##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2005


Commission File Number 1-12367





MIDWAY GAMES INC.


(Exact name of registrant as specified in its charter)


|                                           |  |                    
|------------------------------------------ |  | -------------------
|Delaware                                   |  | 22-2906244         
|(State or other jurisdiction of            |  | (I.R.S. Employer   
|incorporation or organization)             |  | Identification No.)
|                                          
|2704 West Roscoe Street, Chicago, Illinois |  | 60618              
|(Address of principal executive offices)   |  | (Zip Code)         

Registrants telephone number, including area code:
(773) 961-2222


Securities registered pursuant to Section 12(b) of the
Act:


|                                                   |  |                                          
|-------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                |  | Name of Each Exchange on Which Registered
|                                                   |  |                                          
|Common Stock, $.01 par value                       |  | New York Stock Exchange                  
|Stock Purchase Rights pursuant to Rights Agreement |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act:


o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ














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##### Table of Contents



Effective December 31, 2001, we changed our fiscal year
end from June 30 to December 31. References to
fiscal years 2001 or earlier are to years ended
June 30 of each such year. References to years for 2002 or
later in this report refer to our fiscal year ending on
December 31. References to the transition
period are to the six-month transition period beginning on
July 1, 2001 and ended on December 31, 2001.


Midway® is our registered trademark. Our product names mentioned in
this report are also our trademarks, except where we license
them. Other product names mentioned in this report are the
trademarks of their respective owners.


This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, which describe our plans, strategies and goals, our
beliefs concerning future business conditions and our outlook
based on currently available information. Where possible, we
have identified these forward-looking statements by words such
as may, will, should,
could, expect, eventually,
anticipate, believe,
estimate, seek, intend and
similar expressions. Our actual results could differ materially
from those described in the forward-looking statements due to a
number of risks and uncertainties. These risks and uncertainties
include, but are not limited to, the performance of the
interactive entertainment industry, dependence on new product
introductions and the ability to maintain the scheduling of such
introductions, the current console platform transition and other
technological changes, dependence on major platform
manufacturers, volatility of the market price of our common
stock, decisions by Sumner Redstone with respect to his
ownership or trading of our common stock, and other risks more
fully described under Item 1A. Risk Factors.
Each forward-looking statement, including, without limitation,
financial guidance, speaks only as of the date on which it is
made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances
after the date on which it is made or to reflect the occurrence
of anticipated or unanticipated events or circumstances, except
as required by law.




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##### Table of Contents



PART I




|        |          
|------- | ---------
|Item 1. | Business.

Development of Our Business


Xbox, GameCube Game Boy Advance PlayStation 2 PlayStation Portable.


Mortal Kombat




| |   |                                      
| | - | -------------------------------------
| |  | Mortal Kombat: Deception(2004);      
|
| |  | NBA Ballers(2004);                   
|
| |  | Midway Arcade Treasures(2003); and   
|
| |  | Mortal Kombat: Deadly Alliance(2002).





| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Warner Bros. Interactive Entertainment/ Cartoon
    Network  The animated television series: Ed,
    Edd n Eddy, The Grim Adventures of Billy &
    Mandyand certain ADULT SWIM programs;                                    
|
| |  | Warner Bros. Interactive Entertainment/The Ant
    Bully  An animated film executive produced by Tom
    Hanks and expected to feature the talents of Nicolas Cage, Paul
    Giamatti, Julia Roberts, Meryl Streep and others;
|
| |  | Warner Bros. Interactive Entertainment/Happy
    Feet  An animated film co-written and directed by
    George Miller and expected to feature the talents of Brittany
    Murphy, Robin Williams, Elijah Wood and others; and  
|
| |  | TNA Entertainment/ Total NonStop Action
    Wrestlingtm  
    A professional wrestling alternative which airs weekly
    television programs and monthly pay-per-view specials.                                               

2



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10-K, 10-Q, 8-K




Industry Overview




3



---



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The Home Console and Handheld Platform Market.






PlayStation 2 Xbox GameCube,


Game Boy, Game Boy Advance, Game Boy
Advance SP Nintendo DS, PlayStation Portable,


Xbox 360


The Personal Computer Game Market.


4



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##### Table of Contents



The Online and Wireless Markets. head-to


Distribution.


Our Business Strategy






| |                                                          
| | ---------------------------------------------------------
| | Leverage core competencies and established
    franchises

over-the




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mature games  The development of M
    rated games for consumers age 17 and older is one of our
    historic strengths. During the previous home console cycle, from
    1995 to 1999, we were the industry leader in M rated
    dollar and unit sales. We also released the most M
    rated titles during that period. Our most successful and
    profitable video game franchise, Mortal Kombat, is
    marketed to mature audiences. We have sold over 20 million
    copies of this franchise across seven major home console
    releases. The majority of video game players on current consoles
    are over 18 years of age and the average age of video game
    players is increasing. We expect mature games to continue to be
    one of the fastest growing segments of the industry.                          
|
| |  | Over-the-top sports
    games  We have enjoyed strong sales from our line
    of sports games, including NBA Ballers,the Blitzfranchise,NHL Hitz, MLB SlugFestand Ready 2
    Rumble Boxing.Our titles in this popular category are
    characterized by extreme game play and the exaggerated abilities
    of the characters in these games, which we refer to as
    over-the-top
    sports entertainment. We believe our
    over-the-top
    style makes these games popular and differentiates them from the
    simulation style of most publishers sports
    video games. We plan to release over time new versions of
    over-the-top
    sports games with novel and innovative features.                                                                                                                      
|
| |  | Established franchises  Many of the games we
    have released over the past 20 years have been best-sellers
    and have attracted loyal fan bases. The popularity of many of
    our games has enabled us to successfully market sequels,
    including sequels for Mortal Kombat, Spy Hunter, Gauntlet,
    MLB SlugFest, NFL Blitzand San Francisco Rush
    Extreme Racing. A sequel in the Mortal Kombatseries
    that we released in the fourth quarter of 2004, Mortal
    Kombat: Deception,proved to be our top selling game of
    fiscal 2004. We also released an action/adventure title in the
    Mortal Kombatseries, Mortal Kombat: Shaolin
    Monks, in the third quarter of 2005. We intend to leverage
    our franchises to create popular titles for play on traditional
    console platforms and new gaming

5



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| |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | mediums. We also control the intellectual property rights to
    hundreds of classic video game titles, including titles
    originally released under the Midway, Williams and Atari brands.
    We have leveraged this large library of proven intellectual
    properties by releasing 19 collections of arcade
    classics for home consoles and ten for handheld platforms.



| |                                        
| | ---------------------------------------
| | Development of multi-genre action games





| |                                          
| | -----------------------------------------
| | Expand into the childrens and PC markets

Ed, Edd n Eddy,


Rise and Fall:
Civilizations at War Unreal
Tournament,




| |                                            
| | -------------------------------------------
| | Gain market share in the next console cycle





| |                                           
| | ------------------------------------------
| | Investment in internal product development



6



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| |                              
| | -----------------------------
| | Expand international presence



Products


PlayStation 2, Xbox GameCube, Game Boy Advance PlayStation Portable,




PlayStation Portable






Mortal Kombat


7



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| |                         
| | ------------------------
| | 2005 Video Game Releases



|                                       |  |                                     |  |                             
|-------------------------------------- |  | ----------------------------------- |  | ----------------------------
|Video Game Title                       |  | Platform                            |  | Territory                   
|                                       |  |                                     |  |                             
|Area 51                                |  | PlayStation 2; Xbox; PC             |  | North America, International
|Blitz: The League                      |  | PlayStation 2; Xbox                 |  | North America               
|Earth 2160                             |  | PC                                  |  | North America               
|Ed, Edd n Eddy                        |  | PlayStation 2; Game Boy Advance; PC |  | North America, International
|Ed, Edd n Eddy                        |  | Xbox; GameCube                      |  | North America               
|Gauntlet: Seven Sorrows                |  | PlayStation 2; Xbox                 |  | North America               
|L.A. RUSH                              |  | PlayStation 2; Xbox                 |  | North America, International
|Maya the Bee                           |  | Game Boy Advance                    |  | International               
|Midway Arcade Treasures: Extended Play |  | PlayStation Portable                |  | North America               
|Midway Arcade Treasures 3              |  | PlayStation 2; Xbox                 |  | North America, International
|Midway Arcade Treasures 3              |  | GameCube                            |  | North America               
|Mortal Kombat: Deception               |  | GameCube                            |  | North America               
|Mortal Kombat: Shaolin Monks           |  | PlayStation 2; Xbox                 |  | North America, International
|NARC                                   |  | Xbox                                |  | North America, International
|NARC                                   |  | PlayStation 2                       |  | North America               
|The Suffering: Ties that Bind          |  | PlayStation 2; Xbox; PC             |  | North America, International
|Shadowhearts: Covenant                 |  | PlayStation 2                       |  | International               
|Unreal Championship 2                  |  | Xbox                                |  | North America, International



| |                         
| | ------------------------
| | 2004 Video Game Releases



|                                 |  |                     |  |                             
|-------------------------------- |  | ------------------- |  | ----------------------------
|Video Game Title                 |  | Platform            |  | Territory                   
|                                 |  |                     |  |                             
|Mortal Kombat: Deception         |  | PlayStation 2; Xbox |  | North America, International
|Midway Arcade Treasures          |  | PlayStation 2; Xbox |  | International               
|Midway Arcade Treasures 2        |  | PlayStation 2; Xbox |  | North America, International
|Midway Arcade Treasures 2        |  | GameCube            |  | North America               
|MLB SlugFest: Loaded             |  | PlayStation 2; Xbox |  | North America               
|NBA Ballers                      |  | PlayStation 2       |  | North America, International
|NBA Ballers                      |  | Xbox                |  | North America               
|Psi-Ops: The Mindgate Conspiracy |  | PlayStation 2; Xbox |  | North America, International
|Shadowhearts: Covenant           |  | PlayStation 2       |  | North America               
|SpyHunter 2                      |  | PlayStation 2; Xbox |  | International               
|The Suffering                    |  | PlayStation 2; Xbox |  | North America, International



| |              
| | -------------
| | 2006 Products

Midway Arcade Treasures: Deluxe Edition L.A.
RUSH, Mortal Kombat:
Armageddon,


8



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Product Development






state-of








9



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Marketing and Distribution






| |   |                                          
| | - | -----------------------------------------
| |  | mass merchandisers;                      
|
| |  | foreign, national and regional retailers;
|
| |  | discount store chains; and               
|
| |  | video rental retailers.                  







point-of


10



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|                    |                       |                          |         |         |      |  |      |          |   |  |         |         |  |          |      |       |   |  |        |        |  |  |      |       |  
|------------------- | --------------------- | ------------------------ | ------- | ------- | ---- |  | ---- | -------- | - |  | ------- | ------- |  | -------- | ---- | ----- | - |  | ------ | ------ |  |  | ---- | ----- | -
|                    |                       | Years Ended December 31, |        
|                    |                       |                          |        
|                    |                       | 2005                     |         |         | 2004 |  |      | 2003     |  
|                    |                       |                          |         |         |      |  |      |          |  
|                    |                       | Net                      |         |         |      |  | Net  |          |   |  |         | Net     |  |          |     
|                    |                       | Revenues                 |         |         | %    |  |      | Revenues |   |  | %       |         |  | Revenues |      |       | % | 
|                    |                       |                          |         |         |      |  |      |          |   |  |         |         |  |          |      |       |   | 
|                    |                       | (Dollars in thousands)   |        
|North America:      |                       |                          |         |         |      |  |      |          |   |  |         |         |  |          |      |       |   |  |        |        |  |  |      |      
|                    | United States         |                          | $       | 109,993 |      |  |      | 73.3     | % |  | $       | 123,330 |  |          |      | 76.3  | % |  | $      | 66,053 |  |  |      | 71.4  | %
|                    | Outside United States |                          |         | 8,292   |      |  |      | 5.5      |   |  |         | 8,745   |  |          |      | 5.4   |   |  |        | 3,101  |  |  |      | 3.3   |  
|                    |                       |                          |         |         |      |  |      |          |   |  |         |         |  |          |      |       |   | 
|Total North America |                       |                          | 118,285 |         |      |  | 78.8 |          |   |  | 132,075 |         |  |          | 81.7 |       |   |  | 69,154 |        |  |  | 74.7 |      
|International       |                       |                          | 31,793  |         |      |  | 21.2 |          |   |  | 29,520  |         |  |          | 18.3 |       |   |  | 23,370 |        |  |  | 25.3 |      
|                    |                       |                          |         |         |      |  |      |          |   |  |         |         |  |          |      |       |   | 
|                    | Total Net Revenues    |                          | $       | 150,078 |      |  |      | 100.0    | % |  | $       | 161,595 |  |          |      | 100.0 | % |  | $      | 92,524 |  |  |      | 100.0 | %
|                    |                       |                          |         |         |      |  |      |          |   |  |         |         |  |          |      |       |   | 



Competition








| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | the ability to select and develop popular titles;                                                    
|
| |  | the ability to identify and obtain rights to commercially
    marketable intellectual properties; and
|
| |  | the ability to adapt products for use with new technologies.                                         







11



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Mortal Kombat, NBA Ballers Midway Arcade
Treasures,




Manufacturing








Game Boy Advance Nintendo DS PlayStation Portable


12



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Licenses and Intellectual Property


Platform Licenses.




Intellectual Property Licenses.


13



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Patent, Trademark and Copyright Protection.




| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | trademarks associated with elements of the game, such as team
    logos;                
|
| |  | trademarks under which the game is marketed;                                            
|
| |  | the copyrights for the game software, including the games
    audiovisual elements; and
|
| |  | the patents for inventions in the game software.                                        







Seasonality




Employees






|         |              
|-------- | -------------
|Item 1A. | Risk Factors.

The occurrence of any of the following risks could
significantly harm our business, results of operations or
financial condition or have an adverse effect on the market
value of our common stock or convertible senior notes. In that
case, you may lose all or part of your investment.


We have experienced operating and net losses in recent years,
and we may incur future losses.






| |   |                            
| | - | ---------------------------
| |  | $108.5 million for 2005;   
|
| |  | $25.0 million for 2004; and
|
| |  | $116.0 million for 2003.   

14



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| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | releasing titles that failed to gain popularity and generate
    expected sales;                                 
|
| |  | increasing costs of developing new games for existing and
    next-generation platforms;                         
|
| |  | a tendency for retailers to stock only video games for which
    consumer demand is expected to be strongest; and
|
| |  | weakness in the home video game industry during the home console
    transition periods.                         



If our new products fail to gain market acceptance, we may
not have sufficient revenues to pay our expenses and to develop
a continuous stream of new games.




Product development schedules are long and frequently
unpredictable, and we may experience delays in introducing new
products, which may adversely affect our revenues.




Our market is subject to rapid technological change, and if
we do not adapt to, and appropriately allocate our new resources
among, emerging technologies, our revenues would be negatively
affected.




15



---



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If consumers defer purchasing our products or the prices for
our products decrease as a result of the current home console
transition period, our revenues and margins would be adversely
affected.


Xbox 360


Our operating results may fluctuate from quarter to quarter,
making our results difficult to predict.






| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in the level and duration of market acceptance of our
    products;                                                      
|
| |  | delays and timing of product development and introductions;                                                                         
|
| |  | fluctuations in our mix of products with varying profit margins;                                                                    
|
| |  | dependence on a relatively limited number of products in any
    quarter to produce revenues;                                       
|
| |  | introduction and market penetration of game platforms;                                                                              
|
| |  | the amount of royalties payable by us for the content contained
    in our video games;                                             
|
| |  | development and promotional expenses relating to the
    introduction of our products;                                              
|
| |  | peak demand during the year-end retail holiday selling season,
    which typically results in higher revenues in our fourth quarter;
|
| |  | changes in our pricing practices and those of our competitors;                                                                      
|
| |  | the accuracy of the forecasts of consumer demand made by
    retailers and by us; and                                               
|
| |  | the timing of orders from major customers, order cancellations
    and delays in shipment.                                          



Restrictive debt covenants in our credit facility 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.






| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | make payments, including dividends or other distributions, on
    our capital stock, except in shares of common stock;
|
| |  | incur additional indebtedness;                                                                                        

16



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| |   |                                                      
| | - | -----------------------------------------------------
| |  | 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.                           





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, 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.                                                                                                                                                                                                            



17



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| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | seek additional financing in the debt or equity markets;                                                  
|
| |  | refinance or restructure all or a portion of our indebtedness,
    including the convertible senior notes;
|
| |  | sell assets; and/or                                                                                       
|
| |  | reduce or delay planned expenditures on research and development
    and/or commercialization activities. 



If in the future we need to seek additional capital due to
continuing operating losses or otherwise, we may incur
additional expenses in the form of periodic interest or other
debt service payments, or our stockholders may suffer dilution
in their percentage ownership of common stock.




Our market is highly competitive. If we are unable to compete
effectively, our business, results of operations and financial
condition would be adversely affected.








| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | the ability to select and develop popular titles;                                                    
|
| |  | the ability to identify and obtain rights to commercially
    marketable intellectual properties; and
|
| |  | the ability to adapt products for use with new technologies.                                         







18



---



##### Table of Contents













If product returns and price adjustments exceed our
allowances, we will incur additional charges, which would have
an adverse effect on our results of operations.




If game platform manufacturers refuse to license their
platforms to us or do not manufacture our games on a timely
basis or at all, our revenues would be adversely affected.






| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may only publish our games for play on their game platforms
    if we receive a platform license from them, which is renewable
    at their discretion;                                                                                                                                                                                                                
|
| |  | prices for platform licenses may be economically prohibitive;                                                                                                                                                                                                                                                                                                             
|
| |  | we must obtain their prior review and approval to publish games
    on their platforms;                                                                                                                                                                                                                                                                                   
|
| |  | if the popularity of a game platform declines or, if the
    manufacturer stops manufacturing a platform, does not meet the
    demand for a platform or delays the introduction of a platform
    in a region important to us, the games that we have published
    and that we are developing for that platform would likely
    produce lower sales than we anticipate;
|
| |  | these manufacturers control the manufacture of, or approval to
    manufacture, and manufacturing costs of our game discs and
    cartridges; and                                                                                                                                                                                                                         
|
| |  | these manufacturers have the exclusive right to (1) protect
    the intellectual property rights to their respective hardware
    platforms and technology and (2) discourage others from
    producing unauthorized software for their platforms that compete
    with our games.                                                                                        

19



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##### Table of Contents





Approximately half of our total net revenues are attributable
to our five largest customers.






A business failure by any of our major customers could have
an adverse effect on our revenues and our ability to collect
receivables.




Rating systems for interactive entertainment software,
potential legislation and vendor or consumer opposition could
inhibit sales of our products.






20



---



##### Table of Contents





Lawsuits alleging damages as a result of our video games may
require significant expenditures, divert the attention of
management and generate negative publicity, and thereby have an
adverse effect on our results of operations.




We are dependent on third parties to manufacture our
products, and any increase in the amounts we have to pay to have
our products manufactured or any delay or interruption in
production would negatively affect both our ability to make
timely product introductions and our results of operations.




