##### 



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, 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:
    
    
    3Item 1.Financial Statements:
    
    
    3Consolidated Balance Sheets  September 30, 2007 (Unaudited) and December 31, 2006
    
    
    3Consolidated Statements of Operations  Three and Nine Months Ended September 30,
2007 and 2006 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2007 and
2006 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.Controls and Procedures
    
    
    24Part II. Other Information:
    
    
    25Item 1.Legal Proceedings
    
    
    25Item 1A.Risk Factors
    
    
    25Item 5.Other Information
    
    
    25Item 6.Exhibits
    
    
    25Signature
    
    
    26
 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 31,2007
    
    
    2006(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    31,144
    
    
    $
    73,422Receivables, less allowances of $19,715
at September 30, 2007 and $19,408 at
December 31, 2006
    
    
    28,577
    
    
    
    51,366Inventories
    
    
    3,178
    
    
    
    2,891Capitalized product development costs
    
    
    71,366
    
    
    
    35,213Prepaid expenses and other current assets
    
    
    13,526
    
    
    
    12,792Total current assets
    
    
    147,791
    
    
    
    175,684Capitalized product development costs
    
    
    2,766
    
    
    
    6,400Property and equipment, net
    
    
    20,326
    
    
    
    20,407Goodwill
    
    
    41,353
    
    
    
    41,273Other assets
    
    
    9,628
    
    
    
    10,297Total assets
    
    $
    221,864
    
    
    $
    254,061Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    18,774
    
    
    $
    7,864Accrued compensation and related benefits
    
    
    3,808
    
    
    
    4,541Accrued royalties
    
    
    7,013
    
    
    
    8,097Accrued selling and marketing
    
    
    4,551
    
    
    
    4,935Deferred revenue
    
    
    3,395
    
    
    
    2,000Current portion of long-term debt
    
    
    2,000
    
    
    
    3,333Other accrued liabilities
    
    
    16,602
    
    
    
    15,164Total current liabilities
    
    
    56,143
    
    
    
    45,934Convertible senior notes, less
unamortized discount of $74,076 at
September 30, 2007 and $7,990 at
December 31, 2006
    
    
    75,924
    
    
    
    142,010Long-term debt
    
    
    17,667
    
    
    
    3,611Deferred income taxes
    
    
    10,387
    
    
    
    9,402Other noncurrent liabilities
    
    
    846
    
    
    
    397Stockholders equity:Common stock, $0.01 par value,
200,000,000 shares authorized;
93,258,699 and 92,487,105 shares issued
at September 30, 2007 and December 31,
2006, respectively
    
    
    933
    
    
    
    925Additional paid-in capital
    
    
    520,684
    
    
    
    444,115Accumulated deficit
    
    
    (448,528
    )
    
    
    (380,882
    )Accumulated translation adjustment
    
    
    (2,412
    )
    
    
    (1,671
    )Treasury stock, at cost, 1,115,430 shares
    
    
    (9,780
    )
    
    
    (9,780
    )Total stockholders equity
    
    
    60,897
    
    
    
    52,707Total liabilities and stockholders equity
    
    $
    221,864
    
    
    $
    254,061
  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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    36,747
    
    
    $
    27,392
    
    
    $
    79,618
    
    
    $
    68,710Cost of sales:Product costs and distribution
    
    
    13,472
    
    
    
    12,541
    
    
    
    31,141
    
    
    
    30,400Royalties and product development
    
    
    24,196
    
    
    
    14,774
    
    
    
    36,643
    
    
    
    38,898Total cost of sales
    
    
    37,668
    
    
    
    27,315
    
    
    
    67,784
    
    
    
    69,298Gross profit (loss)
    
    
    (921
    )
    
    
    77
    
    
    
    11,834
    
    
    
    (588
    )Research and development expense
    
    
    6,245
    
    
    
    7,147
    
    
    
    20,250
    
    
    
    28,525Selling and marketing expense
    
    
    14,173
    
    
    
    8,059
    
    
    
    29,174
    
    
    
    27,448Administrative expense
    
    
    5,000
    
    
    
    5,142
    
    
    
    15,936
    
    
    
    15,934Restructuring and other charges (benefits)
    
    
    
    
    
    
    1
    
    
    
    (783
    )
    
    
    (160
    )Operating loss
    
    
    (26,339
    )
    
