Ant Bully SpyHunter:
Nowhere to Run
  Three Months EndedSeptember 30,Description
    
    2006
    
    
    2005Amortization of capitalized product development costs
    
    $
    11,605,000
    
    
    $
    13,693,000Writedowns related to future releases
    
    
    
    
    
    
    6,560,000Total
    
    $
    11,605,000
    
    
    $
    20,253,000
 F. Research and Development Expense
  Three Months EndedSeptember 30,Description
    
    2006
    
    
    2005Gross research and development costs
    
    $
    27,245,000
    
    
    $
    28,367,000Research and development costs capitalized
    
    
    (20,098,000
    )
    
    
    (19,611,000
    )Research and development expense
    
    $
    7,147,000
    
    
    $
    8,756,000
 20




---



##### 



L.A. RUSH L.A. RUSH
 G. Selling and Marketing Expense
 Mortal Kombat: Shaolin Monks The Suffering: Ties that
Bind
 H. Administrative Expense
  I. Interest Income
  J. Interest Expense
     21




---



##### 



K. Other Income and (Expense), net
  L. Provision for Income Taxes
  M. Preferred Stock Dividends
  Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005
  Nine Months Ended September 30,2006
    
    
    2005Net revenues
    
    $
    68,710
    
    
    
    100.0
    %
    
    $
    80,268
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    30,400
    
    
    
    44.2
    %
    
    
    30,440
    
    
    
    37.9
    %Royalties and product development
    
    
    38,898
    
    
    
    56.6
    %
    
    
    45,164
    
    
    
    56.3
    %Total cost of sales
    
    
    69,298
    
    
    
    100.8
    %
    
    
    75,604
    
    
    
    94.2
    %Gross profit (loss)
    
    
    (588
    )
    
    
    (0.8
    )%
    
    
    4,664
    
    
    
    5.8
    %Research and development expense
    
    
    28,525
    
    
    
    41.5
    %
    
    
    28,166
    
    
    
    35.1
    %Selling and marketing expense
    
    
    27,448
    
    
    
    40.0
    %
    
    
    35,597
    
    
    
    44.3
    %Administrative expense
    
    
    15,934
    
    
    
    23.2
    %
    
    
    13,124
    
    
    
    16.4
    %Restructuring and other charges
    
    
    (160
    )
    
    
    (0.2
    )%
    
    
    
    
    
    
    0.0
    %Operating loss
    
    
    (72,335
    )
    
    
    (105.3
    )%
    
    
    (72,223
    )
    
    
    (90.0
    )%Interest income
    
    
    3,497
    
    
    
    5.1
    %
    
    
    1,554
    
    
    
    1.9
    %Interest expense
    
    
    (7,561
    )
    
    
    (11.0
    )%
    
    
    (1,319
    )
    
    
    (1.6
    )%Other income and (expense), net
    
    
    1,757
    
    
    
    2.6
    %
    
    
    (1,731
    )
    
    
    (2.1
    )%Loss before income taxes
    
    
    (74,642
    )
    
    
    (108.6
    )%
    
    
    (73,719
    )
    
    
    (91.8
    )%Provision for income taxes
    
    
    1,116
    
    
    
    1.7
    %
    
    
    953
    
    
    
    1.2
    %Net loss
    
    
    (75,758
    )
    
    
    (110.3
    )%
    
    
    (74,672
    )
    
    
    (93.0
    )%Preferred stock dividends:Distributed
    
    
    
    
    
    
    0.0
    %
    
    
    277
    
    
    
    0.4
    %Imputed
    
    
    
    
    
    
    0.0
    %
    
    
    6
    
    
    
    0.0
    %Loss applicable to common stock
    
    $
    (75,758
    )
    
    
    (110.3
    )%
    
    $
    (74,955
    )
    
    
    (93.4
    )%
 22




---



##### 



Nine Months EndedSee
    
    September 30,
    
    Increase /
    
    PercentExplanation
    
    2006
    
    2005
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    68,710
    
    
    $
    80,268
    
    
    $
    (11,558
    )
    
    
    (14.4
    )%North American net revenues
    
    
    B
    
    
    
    52,673
    
    
    
    60,028
    
    
    
    (7,355
    )
    
    
    (12.3
    )%International net revenues
    
    
    C
    
    
    
    16,037
    
    
    
    20,240
    
    
    
    (4,203
    )
    
    
    (20.8
    )%Cost of sales:Product cost and distribution
    
    
    D
    
    
    
    30,400
    
    
    
    30,440
    
    
    
    (40
    )
    
    
    (0.1
    )%Royalties and product development
    
    
    E
    
    
    
    38,898
    
    
    
    45,164
    
    
    
    (6,266
    )
    
    
    (13.9
    )%Research and development expense
    
    
    F
    
    
    