We have limited control over the personnel, scheduling and
use of resources by third parties that develop certain of our
game titles, and our revenues may be adversely affected by
delays caused by these developers.




If we are not able to maintain or acquire licenses for
intellectual property necessary to the success of some of our
games, or if that intellectual property does not achieve market
acceptance, our revenues would be adversely affected.




21



---



##### Table of Contents









We may experience increased costs to continue to attract and
retain senior management and highly qualified software
developers.




If our products contain errors, our reputation, results of
operations and financial condition may be adversely affected.




If we are unsuccessful in protecting our intellectual
property, our revenues may be adversely affected.




If we infringe the intellectual property of others, our costs
may rise and our results of operations may be adversely
affected.




22



---



##### Table of Contents





We face risks associated with doing business in foreign
countries, including our ability to generate international
demand for our products.






| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to obtain or enforce our rights to the intellectual
    property developed by developers outside the United States;
|
| |  | the time and costs associated with translating and localizing
    products for foreign markets;                                
|
| |  | foreign currency fluctuations;                                                                                                 
|
| |  | unexpected changes in regulatory requirements, including import
    and export control regulations; and                        
|
| |  | difficulties and costs of staffing and managing foreign
    operations, or licensing to foreign entities.                      



We may face limitations on our ability to find suitable
acquisition opportunities or to integrate any additional
acquired businesses.


reductions-in


Through their control of over 85% of our outstanding common
stock, Sumner M. Redstone and his related parties decide the
outcome of votes of our stockholders and are able to control our
business strategies and policies.




23



---



##### Table of Contents





Decisions by Mr. Redstone and his related parties with
respect to their ownership or trading of our common stock could
have an adverse effect on the market value of our common stock
and our convertible senior notes.






24



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##### Table of Contents





Effects of anti-takeover provisions could inhibit a change in
control of Midway and could adversely affect the market price of
our common stock.






| |                            
| | ---------------------------
| | Blank check preferred stock





| |            
| | -----------
| | Rights plan





| |                         
| | ------------------------
| | Other charter provisions





| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | directors may be removed only for cause by a majority of the
    votes cast at a meeting of the stockholders by holders of shares
    of our common stock entitled to vote;                                                                                                                
|
| |  | any vacancy on our board of directors may be filled only by a
    vote of a majority of the remaining directors then in office;                                                                                                                                                            
|
| |  | stockholders may not act by written consent;                                                                                                                                                                                                                                               
|
| |  | only the Chairman or our board of directors by a majority vote
    may call special meetings of stockholders, and the only business
    permitted to be conducted at such special meetings is business
    brought before the meeting by or at the direction of our board
    of directors;
|
| |  | stockholders must follow an advance notice procedure for the
    submission of director nominations and other business to be
    considered at an annual meeting of stockholders;                                                                                                          
|
| |  | either a majority vote of our board of directors or an
    affirmative vote of holders of at least 80% of our outstanding
    common stock entitled to vote is needed in order to adopt, amend
    or repeal our bylaws; and                                                               

25



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| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | either a majority vote of our board of directors or an
    affirmative vote of holders of at least 80% of our outstanding
    common stock entitled to vote is needed in order to amend or
    repeal the above provisions.



| |                                                        
| | -------------------------------------------------------
| | Section 203 of the Delaware General Corporation
    Law



Shares available for future issuance, conversion and exercise
could have an adverse effect on the market price of our common
stock.














|         |                           
|-------- | --------------------------
|Item 1B. | Unresolved Staff Comments.





|        |            
|------- | -----------
|Item 2. | Properties.



26



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##### Table of Contents









|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.











|        |                                                     
|------- | ----------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders.



27



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PART II




|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.



|                                      |  |      |       |  |     |   |       | 
|------------------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|Calendar Period                       |  | High |       |  | Low |  
|                                      |  |      |       |  |     |  
|2004                                  |  |      |       |  |     |   |       | 
|First Quarter                         |  | $    | 7.38  |  |     | $ | 3.65  | 
|Second Quarter                        |  |      | 12.85 |  |     |   | 7.25  | 
|Third Quarter                         |  |      | 12.53 |  |     |   | 9.45  | 
|Fourth Quarter                        |  |      | 11.63 |  |     |   | 9.23  | 
|2005                                  |  |      |       |  |     |   |       | 
|First Quarter                         |  | $    | 10.66 |  |     | $ | 8.69  | 
|Second Quarter                        |  | $    | 11.11 |  |     | $ | 8.19  | 
|Third Quarter                         |  | $    | 16.51 |  |     | $ | 11.19 | 
|Fourth Quarter                        |  | $    | 23.39 |  |     | $ | 15.09 | 
|2006                                  |  |      |       |  |     |   |       | 
|First Quarter (through March 9, 2006) |  | $    | 18.17 |  |     | $ | 9.41  | 



Dividends.


Recent Sales of Unregistered Securities.


Issuer Repurchases.




28



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ISSUER (AFFILIATE) PURCHASES OF EQUITY SECURITIES


|                   |  |              |           |  |            |     |       |                          |                  |  |                     |  |  |  |     | 
|------------------ |  | ------------ | --------- |  | ---------- | --- | ----- | ------------------------ | ---------------- |  | ------------------- |  |  |  | --- | 
|                   |  |              |           |  |            |     |       | (d)                      |                 
|                   |  |              |           |  |            |     |       | Maximum Number           |                 
|                   |  |              |           |  |            |     |       | (or Approximate          |                 
|                   |  |              |           |  |            | (c) |       |                          | Dollar Value) of | 
|                   |  | (a)          |           |  | (b)        |     |       | Total Number of Shares   |                  |  | Shares that May Yet | 
|                   |  | Total Number |           |  | Average    |     |       | Purchased as Part of     |                  |  | Be Purchased Under  | 
|                   |  | of Shares    |           |  | Price Paid |     |       | Publicly Announced Plans |                  |  | the Plans or        | 
|Period             |  | Purchased    |           |  | per Share  |     |       | or Programs              |                  |  | Programs            | 
|                   |  |              |           |  |            |     |       |                          |                  |  |                     | 
|10/1/05  10/31/05 |  |              | 1,300,600 |  |            | $   | 16.46 |                          |                  |  | N/A                 |  |  |  | N/A | 
|11/1/05  11/30/05 |  |              | 1,175,300 |  |            | $   | 20.33 |                          |                  |  | N/A                 |  |  |  | N/A | 
|12/1/05  12/31/05 |  |              | 831,200   |  |            | $   | 22.23 |                          |                  |  | N/A                 |  |  |  | N/A | 
|Total              |  |              | 3,307,100 |  |            | $   | 19.29 |                          |                  |  | N/A                 |  |  |  | N/A | 

29



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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

10-K.


|                                                                            |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |         |      |   |         |        |  |   |         |         | 
|--------------------------------------------------------------------------- | ---------------------- | ---------------------------------------- | -------- | ---------- | ------------ | - | ------- | ---------- | ---- | - | -------- | ------ |  | ---- | ------- | ------- | ---- | - | ------- | ------ |  | - | ------- | ------- | 
|                                                                            |                        |                                          |          | Six Months |              |   |        
|                                                                            |                        | Years Ended December 31,                 |          |            | Ended        |   |         | Year Ended |     
|                                                                            |                        |                                          |          |            | December 31, |   |         | June 30,   |     
|                                                                            |                        | 2005                                     |          |            | 2004         |   |         | 2003       |      |   | 2002     |        |  | 2001 |         |         | 2001 |  
|                                                                            |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |         |      |  
|                                                                            |                        | (In thousands, except per share amounts) |         
|SELECTED OPERATING DATA                                                     |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |        
|Net revenues                                                                |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |         |      |   |         |        |  |   |         |        
|                                                                            | Home video             |                                          | $        | 150,078    |              |   | $       | 161,595    |      |   | $        | 92,524 |  |      | $       | 190,412 |      |   | $       | 68,113 |  |   | $       | 117,328 | 
|                                                                            | Coin-operated video(1) |                                          |          |           |              |   |         |           |      |   |          |       |  |      |         | 1,445   |      |   |         | 3,942  |  |   |         | 50,880  | 
|                                                                            |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |         |      |  
|Total net revenues                                                          |                        |                                          | 150,078  |            |              |   | 161,595 |            |      |   | 92,524   |        |  |      | 191,857 |         |      |   | 72,055  |        |  |   | 168,208 |        
|Gross profit (loss)                                                         |                        |                                          | 18,014   |            |              |   | 57,578  |            |      |   | (20,781  | )(7)   |  |      | 49,158  |         |      |   | 35,182  |        |  |   | 46,405  |        
|Operating loss(2)                                                           |                        |                                          | (108,516 | )(4)       |              |   | (25,045 | )          |      |   | (115,975 | )(8)   |  |      | (52,265 | )(9)    |      |   | (6,947  | )      |  |   | (78,363 | )(12)  
|Loss before income taxes                                                    |                        |                                          | (111,226 | )          |              |   | (18,631 | )(6)       |      |   | (113,963 | )      |  |      | (48,346 | )       |      |   | (5,847  | )      |  |   | (76,256 | )      
|Provision (credit) for income taxes(3)                                      |                        |                                          | 1,261    |            |              |   | 1,314   |            |      |   | 1,264    |        |  |      | 5,477   | (10)    |      |   |        |        |  |   | (7,777  | )      
|Net loss                                                                    |                        |                                          | (112,487 | )          |              |   | (19,945 | )          |      |   | (115,227 | )      |  |      | (53,823 | )       |      |   | (5,847  | )      |  |   | (68,479 | )      
|Preferred stock dividends:                                                  |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |         |      |   |         |        |  |   |         |        
|                                                                            | Distributed            |                                          |          | 282        |              |   |         | 1,884      |      |   |          | 1,455  |  |      |         | 1,159   |      |   |         | 1,043  |  |   |         | 184     | 
|                                                                            | Imputed                |                                          |          | 6          |              |   |         | 2,915      | (11) |   |          | 1,252  |  |      |         | 18,636  | (11) |   |         | 3,515  |  |   |         | 672     | 
|Loss applicable to common stock                                             |                        | $                                        | (112,775 | )          |              | $ | (24,744 | )          |      | $ | (117,934 | )      |  | $    | (73,618 | )       |      | $ | (10,405 | )      |  | $ | (69,335 | )      
|Basic and diluted loss per share of common stock                            |                        | $                                        | (1.30    | )          |              | $ | (0.34   | )          |      | $ | (2.43    | )      |  | $    | (1.61   | )       |      | $ | (0.27   | )      |  | $ | (1.84   | )      
|Average number of shares outstanding                                        |                        |                                          | 86,937   |            |              |   | 72,421  |            |      |   | 48,486   |        |  |      | 45,586  |         |      |   | 38,413  |        |  |   | 37,719  |        
|SELECTED BALANCE SHEET DATA                                                 |                        |                                          |          |            |              |   |         |            |      |   |          |        |  |      |         |        
|Total assets                                                                |                        | $                                        | 248,263  |            |              | $ | 242,317 |            |      | $ | 125,449  |        |  | $    | 201,400 |         |      | $ | 246,405 |        |  | $ | 156,219 |        
|Working capital                                                             |                        |                                          | 136,722  |            |              |   | 141,894 |            |      |   | 50,669   |        |  |      | 100,637 |         |      |   | 146,885 |        |  |   | 71,406  |        
|Long-term obligations, excluding redeemable convertible
    preferred stock |                        |                                          | 90,814   | (5)        |              |   | 17,391  |            |      |   | 19,081   |        |  |      | 8,079   |         |      |   | 1,755   |        |  |   | 6,197   |        
|Redeemable convertible preferred stock                                      |                        |                                          |         |            |              |   | 4,453   |            |      |   | 32,156   |        |  |      | 12,571  |         |      |   | 35,949  |        |  |   | 20,667  |        
|Stockholders equity                                                        |                        |                                          | 115,445  |            |              |   | 187,017 |            |      |   | 47,893   |        |  |      | 139,967 |         |      |   | 180,583 |        |  |   | 111,828 |        






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | We exited our coin-operated video game product line in the
    quarter ended June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (2) | Beginning on July 1, 2001, in accordance with Statement of
    Financial Accounting Standards No. 142, Goodwill and
    Other Intangible Assets(SFAS No. 142), we no longer recognize
    amortization expense on goodwill but conduct an ongoing
    impairment review of the asset. Accordingly, operating loss
    includes amortization of goodwill for fiscal 2001, but not for
    2005, 2004, 2003, 2002 and the six-months ended
    December 31, 2001. Amortization expense totaled
    $3.9 million for fiscal 2001. See Note 1 to the
    consolidated financial statements.
|
| | (3) | After December 31, 2000, we have not provided for an income
    tax benefit due to the establishment of a full valuation
    allowance on our deferred tax assets in the periods subsequent
    to December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                    

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | During 2005, we incurred restructuring and other charges
    totaling $10.8 million related to the closing of our
    Adelaide, Australia development studio. See Note 13 to the
    consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (5) | During 2005, we issued $75 million of convertible senior
    notes. See Note 10 to the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (6) | Loss before income taxes for 2004 includes a $5.0 million
    gain from the settlement of liabilities with our former parent,
    WMS. See Note 16 to the consolidated financial statements.
    Also during 2004, we recorded a $1.8 million reduction of
    expenses previously recorded in 2003 related to legal
    proceedings.                                                                                                                                                                                                                                                                                                                                                   
|
| | (7) | During 2003, $33.2 million of charges related to the
    writedown of capitalized product development costs are included
    in cost of sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (8) | During 2003, Neil D. Nicastro ceased to serve as our chief
    executive officer, president and chief operating officer. As a
    result, 2003 administrative expense includes $9.5 million
    of charges incurred under the terms of our employment agreement
    and severance agreement with Mr. Nicastro. See Note 16
    to the consolidated financial statements. In addition, we
    incurred $9.7 million of restructuring and other charges
    relating to the consolidation of California product development
    and marketing operations, net of reductions recorded in prior
    year restructuring activities. See Note 13 to the
    consolidated financial statements.
|
| | (9) | During 2002, we incurred selling and marketing expense and
    administrative expense totaling $0.9 million relating to
    the closing of administrative facilities located in Corsicana,
    Texas. We also incurred restructuring and other charges totaling
    $10.6 million relating primarily to the consolidation of
    product development operations in California and the closing of
    the Corsicana facility, net of reductions recorded in prior year
    restructuring activities.                                                                                                                                                                                     



|     |                                                                                                                                                                                                                                                         
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | During 2002, provision for income taxes includes
    $5.4 million of deferred income tax expense resulting from
    the revaluation of net deferred tax assets. We also incurred
    $0.1 million of current foreign income tax expense during
    2002.
|    
|(11) | Amounts in 2002 and 2004 include the accelerated recognition of
    imputed (non-cash) preferred stock dividends related to the
    conversion of redeemable convertible preferred stock into shares
    of common stock.                               
|    
|(12) | Fiscal 2001 contains restructuring and other charges totaling
    $12.5 million relating to exiting our coin-operated video
    game product line in the quarter ended June 30, 2001.                                                                   



|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | 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.


31



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##### Table of Contents



over-the Mortal Kombat: Shaolin
Monks, Mortal Kombat Blitz: The League, Blitz


re-entered Ed, Edd n Eddy: The
Mis-Edventures.








| |                                                    
| | ---------------------------------------------------
| | New Platform Cycle, Recent Trends and Uncertainties



New Platform Cycle PS2 GameCube Xbox, Game Boy Advance, PSP, Xbox 360,


32



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Decreasing Revenues and Selling Prices


Increasing Costs to Develop Video Games




| |                
| | ---------------
| | Handheld Market

Nintendo DS. PSP. PSP PSP




| |          
| | ---------
| | PC Market

Earth 2160, Rise and Fall: Civilizations at War, Unreal Tournament,




| |                  
| | -----------------
| | Childrens Market



33



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##### Table of Contents



Ed, Edd n Eddy: The Mis-Edventures,




| |                    
| | -------------------
| | Strategic Alliances

L.A. RUSH, PS2 Xbox,




The Lord of the Rings
Online tm :
Shadows of
Angmar tm The Lord of the Rings
Online tm




| |                        
| | -----------------------
| | Expansion of Operations







| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Seattle, Washington-based Surreal Software Inc.
    (Surreal) in April 2004. Surreal worked with us in
    the development of The Suffering, a title we released in
    March 2004, and The Suffering: Ties that Bind, a title we
    released in September 2005.
|
| |  | Austin, Texas-based Inevitable Entertainment Inc.
    (Inevitable) in October 2004. Inevitable worked with
    us on the development of Area 51, a title we released in
    April 2005.                                                                          
|
| |  | Moorpark, California-based CWS Entertainment Ltd. d/b/a Paradox
    Development (Paradox) in November 2004. Paradox
    worked with us on the development of Mortal Kombat: Shaolin
    Monks, a title we released in September 2005.                            
|
| |  | Adelaide, South Australia-based Ratbag Holdings Pty Ltd. and its
    subsidiary companies (Ratbag) in August 2005. We
    subsequently closed this studio in December 2005 due to
    operating and cost inefficiencies.                                         
|
| |  | Newcastle, United Kingdom-based The Pitbull Syndicate Ltd.
    (Pitbull) in October 2005. Pitbull worked with us on
    the development of L.A. RUSH, a title we released in
    October 2005.                                                                   



34



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##### Table of Contents







| |                                     
| | ------------------------------------
| | Issuance of Convertible Senior Notes





| |                                                               
| | --------------------------------------------------------------
| | Series D Redeemable Convertible Preferred Stock
    Conversion







| |                     
| | --------------------
| | Majority Stockholder





35



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##### Table of Contents





| |              
| | -------------
| | Restructuring

year-to




| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | $2,632,000 related to the impairment of capitalized product
    development costs;                
|
| |  | $1,326,000 related to severance and employee-related costs;                                       
|
| |  | $1,410,000 related to charges accrued for lease and long-term
    commitments and other costs; and
|
| |  | $5,416,000 related to the impairment of fixed and intangible
    assets and goodwill.             



Critical Accounting Policies and Estimates






| |                    
| | -------------------
| | Revenue recognition

Software Revenue Recognition.




| |                                        
| | ---------------------------------------
| | Price protection, returns and discounts



36



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##### Table of Contents









| |                  
| | -----------------
| | Doubtful accounts







| |                                      
| | -------------------------------------
| | Capitalized product development costs

Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed.