    
    (20,272
    )
    
    
    (52,743
    )
    
    
    (72,335
    )Interest income
    
    
    498
    
    
    
    1,360
    
    
    
    2,075
    
    
    
    3,497Interest expense
    
    
    (8,429
    )
    
    
    (3,678
    )
    
    
    (17,600
    )
    
    
    (7,561
    )Other income, net
    
    
    1,160
    
    
    
    781
    
    
    
    2,003
    
    
    
    1,757Loss before income taxes
    
    
    (33,110
    )
    
    
    (21,809
    )
    
    
    (66,265
    )
    
    
    (74,642
    )Provision for income taxes
    
    
    417
    
    
    
    342
    
    
    
    1,381
    
    
    
    1,116Net loss
    
    $
    (33,527
    )
    
    $
    (22,151
    )
    
    $
    (67,646
    )
    
    $
    (75,758
    )Basic and diluted loss per share of common stock
    
    $
    (0.37
    )
    
    $
    (0.24
    )
    
    $
    (0.74
    )
    
    $
    (0.84
    )Basic and diluted weighted average number of
shares outstanding
    
    
    91,180
    
    
    
    90,812
    
    
    
    91,095
    
    
    
    90,626
  4




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (67,646
    )
    
    $
    (75,758
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    27,724
    
    
    
    32,849Depreciation and amortization
    
    
    5,633
    
    
    
    5,598Receivables provision
    
    
    23,111
    
    
    
    17,429Deferred income taxes
    
    
    985
    
    
    
    985Stock-based compensation expense
    
    
    2,022
    
    
    
    4,923Amortization of debt issuance costs
    
    
    1,041
    
    
    
    873Amortization of convertible senior notes discount
    
    
    8,004
    
    
    
    574Loss on disposal of property and equipment
    
    
    56
    
    
    
    23Changes in operating assets and liabilities:Receivables
    
    
    524
    
    
    
    1,698Inventories
    
    
    (225
    )
    
    
    3,408Capitalized product development costs
    
    
    (60,243
    )
    
    
    (54,067
    )Prepaid expenses and other current assets
    
    
    (616
    )
    
    
    (9,898
    )Accounts payable, accruals and deferred revenue
    
    
    12,047
    
    
    
    (2,782
    )Other assets and liabilities
    
    
    (2,229
    )
    
    
    (3,175
    )Net cash used in operating activities
    
    
    (49,812
    )
    
    
    (77,320
    )Investing activity:Purchases of property and equipment
    
    
    (4,713
    )
    
    
    (6,469
    )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
    
    
    (2,150
    )
    
    
    (2,499
    )Payment of software license financing arrangements
    
    
    (1,156
    )
    
    
    (374
    )Cash received from exercise of common stock options
    
    
    133
    
    
    
    6,247Net cash provided by financing activities
    
    
    11,549
    
    
    
    76,091Effect of exchange rate changes on cash and cash equivalents
    
    
    698
    
    
    
    816Decrease in cash and cash equivalents
    
    
    (42,278
    )
    
    
    (6,882
    )Cash and cash equivalents at beginning of period
    
    
    73,422
    
    
    
    98,376Cash and cash equivalents at end of period
    
    $
    31,144
    
    
    $
    91,494
  5




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##### 



MIDWAY GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Financial Statements
  2. Comprehensive Loss
 Reporting Comprehensive Income
 3. Loss per Common Share
  September 30,2007
    
    
    2006Stock options
    
    
    4,579
    
    
    
    4,733Contingent shares
    
    
    1,416
    
    
    
    1,144Convertible senior notes
    
    
    18,864
    
    
    
    12,747Total common stock equivalents
    
    
    24,859
    
    
    
    18,624
  4. Inventories
  6




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##### 



5. Capitalized Product Development Costs and Research and Development Costs
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance
    
    $
    73,532
    
    
    $
    40,320
    
    
    $
    41,613
    
    
    $
    27,595Additions
    
    
    21,201
    
    
    
    20,098
    
    
    
    60,243
    
    
    
    54,067Amortization
    
    
    (15,819
    )
    
    
    (11,605
    )
    
    
    (22,793
    )
    
    
    (31,153
    )Writedowns
    
    
    (4,782
    )
    
    
    
    
    