    28,525
    
    
    
    28,166
    
    
    
    359
    
    
    
    1.3
    %Selling and marketing expense
    
    
    G
    
    
    
    27,448
    
    
    
    35,597
    
    
    
    (8,149
    )
    
    
    (22.9
    )%Administrative expense
    
    
    H
    
    
    
    15,934
    
    
    
    13,124
    
    
    
    2,810
    
    
    
    21.4
    %Restructuring and other charges
    
    
    I
    
    
    
    (160
    )
    
    
    
    
    
    
    (160
    )
    
    
    (100.0
    )%Interest income
    
    
    J
    
    
    
    3,497
    
    
    
    1,554
    
    
    
    1,943
    
    
    
    125.0
    %Interest expense
    
    
    K
    
    
    
    (7,561
    )
    
    
    (1,319
    )
    
    
    (6,242
    )
    
    
    473.2
    %Other income and (expense), net
    
    
    L
    
    
    
    1,757
    
    
    
    (1,731
    )
    
    
    3,488
    
    
    
    (201.5
    )%Provision for income taxes
    
    
    M
    
    
    
    1,116
    
    
    
    953
    
    
    
    163
    
    
    
    17.1
    %Preferred stock dividends
    
    
    N
    
    
    
    
    
    
    
    283
    
    
    
    (283
    )
    
    
    (100.0
    )%
 A. Consolidated Net Revenues
  Nine Months Ended September 30,2006
    
    
    2005Net revenues by platformSony PlayStation 2(PS2)
    
    $
    36,320
    
    
    
    52.9
    %
    
    $
    37,463
    
    
    
    46.7
    %Microsoft Xbox
    
    
    7,809
    
    
    
    11.4
    %
    
    
    31,723
    
    
    
    39.5
    %Nintendo GameCube(NGC)
    
    
    6,230
    
    
    
    9.1
    %
    
    
    3,033
    
    
    
    3.8
    %Nintendo Game Boy Advance(GBA)
    
    
    2,418
    
    
    
    3.5
    %
    
    
    608
    
    
    
    0.8
    %Sony PlayStation Portable(PSP)
    
    
    4,755
    
    
    
    6.9
    %
    
    
    
    
    
    
    0.0
    %Personal Computer (PC)
    
    
    7,118
    
    
    
    10.4
    %
    
    
    2,262
    
    
    
    2.8
    %License and royalty
    
    
    3,930
    
    
    
    5.7
    %
    
    
    4,193
    
    
    
    5.2
    %Other
    
    
    130
    
    
    
    0.1
    %
    
    
    986
    
    
    
    1.2
    %Total net revenues
    
    $
    68,710
    
    
    
    100.0
    %
    
    $
    80,268
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryNine Months Ended September 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 AmericaSpyHunter: Nowhere to Run
    
    PS2, Xbox
    
    North AmericaThe Ant Bully
    
    PS2, NGC,PC, GBA
    
    North AmericaThe Grim Adventures of Billy & Mandy
    
    PS2, NGC
    
    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
    
    InternationalSpyHunter: Nowhere to Run
    
    PS2
    
    InternationalThe Ant Bully
    
    PS2,PC, GBA
    
    International
 23




---



##### 



Video Game Title
    
    Platform
    
    TerritoryNine Months Ended September 30, 2005Area 51
    
    PS2, Xbox,PC
    
    North AmericaMidway Arcade Treasures 3
    
    PS2, Xbox
    
    North AmericaMortal Kombat: Deception
    
    NGC
    
    North AmericaMortal Kombat: Shaolin Monks
    
    PS2, Xbox
    
    North AmericaNARC
    
    PS2, Xbox
    
    North AmericaThe Suffering: Ties that Bind
    
    PS2, Xbox,PC
    
    North AmericaUnreal Championship 2
    
    Xbox
    
    North AmericaArea 51
    
    PS2, Xbox,PC
    
    InternationalMaya the Bee
    
    GBA
    
    InternationalMortal Kombat: Shaolin Monks
    
    PS2, Xbox
    
    InternationalNARC
    
    Xbox
    
    InternationalShadow Hearts: Covenant
    
    PS2
    
    InternationalUnreal Championship 2: The Liandri Conflict
    
    Xbox
    
    International
  B. North American Net Revenues
 NBA Ballers: Phenom Rampage: Total Destruction The Ant Bully Mortal Kombat: Shaolin Monks, Area 51 Unreal Championship 2: The Liandri Conflict
 C. International Net Revenues
 Rise & Fall: Civilizations at War The Ant Bully Midway Arcade Treasures: Extended Play. Area 51 Mortal Kombat: Shaolin Monks Unreal Championship 2
 D. and E. Cost of Sales
  Unreal Championship 2: The Liandri Conflict The Ant Bully NBA
Ballers: Phenom SpyHunter: Nowhere to Run
 24