37



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##### Table of Contents









| |         
| | --------
| | Goodwill









| |                                 
| | --------------------------------
| | Valuation of deferred tax assets



38



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##### Table of Contents



Results of Operations




|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |   |          |        |  |  |        |      | 
|-------------------------------- | --------------------------------- | ------------------------ | -------- | ------ | ---- |  | ----- | ---- |  | - | ------- | ------ |  |  | ----- | ---- |  | - | -------- | ------ |  |  | ------ | ---- | 
|                                 |                                   | Years Ended December 31, |         
|                                 |                                   |                          |         
|                                 |                                   | 2005                     |          |        | 2004 |  |       | 2003 | 
|                                 |                                   |                          |          |        |      |  |       |      | 
|                                 |                                   | (Dollars in thousands)   |         
|Net revenues                     |                                   | $                        | 150,078  |        |      |  | 100.0 | %    |  | $ | 161,595 |        |  |  | 100.0 | %    |  | $ | 92,524   |        |  |  | 100.0  | %   
|Cost of sales                    |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |   |          |        |  |  |        |     
|                                 | Product costs and distribution    |                          |          | 56,212 |      |  |       | 37.5 |  |   |         | 62,742 |  |  |       | 38.8 |  |   |          | 47,206 |  |  |        | 51.0 | 
|                                 | Royalties and product development |                          |          | 75,852 |      |  |       | 50.5 |  |   |         | 41,275 |  |  |       | 25.6 |  |   |          | 66,099 |  |  |        | 71.5 | 
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  
|Total cost of sales              |                                   |                          | 132,064  |        |      |  | 88.0  |      |  |   | 104,017 |        |  |  | 64.4  |      |  |   | 113,305  |        |  |  | 122.5  |     
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  
|Gross profit (loss)              |                                   |                          | 18,014   |        |      |  | 12.0  |      |  |   | 57,578  |        |  |  | 35.6  |      |  |   | (20,781  | )      |  |  | (22.5  | )   
|Research and development expense |                                   |                          | 39,693   |        |      |  | 26.4  |      |  |   | 25,621  |        |  |  | 15.8  |      |  |   | 22,809   |        |  |  | 24.7   |     
|Selling and marketing expense    |                                   |                          | 57,189   |        |      |  | 38.1  |      |  |   | 41,159  |        |  |  | 25.5  |      |  |   | 35,044   |        |  |  | 37.9   |     
|Administrative expense           |                                   |                          | 18,864   |        |      |  | 12.6  |      |  |   | 15,949  |        |  |  | 9.9   |      |  |   | 27,688   |        |  |  | 29.8   |     
|Restructuring and other charges  |                                   |                          | 10,784   |        |      |  | 7.2   |      |  |   | (106    | )      |  |  | (0.1  | )    |  |   | 9,653    |        |  |  | 10.4   |     
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  
|Operating loss                   |                                   |                          | (108,516 | )      |      |  | (72.3 | )    |  |   | (25,045 | )      |  |  | (15.5 | )    |  |   | (115,975 | )      |  |  | (125.3 | )   
|Interest income                  |                                   |                          | 2,449    |        |      |  | 1.6   |      |  |   | 1,267   |        |  |  | 0.8   |      |  |   | 751      |        |  |  | 0.8    |     
|Interest expense                 |                                   |                          | (3,119   | )      |      |  | (2.1  | )    |  |   | (1,248  | )      |  |  | (0.8  | )    |  |   | (70      | )      |  |  | (0.1   | )   
|Other (expense) income, net      |                                   |                          | (2,040   | )      |      |  | (1.3  | )    |  |   | 6,395   |        |  |  | 4.0   |      |  |   | 1,331    |        |  |  | 1.4    |     
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  
|Loss before income taxes         |                                   |                          | (111,226 | )      |      |  | (74.1 | )    |  |   | (18,631 | )      |  |  | (11.5 | )    |  |   | (113,963 | )      |  |  | (123.2 | )   
|Provision for income taxes       |                                   |                          | 1,261    |        |      |  | 0.8   |      |  |   | 1,314   |        |  |  | 0.8   |      |  |   | 1,264    |        |  |  | 1.3    |     
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  
|Net loss                         |                                   |                          | (112,487 | )      |      |  | (74.9 | )    |  |   | (19,945 | )      |  |  | (12.3 | )    |  |   | (115,227 | )      |  |  | (124.5 | )   
|Preferred stock dividends:       |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |   |          |        |  |  |        |     
|                                 | Distributed                       |                          |          | 282    |      |  |       | 0.2  |  |   |         | 1,884  |  |  |       | 1.2  |  |   |          | 1,455  |  |  |        | 1.6  | 
|                                 | Imputed                           |                          |          | 6      |      |  |       |     |  |   |         | 2,915  |  |  |       | 1.8  |  |   |          | 1,252  |  |  |        | 1.4  | 
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  
|Loss applicable to common stock  |                                   | $                        | (112,775 | )      |      |  | (75.1 | )%   |  | $ | (24,744 | )      |  |  | (15.3 | )%   |  | $ | (117,934 | )      |  |  | (127.5 | )%  
|                                 |                                   |                          |          |        |      |  |       |      |  |   |         |        |  |  |       |      |  |  



|                               |  |               |      | 
|------------------------------ |  | ------------- | ---- | 
|Video Game Title               |  | Year Released |     
|                               |  |               |     
|Mortal Kombat: Deception       |  |               | 2004 | 
|NBA Ballers                    |  |               | 2004 | 
|Midway Arcade Treasures        |  |               | 2003 | 
|Mortal Kombat: Deadly Alliance |  |               | 2002 | 

39



---



##### Table of Contents





| |                        
| | -----------------------
| | 2005 Compared with 2004

year-to


|                                 |                                   |             |   |                          |      |   |          |          |  |  |       |          |   |          |           |         |            |  |       |          |   |   |         |         |   |  |          |       |   
|-------------------------------- | --------------------------------- | ----------- | - | ------------------------ | ---- | - | -------- | -------- |  |  | ----- | -------- | - | -------- | --------- | ------- | ---------- |  | ----- | -------- | - | - | ------- | ------- | - |  | -------- | ----- | --
|                                 |                                   |             |   | Years Ended December 31, |      |   |          |          | 
|                                 |                                   |             |   |                          |      |   |          |          | 
|                                 |                                   | See         |   |                          |      |   | % of Net |          |  |  |       | % of Net |   |          | Increase/ |         |            | 
|                                 |                                   | Explanation |   |                          | 2005 |   |          | Revenues |  |  | 2004  |          |   | Revenues |           |         | (Decrease) |  |       | % Change |  
|                                 |                                   |             |   |                          |      |   |          |          |  |  |       |          |   |          |           |         |            |  |       |          |  
|Consolidated net revenues        |                                   |             | A |                          |      | $ | 150,078  |          |  |  | 100.0 | %        |   | $        | 161,595   |         |            |  | 100.0 | %        |   | $ | (11,517 | )       |   |  | (7.1     | )%   
|                                 | North American net revenues       |             |   | B                        |      |   |          | 118,285  |  |  |       | 78.8     | % |          |           | 132,075 |            |  |       | 81.7     | % |   |         | (13,790 | ) |  |          | (10.4 | )%
|                                 | International net revenues        |             |   | C                        |      |   |          | 31,793   |  |  |       | 21.2     | % |          |           | 29,520  |            |  |       | 18.3     | % |   |         | 2,273   |   |  |          | 7.7   | % 
|Cost of sales:                   |                                   |             |   |                          |      |   |          |          |  |  |       |          |   |          |           |         |            |  |       |          |   |   |         |         |   |  |          |      
|                                 | Product costs and distribution    |             |   | D                        |      |   |          | 56,212   |  |  |       | 37.5     | % |          |           | 62,742  |            |  |       | 38.8     | % |   |         | (6,530  | ) |  |          | (10.4 | )%
|                                 | Royalties and product development |             |   | E                        |      |   |          | 75,852   |  |  |       | 50.5     | % |          |           | 41,275  |            |  |       | 25.6     | % |   |         | 34,577  |   |  |          | 83.8  | % 
|Research and development expense |                                   |             | F |                          |      |   | 39,693   |          |  |  | 26.4  | %        |   |          | 25,621    |         |            |  | 15.8  | %        |   |   | 14,072  |         |   |  | 54.9     | %    
|Selling and marketing expense    |                                   |             | G |                          |      |   | 57,189   |          |  |  | 38.1  | %        |   |          | 41,159    |         |            |  | 25.5  | %        |   |   | 16,030  |         |   |  | 38.9     | %    
|Administrative expense           |                                   |             | H |                          |      |   | 18,864   |          |  |  | 12.6  | %        |   |          | 15,949    |         |            |  | 9.9   | %        |   |   | 2,915   |         |   |  | 18.3     | %    
|Restructuring and other charges  |                                   |             | I |                          |      |   | 10,784   |          |  |  | 7.2   | %        |   |          | (106      | )       |            |  | (0.1  | )%       |   |   | 10,890  |         |   |  | 10,273.6 | %    
|Interest income                  |                                   |             | J |                          |      |   | 2,449    |          |  |  | 1.6   | %        |   |          | 1,267     |         |            |  | 0.8   | %        |   |   | 1,182   |         |   |  | 93.3     | %    
|Interest expense                 |                                   |             | K |                          |      |   | (3,119   | )        |  |  | (2.1  | )%       |   |          | (1,248    | )       |            |  | (0.8  | )%       |   |   | (1,871  | )       |   |  | 149.9    | %    
|Other (expense) income, net      |                                   |             | L |                          |      |   | (2,040   | )        |  |  | (1.3  | )%       |   |          | 6,395     |         |            |  | 4.0   | %        |   |   | (8,435  | )       |   |  | (131.9   | )%   
|Provision for income taxes       |                                   |             | M |                          |      |   | 1,261    |          |  |  | 0.8   | %        |   |          | 1,314     |         |            |  | 0.8   | %        |   |   | (53     | )       |   |  | (4.0     | )%   
|Preferred stock dividends        |                                   |             | N |                          |      |   | 288      |          |  |  | 0.2   | %        |   |          | 4,799     |         |            |  | 3.0   | %        |   |   | (4,511  | )       |   |  | (94.0    | )%   



|   |                          
|-- | -------------------------
|A. | Consolidated Net Revenues



|                                  |                    |                          |        |         |      |  |      |       |   |   |        |         |  |  |      |       |  
|--------------------------------- | ------------------ | ------------------------ | ------ | ------- | ---- |  | ---- | ----- | - | - | ------ | ------- |  |  | ---- | ----- | -
|                                  |                    | Years Ended December 31, |       
|                                  |                    |                          |       
|                                  |                    | 2005                     |        |         | 2004 | 
|                                  |                    |                          |        |         |      | 
|Sony PlayStation 2 (PS2)        |                    | $                        | 77,590 |         |      |  | 51.7 | %     |   | $ | 97,299 |         |  |  | 60.2 | %    
|Microsoft Xbox                    |                    |                          | 51,570 |         |      |  | 34.4 |       |   |   | 54,889 |         |  |  | 34.0 |      
|Nintendo GameCube (NGC)         |                    |                          | 5,452  |         |      |  | 3.6  |       |   |   | 4,764  |         |  |  | 2.9  |      
|Personal Computer (PC)          |                    |                          | 4,016  |         |      |  | 2.7  |       |   |   |       |         |  |  |     |      
|Nintendo Game Boy Advance (GBA) |                    |                          | 2,333  |         |      |  | 1.6  |       |   |   | 293    |         |  |  | 0.2  |      
|Sony PlayStation Portable (PSP) |                    |                          | 1,729  |         |      |  | 1.2  |       |   |   |       |         |  |  |     |      
|Royalties                         |                    |                          | 6,145  |         |      |  | 4.1  |       |   |   | 3,588  |         |  |  | 2.2  |      
|Other                             |                    |                          | 1,243  |         |      |  | 0.7  |       |   |   | 762    |         |  |  | 0.5  |      
|                                  |                    |                          |        |         |      |  |      |       |   |   |        |        
|                                  | Total Net Revenues |                          | $      | 150,078 |      |  |      | 100.0 | % |   | $      | 161,595 |  |  |      | 100.0 | %
|                                  |                    |                          |        |         |      |  |      |       |   |   |        |        





|   |                            
|-- | ---------------------------
|B. | North American Net Revenues



40



---



##### Table of Contents



Blitz: The League, Mortal Kombat: Shaolin Monks Area 51 Mortal Kombat: Deception, NBA Ballers The
Suffering.






|   |                           
|-- | --------------------------
|C. | International Net Revenues

Area 51, Mortal Kombat: Shaolin Monks L.A. RUSH Mortal Kombat: Deception, The Suffering Psi-Ops:
The Mindgate Conspiracy.


D. and
E.     Cost of Sales


Mortal Kombat: Deception over-the NBA Ballers. NBA Ballers.




|                                                      |       |                          |            |            |      |   |            |            | 
|----------------------------------------------------- | ----- | ------------------------ | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                      |       | Years Ended December 31, |           
|                                                      |       |                          |           
|Description                                           |       | 2005                     |            |            | 2004 |  
|                                                      |       |                          |            |            |      |  
|Amortization of capitalized product development costs |       | $                        | 55,417,000 |            |      | $ | 21,462,000 |           
|Writedowns related to future releases                 |       |                          | 4,366,000  |            |      |   | 9,184,000  |           
|Writedowns related to current releases                |       |                          | 7,691,000  |            |      |   | 384,000    |           
|Writedowns related to cancelled games                 |       |                          |           |            |      |   | 275,000    |           
|                                                      |       |                          |            |            |      |  
|                                                      | Total |                          | $          | 67,474,000 |      |   | $          | 31,305,000 | 
|                                                      |       |                          |            |            |      |  



41



---



##### Table of Contents





|   |                                 
|-- | --------------------------------
|F. | Research and Development Expense



|                                           |  |                          |             |   |      |   |             |  
|------------------------------------------ |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                           |  | Years Ended December 31, |            
|                                           |  |                          |            
|Description                                |  | 2005                     |             |   | 2004 |  
|                                           |  |                          |             |   |      |  
|Gross research and development costs       |  | $                        | 108,735,000 |   |      | $ | 74,293,000  |  
|Research and development costs capitalized |  |                          | (69,042,000 | ) |      |   | (48,672,000 | )
|                                           |  |                          |             |   |      |  
|Research and development expense           |  | $                        | 39,693,000  |   |      | $ | 25,621,000  |  
|                                           |  |                          |             |   |      |  







|   |                              
|-- | -----------------------------
|G. | Selling and Marketing Expense



Mortal Kombat: Deception, PS2 Xbox NGC


42



---



##### Table of Contents





|   |                       
|-- | ----------------------
|H. | Administrative Expense





|   |                                
|-- | -------------------------------
|I. | Restructuring and Other Charges



|                                                       |       |                          |           |            |      |   |          |          |  
|------------------------------------------------------ | ----- | ------------------------ | --------- | ---------- | ---- | - | -------- | -------- | -
|                                                       |       | Years Ended December 31, |          
|                                                       |       |                          |          
|Description                                            |       | 2005                     |           |            | 2004 |  
|                                                       |       |                          |           |            |      |  
|Impairment of fixed and intangible assets and goodwill |       | $                        | 5,416,000 |            |      | $ |         |         
|Impairment of capitalized product development costs    |       |                          | 2,632,000 |            |      |   |         |         
|Lease and long-term commitments and other costs        |       |                          | 1,410,000 |            |      |   | 76,000   |         
|Severance and related costs                            |       |                          | 1,326,000 |            |      |   |         |         
|Reversals of previously accrued charges                |       |                          |          |            |      |   | (182,000 | )       
|                                                       |       |                          |           |            |      |  
|                                                       | Total |                          | $         | 10,784,000 |      |   | $        | (106,000 | )
|                                                       |       |                          |           |            |      |  



|   |                
|-- | ---------------
|J. | Interest Income





|   |                 
|-- | ----------------
|K. | Interest Expense





|   |                            
|-- | ---------------------------
|L. | Other (Expense) Income, net



43



---



##### Table of Contents





|   |                           
|-- | --------------------------
|M. | Provision for Income Taxes





|   |                          
|-- | -------------------------
|N. | Preferred Stock Dividends





| |                        
| | -----------------------
| | 2004 Compared with 2003

year-to


|                                 |                                   |             |   |                          |      |   |          |          |  |  |       |          |   |          |           |        |            |  |       |          |   |   |         |         |   |  |          |       |   
|-------------------------------- | --------------------------------- | ----------- | - | ------------------------ | ---- | - | -------- | -------- |  |  | ----- | -------- | - | -------- | --------- | ------ | ---------- |  | ----- | -------- | - | - | ------- | ------- | - |  | -------- | ----- | --
|                                 |                                   |             |   | Years Ended December 31, |      |   |          |          | 
|                                 |                                   |             |   |                          |      |   |          |          | 
|                                 |                                   | See         |   |                          |      |   | % of Net |          |  |  |       | % of Net |   |          | Increase/ |        |            | 
|                                 |                                   | Explanation |   |                          | 2004 |   |          | Revenues |  |  | 2003  |          |   | Revenues |           |        | (Decrease) |  |       | % Change |  
|                                 |                                   |             |   |                          |      |   |          |          |  |  |       |          |   |          |           |        |            |  |       |          |  
|Consolidated net revenues        |                                   |             | A |                          |      | $ | 161,595  |          |  |  | 100.0 | %        |   | $        | 92,524    |        |            |  | 100.0 | %        |   | $ | 69,071  |         |   |  | 74.7     | %    
|                                 | North American net revenues       |             |   | B                        |      |   |          | 132,075  |  |  |       | 81.7     | % |          |           | 69,154 |            |  |       | 74.7     | % |   |         | 62,921  |   |  |          | 91.0  | % 
|                                 | International net revenues        |             |   | C                        |      |   |          | 29,520   |  |  |       | 18.3     | % |          |           | 23,370 |            |  |       | 25.3     | % |   |         | 6,150   |   |  |          | 26.3  | % 
|Cost of sales:                   |                                   |             |   |                          |      |   |          |          |  |  |       |          |   |          |           |        |            |  |       |          |   |   |         |         |   |  |          |      
|                                 | Product costs and distribution    |             |   | D                        |      |   |          | 62,742   |  |  |       | 38.8     | % |          |           | 47,206 |            |  |       | 51.0     | % |   |         | 15,536  |   |  |          | 32.9  | % 
|                                 | Royalties and product development |             |   | E                        |      |   |          | 41,275   |  |  |       | 25.6     | % |          |           | 66,099 |            |  |       | 71.5     | % |   |         | (24,824 | ) |  |          | (37.6 | )%
|Research and development expense |                                   |             | F |                          |      |   | 25,621   |          |  |  | 15.8  | %        |   |          | 22,809    |        |            |  | 24.7  | %        |   |   | 2,812   |         |   |  | 12.3     | %    
|Selling and marketing expense    |                                   |             | G |                          |      |   | 41,159   |          |  |  | 25.5  | %        |   |          | 35,044    |        |            |  | 37.9  | %        |   |   | 6,115   |         |   |  | 17.4     | %    
|Administrative expense           |                                   |             | H |                          |      |   | 15,949   |          |  |  | 9.9   | %        |   |          | 27,688    |        |            |  | 29.8  | %        |   |   | (11,739 | )       |   |  | (42.4    | )%   
|Restructuring and other charges  |                                   |             | I |                          |      |   | (106     | )        |  |  | (0.1  | )%       |   |          | 9,653     |        |            |  | 10.4  | %        |   |   | (9,759  | )       |   |  | (101.1   | )%   
|Interest income                  |                                   |             | J |                          |      |   | 1,267    |          |  |  | 0.8   | %        |   |          | 751       |        |            |  | 0.8   | %        |   |   | 516     |         |   |  | 68.7     | %    
|Interest expense                 |                                   |             | K |                          |      |   | (1,248   | )        |  |  | (0.8  | )%       |   |          | (70       | )      |            |  | (0.1  | )%       |   |   | (1,178  | )       |   |  | (1,682.9 | )%   
|Other (expense) income, net      |                                   |             | L |                          |      |   | 6,395    |          |  |  | 4.0   | %        |   |          | 1,331     |        |            |  | 1.4   | %        |   |   | 5,064   |         |   |  | 380.5    | %    
|Provision for income taxes       |                                   |             | M |                          |      |   | 1,314    |          |  |  | 0.8   | %        |   |          | 1,264     |        |            |  | 1.3   | %        |   |   | 50      |         |   |  | 4.0      | %    
|Preferred stock dividends        |                                   |             | N |                          |      |   | 4,799    |          |  |  | 3.0   | %        |   |          | 2,707     |        |            |  | 2.9   | %        |   |   | 2,092   |         |   |  | 77.3     | %    