    
    (4,931
    )
    
    
    (1,696
    )Ending balance
    
    $
    74,132
    
    
    $
    48,813
    
    
    $
    74,132
    
    
    $
    48,813
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross research and development costs
    
    $
    27,446
    
    
    $
    27,245
    
    
    $
    80,493
    
    
    $
    82,592Research and development costs capitalized
    
    
    (21,201
    )
    
    
    (20,098
    )
    
    
    (60,243
    )
    
    
    (54,067
    )Research and development expense
    
    $
    6,245
    
    
    $
    7,147
    
    
    $
    20,250
    
    
    $
    28,525
 6. Restructuring
   Lease andLong-TermCommitmentsand OtherCostsBalances at December 31, 2006
    
    $
    911Provision (benefits)
    
    
    (783
    )Other
    
    
    (128
    )Balances at September 30, 2007
    
    $
    0
  7




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##### 



7. New Accounting Pronouncement
 Accounting for Uncertainty in
Income Taxes An Interpretation of FASB Statement No. 109 Accounting
for Income Taxes.
   8. Convertible Senior Notes  Conversion Rate Adjustments
 6.0% Notes
   7.125% Notes
  8




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##### 




    
    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 ($6.60 Reset feature).
    9. Credit Facility
    9




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##### 



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
  10




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 PlayStation 2 PS2 PlayStation 3 PS3 PlayStation
Portable PSP Xbox Xbox 360; GameCube NGC Wii Game Boy Advance GBA , Nintendo DS DS PS3 Xbox 360 Wii. Blitz: The League Xbox 360 Wii. PS3 Stranglehold PS3
 New Console Platform Cycle and Increasing Costs to Develop Video Games
 New Console Platform Cycle  PS2 NGC Xbox, Xbox 360, Wii, PS3
 11




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##### 



Increasing Costs to Develop Video Games 
 Handheld Market
 DS. PSP. PSP PSP DS
 PC Market
 The Lord of the Rings Online:
Shadows of Angmar Stranglehold Unreal Tournament 3
 Childrens Market
 Ed, Edd n
Eddy The Ant Bully The Grim Adventures of Billy & Mandy Happy Feet
 Majority Stockholder
  12




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##### 



Results of Operations
 Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006
  Three Months Ended September 30,2007
    
    
    2006Net revenues
    
    $
    36,747
    
    
    
    100.0
    %
    
    $
    27,392
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    13,472
    
    
    
    36.7
    %
    
    
    12,541
    
    
    
    45.8
    %Royalties and product development
    
    
    24,196
    
    
    
    65.8
    %
    
    
    14,774
    
    
    
    53.9
    %Total cost of sales
    
    
    37,668
    
    
    
    102.5
    %
    
    
    27,315
    
    
    
    99.7
    %Gross profit (loss)
    
    
    (921
    )
    
    
    (2.5
    )%
    
    
    77
    
    
    
    0.3
    %Research and development expense
    
    
    6,245
    
    
    
    17.0
    %
    
    
    7,147
    
    
    
    26.1
    %Selling and marketing expense
    
    
    14,173
    
    
    
    38.6
    %
    
    
    8,059
    
    
    
    29.4
    %Administrative expense
    
    
    5,000
    
    
    
    13.6
    %
    
    
    5,142
    
    
    
    18.8
    %Restructuring and other charges
    
    
    
    
    
    
    0.0
    %
    
    
    1
    
    
    
    0.0
    %Operating loss
    
    
    (26,339
    )
    
    
    (71.7
    )%
    
    
    (20,272
    )
    
    
    (74.0
    )%Interest income
    
    
    498
    
    
    
    1.4
    %
    
    
    1,360
    
    
    
    5.0
    %Interest expense
    
    
    (8,429
    )
    
    
    (22.9
    )%
    
    
    (3,678
    )
    
    
    (13.4
    )%Other income, net
    
    
    1,160
    
    
    
    3.2
    %
    
    
    781
    
    
    
    2.8
    %Loss before income taxes
    
    
    (33,110
    )
    
    
    (90.0
    )%
    
    
    (21,809
    )
    
    
    (79.6
    )%Provision for income taxes
    
    
    417
    
    
    
    1.1
    %
    
    
    342
    
    
    
    1.3
    %Net loss
    
    $
    (33,527
    )
    