---



##### 



Nine Months EndedSeptember 30,Description
    
    2006
    
    
    2005Amortization of capitalized product development costs
    
    $
    31,153,000
    
    
    $
    32,372,000Writedown related to a current release
    
    
    1,696,000
    
    
    
    Writedowns related to future releases
    
    
    
    
    
    
    8,604,000Total
    
    $
    32,849,000
    
    
    $
    40,976,000
 F. Research and Development Expense
  Nine Months EndedSeptember 30,Description
    
    2006
    
    
    2005Gross research and development costs
    
    $
    82,592,000
    
    
    $
    82,019,000Research and development costs capitalized
    
    
    (54,067,000
    )
    
    
    (53,853,000
    )Research and development expense
    
    $
    28,525,000
    
    
    $
    28,166,000
 L.A. RUSH
 G. Selling and Marketing Expense
 L.A. RUSH Blitz: The League
 H. Administrative Expense
  25




---



##### 



I. Restructuring and Other Charges
  J. Interest Income
  K. Interest Expense
      L. Other Income and (Expense), net
  M. Provision for Income Taxes
  N. Preferred Stock Dividends
  26




---



##### 



Liquidity and Capital Resources
   Mortal Kombat: Armageddon Happy Feet
     27




---



##### 



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)
    
    $
    7,778
    
    
    $
    3,333
    
    
    $
    4,445
    
    
    $
    
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    775
    
    
    
    515
    
    
    
    260
    
    
    
    
    
    
    
    Convertible senior notes(3)
    
    
    150,000
    
    
    
    
    
    
    
    75,000
    
    
    
    75,000
    
    
    
    Interest on convertible senior notes(4)
    
    
    31,219
    
    
    
    9,844
    
    
    
    17,813
    
    
    
    3,562
    
    
    
    Operating lease obligations(5)
    
    
    12,967
    
    
    
    3,577
    
    
    
    4,069
    
    
    
    2,601
    
    
    
    2,720Purchase obligations(6)
    
    
    72,951
    
    
    
    37,611
    
    
    
    27,100
    
    
    
    8,160
    
    
    
    80Other liabilities(7)
    
    
    1,635
    
    
    
    1,536
    
    
    
    99
    
    
    
    
    
    
    
    Total
    
    $
    277,325
    
    
    $
    56,416
    
    
    $
    128,786
    
    
    $
    89,323
    
    
    $
    2,800
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet at September 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 September 30, 2006
(8.25%). These obligations are not reflected on our consolidated balance sheet at September
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 September
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 September 30, 2006.(5)
    
    These obligations are not reflected on our consolidated balance sheet at September 30, 2006.(6)
    
    Purchase obligations are agreements to purchase goods or services that are enforceable and
legally binding on us and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The amounts in the table above include inventory items, marketing
commitments, and minimum payments due under various licensing agreements and third party
developer agreements. The amounts disclosed above assume all transactions are carried to
contractual term and do not reflect cancellations within our control. Such cancellations could
result in amounts owed being less than those reflected above. These obligations are not
reflected on our consolidated balance sheet at September 30, 2006.(7)
    
    These items are reflected on our consolidated balance sheet at September 30, 2006 in current
and noncurrent liabilities, as appropriate. Impact of Inflation
  28




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##### 



Seasonality
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Item 4. Controls and Procedures
   29




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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.
   30




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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.
  31




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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 Programs07/1/06-07/31/06
    
    
    185,600
    
    
    $
    9.87
    
    
    
    N/A
    
    
    
    N/A08/01/06-08/31/06
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A09/01/06-09/30/06
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    185,600
    
    
    $
    9.87
    
    
    
    N/A
    
    
    
    N/A
 32




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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
    
    Form of Non-Employee Director Stock Option Agreement under the 2005 Long-Term Incentive
Plan filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on
September 12, 2006.10.2
    
    Eighteenth Amendment to Loan and Security Agreement between the Registrant and Wells
Fargo Foothill, Inc. dated as of October 10, 2006.31
    
    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.
 33




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##### 



Signature
  MIDWAY GAMES INC.By:
    
    /s/ Thomas E. PowellThomas E. PowellExecutive Vice PresidentFinance, Treasurer andChief Financial OfficerA duly authorized officer(Principal Financial Officer)
  34




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##### 



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
    
    Form of Non-Employee Director Stock Option Agreement under the 2005 Long-Term
Incentive Plan filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on September 12, 2006.10.2
    
    Eighteenth Amendment to Loan and Security Agreement between the Registrant and Wells
Fargo Foothill, Inc. dated as of October 10, 2006.31
    
    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