44



---



##### Table of Contents





|   |                          
|-- | -------------------------
|A. | Consolidated Net Revenues



|                          |                    |                          |        |         |      |  |      |       |   |   |        |        |  |  |      |       |  
|------------------------- | ------------------ | ------------------------ | ------ | ------- | ---- |  | ---- | ----- | - | - | ------ | ------ |  |  | ---- | ----- | -
|                          |                    | Years Ended December 31, |       
|                          |                    |                          |       
|                          |                    | 2004                     |        |         | 2003 | 
|                          |                    |                          |        |         |      | 
|Sony PlayStation 2        |                    | $                        | 97,299 |         |      |  | 60.2 | %     |   | $ | 53,292 |        |  |  | 57.6 | %    
|Microsoft Xbox            |                    |                          | 54,889 |         |      |  | 34.0 |       |   |   | 22,804 |        |  |  | 24.6 |      
|Nintendo GameCube         |                    |                          | 4,764  |         |      |  | 2.9  |       |   |   | 8,068  |        |  |  | 8.7  |      
|Nintendo Game Boy Advance |                    |                          | 293    |         |      |  | 0.2  |       |   |   | 4,713  |        |  |  | 5.1  |      
|Royalties                 |                    |                          | 3,588  |         |      |  | 2.2  |       |   |   | 1,051  |        |  |  | 1.1  |      
|Other                     |                    |                          | 762    |         |      |  | 0.5  |       |   |   | 2,596  |        |  |  | 2.9  |      
|                          |                    |                          |        |         |      |  |      |       |   |   |        |       
|                          | Total Net Revenues |                          | $      | 161,595 |      |  |      | 100.0 | % |   | $      | 92,524 |  |  |      | 100.0 | %
|                          |                    |                          |        |         |      |  |      |       |   |   |        |       



|   |                            
|-- | ---------------------------
|B. | North American Net Revenues

Mortal Kombat: Deception. Mortal Kombat: Deception,
NBA Ballers The Suffering MLB SlugFest 20-04 SpyHunter 2 Mortal Kombat: Deadly Alliance.




|   |                           
|-- | --------------------------
|C. | International Net Revenues

Mortal Kombat: Deception, The Suffering Psi-Ops:
The Mindgate Conspiracy Mortal Kombat: Deadly
Alliance, Freestyle Metal X Defender.




|          |              
|--------- | -------------
|D. and E. | Cost of Sales

Mortal Kombat: Deception over-the NBA Ballers


|                                                      |       |                          |            |            |      |   |            |            | 
|----------------------------------------------------- | ----- | ------------------------ | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                      |       | Years Ended December 31, |           
|                                                      |       |                          |           
|Description                                           |       | 2004                     |            |            | 2003 |  
|                                                      |       |                          |            |            |      |  
|Amortization of capitalized product development costs |       | $                        | 21,462,000 |            |      | $ | 23,639,000 |           
|Writedowns related to future releases                 |       |                          | 9,184,000  |            |      |   | 18,187,000 |           
|Writedowns related to current releases                |       |                          | 384,000    |            |      |   | 12,914,000 |           
|Writedowns related to cancelled games                 |       |                          | 275,000    |            |      |   | 2,143,000  |           
|                                                      |       |                          |            |            |      |  
|                                                      | Total |                          | $          | 31,305,000 |      |   | $          | 56,883,000 | 
|                                                      |       |                          |            |            |      |  

45



---



##### Table of Contents







|   |                                 
|-- | --------------------------------
|F. | Research and Development Expense



|                                           |  |                          |             |   |      |   |             |  
|------------------------------------------ |  | ------------------------ | ----------- | - | ---- | - | ----------- | -
|                                           |  | Years Ended December 31, |            
|                                           |  |                          |            
|Description                                |  | 2004                     |             |   | 2003 |  
|                                           |  |                          |             |   |      |  
|Gross research and development costs       |  | $                        | 74,293,000  |   |      | $ | 65,898,000  |  
|Research and development costs capitalized |  |                          | (48,672,000 | ) |      |   | (43,089,000 | )
|                                           |  |                          |             |   |      |  
|Research and development expense           |  | $                        | 25,621,000  |   |      | $ | 22,809,000  |  
|                                           |  |                          |             |   |      |  





|   |                              
|-- | -----------------------------
|G. | Selling and Marketing Expense





|   |                       
|-- | ----------------------
|H. | Administrative Expense





|   |                                
|-- | -------------------------------
|I. | Restructuring and Other Charges



46



---



##### Table of Contents





|                                                    |       |                          |          |          |      |   |           |           | 
|--------------------------------------------------- | ----- | ------------------------ | -------- | -------- | ---- | - | --------- | --------- | 
|                                                    |       | Years Ended December 31, |         
|                                                    |       |                          |         
|Description                                         |       | 2004                     |          |          | 2003 |  
|                                                    |       |                          |          |          |      |  
|Lease and long-term commitments and other costs     |       | $                        | 76,000   |          |      | $ | 2,090,000 |          
|Impairment of capitalized product development costs |       |                          |         |          |      |   | 4,998,000 |          
|Severance costs                                     |       |                          |         |          |      |   | 3,311,000 |          
|Reversals of previously accrued charges             |       |                          | (182,000 | )        |      |   | (746,000  | )        
|                                                    |       |                          |          |          |      |  
|                                                    | Total |                          | $        | (106,000 | )    |   | $         | 9,653,000 | 
|                                                    |       |                          |          |          |      |  



|   |                
|-- | ---------------
|J. | Interest Income





|   |                 
|-- | ----------------
|K. | Interest Expense





|   |                            
|-- | ---------------------------
|L. | Other (Expense) Income, net





|   |                           
|-- | --------------------------
|M. | Provision for Income Taxes





|   |                          
|-- | -------------------------
|N. | Preferred Stock Dividends



Impact of Recently Issued Accounting Pronouncement


Share-Based Payment,


47



---



##### Table of Contents





Liquidity and Capital Resources








Mortal Kombat: Deception, Mortal Kombat: Deception,


48



---



##### Table of Contents













Off Balance Sheet Arrangements and Contractual Obligations




49



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##### Table of Contents





|                                          |  |       |         |                        |        |   |        |       |  |     |        |  |           |         |        |  |  |   |       | 
|----------------------------------------- |  | ----- | ------- | ---------------------- | ------ | - | ------ | ----- |  | --- | ------ |  | --------- | ------- | ------ |  |  | - | ----- | 
|                                          |  |       |         | Payments Due by Period |       
|                                          |  |       |         |                        |       
|                                          |  |       |         | Less Than              |        |   | 1-3    |       |  | 3-5 |        |  | More than |        
|Contractual Obligations                   |  | Total |         |                        | 1 Year |   |        | Years |  |     | Years  |  |           | 5 Years |       
|                                          |  |       |         |                        |        |   |        |       |  |     |        |  |           |         |       
|Long-term debt obligations(1)             |  | $     | 10,277  |                        |        | $ | 3,333  |       |  | $   | 6,667  |  |           | $       | 277    |  |  | $ |      | 
|Interest on long-term debt obligations(2) |  |       | 1,180   |                        |        |   | 634    |       |  |     | 544    |  |           |         | 2      |  |  |   |      | 
|Convertible senior notes(3)               |  |       | 75,000  |                        |        |   |       |       |  |     |       |  |           |         | 75,000 |  |  |   |      | 
|Interest on convertible senior notes(4)   |  |       | 15,000  |                        |        |   | 4,500  |       |  |     | 9,000  |  |           |         | 1,500  |  |  |   |      | 
|Operating lease obligations(5)            |  |       | 10,356  |                        |        |   | 3,679  |       |  |     | 4,253  |  |           |         | 1,310  |  |  |   | 1,114 | 
|Purchase obligations(6)                   |  |       | 62,375  |                        |        |   | 30,980 |       |  |     | 22,075 |  |           |         | 8,160  |  |  |   | 1,160 | 
|Other long-term liabilities(7)            |  |       | 2,179   |                        |        |   | 1,792  |       |  |     | 387    |  |           |         |       |  |  |   |      | 
|                                          |  |       |         |                        |        |   |        |       |  |     |        |  |           |         |       
|Total                                     |  | $     | 176,367 |                        |        | $ | 44,918 |       |  | $   | 42,926 |  |           | $       | 86,249 |  |  | $ | 2,274 | 
|                                          |  |       |         |                        |        |   |        |       |  |     |        |  |           |         |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These obligations are reflected on our consolidated balance
    sheet at December 31, 2005 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 December 31, 2005
    (7.25%). These obligations are not reflected on our consolidated
    balance sheet at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | Assumes convertible senior notes are carried through the date
    the holders can first require redemption of the notes,
    April 30, 2009. These obligations are reflected on our
    consolidated balance sheet at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) | Assumes convertible senior notes are carried through the date
    the holders can first redeem the notes, April 30, 2009. The
    debt bears interest at the fixed rate of 6.00% per annum.
    These obligations are not reflected on our consolidated balance
    sheet at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(5) | These obligations are not reflected on our consolidated balance
    sheet at December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(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 December 31,
    2005.
|   
|(7) | These items are reflected on our consolidated balance sheet at
    December 31, 2005 in current and noncurrent liabilities, as
    appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Impact of Inflation




Seasonality




50



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##### Table of Contents





|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk.



| |                   
| | ------------------
| | Interest Rate Risk









| |                      
| | ---------------------
| | Foreign Currency Risk







|        |                                             
|------- | --------------------------------------------
|Item 8. | Financial Statements and Supplementary Data.





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on Accounting
    and Financial Disclosure.





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Disclosure Controls and Procedures.


13a-15(b)


51



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Internal Control over Financial Reporting.


Management Annual Report on Internal Control over Financial
Reporting.


Changes in Internal Control over Financial Reporting. 13a-15(d)


Item 9B.     Other
Information.




52



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PART III




|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.

Identification of Directors and Executive Officers.


|                             |  |                                                                                                |  |              |                | 
|---------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------ | -------------- | 
|Name and Age                 |  | Position(s) with Midway                                                                        |  | Committee(s) |               
|                             |  |                                                                                                |  |              |               
|David F. Zucker (43)         |  | President and Chief Executive Officer                                                          |  |              |                | 
|Thomas E. Powell (44)        |  | Executive Vice President  Finance, Treasurer and
    Chief Financial Officer                  |  |              |                | 
|Steven M. Allison (38)       |  | Senior Vice President  Marketing and Chief Marketing
    Officer                              |  |              |                | 
|Matthew V. Booty (39)        |  | Senior Vice President  Worldwide Studios                                                      |  |              |                | 
|Deborah K. Fulton (42)       |  | Senior Vice President, Secretary and General Counsel                                           |  |              |                | 
|Miguel Iribarren (39)        |  | Vice President  Publishing                                                                    |  |              |                | 
|James R. Boyle (41)          |  | Vice President  Finance, Controller, Assistant
    Treasurer and Principal Accounting Officer |  |              |                | 
|William C. Bartholomay (77)  |  | Director                                                                                       |  |              | (1); (2)*;(5)  | 
|Peter C. Brown (47)          |  | Director                                                                                       |  |              | (1);           | 
|Joseph A. Califano, Jr. (74) |  | Director                                                                                       |  |              | (1); (3);(4)   | 
|Kenneth D. Cron (49)         |  | Chairman of the Board of Directors                                                             |  |              | (2); (3); (5)* | 
|Shari E. Redstone (51)       |  | Vice Chairwoman of the Board of Directors                                                      |  |              | (2); (3)*;(4)  | 
|Ira S. Sheinfeld (68)        |  | Director                                                                                       |  |              | (4)*           | 
|Robert N. Waxman (69)        |  | Director                                                                                       |  |              | (1)*; (5)      | 






|    |                                                         
|--- | --------------------------------------------------------
|(1) | Member of the Audit Committee                           
|   
|(2) | Member of the Compensation Committee                    
|   
|(3) | Member of the Nominating Committee                      
|   
|(4) | Member of the Corporate Governance Committee            
|   
|(5) | Member of the Special Committee of Independent Directors





| |                         
| | ------------------------
| | Biographical Information

David F. Zucker


53



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Travel Agent Magazine;


Thomas E. Powell


Steven M. Allison


Matthew V. Booty


Deborah K. Fulton


Miguel Iribarren


James R. Boyle


William C. Bartholomay


54



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##### Table of Contents



Peter C. Brown


Joseph A. Califano, Jr.


Kenneth D. Cron


Shari E. Redstone


Ira S. Sheinfeld


Robert N. Waxman, partner-in


Section 16(a) Beneficial Ownership Reporting
Compliance.


55



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##### Table of Contents



Audit Committee Membership.


Audit Committee Financial Expert.


Code of Business Conduct and Ethics.




|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.



SUMMARY COMPENSATION TABLE


|                   |                            |                     |      |                     |            |  |              |            |      |           |                     |         |            |           |        |           |             |  |           |                  |     |  |       |           |  |  |   |        |    
|------------------ | -------------------------- | ------------------- | ---- | ------------------- | ---------- |  | ------------ | ---------- | ---- | --------- | ------------------- | ------- | ---------- | --------- | ------ | --------- | ----------- |  | --------- | ---------------- | --- |  | ----- | --------- |  |  | - | ------ | ---
|                   |                            |                     |      |                     |            |  |              |            |      | Long Term |                     |         |           
|                   |                            |                     |      | Compensation Awards |            |  |             
|                   |                            | Annual Compensation |      |                     |            |  |              |           
|                   |                            |                     |      |                     | Restricted |  |              | Securities |      |           |                    
|Name and           |                            | Fiscal              |      |                     |            |  | Other Annual |            |      | Stock     |                     |         | Underlying |           |        | All Other |            
|Principal Position |                            | Year                |      |                     | Salary ($) |  |              | Bonus ($)  |      |           | Compensation ($)(1) |         |            | Award ($) |        |           | Options (#) |  |           | Compensation ($) |    
|                   |                            |                     |      |                     |            |  |              |            |      |           |                     |         |            |           |        |           |             |  |           |                  |    
|David F. Zucker    |                            |                     | 2005 |                     |            |  | 600,000      |            |      |           |                    |         |            |           | 11,435 |           |             |  | 1,360,800 | (3)              |     |  | 2,334 |           |  |  |  |       
|                   | President and Chief        |                     |      | 2004                |            |  |              | 600,000    |      |           |                     |        |            |           |        | 9,096     |             |  |           |                 |     |  |       | 874,287   |  |  |   |       |    
|                   | Executive Officer(2)       |                     |      | 2003                |            |  |              | 390,000    |      |           |                     | 300,000 | (4)        |           |        | 3,646     |             |  |           | 446,250          | (5) |  |       | 1,825,968 |  |  |   |       |    
|Thomas E. Powell   |                            |                     | 2005 |                     |            |  | 318,032      |            |      |           |                    |         |            |           | 8,174  |           |             |  | 680,400   | (3)              |     |  |      |           |  |  |  |       
|                   | Executive Vice President  |                     |      | 2004                |            |  |              | 304,024    |      |           |                     |        |            |           |        | 6,397     |             |  |           |                 |     |  |       |          |  |  |   |       |    
|                   | Finance, Treasurer and     |                     |      | 2003                |            |  |              | 238,541    | (6)  |           |                     |        |            |           |        | 6,599     |             |  |           |                 |     |  |       | 50,000    |  |  |   |       |    
|                   | Chief Financial Officer    |                     |      |                     |            |  |              |            |      |           |                     |         |            |           |        |           |             |  |           |                  |     |  |       |           |  |  |   |        |    
|Steven M. Allison  |                            |                     | 2005 |                     |            |  | 285,962      |            |      |           |                    |         |            |           |       |           |             |  | 680,400   | (3)              |     |  |      |           |  |  |  |       
|                   | Senior Vice President     |                     |      | 2004                |            |  |              | 275,000    |      |           |                     |        |            |           |        |          |             |  |           |                 |     |  |       |          |  |  |   | 95,525 | (8)
|                   | Marketing and Chief        |                     |      | 2003                |            |  |              | 5,300      |      |           |                     | 15,000  | (9)        |           |        |          |             |  |           |                 |     |  |       | 85,000    |  |  |   |       |    
|                   | Marketing Officer(7)       |                     |      |                     |            |  |              |            |      |           |                     |         |            |           |        |           |             |  |           |                  |     |  |       |           |  |  |   |        |    
|Matthew V. Booty   |                            |                     | 2005 |                     |            |  | 337,423      |            |      |           |                    |         |            |           | 3,974  |           |             |  | 680,400   | (3)              |     |  |      |           |  |  |  |       
|                   | Senior Vice President     |                     |      | 2004                |            |  |              | 299,615    |      |           |                     |        |            |           |        | 4,763     |             |  |           |                 |     |  |       |          |  |  |   |       |    
|                   | Worldwide Studios(10)      |                     |      | 2003                |            |  |              | 236,031    | (11) |           |                     |        |            |           |        | 10,259    |             |  |           |                 |     |  |       | 50,000    |  |  |   |       |    
|Miguel Iribarren   |                            |                     | 2005 |                     |            |  | 224,738      |            |      |           |                    |         |            |           | 10,723 |           |             |  | 453,600   | (3)              |     |  |      |           |  |  |  |       
|                   | Vice President            |                     |      | 2004                |            |  |              | 203,682    |      |           |                     |        |            |           |        | 11,364    |             |  |           |                 |     |  |       |          |  |  |   |       |    
|                   | Publishing(12)             |                     |      | 2003                |            |  |              | 159,028    | (13) |           |                     |        |            |           |        | 8,132     |             |  |           |                 |     |  |       |          |  |  |   |       |    
|Mark S. Beaumont   |                            |                     | 2005 |                     |            |  | 301,725      | (15)       |      |           |                    |         |            |           | 1,605  |           |             |  |          |                  |     |  |      |           |  |  |  |       
|                   | Senior Vice President     |                     |      | 2004                |            |  |              | 273,426    |      |           |                     |        |            |           |        | 6,339     |             |  |           |                 |     |  |       |          |  |  |   |       |    
|                   | Entertainment(14)          |                     |      | 2003                |            |  |              | 256,538    |      |           |                     |        |            |           |        | 63        |             |  |           |                 |     |  |       | 60,000    |  |  |   |       |    






| |     |                                                                                                                                                                                                                                                                                                                                              
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Represents payments made under our Exec-U-Care supplemental
    health care insurance program.                                                                                                                                                                                                                                               
|
| | (2) | Mr. Zucker joined Midway on May 6, 2003.                                                                                                                                                                                                                                                                                                     
|
| | (3) | Represents the fair value of the performance-based restricted
    stock awards granted to key employees on October 6, 2005
    pursuant to the Midway Games Inc. 2005 Long-Term Incentive Plan,
    calculated by multiplying the number of shares awarded by
    $15.12, the closing price of our common stock on the NYSE on
    that date.