    
    (91.1
    )%
    
    $
    (22,151
    )
    
    
    (80.9
    )%
  Three Months EndedSee
    
    September 30,
    
    Increase /
    
    PercentExplanation
    
    2007
    
    2006
    
    (Decrease)
    
    ChangeNet revenues
    
    
    A
    
    
    $
    36,747
    
    
    $
    27,392
    
    
    $
    9,355
    
    
    
    34.2
    %North American net revenues
    
    
    B
    
    
    
    18,814
    
    
    
    21,370
    
    
    
    (2,556
    )
    
    
    (12.0
    )%International net revenues
    
    
    C
    
    
    
    17,933
    
    
    
    6,022
    
    
    
    11,911
    
    
    
    197.8
    %Cost of sales:Product costs and distribution
    
    
    D
    
    
    
    13,472
    
    
    
    12,541
    
    
    
    931
    
    
    
    7.4
    %Royalties and product development
    
    
    E
    
    
    
    24,196
    
    
    
    14,774
    
    
    
    9,422
    
    
    
    63.8
    %Research and development expense
    
    
    F
    
    
    
    6,245
    
    
    
    7,147
    
    
    
    (902
    )
    
    
    (12.6
    )%Selling and marketing expense
    
    
    G
    
    
    
    14,173
    
    
    
    8,059
    
    
    
    6,114
    
    
    
    75.9
    %Administrative expense
    
    
    H
    
    
    
    5,000
    
    
    
    5,142
    
    
    
    (142
    )
    
    
    (2.8
    )%Restructuring and other charges
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    100.0
    %Interest income
    
    
    I
    
    
    
    498
    
    
    
    1,360
    
    
    
    (862
    )
    
    
    (63.4
    )%Interest expense
    
    
    J
    
    
    
    (8,429
    )
    
    
    (3,678
    )
    
    
    4,751
    
    
    
    129.2
    %Other income, net
    
    
    K
    
    
    
    1,160
    
    
    
    781
    
    
    
    379
    
    
    
    48.5
    %Provision for income taxes
    
    
    L
    
    
    
    417
    
    
    
    342
    
    
    
    75
    
    
    
    21.9
    %
 13




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##### 



A. Net Revenues
  Three Months Ended September 30,2007
    
    
    2006Microsoft Xbox 360
    
    $
    25,655
    
    
    
    69.8
    %
    
    $
    
    
    
    
    Nintendo Wii
    
    
    2,137
    
    
    
    5.8
    %
    
    
    
    
    
    
    Sony PlayStation 2(PS2)
    
    
    1,946
    
    
    
    5.3
    %
    
    
    15,561
    
    
    
    56.8
    %Microsoft Xbox
    
    
    (55
    )
    
    
    (0.1
    )%
    
    
    2,202
    
    
    
    8.0
    %Nintendo GameCube(NGC)
    
    
    103
    
    
    
    0.3
    %
    
    
    4,035
    
    
    
    14.7
    %Sony PlayStation Portable(PSP)
    
    
    1,239
    
    
    
    3.4
    %
    
    
    744
    
    
    
    2.7
    %Nintendo DS
    
    
    1,806
    
    
    
    4.9
    %
    
    
    
    
    
    
    Nintendo Game Boy Advance(GBA)
    
    
    164
    
    
    
    0.4
    %
    
    
    2,185
    
    
    
    8.0
    %Personal Computer (PC)
    
    
    3,729
    
    
    
    10.1
    %
    
    
    1,666
    
    
    
    6.1
    %Royalties and other
    
    
    23
    
    
    
    0.1
    %
    
    
    999
    
    
    
    3.7
    %Total net revenues
    
    $
    36,747
    
    
    
    100.0
    %
    
    $
    27,392
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryThree Months Ended September 30, 2007Big Buck Hunter
    
    PC
    
    North AmericaStranglehold
    
    Xbox 360, PC
    
    North AmericaStranglehold
    
    Xbox 360, PC
    
    InternationalThree 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
    
    International
 Stranglehold
 B. North American Net Revenues
 Stranglehold Mortal Kombat: Armageddon Happy Feet Wii Mortal Kombat: Armageddon The Ant Bully Spyhunter: Nowhere to Run Rampage: Total Destruction
 C. International Net Revenues
 Stranglehold Touchmaster Happy Feet The Ant Bully Spyhunter:
Nowhere to Run Rise & Fall: Civilizations at War, .
 14