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| |     |                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | Represents a $150,000 signing bonus under Mr. Zuckers
    employment agreement, and an additional bonus of $150,000
    received in December 2003.                                                                                                                                                                                              
|
| | (5) | Represents the fair value of the restricted stock award granted
    to Mr. Zucker on May 6, 2003 pursuant to his
    restricted stock agreement, calculated by multiplying the
    125,000 restricted shares of common stock by $3.57, the closing
    price of our common stock on the NYSE on that date. See
    Employment Agreements below.
|
| | (6) | Mr. Powell reduced his fiscal 2003 salary by $61,935 in
    connection with his participation in the salary and director fee
    reduction/stock option program under the 2002 Non-Qualified
    Stock Option Plan.                                                                                                                              
|
| | (7) | Mr. Allison has served as our Senior Vice
    President  Marketing and Chief Marketing Officer
    since December 22, 2003.                                                                                                                                                                                                                     
|
| | (8) | Represents payments of the expenses for Mr. Allisons
    relocation.                                                                                                                                                                                                                                                                            
|
| | (9) | Represents a signing bonus to Mr. Allison under our
    agreement with him dated December 3, 2003.                                                                                                                                                                                                                                               



|     |                                                                                                                                                                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Booty has served as our Senior Vice
    President  Worldwide Studios since June 6, 2005.
    Prior to that, since June 2004, Mr. Booty served as Senior
    Vice President  Product Development.                                                                                  
|    
|(11) | Mr. Booty reduced his fiscal 2003 salary by $24,155 in
    connection with his participation in the salary and director fee
    reduction/stock option program under the 2002 Non-Qualified
    Stock Option Plan.                                                                      
|    
|(12) | Mr. Iribarren has served as our Vice President 
    Publishing since July 13, 2005. Prior to that, since
    February 2002, Mr. Iribarren served as our Vice
    President  Corporate Communications and Strategic
    Planning.                                                      
|    
|(13) | Mr. Iribarren reduced his fiscal 2003 salary by $41,290 in
    connection with his participation in the salary and director fee
    reduction/stock option program under the 2002 Non-Qualified
    Stock Option Plan.                                                                  
|    
|(14) | Mr. Beaumont served as our Senior Vice
    President  Publishing, from January 30, 2002 to
    October 17, 2003. From that date to August 19, 2005,
    he had served as our Senior Vice President 
    Entertainment. Mr. Beaumont left the employ of our company
    in August 2005.
|    
|(15) | Includes continued payments of Mr. Beaumonts regular
    salary totaling $98,307 after Mr. Beaumonts
    termination from Midway in accordance with his severance
    agreement under which he will receive 15 months salary from
    his termination date.                           

57



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Stock Options




OPTION GRANTS IN LAST FISCAL YEAR


|                  |  |                   |       |                    |                 |  |     |                |                  |  |            |  |  |        |          |  |         |  |        |  |  |  |        | 
|----------------- |  | ----------------- | ----- | ------------------ | --------------- |  | --- | -------------- | ---------------- |  | ---------- |  |  | ------ | -------- |  | ------- |  | ------ |  |  |  | ------ | 
|                  |  |                   |       | Value at Assumed   |                
|                  |  | Individual Grants |       |                    | Annual Rates of | 
|                  |  |                   |       |                    | Stock Price     | 
|                  |  |                   |       | % of Total Options |                 |  |     |                | Appreciation for | 
|                  |  |                   |       | Granted to         |                 |  |     |                | Option Term (1)  | 
|                  |  | Shares Underlying |       |                    | Employees in    |  |     | Exercise Price |                  |  | Expiration |  |  |        |         
|Name              |  | Option Granted    |       |                    | Fiscal Year     |  |     | ($/Share)      |                  |  | Date       |  |  | 5% ($) |          |  | 10% ($) | 
|                  |  |                   |       |                    |                 |  |     |                |                  |  |            |  |  |        |          |  |         | 
|David Zucker(2)   |  |                   | 1,067 |                    |                 |  | 1.1 | %              |                  |  | 9.42       |  |  |        | 5/5/2013 |  |         |  | 15,593 |  |  |  | 23,700 | 
|                  |  |                   | 7     |                    |                 |  | *   |                |                  |  | 10.13      |  |  |        | 5/5/2013 |  |         |  | 110    |  |  |  | 167    | 
|                  |  |                   | 33    |                    |                 |  | *   |                |                  |  | 10.38      |  |  |        | 5/5/2013 |  |         |  | 531    |  |  |  | 808    | 
|                  |  |                   | 76    |                    |                 |  | 0.1 | %              |                  |  | 10.20      |  |  |        | 5/5/2013 |  |         |  | 1,203  |  |  |  | 1,828  | 
|                  |  |                   | 584   |                    |                 |  | 0.6 | %              |                  |  | 10.06      |  |  |        | 5/5/2013 |  |         |  | 9,114  |  |  |  | 13,853 | 
|                  |  |                   | 119   |                    |                 |  | 0.1 | %              |                  |  | 10.55      |  |  |        | 5/5/2013 |  |         |  | 1,948  |  |  |  | 2,960  | 
|                  |  |                   | 69    |                    |                 |  | 0.1 | %              |                  |  | 10.46      |  |  |        | 5/5/2013 |  |         |  | 1,120  |  |  |  | 1,702  | 
|                  |  |                   | 285   |                    |                 |  | 0.3 | %              |                  |  | 10.42      |  |  |        | 5/5/2013 |  |         |  | 4,607  |  |  |  | 7,002  | 
|                  |  |                   | 6     |                    |                 |  | *   |                |                  |  | 10.26      |  |  |        | 5/5/2013 |  |         |  | 96     |  |  |  | 145    | 
|                  |  |                   | 61    |                    |                 |  | 0.1 | %              |                  |  | 10.40      |  |  |        | 5/5/2013 |  |         |  | 984    |  |  |  | 1,496  | 
|                  |  |                   | 27    |                    |                 |  | *   |                |                  |  | 9.39       |  |  |        | 5/5/2013 |  |         |  | 393    |  |  |  | 598    | 
|Thomas E. Powell  |  |                   | 0     |                    |                 |  | 0   | %              |                  |  | n/a        |  |  |        | n/a      |  |         |  |       |  |  |  |       | 
|Steven M. Allison |  |                   | 0     |                    |                 |  | 0   | %              |                  |  | n/a        |  |  |        | n/a      |  |         |  |       |  |  |  |       | 
|Matthew V. Booty  |  |                   | 0     |                    |                 |  | 0   | %              |                  |  | n/a        |  |  |        | n/a      |  |         |  |       |  |  |  |       | 
|Miguel Iribarren  |  |                   | 0     |                    |                 |  | 0   | %              |                  |  | n/a        |  |  |        | n/a      |  |         |  |       |  |  |  |       | 
|Mark S. Beaumont  |  |                   | 0     |                    |                 |  | 0   | %              |                  |  | n/a        |  |  |        | n/a      |  |         |  |       |  |  |  |       | 






|  |                
|- | ---------------
|* | Less than 0.1%.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The assumed appreciation rates are examples set by rules
    promulgated under the Securities Exchange Act of 1934 and are
    not related to or derived from the historical or projected
    prices of our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | All of Mr. Zuckers options in 2005 were granted under
    the terms of an option agreement between Mr. Zucker and us
    dated as of May 6, 2003, which provides that, on each
    occasion prior to May 6, 2005 that we issue additional
    shares of our common stock, we grant to Mr. Zucker an
    additional option to purchase shares of our common stock in an
    amount equal to (a) 3.23% of the shares so issued, for
    issuances prior to May 6, 2004, and (b) the percentage
    of the shares so issued (but not to exceed 3.23%) determined by
    dividing (i) the number of shares then issuable under
    unexercised options held by Mr. Zucker immediately prior to
    the issuance by (ii) the number of outstanding shares of
    common stock immediately prior to the issuance, for issuances on
    or after May 6, 2004.

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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR


AND FISCAL YEAR-END OPTION VALUES


|                  |  |              |         |  |              |                        |                         |             |                      |                    |               |  |  |             |           |  |               |  |            |  |  |  |            | 
|----------------- |  | ------------ | ------- |  | ------------ | ---------------------- | ----------------------- | ----------- | -------------------- | ------------------ | ------------- |  |  | ----------- | --------- |  | ------------- |  | ---------- |  |  |  | ---------- | 
|                  |  |              |         |  |              | Number of Securities   |                         |             | Value of Unexercised |                   
|                  |  |              |         |  |              | Underlying Unexercised |                         |             | In-the-Money Options |                   
|                  |  | Shares       |         |  |              |                        | Options at 12/31/05 (#) |             |                      | at 12/31/05 ($)(1) |              
|                  |  | Acquired on  |         |  | Value        |                        |                         |             |                      |                    |               | 
|Name              |  | Exercise (#) |         |  | Realized ($) |                        |                         | Exercisable |                      |                    | Unexercisable |  |  | Exercisable |           |  | Unexercisable | 
|                  |  |              |         |  |              |                        |                         |             |                      |                    |               |  |  |             |           |  |               | 
|David F. Zucker   |  |              | 377,918 |  |              |                        | 4,114,017               |             |                      |                    | 970,539       |  |  |             | 1,004,132 |  |               |  | 13,864,266 |  |  |  | 13,454,513 | 
|Thomas E. Powell  |  |              | 77,500  |  |              |                        | 616,492                 |             |                      |                    |              |  |  |             | 35,000    |  |               |  | 0          |  |  |  | 468,200    | 
|Steven M. Allison |  |              | 42,500  |  |              |                        | 501,369                 |             |                      |                    |              |  |  |             | 42,500    |  |               |  | 0          |  |  |  | 648,125    | 
|Matthew V. Booty  |  |              |        |  |              |                        |                        |             |                      |                    | 61,125        |  |  |             | 45,000    |  |               |  | 701,929    |  |  |  | 597,100    | 
|Miguel Iribarren  |  |              | 15,000  |  |              |                        | 155,070                 |             |                      |                    | 37,500        |  |  |             | 27,500    |  |               |  | 433,575    |  |  |  | 351,675    | 
|Mark S. Beaumont  |  |              | 50,000  |  |              |                        | 387,953                 |             |                      |                    |              |  |  |             |          |  |               |  | 0          |  |  |  | 0          | 






|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(1) | Based on the closing price of our common stock on the NYSE on
    December 30, 2005, which was $18.97 per share.









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EQUITY COMPENSATION PLAN INFORMATION


|                                                   |  |                         |           |  |                           |                         |      |                              |  |  |           | 
|-------------------------------------------------- |  | ----------------------- | --------- |  | ------------------------- | ----------------------- | ---- | ---------------------------- |  |  | --------- | 
|                                                   |  | (a)                     |           |  | (b)                       |                         |      | (c)                          | 
|                                                   |  |                         |           |  |                           | Number of Securities    |     
|                                                   |  |                         |           |  |                           | Remaining Available for |     
|                                                   |  | Number of Securities to |           |  | Weighted-Average Exercise |                         |      | Future Issuance Under Equity | 
|                                                   |  | be Issued upon Exercise |           |  | Price of Outstanding      |                         |      | Compensation Plans           | 
|                                                   |  | of Outstanding Options, |           |  | Options, Warrants and     |                         |      | (Excluding Securities        | 
|Plan Category                                      |  | Warrants and Rights     |           |  | Rights                    |                         |      | Reflected in Column (a))     | 
|                                                   |  |                         |           |  |                           |                         |      |                              | 
|Equity compensation plans approved by stockholders |  |                         | 4,877,080 |  |                           | $                       | 9.65 |                              |  |  | 1,754,475 | 



Senior Employee Bonus Incentive Plan




2005 Long-Term Incentive Plan






Compensation of Directors




60



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##### Table of Contents







Compensation Committee Interlocks and Insider
Participation




Employment Agreements






12-month






| |   |                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the conviction of a felony, or of any other crime involving
    fraud, dishonesty or breach of trust relating to our company or
    Mr. Zuckers employment;                     
|
| |  | Mr. Zuckers failure and refusal to follow a
    reasonable direction of our board of directors after written
    notice of the failure or refusal and a cure period of ten days;

61



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| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the commission of any dishonest or grossly negligent act that
    has or is reasonably likely to have a material adverse effect on
    our company or our customer or trade relationships provided that
    the act was not taken with the approval of our board of
    directors; or
|
| |  | a breach by Mr. Zucker of any material provision of his
    employment agreement, including representations and warranties,
    after written notice and a cure period of ten days.                                                                                                  





| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a breach by us of any material provision of the agreement,
    including representations and warranties, after written notice
    and a cure period of ten days;                                                                
|
| |  | any material diminution or reduction in Mr. Zuckers
    duties, whether in scope or nature, or Mr. Zucker is
    required to report to anyone other than our board of directors
    or any committee of our board of directors;
|
| |  | our board of directors elects an executive officer senior in
    rank to Mr. Zucker; or                                                                                                                                         
|
| |  | our principal place of business is moved more than
    50 miles, and as a result, Mr. Zuckers commute
    to work is increased by more than 50 miles each way.                                                                 





| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | his base salary through his termination date, within
    30 days after the date of termination;                                                                                                                    
|
| |  | within 30 days after we publicly announce our audited
    results for the fiscal year in which the termination occurs, his
    prorated bonus through the date of termination; and                                 
|
| |  | an amount equal to two times his base salary in effect on the
    date of termination, payable 25% on the date of termination, and
    an additional 25% on each of 121 days, 242 days and
    365 days thereafter.









62



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63



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##### Table of Contents







|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management.

Principal Stockholders




|                                     |                                     |                       |            |     |                 |  |      |   | 
|------------------------------------ | ----------------------------------- | --------------------- | ---------- | --- | --------------- |  | ---- | - | 
|                                     |                                     | Number of Shares of   |            |     | Percentage of   | 
|                                     |                                     | Common Stock          |            |     | Outstanding     | 
|Name and Address of Beneficial Owner |                                     | Beneficially Owned(1) |            |     | Common Stock(1) | 
|                                     |                                     |                       |            |     |                 | 
|Sumner M. Redstone                   |                                     |                       | 80,028,766 | (2) |                 |  | 87.6 | %
|                                     | 200 Elm Street
    Dedham, MA 02026 |                       |            |     |                 |  |      |   | 
|National Amusements, Inc.            |                                     |                       | 22,376,979 | (2) |                 |  | 24.5 | %
|                                     | 200 Elm Street
    Dedham, MA 02026 |                       |            |     |                 |  |      |   | 
|Sumco, Inc.                          |                                     |                       | 32,784,673 | (2) |                 |  | 35.9 | %
|                                     | 200 Elm Street
    Dedham, MA 02026 |                       |            |     |                 |  |      |   | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under
    Rule 13d-3(d)(1)
    of the Securities Exchange Act of 1934, shares underlying
    options are deemed to be beneficially owned if the holder of the
    option has the right to acquire beneficial ownership, of the
    underlying shares within 60 days. Percentage calculations
    are based on 91,351,225 shares outstanding on March 9,
    2006.                                                                                                                                                                                                                                                                                       
|   
|(2) | Based upon a Form 4 filed with the SEC by Sumner M.
    Redstone on December 28, 2005. Mr. Redstone reported
    direct ownership of 24,867,114 and indirect ownership through
    NAI (shared voting power) of 22,376,979 and Sumco (shared voting
    power) 32,784,673 shares of our common stock.
    Mr. Redstones shares do not include
    17,500 shares held by his wife, Paula Redstone, with
    respect to which shares Mr. Redstone disclaims beneficial
    ownership. As a result of his stock ownership in NAI and Sumco,
    Mr. Redstone is deemed the beneficial owner of the shares
    of common stock owned by both NAI and Sumco.

Securities Authorized for Issuance Under Equity Compensation
Plans




64



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##### Table of Contents



Security Ownership of Management




|                                                         |  |                       |            |      |                 |  |      |  
|-------------------------------------------------------- |  | --------------------- | ---------- | ---- | --------------- |  | ---- | -
|                                                         |  | Number of Shares of   |            |      | Percentage of   | 
|                                                         |  | Common Stock          |            |      | Outstanding     | 
|Name of Beneficial Owner                                 |  | Beneficially Owned(1) |            |      | Common Stock(1) | 
|                                                         |  |                       |            |      |                 | 
|Steven M. Allison                                        |  |                       | 45,000     |      |                 |  | *    |  
|William C. Bartholomay                                   |  |                       | 141,983    | (2)  |                 |  | *    |  
|Mark S. Beaumont(#)                                      |  |                       | 0          |      |                 |  | 0    | %
|Matthew V. Booty                                         |  |                       | 106,125    | (3)  |                 |  | *    |  
|Peter C. Brown                                           |  |                       | 0          |      |                 |  | 0    | %
|Joseph A. Califano, Jr.                                  |  |                       | 10,000     |      |                 |  | *    |  
|Kenneth D. Cron                                          |  |                       | 0          |      |                 |  | 0    | %
|Miguel Iribarren                                         |  |                       | 80,000     | (4)  |                 |  |      |  
|Thomas E. Powell                                         |  |                       | 55,000     | (5)  |                 |  | *    |  
|Shari E. Redstone                                        |  |                       | 55,171,233 | (6)  |                 |  | 60.4 | %
|Ira S. Sheinfeld                                         |  |                       | 116,864    | (7)  |                 |  | *    |  
|Robert N. Waxman                                         |  |                       | 25,000     | (8)  |                 |  | *    |  
|David F. Zucker                                          |  |                       | 1,268,092  | (9)  |                 |  | 1.4  | %
|Directors and Executive Officers as a Group (15 persons) |  |                       | 57,095,467 | (10) |                 |  | 62.5 | %






| |   |             
| | - | ------------
| | * | Less than 1%



| |     |                                                                     
| | --- | --------------------------------------------------------------------
| | (#) | Mr. Beaumonts employment with us terminated on
    August 19, 2005.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Under
    Rule 13d-3(d)(1)
    of the Securities Exchange Act of 1934, shares underlying
    options are deemed to be beneficially owned if the holder of the
    option has the right to acquire beneficial ownership of the
    underlying shares within 60 days. Percentage calculations
    are based on 91,351,225 shares outstanding on March 9,
    2006 excluding treasury shares.                                                                                                                                                                                                                                            
|
| | (2) | Includes 96,613 shares of common stock underlying stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (3) | Includes 61,125 shares of common stock underlying stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (4) | Includes 50,000 shares of common stock underlying stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (5) | Includes 10,000 shares of common stock underlying stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (6) | Includes 55,161,652 shares (60.4%) owned by NAI and Sumco as of
    March 9, 2006. As a director, President and shareholder of
    NAI, Ms. Redstone may be deemed a beneficial owner of
    NAIs shares of our common stock. Also, as President of
    Sumco, Ms. Redstone has voting and investment power with
    respect to shares of our common stock held by Sumco.                                                                                                                                                                                                                                                            
|
| | (7) | Includes 95,063 shares of common stock underlying stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (8) | Includes 17,000 shares of common stock underlying stock
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (9) | Includes 1,105,174 shares of common stock underlying stock
    options. Also includes 72,918 shares of common stock issued
    under a Restricted Stock Agreement between Mr. Zucker and
    Midway dated as of May 6, 2003. The period of restriction
    on these shares lapses May 1, 2006, if Mr. Zucker
    continues to be employed by us on that date. If
    Mr. Zuckers employment is terminated by us for
    cause or by Mr. Zucker without good
    reason, as these terms are defined in the restricted stock
    agreement, then Mr. Zucker will forfeit the shares for
    which the restrictions have not lapsed.



|     |                                                                                        
|---- | ---------------------------------------------------------------------------------------
|(10) | Includes an aggregate of 1,459,975 shares of common stock
    underlying stock options.

65



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|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.

New Consolidated Subsidiary






Australia Subsidiary Management




Other Related Party Transactions








66



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##### Table of Contents



L.A.
RUSH, L.A. RUSH








|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.



|                      |  |              |           |  |      |   |         | 
|--------------------- |  | ------------ | --------- |  | ---- | - | ------- | 
|                      |  | Years Ended  |          
|                      |  | December 31, |          
|                      |  |              |          
|                      |  | 2005         |           |  | 2004 |  
|                      |  |              |           |  |      |  
|Audit Fees(1)         |  | $            | 1,212,747 |  |      | $ | 604,325 | 
|Audit-Related Fees(2) |  |              | 40,710    |  |      |   | 18,000  | 
|Tax Fees              |  |              | 50,000    |  |      |   |        | 
|All Other Fees        |  |              |          |  |      |   |        | 
|                      |  |              |           |  |      |  
|Total                 |  | $            | 1,303,457 |  |      | $ | 622,325 | 
|                      |  |              |           |  |      |  






|    |                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Comprised of the audit of our annual consolidated financial
    statements, internal control attestation services required in
    2005 and 2004 to comply with the requirements of the
    Sarbanes-Oxley Act, review of financial statements included in
    our Form 10-Qs and
    other services provided by the accountant in connection with
    statutory and regulatory filings.
|   
|(2) | Comprised of 401(K) audit procedures and various other services.                                                                                                                                                                                                                                                                                                                       

67



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| |                                     
| | ------------------------------------
| | Pre-approval Policies and Procedures





| |                                                                    
| | -------------------------------------------------------------------
| | Percentage of Services Approved Under S-X
    Rule 2-01(c)(7)(i)(C)



PART IV




|         |                                          
|-------- | -----------------------------------------
|Item 15. | Exhibits and Financial Statement Schedule

Financial Statements.


Financial Statement Schedule.


Exhibits.


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .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 (the S-1 Registration Statement).
|        | 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 Registrants
    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 an exhibit
    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, initially
    filed on June 10, 2004 (the 6/10/04 S-3).                                                                                                                  
|        | 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          |  | Tax Sharing Agreement dated as of July 1, 1996 among WMS
    Industries Inc., the Registrant, Midway Home Entertainment Inc.,
    Midway Interactive Inc., Atari Games Corporation and Tengen
    Inc., incorporated herein by reference to the S-1
    Registration Statement.                                                                  
|        | 10 | .2          |  | Employment Agreement dated as of July 1, 1996 between Neil
    D. Nicastro and the Registrant, incorporated herein by reference
    to the S-1 Registration Statement.                                                                                                                                                                           
|        | 10 | .3          |  | 1996 Stock Option Plan, incorporated herein by reference to
    the S-1 Registration Statement.                                                                                                                                                                                                                                                  

68



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .4          |  | Old form of Indemnity Agreement authorized to be entered into
    between the Registrant and officers and directors of the
    Registrant, incorporated herein by reference to the S-1
    Registration Statement.                                                                                                                                     
|        | 10 | .5          |  | 1998 Non-Qualified Stock Option Plan, incorporated herein by
    reference to the Registrants Registration Statement on
    Form S-8, filed on June 24, 1998 (File
    No. 333-57583).                                                                                                                                                                
|        | 10 | .6          |  | Letter Agreement dated March 5, 1998 between the Registrant
    and Neil D. Nicastro amending Mr. Nicastros
    Employment Agreement with Midway, incorporated herein by
    reference to the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 1998 (the
    1998 10-K).                                              
|        | 10 | .7          |  | Tax Separation Agreement dated as of April 6, 1998 between
    WMS Industries Inc. and the Registrant, incorporated herein by
    reference to the 1998 10-K.                                                                                                                                                                                          
|        | 10 | .8          |  | 1998 Stock Incentive Plan, incorporated herein by reference to
    the Registrants Registration Statement on Form S-8,
    filed on December 4, 1998 (File No. 333-68373).                                                                                                                                                                            
|        | 10 | .9          |  | 1999 Stock Option Plan, incorporated herein by reference to the
    Registrants Registration Statement on Form S-8, filed
    on March 5, 1999 (File No. 333-73451).                                                                                                                                                                                  
|        | 10 | .10         |  | Employment Agreement dated as of June 1, 1999 between
    Kenneth J. Fedesna and the Registrant, incorporated herein by
    reference to the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 1999.                                                                                                                      
|        | 10 | .11         |  | Letter Agreement dated November 5, 1999 between the
    Registrant and Neil D. Nicastro further amending
    Mr. Nicastros Employment Agreement with the
    Registrant, incorporated herein by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended March 31, 2000.                                      
|        | 10 | .12         |  | Letter Agreement dated May 4, 2000 between the Registrant
    and Neil D. Nicastro further amending Mr. Nicastros
    Employment Agreement with the Registrant, incorporated herein by
    reference to the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 2000 (the
    2000 10-K).                                
|        | 10 | .13         |  | 2000 Non-Qualified Stock Option Plan, incorporated herein by
    reference to the 2000 10-K.                                                                                                                                                                                                                                                           
|        | 10 | .14         |  | Letter Agreement dated as of October 30, 2000 between the
    Registrant and Neil D. Nicastro further amending
    Mr. Nicastros Employment Agreement with the
    Registrant, incorporated by reference to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    September 30, 2000.                                   
|        | 10 | .15         |  | Form of Warrants to purchase common stock of the Registrant,
    issued to Gerard Klauer Mattison & Co., Inc.,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on May 22, 2001.                                                                                                                          
|        | 10 | .16         |  | Tax Separation Agreement Letter dated September 24, 2001
    between the Registrant and WMS Industries Inc., incorporated
    herein by reference to the WMS Industries Inc. Annual Report on
    Form 10-K for the fiscal year ended June 30, 2001.                                                                                                   
|        | 10 | .17         |  | Amendment to 1998 Stock Incentive Plan, incorporated herein by
    reference to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended September 30,
    2001.                                                                                                                                                                
|        | 10 | .18         |  | 2002 Stock Option Plan, incorporated herein by reference to the
    Registrants definitive proxy statement filed on
    December 5, 2001.                                                                                                                                                                                                             
|        | 10 | .19         |  | Letter Agreement dated as of March 21, 2001, between the
    Registrant and Thomas E. Powell regarding Mr. Powells
    employment by the Registrant, incorporated herein by reference
    to the Registrants Transition Report on Form 10-K for
    the six-month transition period ended December 31, 2001.                                         
|        | 10 | .20         |  | 2002 Non-Qualified Stock Option Plan, incorporated herein by
    reference to the Registrants Registration Statement on
    Form S-8, filed on August 26, 2002 (File
    No. 333-98745).                                                                                                                                                              
|        | 10 | .21         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and Thomas E. Powell regarding Mr. Powells
    employment by the Registrant, incorporated herein by reference
    to the Registrants Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002 filed with the SEC on
    March 28, 2003 (the 2002 10-K).

69



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .22         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and Mark S. Beaumont regarding
    Mr. Beaumonts employment by the Registrant,
    incorporated herein by reference to the 2002 10-K.                                                                                                                                                                                                                                                                                               
|        | 10 | .23         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and David W. Nichols regarding
    Mr. Nicholss employment by the Registrant,
    incorporated herein by reference to the 2002 10-K.                                                                                                                                                                                                                                                                                                
|        | 10 | .24         |  | Amendment and Waiver dated as of May 16, 2003, among The
    Registrant, Peconic Fund, Ltd., Smithfield Fiduciary LLC and
    Neil D. Nicastro, incorporated herein by reference to the
    Registrants Current Report on Form 8-K filed on
    May 19, 2003 (the 5/19/03 8-K).                                                                                                                                                                                                                             
|        | 10 | .25         |  | Executive Employment Agreement made as of the 6th day of
    May, 2003, between the Registrant and David Zucker, incorporated
    herein by reference to the Registrants Current Report on
    Form 8-K filed on May 7, 2003 (the
    5/7/03 8-K).                                                                                                                                                                                                                                                          
|        | 10 | .26         |  | Stock Option Agreement made as of the 6th day of May, 2003,
    between the Registrant and David Zucker, incorporated herein by
    reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .27         |  | Stock Option Agreement under 2002 Stock Option Plan made as of
    the 6th day of May, 2003, between the Registrant and David
    Zucker, incorporated herein by reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                  
|        | 10 | .28         |  | Restricted Stock Agreement entered into as of the 6th day
    of May, 2003, between the Registrant and David Zucker,
    incorporated herein by reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .29         |  | Severance Agreement dated as of the 6th day of May, 2003,
    between the Registrant and Neil D. Nicastro, incorporated herein
    by reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .30         |  | Securities Purchase Agreement dated as of May 16, 2003
    among the Registrant and the investors listed on the Schedule of
    Buyers attached thereto, incorporated herein by reference to the
    5/19/03 8-K.                                                                                                                                                                                                                                                                                              
|        | 10 | .31         |  | Xbox Publisher License Agreement dated October 30, 2000
    between Microsoft Licensing Inc. and Midway Home Entertainment
    Inc., incorporated by reference to the Registrants
    Registration Statement on Form S-3, as amended, File
    No. 333-106643, initially filed on June 30, 2003 (the
    June 2003 S-3). (Portions of this exhibit have
    been omitted pursuant to a request for confidential treatment in
    accordance with Rule 406 under the Securities Act of 1933,
    as amended.)
|        | 10 | .32         |  | Amendment to the Xbox Publisher Licensing Agreement effective
    January 31, 2003 between Microsoft Licensing Inc. and
    Midway Home Entertainment Inc., incorporated herein by reference
    to the June 2003 S-3. (Portions of this exhibit have been
    omitted pursuant to a request for confidential treatment in
    accordance with Rule 406 under the Securities Act of 1933,
    as amended.)                                                                                                     
|        | 10 | .33         |  | Confidential License Agreement for Nintendo GameCube dated
    February 19, 2002 between Nintendo of America Inc. and
    Midway Home Entertainment Inc., incorporated herein by reference
    to the June 2003 S-3. (Portions of this exhibit have been
    omitted pursuant to a request for confidential treatment in
    accordance with Rule 406 under the Securities Act of 1933,
    as amended.)                                                                                                       
|        | 10 | .34         |  | PlayStation 2 CD-ROM/ DVD-ROM Licensed Publisher Agreement dated
    April 1, 2002 between Sony Computer Entertainment America
    Inc. and Midway Home Entertainment Inc., incorporated herein by
    reference to the June 2003 S-3. (Portions of this exhibit
    have been omitted pursuant to a request for confidential
    treatment in accordance with Rule 406 under the Securities
    Act of 1933, as amended.)                                                                                     
|        | 10 | .35         |  | PlayStation 2 Licensed Publisher Agreement dated
    November 14, 2000 between Sony Computer Entertainment
    Europe Limited and Midway Games Limited., incorporated herein by
    reference to the June 2003 S-3. (Portions of this exhibit
    have been omitted pursuant to a request for confidential
    treatment in accordance with Rule 406 under the Securities
    Act of 1933, as amended.)                                                                                                        
|        | 10 | .36         |  | Amendment and Exchange Agreement dated as of October 14,
    2003 between the Registrant and Smithfield Fiduciary LLC,
    incorporated herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                                                                                               
|        | 10 | .37         |  | Amendment and Exchange Agreement dated as of October 14,
    2003 between the Registrant and Portside Growth and Opportunity
    Fund, incorporated herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                                                                                   
|        | 10 | .38         |  | Amendment and Exchange Agreement dated as of October 14,
    2003 between the Registrant and Lighthouse LLC, incorporated
    herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                                                                                                         

70



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .39         |  | Registration Rights Agreement dated as of October 14, 2003
    between the Registrant and the investors in the Series D
    stock, incorporated herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                               
|        | 10 | .40         |  | Securities Purchase Agreement dates as of October 14, 2003
    among the Registrant and the investors listed on the Schedule of
    Buyers attached thereto, incorporated herein by reference to the
    10/15/03 8-K.                                                                                                                                                                                                                                 
|        | 10 | .41         |  | Loan and Security Agreement by and among the Registrant,
    specified subsidiaries of the Registrant, the lenders
    signatories thereto, and Wells Fargo Foothill, Inc., dated as of
    March 3, 2004, incorporated herein by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2003 (the
    2003 10-K).                                                                                  
|        | 10 | .42         |  | Continuing Guaranty dated as of March 3, 2004, between the
    Registrant and specified subsidiaries in favor of Wells Fargo
    Foothill, Inc., incorporated herein by reference to the
    2003 10-K.                                                                                                                                                                                                                                                
|        | 10 | .43         |  | Intercompany Subordination Agreement dated as of March 3,
    2004 among the Registrant, specified subsidiaries of the
    Registrant and Wells Fargo Foothill, Inc., incorporated herein
    by reference to the 2003 10-K.                                                                                                                                                                                                                           
|        | 10 | .44         |  | Form of Pledge Agreement dated as of March 3, 2004, between
    the Registrant, specified subsidiaries of the Registrant and
    Wells Fargo Foothill, Inc., incorporated herein by reference to
    the 2003 10-K.                                                                                                                                                                                                                                    
|        | 10 | .45         |  | Xbox Live Distribution Amendment to the Xbox Publisher License
    Agreement entered into as of December 8, 2003 by and among
    Microsoft Licensing, GP and Midway Home Entertainment Inc.
    (Portions of this exhibit have been omitted pursuant to a
    request for confidential treatment in accordance with
    Rule 24b-2 under the Securities Exchange Act of 1934, as
    amended.), incorporated herein by reference to the
    2003 10-K.
|        | 10 | .46         |  | Settlement Agreement dated August 11, 2003 between WMS and
    Midway, incorporated herein by reference to the 2003 10-K.                                                                                                                                                                                                                                                                                                                              
|        | 10 | .47         |  | Waiver, dated as of April 5, 2004, by David F. Zucker,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on April 13, 2004.                                                                                                                                                                                                                                                                                
|        | 10 | .48         |  | Form of Purchase Agreement between Midway and each investor in
    the April 2004 shelf offering, incorporated herein by reference
    to the Registrants Current Report on Form 8-K filed
    on April 13, 2004.                                                                                                                                                                                                                                     
|        | 10 | .49         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Surreal Software, incorporated by reference
    to the Registrants Registration Statement on
    Form S-3, File No. 333-115055, initially filed on
    April 30, 2004.                                                                                                                                                                                          
|        | 10 | .50         |  | Consent and First Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    April 5, 2004, incorporated herein by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2004 (the
    3/31/04 10-Q).                                                                                                                                                
|        | 10 | .51         |  | Second Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of April 14,
    2004, incorporated herein by reference to the 3/31/04 10-Q.                                                                                                                                                                                                                                                              
|        | 10 | .52         |  | Amendment to Stock Option Plans of the Registrant, incorporated
    herein by reference to the 6/10/04 S-3.                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .53         |  | Settlement Agreement and General Release between the Registrant
    and Kenneth J. Fedesna, dated as of July 6, 2004,
    incorporated herein by reference to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2004 (the 6/30/04 10-Q).                                                                                                                                                                         
|        | 10 | .54         |  | Letter Agreement dated as of June 29, 2004 between the
    Registrant and Mr. Nicastro amending the Severance
    Agreement dated May 6, 2003 between the Registrant and
    Mr. Nicastro, incorporated herein by reference to the
    6/30/04 10-Q.                                                                                                                                                                                                   
|        | 10 | .55         |  | Third Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of August 30,
    2004, incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on September 3, 2004.                                                                                                                                                                                                    
|        | 10 | .56         |  | Fourth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of
    September 15, 2004, incorporated herein by reference to the
    Registrants Current Report on Form 8-K filed on
    September 20, 2004.                                                                                                                                                                                           