---



##### 



D. Cost of Sales  Product Costs and Distribution
  E. Cost of Sales  Royalties and Product Development
   Three Months EndedSeptember 30,Description
    
    2007
    
    
    2006Amortization of capitalized product development costs
    
    $
    15,819,000
    
    
    $
    11,605,000Writedowns related to future releases
    
    
    4,782,000
    
    
    
    Total
    
    $
    20,601,000
    
    
    $
    11,605,000
 Stranglehold
 F. Research and Development Expense
  Three Months EndedSeptember 30,Description
    
    2007
    
    
    2006Gross research and development costs
    
    $
    27,446,000
    
    
    $
    27,245,000Research and development costs capitalized
    
    
    (21,201,000
    )
    
    
    (20,098,000
    )Research and development expense
    
    $
    6,245,000
    
    
    $
    7,147,000
  G. Selling and Marketing Expense
 Stranglehold
 15




---



##### 



H. Administrative Expense
  I. Interest Income
  J. Interest Expense
   K. Other Income, Net
  L. Provision for Income Taxes
  16




---



##### 



Nine Months Ended September 30, 2007 Compared with Nine Months Ended September 30, 2006
  Nine Months Ended September 30,2007
    
    
    2006Net revenues
    
    $
    79,618
    
    
    
    100.0
    %
    
    $
    68,710
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    31,141
    
    
    
    39.1
    %
    
    
    30,400
    
    
    
    44.2
    %Royalties and product development
    
    
    36,643
    
    
    
    46.0
    %
    
    
    38,898
    
    
    
    56.6
    %Total cost of sales
    
    
    67,784
    
    
    
    85.1
    %
    
    
    69,298
    
    
    
    100.8
    %Gross profit (loss)
    
    
    11,834
    
    
    
    14.9
    %
    
    
    (588
    )
    
    
    (0.8
    )%Research and development expense
    
    
    20,250
    
    
    
    25.4
    %
    
    
    28,525
    
    
    
    41.5
    %Selling and marketing expense
    
    
    29,174
    
    
    
    36.6
    %
    
    
    27,448
    
    
    
    40.0
    %Administrative expense
    
    
    15,936
    
    
    
    20.0
    %
    
    
    15,934
    
    
    
    23.2
    %Restructuring and other charges (benefits)
    
    
    (783
    )
    
    
    (1.0
    )%
    
    
    (160
    )
    
    
    (0.2
    )%Operating loss
    
    
    (52,743
    )
    
    
    (66.1
    )%
    
    
    (72,335
    )
    
    
    (105.3
    )%Interest income
    
    
    2,075
    
    
    
    2.6
    %
    
    
    3,497
    
    
    
    5.1
    %Interest expense
    
    
    (17,600
    )
    
    
    (22.1
    )%
    
    
    (7,561
    )
    
    
    (11.0
    )%Other income, net
    
    
    2,003
    
    
    
    2.5
    %
    
    
    1,757
    
    
    
    2.6
    %Loss before income taxes
    
    
    (66,265
    )
    
    
    (83.1
    )%
    
    
    (74,642
    )
    
    
    (108.6
    )%Provision for income taxes
    
    
    1,381
    
    
    
    1.7
    %
    
    
    1,116
    
    
    
    1.7
    %Net loss
    
    $
    (67,646
    )
    
    
    (84.8
    )%
    
    $
    (75,758
    )
    
    
    (110.3
    )%
  Nine Months EndedSee
    
    September 30,
    
    Increase /
    
    Percentexplanation
    
    2007
    
    2006
    
    (Decrease)
    
    ChangeNet revenues
    
    
    A
    
    
    $
    79,618
    
    
    $
    68,710
    
    
    $
    10,908
    
    
    
    15.9
    %North American net revenues
    
    
    B
    
    
    
    48,792
    
    
    
    52,673
    
    
    
    (3,881
    )
    
    
    (7.4
    )%International net revenues
    
    
    C
    
    
    
    30,826
    
    
    
    16,037
    
    
    
    14,789
    
    
    
    92.2
    %Cost of sales:Product costs and distribution
    
    
    D
    
    
    