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .57         |  | Letter Agreement entered into as of September 20, 2004
    amending the
    PlayStation®2
    CD-ROM/ DVD-ROM Licensed Publisher Agreement effective as of
    April 1, 2000 between Sony Computer Entertainment America
    Inc. and Midway Home Entertainment Inc., incorporated herein by
    reference to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended on
    September 30, 2004 (the 9/30/2004 10-Q).
    (Portions of this exhibit have been omitted pursuant to a
    request for confidential treatment in accordance with
    Rule 24b-2 under the Securities Exchange Act of 1934, as
    amended.)
|        | 10 | .58         |  | Fifth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of October 5,
    2004, incorporated herein by reference to the
    9/30/2004 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .59         |  | First Amendment made as of October 18, 2004, to Restricted
    Stock Agreement entered into as of May 6, 2003 between the
    Registrant and David F. Zucker, incorporated herein by reference
    to the 9/30/2004 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .60         |  | Sixth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of November 1,
    2004, incorporated herein by reference to the
    9/30/2004 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .61         |  | 2000 Stock Option/ Stock Issuance Plan for Midway
    Studios  Austin Inc. and Form of Option Agreement,
    incorporated herein by reference to the Registrants
    Registration Statement on Form S-8, File
    No. 333-120347, filed on November 10, 2004.                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .62         |  | Term Extensions to Xbox Publisher License Agreement,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on November 18, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .63         |  | Letter Agreement, signed November 19, 2004, between the
    Registrant and WMS Industries terminating tax agreements,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on November 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .64         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Midway Studios  Austin Inc.,
    incorporated by reference to the Registrants Registration
    Statement on Form S-3, File No. 333-120952, initially
    filed on December 2, 2004.                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .65         |  | Seventh Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of November 1,
    2004, incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on November 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .66         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Inevitable Entertainment, incorporated by
    reference to the Registrants Registration Statement on
    Form S-3, File No. 333-120952, initially filed on
    December 2, 2004.                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .67         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Paradox Development, incorporated by
    reference to the Registrants Registration Statement on
    Form S-3, File No. 333-121523, initially filed on
    December 22, 2004.                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .68         |  | Restricted Stock Agreement between the Registrant and Christine
    Hsu, dated as of November 23, 2004, incorporated by
    reference to Amendment No. 1 to the Registrants
    Registration Statement on Form S-3, File
    No. 333-121523, filed on January 31, 2004.                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .69         |  | 2004 Form of Indemnity Agreement authorized to be entered into
    between the Registrant and officers and directors of the
    Registrant, incorporated herein by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2004 (the
    2004 10-K).                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .70         |  | Eighth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of
    December 28, 2004,incorporated herein by reference to the
    2004 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .71         |  | Ninth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of January 19,
    2005, incorporated herein by reference to the 2004 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .72         |  | Form of Stock Option Agreement used currently by the Registrant
    for directors under its stock option plans, incorporated herein
    by reference to the 2004 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .73         |  | Form of Stock Option Agreement used currently by the Registrant
    for employees under its stock option plans, incorporated herein
    by reference to the 2004 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .74         |  | Amended and Restated Midway Incentive Plan, incorporated herein
    by reference to the 2004 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .75         |  | Amendment to the
    XboxtmPublisher Licensing Agreement dated as of
    January 10, 2005 between Microsoft Licensing, GP and Midway
    Home Entertainment, Inc., incorporated herein by reference to
    the Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended on March 31, 2005 (the
    3/31/2005 10-Q), (portions of this exhibit have
    been omitted pursuant to a request for confidential treatment in
    accordance with Rule 24b-2 under the Securities Exchange
    Act, as amended).
|        | 10 | .76         |  | Amendment to the
    XboxtmPublisher Licensing Agreement dated as of
    March 1, 2005 between Microsoft Licensing, GP and Midway
    Home Entertainment, Inc., incorporated herein by reference to
    the 3/31/2005 10-Q, (portions of this exhibit have been
    omitted pursuant to a request for confidential treatment in
    accordance with Rule 24b-2 under the Securities Exchange
    Act, as amended).                                                                                                             
|        | 10 | .77         |  | Tenth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of March 11. 2005,
    incorporated herein by reference to the 3/31/2005 10-Q.                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .78         |  | Eleventh Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of April 26,
    2005, incorporated herein by reference to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    on June 30, 2005 (the 6/30/2005 10-Q).                                                                                                                                                                                                                         
|        | 10 | .79         |  | 2005 Long-Term Incentive Plan, incorporated herein by reference
    to the Registrants Registration Statement on
    Form S-8, filed on June 15, 2005 (File
    No. 333-125830).                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .80         |  | Form of Stock Option Agreement used currently by the Registrant
    for employees under its 2005 Long-Term Incentive Plan,
    incorporated herein by reference to the 6/30/2005 10-Q.                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .81         |  | Separation Agreement by and between the Registrant and Mark S.
    Beaumont, dated as of July 28, 2005 and effective as of
    August 19, 2005, incorporated herein by reference to the
    Registrants Current Report on Form 8-K filed on
    August 5, 2005.                                                                                                                                                                                                                                                               
|        | 10 | .82         |  | Twelfth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of August 4,
    2005, incorporated herein by reference to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    on September 30, 2005 (the 9/30/2005 10-Q).                                                                                                                                                                                                                     
|        | 10 | .83         |  | Purchase Agreement, dated as of September 13, 2005, among
    Midway and the Initial Purchasers, incorporated herein by
    reference to the Registrants Current Report on
    Form 8-K filed on September 19, 2005 (the
    9/19/2005 8-K).                                                                                                                                                                                                                                                                                
|        | 10 | .84         |  | Indenture, dated as of September 19, 2005, between the
    Registrant and Wells Fargo Bank, National Association,
    incorporated herein by reference to the 9/19/2005 8-K).                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .85         |  | Registration Rights Agreement, dated as of September 19,
    2005 between the Registrant and Banc of America Securities, LLC,
    as representative of the Initial Purchasers, incorporated herein
    by reference to the 9/19/2005 8-K.                                                                                                                                                                                                                                                                                      
|        | 10 | .86         |  | Consent and Thirteenth Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    September 19, 2005, incorporated herein by reference to the
    9/19/2005 8-K.                                                                                                                                                                                                                                                                                                             
|        | 10 | .87         |  | Form of Restricted Stock Agreement used currently by the
    Registrant for management under its 2005 Long-Term Incentive
    Plan, incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on October 7, 2005.                                                                                                                                                                                                                                                                              
|        | 10 | .88         |  | Consent and Fourteenth Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    October 3, 2005.                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .89         |  | Waiver, Consent and Fifteenth Amendment to Loan and Security
    Agreement between the Registrant and Wells Fargo Foothill dated
    as of October 17, 2005.                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .90         |  | Consent and Sixteenth Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    November 3, 2005.                                                                                                                                                                                                                                                                                                                                                                           
|        | 10 | .91         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and Miguel Iribarren regarding
    Mr. Iribarrens employment by the Registrant.                                                                                                                                                                                                                                                                                                                                                                     
|        | 21 |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 23 |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|        |    |             |  |                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 31 |             |  | Certifications of Chief Executive Officer and Chief Financial
    Officer Pursuant to Rule 13a-14(a) under the Securities
    Exchange Act of 1934, as amended, 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.                                                  

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75



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##### 










MIDWAY GAMES INC.


INDEX TO FINANCIAL INFORMATION


|                                                                                                                                 |  |          |      | 
|-------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---- | 
|                                                                                                                                 |  | Page No. |     
|                                                                                                                                 |  |          |     
|Financial Statements and Financial Statement Schedule                                                                            |  |          |      | 
|Management Annual Report on Internal
    Control over Financial Reporting                                                        |  |          | F-2  | 
|Reports of Independent Registered Public
    Accounting Firm                                                                     |  |          | F-3  | 
|Consolidated Balance Sheets at
    December 31, 2005 and 2004                                                                    |  |          | F-5  | 
|Consolidated Statements of Operations for
    the years ended December 31, 2005, 2004 and 2003                                   |  |          | F-6  | 
|Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 31,
    2005, 2004 and 2003          |  |          | F-7  | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2005, 2004 and 2003                                   |  |          | F-8  | 
|Notes to Consolidated Financial
    Statements                                                                                   |  |          | F-9  | 
|Financial Statement
    Schedule II  Valuation and Qualifying Accounts
    for the years ended December 31, 2005, 2004 and 2003 |  |          | F-38 | 
|Consent and Amendment to Loan and Security Agreement                                                                            
|Waive, Consent and Amendment to Loan and Security Agreement                                                                     
|Consent and Amendment to Loan and Security Agreement                                                                            
|Letter Agreement                                                                                                                
|Subsidiaries                                                                                                                    
|Consent of Ernst & Young LLP                                                                                                    
|Certification                                                                                                                   
|Certification                                                                                                                   





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##### Table of Contents






MANAGEMENT ANNUAL REPORT ON INTERNAL CONTROL


OVER FINANCIAL REPORTING


13a-15(f) 15d-15(f)


Internal Control 
Integrated Framework.




F-4.


F-2



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





F-3



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING




















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





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##### Table of Contents



MIDWAY GAMES INC.





CONSOLIDATED BALANCE SHEETS


|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |   |         |          |  
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | -------- | ---- | - | ------- | -------- | -
|                                           |                                                                                                                                                                                                                                                               | December 31,                |        
|                                           |                                                                                                                                                                                                                                                               |                             |        
|                                           |                                                                                                                                                                                                                                                               | 2005                        |         |          | 2004 |  
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|                                           |                                                                                                                                                                                                                                                               | (In thousands, except share |        
|                                           |                                                                                                                                                                                                                                                               | and per share amounts)      |        
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                                                                                                               |                             |         |          |      |   |         |         
|                                           | Cash and cash equivalents                                                                                                                                                                                                                                     |                             | $       | 98,376   |      |   | $       | 118,313  |  
|                                           | Receivables, less allowances of $16,130 and $8,836 at 2005 and
    2004, respectively                                                                                                                                                                         |                             |         | 30,835   |      |   |         | 15,545   |  
|                                           | Inventories                                                                                                                                                                                                                                                   |                             |         | 5,811    |      |   |         | 6,893    |  
|                                           | Capitalized product development costs                                                                                                                                                                                                                         |                             |         | 27,570   |      |   |         | 27,850   |  
|                                           | Prepaid expenses and other current assets                                                                                                                                                                                                                     |                             |         | 16,134   |      |   |         | 6,749    |  
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|Total current assets                       |                                                                                                                                                                                                                                                               |                             | 178,726 |          |      |   | 175,350 |         
|                                           | Capitalized product development costs                                                                                                                                                                                                                         |                             |         | 25       |      |   |         | 809      |  
|                                           | Property and equipment, net                                                                                                                                                                                                                                   |                             |         | 19,049   |      |   |         | 15,470   |  
|                                           | Goodwill                                                                                                                                                                                                                                                      |                             |         | 41,108   |      |   |         | 39,533   |  
|                                           | Other assets                                                                                                                                                                                                                                                  |                             |         | 9,355    |      |   |         | 11,155   |  
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|Total assets                               |                                                                                                                                                                                                                                                               | $                           | 248,263 |          |      | $ | 242,317 |         
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|Current liabilities:                       |                                                                                                                                                                                                                                                               |                             |         |          |      |   |         |         
|                                           | Accounts payable                                                                                                                                                                                                                                              |                             | $       | 12,431   |      |   | $       | 6,673    |  
|                                           | Accrued compensation and related benefits                                                                                                                                                                                                                     |                             |         | 4,060    |      |   |         | 5,183    |  
|                                           | Accrued royalties                                                                                                                                                                                                                                             |                             |         | 3,938    |      |   |         | 3,493    |  
|                                           | Accrued selling and marketing                                                                                                                                                                                                                                 |                             |         | 4,418    |      |   |         | 3,525    |  
|                                           | Current portion of long-term debt                                                                                                                                                                                                                             |                             |         | 3,333    |      |   |         | 3,333    |  
|                                           | Other accrued liabilities                                                                                                                                                                                                                                     |                             |         | 13,824   |      |   |         | 11,249   |  
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|Total current liabilities                  |                                                                                                                                                                                                                                                               |                             | 42,004  |          |      |   | 33,456  |         
|                                           | Convertible senior notes                                                                                                                                                                                                                                      |                             |         | 75,000   |      |   |         |         |  
|                                           | Long-term debt                                                                                                                                                                                                                                                |                             |         | 6,944    |      |   |         | 10,278   |  
|                                           | Deferred income taxes                                                                                                                                                                                                                                         |                             |         | 8,086    |      |   |         | 6,773    |  
|                                           | Other noncurrent liabilities                                                                                                                                                                                                                                  |                             |         | 784      |      |   |         | 340      |  
|                                           | Redeemable convertible preferred stock, Series D,
    $0.01 par value, 4,750 shares authorized and
    designated; 0 and 446 shares issued and outstanding at 2005
    and 2004, respectively; redeemable at $0 and $4,460 at 2005 and
    2004, respectively |                             |         |         |      |   |         | 4,453    |  
|Stockholders 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; 92,233,807 and 87,883,494 shares issued at 2005
    and 2004, respectively                                                                                                                  |                             |         | 922      |      |   |         | 879      |  
|                                           | Additional paid-in capital                                                                                                                                                                                                                                    |                             |         | 431,273  |      |   |         | 392,177  |  
|                                           | Accumulated deficit                                                                                                                                                                                                                                           |                             |         | (303,099 | )    |   |         | (190,612 | )
|                                           | Accumulated translation adjustment                                                                                                                                                                                                                            |                             |         | (439     | )    |   |         | (1,420   | )
|                                           | Deferred compensation                                                                                                                                                                                                                                         |                             |         | (3,610   | )    |   |         | (4,379   | )
|                                           | Treasury stock, at cost, 1,093,627 and 1,096,646 shares at
    2005 and 2004, respectively                                                                                                                                                                    |                             |         | (9,602   | )    |   |         | (9,628   | )
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|Total stockholders equity                 |                                                                                                                                                                                                                                                               |                             | 115,445 |          |      |   | 187,017 |         
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  
|Total liabilities and stockholders equity |                                                                                                                                                                                                                                                               | $                           | 248,263 |          |      | $ | 242,317 |         
|                                           |                                                                                                                                                                                                                                                               |                             |         |          |      |  



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##### Table of Contents



MIDWAY GAMES INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                 |                                   |                                          |          |        |      |   |         |        |  |   |          |        | 
|------------------------------------------------ | --------------------------------- | ---------------------------------------- | -------- | ------ | ---- | - | ------- | ------ |  | - | -------- | ------ | 
|                                                 |                                   | Years Ended December 31,                 |         
|                                                 |                                   |                                          |         
|                                                 |                                   | 2005                                     |          |        | 2004 |   |         | 2003   | 
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|                                                 |                                   | (In thousands, except per share amounts) |         
|Net revenues                                     |                                   | $                                        | 150,078  |        |      | $ | 161,595 |        |  | $ | 92,524   |       
|Cost of sales                                    |                                   |                                          |          |        |      |   |         |        |  |   |          |       
|                                                 | Product costs and distribution    |                                          |          | 56,212 |      |   |         | 62,742 |  |   |          | 47,206 | 
|                                                 | Royalties and product development |                                          |          | 75,852 |      |   |         | 41,275 |  |   |          | 66,099 | 
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Total cost of sales                              |                                   |                                          | 132,064  |        |      |   | 104,017 |        |  |   | 113,305  |       
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Gross profit (loss)                              |                                   |                                          | 18,014   |        |      |   | 57,578  |        |  |   | (20,781  | )     
|Research and development expense                 |                                   |                                          | 39,693   |        |      |   | 25,621  |        |  |   | 22,809   |       
|Selling and marketing expense                    |                                   |                                          | 57,189   |        |      |   | 41,159  |        |  |   | 35,044   |       
|Administrative expense                           |                                   |                                          | 18,864   |        |      |   | 15,949  |        |  |   | 27,688   |       
|Restructuring and other charges                  |                                   |                                          | 10,784   |        |      |   | (106    | )      |  |   | 9,653    |       
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Operating loss                                   |                                   |                                          | (108,516 | )      |      |   | (25,045 | )      |  |   | (115,975 | )     
|Interest income                                  |                                   |                                          | 2,449    |        |      |   | 1,267   |        |  |   | 751      |       
|Interest expense                                 |                                   |                                          | (3,119   | )      |      |   | (1,248  | )      |  |   | (70      | )     
|Other (expense) income, net                      |                                   |                                          | (2,040   | )      |      |   | 6,395   |        |  |   | 1,331    |       
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Loss before income taxes                         |                                   |                                          | (111,226 | )      |      |   | (18,631 | )      |  |   | (113,963 | )     
|Provision for income taxes                       |                                   |                                          | 1,261    |        |      |   | 1,314   |        |  |   | 1,264    |       
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Net loss                                         |                                   |                                          | (112,487 | )      |      |   | (19,945 | )      |  |   | (115,227 | )     
|Preferred stock dividends:                       |                                   |                                          |          |        |      |   |         |        |  |   |          |       
|                                                 | Distributed                       |                                          |          | 282    |      |   |         | 1,884  |  |   |          | 1,455  | 
|                                                 | Imputed                           |                                          |          | 6      |      |   |         | 2,915  |  |   |          | 1,252  | 
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Loss applicable to common stock                  |                                   | $                                        | (112,775 | )      |      | $ | (24,744 | )      |  | $ | (117,934 | )     
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Basic and diluted loss per share of common stock |                                   | $                                        | (1.30    | )      |      | $ | (0.34   | )      |  | $ | (2.43    | )     
|                                                 |                                   |                                          |          |        |      |   |         |        | 
|Average number of shares outstanding             |                                   |                                          | 86,937   |        |      |   | 72,421  |        |  |   | 48,486   |       
|                                                 |                                   |                                          |          |        |      |   |         |        | 



F-6



---



##### Table of Contents



MIDWAY GAMES INC.