    31,141
    
    
    
    30,400
    
    
    
    741
    
    
    
    2.4
    %Royalties and product development
    
    
    E
    
    
    
    36,643
    
    
    
    38,898
    
    
    
    (2,255
    )
    
    
    (5.8
    )%Research and development expense
    
    
    F
    
    
    
    20,250
    
    
    
    28,525
    
    
    
    (8,275
    )
    
    
    (29.0
    )%Selling and marketing expense
    
    
    G
    
    
    
    29,174
    
    
    
    27,448
    
    
    
    1,726
    
    
    
    6.3
    %Administrative expense
    
    
    H
    
    
    
    15,936
    
    
    
    15,934
    
    
    
    2
    
    
    
    0.0
    %Restructuring and other charges (benefits)
    
    
    I
    
    
    
    (783
    )
    
    
    (160
    )
    
    
    623
    
    
    
    389.4
    %Interest income
    
    
    J
    
    
    
    2,075
    
    
    
    3,497
    
    
    
    (1,422
    )
    
    
    (40.7
    )%Interest expense
    
    
    K
    
    
    
    (17,600
    )
    
    
    (7,561
    )
    
    
    10,039
    
    
    
    132.8
    %Other income, net
    
    
    L
    
    
    
    2,003
    
    
    
    1,757
    
    
    
    246
    
    
    
    14.0
    %Provision for income taxes
    
    
    M
    
    
    
    1,381
    
    
    
    1,116
    
    
    
    265
    
    
    
    23.7
    %
 17




---



##### 



A. Net Revenues
  Nine Months Ended September 30,2007
    
    
    2006Microsoft Xbox 360
    
    $
    33,544
    
    
    
    42.1
    %
    
    $
    
    
    
    
    Nintendo Wii
    
    
    10,128
    
    
    
    12.7
    %
    
    
    
    
    
    
    Sony PlayStation 2(PS2)
    
    
    8,971
    
    
    
    11.3
    %
    
    
    36,320
    
    
    
    52.9
    %Microsoft Xbox
    
    
    730
    
    
    
    0.9
    %
    
    
    7,809
    
    
    
    11.4
    %Nintendo GameCube(NGC)
    
    
    841
    
    
    
    1.1
    %
    
    
    6,230
    
    
    
    9.1
    %Sony PlayStation Portable(PSP)
    
    
    2,779
    
    
    
    3.5
    %
    
    
    4,755
    
    
    
    6.9
    %Nintendo DS
    
    
    5,342
    
    
    
    6.7
    %
    
    
    
    
    
    
    Nintendo Game Boy Advance(GBA)
    
    
    1,403
    
    
    
    1.8
    %
    
    
    2,418
    
    
    
    3.5
    %Personal Computer (PC)
    
    
    13,865
    
    
    
    17.4
    %
    
    
    7,118
    
    
    
    10.4
    %Royalties and other
    
    
    2,015
    
    
    
    2.5
    %
    
    
    4,060
    
    
    
    5.8
    %Total net revenues
    
    $
    79,618
    
    
    
    100.0
    %
    
    $
    68,710
    
    
    
    100.0
    %
  Video Game Title
    
    Platform
    
    TerritoryNine Months Ended September 30, 2007Big Buck Hunter
    
    PC
    
    North AmericaHot Brain
    
    PSP
    
    North AmericaHour of Victory
    
    Xbox 360
    
    North AmericaThe Lord of the Rings Online: Shadows of Angmar
    
    PC
    
    North AmericaMortal Kombat: Armageddon
    
    Wii
    
    North AmericaStranglehold
    
    Xbox 360, PC
    
    North AmericaTouchmaster
    
    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
    
    InternationalStranglehold
    
    Xbox 360, PC
    
    InternationalTouchmaster
    
    NDS
    
    InternationalVideo 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
 18




---



##### 



B. North American Net Revenues
 Stranglehold The Lord of the Rings Online: Shadows of Angmar Mortal Kombat: Armageddon PS2 Xbox Wii . NBA Ballers: Phenom Rampage: Total Destruction The Ant Bully
 C. International Net Revenues
 Stranglehold Hour of Victory Mortal Kombat: Armageddon PS2 Wii Rise & Fall: Civilizations at War The Ant Bully Midway Arcade Treasures:
Extended Play.
 D. Cost of Sales  Product Costs and Distribution
  E. Cost of Sales  Royalties and Product Development
   Nine Months EndedSeptember 30,Description
    
    2007
    
    
    2006Amortization of capitalized product development costs
    
    $
    22,793,000
    
    
    $
    31,153,000Writedowns related to current releases
    
    
    43,000
    
    
    
    1,696,000Writedowns related to future releases
    
    
    4,888,000
    
    
    
    Total
    
    $
    27,724,000
    
    
    $
    32,849,000
 Stranglehold The Lord of the Rings Online: Shadows of Angmar
 19




---



##### 



F. Research and Development Expense
  Nine Months EndedSeptember 30,Description
    
    2007
    
    
    2006Gross research and development costs
    
    $
    80,493,000
    
    
    $
    82,592,000Research and development costs capitalized
    
    
    (60,243,000
    )
    
    
    (54,067,000
    )Research and development expense
    
    $
    20,250,000
    
    
    $
    28,525,000
  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
  Liquidity and Capital Resources
    21




---



##### 



Off-Balance Sheet Arrangements and Contractual Obligations
  22




---



##### 



Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations(1)
    
    $
    19,667
    
    
    $
    2,000
    
    
    $
    4,000
    
    
    $
    13,667
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    5,686
    
    
    
    1,500
    
    
    
    2,515
    
    
    
    1,671
    
    
    
    Convertible senior notes(3)
    
    
    150,000
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    Interest on convertible senior notes(4)
    
    
    21,375
    
    
    
    9,844
    
    
    
    11,531
    
    
    
    
    
    
    
    Operating lease obligations(5)
    
    
    14,149
    
    
    
    3,424
    
    
    
    4,474
    
    
    
    4,208
    
    
    
    2,043Purchase obligations(6)
    
    
    53,046
    
    
    
    30,660
    
    
    
    21,226
    
    
    
    1,160
    
    
    
    Other liabilities(7)
    
    
    726
    
    
    
    363
    
    
    
    363
    
    
    
    
    
    
    
    Total
    
    $
    264,649
    
    
    $
    47,791
    
    
    $
    194,109
    
    
    $
    20,706
    
    
    $
    2,043
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet at September 30, 2007 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 8.07% (one month LIBOR rate plus 2.75%) from
October 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 September 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 September 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 September 30, 2007.(5)
    
    These obligations are not reflected on our consolidated balance sheet at September 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 September 30, 2007.(7)
    
    This item represents the remaining obligations under software license financing arrangements
which are reflected on our consolidated balance sheet at September 30, 2007 in other accrued
liabilities (current) and other noncurrent liabilities (noncurrent). Impact of Inflation
  Seasonality
  23




---



##### 



Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Item 4. Controls and Procedures
   24




---



##### 



Part II. Other Information
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item
5. Other Information
  Item 6. Exhibits
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant
dated October 25, 1996, incorporated herein by reference to the
Registrants Registration Statement on Form S-1, as amended, File
No. 333-11919, initially filed on September 13, 1996 and effective
October 29, 1996.3.2
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated February 25, 1998,
incorporated herein by reference to the Registrants Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20, 1998.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated August 5, 2003, incorporated
herein by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.3.4
    
    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*
    
    Second Form of Restricted Stock Agreement used currently by the
Registrant for management under its 2005 Long-Term Incentive Plan.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.*
       Indicates a management contract or compensatory plan or arrangement.
 25




---



##### 



Signature
  MIDWAY GAMES INC.By:
    
    /s/ Thomas E. Powell

Thomas E. PowellExecutive Vice
President - Finance, TreasurerandChief Financial Officer(Principal Financial Officer andduly authorized officer)
  26




---



##### 



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant
dated October 25, 1996, incorporated herein by reference to the
Registrants Registration Statement on Form S-1, as amended, File
No. 333-11919, initially filed on September 13, 1996 and effective
October 29, 1996.3.2
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated February 25, 1998,
incorporated herein by reference to the Registrants Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20, 1998.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated August 5, 2003, incorporated
herein by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.3.4
    
    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*
    
    Second Form of Restricted Stock Agreement used currently by the
Registrant for management under its 2005 Long-Term Incentive Plan.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.*
     Indicates a management contract or compensatory plan or arrangement.
 27