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY


|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          |        |  
|------------------------------------------------------------------------------------------------------- | ----------- | -------------- | ------ | - | ---------- | - | --- | ------- |  | ---------- | ----------- | ------ | - | ----------- | -------- | - | ------------ | ----- | ------ | -------- |  | - | ------------- | - |  | - | ------- | - |  | - | -------- | ------ | -
|                                                                                                        |             | Common Stock   |        |   |            |   |     |         |  |            |             |        |   |             |         
|                                                                                                        |             |                |        |   | Additional |   |     |         |  | Cumulative |             |        |   |             | Treasury |   |              | Total |       
|                                                                                                        |             | Number         |        |   | Par        |   |     | Paid-In |  |            | Accumulated |        |   | Translation |          |   | Deferred     |       |        | Stock At |  |   | Stockholders |  
|                                                                                                        |             | of Shares      |        |   | Value      |   |     | Capital |  |            | Deficit     |        |   | Adjustment  |          |   | Compensation |       |        | Cost     |  |   | Equity        |  
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|                                                                                                        |             | (In thousands) |       
|Balance at December 31, 2002                                                                            |             |                | 49,399 |   |            | $ | 494 |         |  | $          | 221,074     |        |   | $           | (55,440  | ) |              | $     | (436   | )        |  | $ |              |   |  | $ | (25,725 | ) |  | $ | 139,967  |       
|Net loss                                                                                                |             |                |        |   |            |   |     |         |  |            |             |        |   |             | (115,227 | ) |              |       |        |          |  |   |               |   |  |   |         |   |  |   | (115,227 | )     
|Translation adjustment                                                                                  |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       | (483   | )        |  |   |               |   |  |   |         |   |  |   | (483     | )     
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|Comprehensive loss                                                                                      |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | (115,710 | )     
|Stock option expense                                                                                    |             |                |        |   |            |   |     |         |  |            | 358         |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 358      |       
|Sale of common stock                                                                                    |             |                | 9,318  |   |            |   | 93  |         |  |            | 23,364      |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 23,457   |       
|Issuance of restricted common stock                                                                     |             |                | 125    |   |            |   | 1   |         |  |            | 445         |        |   |             |          |   |              |       |        |          |  |   | (446          | ) |  |   |         |   |  |   |         |       
|Amortization of restricted stock deferred compensation                                                  |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   | 99            |   |  |   |         |   |  |   | 99       |       
|Dividend on Series B preferred stock                                                                    |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          |       
|                                                                                                        | Distributed |                |        |   |            |   |     |         |  |            |             | (192   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (192   | )
|                                                                                                        | Imputed     |                |        |   |            |   |     |         |  |            |             | (554   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (554   | )
|Dividend on Series C preferred stock                                                                    |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          |       
|                                                                                                        | Distributed |                |        |   |            |   |     |         |  |            |             | (833   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (833   | )
|                                                                                                        | Imputed     |                |        |   |            |   |     |         |  |            |             | (442   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (442   | )
|Proceeds from sale of Series C preferred stock allocated to
    warrants and options to purchase        |             |                |        |   |            |   |     |         |  |            | 2,178       |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 2,178    |       
|Dividend on Series D preferred stock                                                                    |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          |       
|                                                                                                        | Distributed |                |        |   |            |   |     |         |  |            |             | (430   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (430   | )
|                                                                                                        | Imputed     |                |        |   |            |   |     |         |  |            |             | (256   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (256   | )
|Exchange of Series C warrants and options to purchase for
    Series D warrants and options to purchase |             |                |        |   |            |   |     |         |  |            | 251         |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 251      |       
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|Balance at December 31, 2003                                                                            |             |                | 58,842 |   |            |   | 588 |         |  |            | 244,963     |        |   |             | (170,667 | ) |              |       | (919   | )        |  |   | (347          | ) |  |   | (25,725 | ) |  |   | 47,893   |       
|Net loss                                                                                                |             |                |        |   |            |   |     |         |  |            |             |        |   |             | (19,945  | ) |              |       |        |          |  |   |               |   |  |   |         |   |  |   | (19,945  | )     
|Translation adjustment                                                                                  |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       | (501   | )        |  |   |               |   |  |   |         |   |  |   | (501     | )     
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|Comprehensive loss                                                                                      |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | (20,446  | )     
|Stock option expense                                                                                    |             |                |        |   |            |   |     |         |  |            | 410         |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 410      |       
|Sale of common stock                                                                                    |             |                | 11,350 |   |            |   | 114 |         |  |            | 78,185      |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 78,299   |       
|Exercise of common stock options                                                                        |             |                | 4,229  |   |            |   | 42  |         |  |            | 24,132      |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   | 134     |   |  |   | 24,308   |       
|Exercise of common stock warrants                                                                       |             |                | 1,141  |   |            |   | 11  |         |  |            | 4,267       |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 4,278    |       
|Issuance of stock for acquisitions                                                                      |             |                | 540    |   |            |   | 5   |         |  |            | 5,199       |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   | 4,845   |   |  |   | 10,049   |       
|Conversion of Series D preferred stock                                                                  |             |                | 11,644 |   |            |   | 117 |         |  |            | 43,587      |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 43,704   |       
|Issuance of restricted common stock                                                                     |             |                | 137    |   |            |   | 2   |         |  |            | 1,720       |        |   |             |          |   |              |       |        |          |  |   | (5,363        | ) |  |   | 3,641   |   |  |   |         |       
|Amortization of restricted stock deferred compensation                                                  |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   | 1,331         |   |  |   |         |   |  |   | 1,331    |       
|Treasury shares issued pursuant to payment of retirement benefits                                       |             |                |        |   |            |   |     |         |  |            | (5,487      | )      |   |             |          |   |              |       |        |          |  |   |               |   |  |   | 7,477   |   |  |   | 1,990    |       
|Dividend on Series D preferred stock                                                                    |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          |       
|                                                                                                        | Distributed |                |        |   |            |   |     |         |  |            |             | (1,884 | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (1,884 | )
|                                                                                                        | Imputed     |                |        |   |            |   |     |         |  |            |             | (2,915 | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (2,915 | )
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|Balance at December 31, 2004                                                                            |             |                | 87,883 |   |            |   | 879 |         |  |            | 392,177     |        |   |             | (190,612 | ) |              |       | (1,420 | )        |  |   | (4,379        | ) |  |   | (9,628  | ) |  |   | 187,017  |       
|Net loss                                                                                                |             |                |        |   |            |   |     |         |  |            |             |        |   |             | (112,487 | ) |              |       |        |          |  |   |               |   |  |   |         |   |  |   | (112,487 | )     
|Translation adjustment                                                                                  |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       | 981    |          |  |   |               |   |  |   |         |   |  |   | 981      |       
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|Comprehensive loss                                                                                      |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | (111,506 | )     
|Exercise of common stock options                                                                        |             |                | 2,465  |   |            |   | 25  |         |  |            | 24,401      |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   | 92      |   |  |   | 24,518   |       
|Exercise of common stock warrants                                                                       |             |                | 124    |   |            |   | 1   |         |  |            | 1,311       |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 1,312    |       
|Issuance of stock for acquisitions                                                                      |             |                | 493    |   |            |   | 5   |         |  |            | 6,557       |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 6,562    |       
|Conversion of Series D preferred stock                                                                  |             |                | 1,121  |   |            |   | 11  |         |  |            | 4,587       |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   | 4,598    |       
|Issuance of restricted common stock                                                                     |             |                | 150    |   |            |   | 1   |         |  |            | 2,561       |        |   |             |          |   |              |       |        |          |  |   | (2,562        | ) |  |   |         |   |  |   |         |       
|Forfeiture of restricted common stock                                                                   |             |                | (2     | ) |            |   |     |         |  |            | (33         | )      |   |             |          |   |              |       |        |          |  |   | 99            |   |  |   | (66     | ) |  |   |         |       
|Amortization of restricted stock deferred compensation                                                  |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   | 3,232         |   |  |   |         |   |  |   | 3,232    |       
|Dividend on Series D preferred stock                                                                    |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          |       
|                                                                                                        | Distributed |                |        |   |            |   |     |         |  |            |             | (282   | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (282   | )
|                                                                                                        | Imputed     |                |        |   |            |   |     |         |  |            |             | (6     | ) |             |          |   |              |       |        |          |  |   |               |   |  |   |         |   |  |   |          | (6     | )
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  
|Balance at December 31, 2005                                                                            |             |                | 92,234 |   |            | $ | 922 |         |  | $          | 431,273     |        |   | $           | (303,099 | ) |              | $     | (439   | )        |  | $ | (3,610        | ) |  | $ | (9,602  | ) |  | $ | 115,445  |       
|                                                                                                        |             |                |        |   |            |   |     |         |  |            |             |        |   |             |          |   |              |       |        |          |  |   |               |  



F-7



---



##### Table of Contents



MIDWAY GAMES INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |        |         |   |          |        |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------- | -------- | ------ | ------- | - | ------- | ------ | ------- | - | -------- | ------ | ------- | -
|                                                 |                                                                                 | Years Ended December 31,                                                        |                                          
|                                                 |                                                                                 |                                                                                 |                                          
|                                                 |                                                                                 | 2005                                                                            |                                           |          | 2004   |         |   | 2003    |       
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 |                                                                                 | (In thousands)                                                                  |                                          
|OPERATING ACTIVITIES                             |                                                                                 |                                                                                 |                                           |          |        |         |   |         |        |         |   |         
|                                                 | Net loss                                                                        |                                                                                 | $                                         | (112,487 | )      |         | $ | (19,945 | )      |         | $ | (115,227 | )     
|                                                 | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                                 |                                           |          |        |         |   |         |        |         |   |          |       
|                                                 |                                                                                 | Depreciation and amortization                                                   |                                           |          | 7,200  |         |   |         | 5,892  |         |   |          | 7,872  |        
|                                                 |                                                                                 | Receivables provision                                                           |                                           |          | 27,342 |         |   |         | 16,456 |         |   |          | 16,114 |        
|                                                 |                                                                                 | Amortization of capitalized product development costs, including
    writedowns |                                           |          | 70,106 |         |   |         | 31,305 |         |   |          | 60,558 |        
|                                                 |                                                                                 | Deferred income taxes                                                           |                                           |          | 1,313  |         |   |         | 1,314  |         |   |          | 1,314  |        
|                                                 |                                                                                 | Stock-based compensation expense                                                |                                           |          | 3,232  |         |   |         | 1,741  |         |   |          | 457    |        
|                                                 |                                                                                 | Loss on disposal of property and equipment                                      |                                           |          | 69     |         |   |         | 61     |         |   |          | 298    |        
|                                                 |                                                                                 | Loss on impairment of assets                                                    |                                           |          | 5,416  |         |   |         |       |         |   |          |       |        
|                                                 |                                                                                 | Gain from settlement of due to former parent (WMS Industries
    Inc.)          |                                           |          |       |         |   |         | (4,987 | )       |   |          |       |        
|                                                 |                                                                                 | Changes in operating assets and liabilities:                                    |                                           |          |        |         |   |         |        |         |   |          |        |        
|                                                 |                                                                                 |                                                                                 | Receivables                               |          |        | (42,090 | ) |         |        | (15,907 | ) |          |        | 21,697  |  
|                                                 |                                                                                 |                                                                                 | Inventories                               |          |        | 957     |   |         |        | (3,222  | ) |          |        | 5,956   |  
|                                                 |                                                                                 |                                                                                 | Capitalized product development costs     |          |        | (69,042 | ) |         |        | (48,672 | ) |          |        | (43,089 | )
|                                                 |                                                                                 |                                                                                 | Prepaid expenses and other current assets |          |        | (4,265  | ) |         |        | (1,688  | ) |          |        | (234    | )
|                                                 |                                                                                 |                                                                                 | Accounts payable and accruals             |          |        | 6,623   |   |         |        | 2,932   |   |          |        | (15,150 | )
|                                                 |                                                                                 |                                                                                 | Other assets and liabilities              |          |        | 5,249   |   |         |        | (11,362 | ) |          |        | 11,066  |  
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 | Net cash used in operating activities                                           |                                                                                 |                                           | (100,377 | )      |         |   | (46,082 | )      |         |   | (48,368  | )     
|INVESTING ACTIVITIES                             |                                                                                 |                                                                                 |                                           |          |        |         |   |         |        |         |   |         
|                                                 | Purchases of property and equipment                                             |                                                                                 |                                           | (6,430   | )      |         |   | (4,161  | )      |         |   | (2,068   | )     
|                                                 | Direct costs of acquisitions, net of cash acquired                              |                                                                                 |                                           | (919     | )      |         |   | 76      |        |         |   |         |       
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 | Net cash used in investing activities                                           |                                                                                 |                                           | (7,349   | )      |         |   | (4,085  | )      |         |   | (2,068   | )     
|FINANCING ACTIVITIES                             |                                                                                 |                                                                                 |                                           |          |        |         |   |         |        |         |   |         
|                                                 | Proceeds from issuance of convertible senior notes                              |                                                                                 |                                           | 75,000   |        |         |   |        |        |         |   |         |       
|                                                 | Proceeds from long-term debt                                                    |                                                                                 |                                           |         |        |         |   | 15,000  |        |         |   |         |       
|                                                 | Payment of debt issuance costs                                                  |                                                                                 |                                           | (2,682   | )      |         |   | (789    | )      |         |   |         |       
|                                                 | Payment of long-term debt                                                       |                                                                                 |                                           | (3,333   | )      |         |   | (1,389  | )      |         |   |         |       
|                                                 | Payment on capital lease obligation                                             |                                                                                 |                                           | (800     | )      |         |   |        |        |         |   |         |       
|                                                 | Net proceeds from sale of common stock                                          |                                                                                 |                                           |         |        |         |   | 78,299  |        |         |   | 23,457   |       
|                                                 | Cash received on exercise of common stock options                               |                                                                                 |                                           | 19,417   |        |         |   | 24,128  |        |         |   |         |       
|                                                 | Cash received on exercise of common stock warrants                              |                                                                                 |                                           | 1,312    |        |         |   | 4,278   |        |         |   |         |       
|                                                 | Net proceeds from sale of Series D preferred stock                              |                                                                                 |                                           |         |        |         |   | 12,422  |        |         |   |         |       
|                                                 | Cash dividend on preferred stock                                                |                                                                                 |                                           | (210     | )      |         |   | (1,658  | )      |         |   | (1,087   | )     
|                                                 | Remittance of withholding taxes in lieu of stock issuance                       |                                                                                 |                                           |         |        |         |   | (3,924  | )      |         |   |         |       
|                                                 | Net proceeds from sale of Series C preferred stock and
    warrants             |                                                                                 |                                           |         |        |         |   |        |        |         |   | 34,050   |       
|                                                 | Exchange of Series C for Series D preferred stock and
    warrants              |                                                                                 |                                           |         |        |         |   |        |        |         |   | (163     | )     
|                                                 | Redemption of Series B preferred stock                                          |                                                                                 |                                           |         |        |         |   |        |        |         |   | (13,125  | )     
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 | Net cash provided by financing activities                                       |                                                                                 |                                           | 88,704   |        |         |   | 126,367 |        |         |   | 43,132   |       
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 | Effect of exchange rate changes on cash                                         |                                                                                 |                                           | (915     | )      |         |   | 431     |        |         |   | 3        |       
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 | (Decrease) increase in cash and cash equivalents                                |                                                                                 |                                           | (19,937  | )      |         |   | 76,631  |        |         |   | (7,301   | )     
|                                                 | Cash and cash equivalents at beginning of period                                |                                                                                 |                                           | 118,313  |        |         |   | 41,682  |        |         |   | 48,983   |       
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|                                                 | Cash and cash equivalents at end of period                                      |                                                                                 | $                                         | 98,376   |        |         | $ | 118,313 |        |         | $ | 41,682   |       
|                                                 |                                                                                 |                                                                                 |                                           |          |        |         |   |         |       
|Supplemental Disclosure of Cash Flow Information |                                                                                 |                                                                                 |                                           |          |        |         |   |         |        |         |   |         
|                                                 | Interest paid                                                                   |                                                                                 | $                                         | 1,257    |        |         | $ | 856     |        |         | $ | 65       |       



F-8



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##### Table of Contents



MIDWAY GAMES INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|        |                                                        
|------- | -------------------------------------------------------
|NOTE 1: | BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business


PlayStation 2 PlayStation Portable, Xbox, GameCube Game Boy Advance.


Consolidation Policy




Segment Reporting


Disclosures about Segments
of an Enterprise and Related Information.


Cash Equivalents




Receivable Allowances






F-9



---



##### Table of Contents







Inventories


first-in,


Capitalized Product Development Costs


Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed.






Property and Equipment




F-10



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##### Table of Contents



Long-Lived Assets




Goodwill


Goodwill and Other Intangible
Assets,


Intangible Assets




Stock-Based Compensation


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.


F-11



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##### Table of Contents





|                                                                                                        |             |                          |          |       |      |   |         |       |   |   |          |       |  
|------------------------------------------------------------------------------------------------------- | ----------- | ------------------------ | -------- | ----- | ---- | - | ------- | ----- | - | - | -------- | ----- | -
|                                                                                                        |             | Years Ended December 31, |         
|                                                                                                        |             |                          |         
|                                                                                                        |             | 2005                     |          |       | 2004 |   |         | 2003  |  
|                                                                                                        |             |                          |          |       |      |   |         |       |  
|Reported loss applicable to common stock                                                                |             | $                        | (112,775 | )     |      | $ | (24,744 | )     |   | $ | (117,934 | )    
|Deduct stock-based compensation expense(a)                                                              |             |                          | 3,232    |       |      |   | 1,741   |       |   |   | 457      |      
|Add stock-based compensation expense determined under the fair
    value based method for all awards(a) |             |                          | (7,097   | )     |      |   | (9,234  | )     |   |   | (15,227  | )    
|                                                                                                        |             |                          |          |       |      |   |         |       |  
|Pro forma net loss applicable to common stock                                                           |             | $                        | (116,640 | )     |      | $ | (32,237 | )     |   | $ | (132,704 | )    
|                                                                                                        |             |                          |          |       |      |   |         |       |  
|Basic and diluted loss per share:                                                                       |             |                          |          |       |      |   |         |       |   |   |          |      
|                                                                                                        | As reported |                          | $        | (1.30 | )    |   | $       | (0.34 | ) |   | $        | (2.43 | )
|                                                                                                        | Pro forma   |                          | $        | (1.34 | )    |   | $       | (0.45 | ) |   | $        | (2.74 | )






|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(a) | These amounts reflect no income tax effect. See Note 9 for
    details about our income taxes.

Share-Based
Payment.


Revenue Recognition


97-2, Software Revenue Recognition




Distribution Costs




Advertising Expense




F-12



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##### Table of Contents





Income Taxes




Foreign Currencies






Comprehensive Loss


Reporting Comprehensive Income,


Loss per Common Share




|                                                 |  |              |        |  |      |  |        |      |  |  |        | 
|------------------------------------------------ |  | ------------ | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                 |  | December 31, |       
|                                                 |  |              |       
|Type                                             |  | 2005         |        |  | 2004 |  |        | 2003 | 
|                                                 |  |              |        |  |      |  |        |      | 
|Stock options                                    |  |              | 4,877  |  |      |  | 7,583  |      |  |  | 11,230 | 
|Warrants                                         |  |              | 555    |  |      |  | 679    |      |  |  | 2,870  | 
|Contingent shares                                |  |              | 1,578  |  |      |  | 1,185  |      |  |  | 1,332  | 
|Redeemable convertible preferred stock, Series D |  |              |       |  |      |  | 1,115  |      |  |  | 9,589  | 
|Convertible senior notes                         |  |              | 4,224  |  |      |  |       |      |  |  |       | 
|                                                 |  |              |        |  |      |  |        |      | 
|Total                                            |  |              | 11,234 |  |      |  | 10,562 |      |  |  | 25,021 | 
|                                                 |  |              |        |  |      |  |        |      | 



F-13



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##### Table of Contents





|        |  |           |       | 
|------- |  | --------- | ----- | 
|Vesting |  | Number    |      
|Period  |  | of Shares |      
|        |  |           |      
|2006    |  |           | 460   | 
|2007    |  |           | 372   | 
|2008    |  |           | 746   | 
|        |  |           |      
|Total   |  |           | 1,578 | 
|        |  |           |      



Registration Rights








| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $75,000,000 of convertible senior notes that are convertible
    into common stock at a current conversion rate of
    56.3253 shares per $1,000 principal amount of the
    notes; and
|
| |  | Warrants to purchase 555,161 shares of our common
    stock at an exercise price of $9.33 per share.                                                                                   



Concentration of Risk




F-14



---



##### Table of Contents





|                                                     |  |                          |        |  |      |   |        |      |  |   |        | 
|---------------------------------------------------- |  | ------------------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                                     |  | Years Ended December 31, |       
|                                                     |  |                          |       
|                                                     |  | 2005                     |        |  | 2004 |   |        | 2003 | 
|                                                     |  |                          |        |  |      |   |        |      | 
|Geographic areas                                     |  |                          |        |  |      |   |        |      |  |   |        | 
|Net revenues outside of United States                |  | $                        | 40,085 |  |      | $ | 38,265 |      |  | $ | 26,471 | 
|Major customers                                      |  |                          |        |  |      |   |        |      |  |   |        | 
|Home video net revenues from largest customer        |  | $                        | 27,706 |  |      | $ | 25,883 |      |  | $ | 10,865 | 
|Home video net revenues from second largest customer |  | $                        | 20,716 |  |      | $ | 16,939 |      |  | $ | 8,537  | 





Mortal Kombat




Guarantees




Fair Value of Financial Instruments




Use of Estimates




Reclassifications




Recently Issued Accounting Pronouncement


Share-Based Payment,


F-15



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##### Table of Contents







|        |             
|------- | ------------
|NOTE 2: | ACQUISITIONS

Ratbag








|                                        |  |   |           | 
|--------------------------------------- |  | - | --------- | 
|Net tangible assets, including software |  | $ | 430,000   | 
|Non-compete agreements                  |  |   | 330,000   | 
|Goodwill                                |  |   | 4,867,000 | 
|                                        |  |   |          
|Total                                   |  | $ | 5,627,000 | 
|                                        |  |   |          







F-16



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##### Table of Contents





Pitbull


L.A. RUSH,






|                                        |  |   |           | 
|--------------------------------------- |  | - | --------- | 
|Net tangible assets, including software |  | $ | 446,000   | 
|Goodwill                                |  |   | 1,641,000 | 
|                                        |  |   |          
|Total                                   |  | $ | 2,087,000 | 
|                                        |  |   |          







2004 Acquisitions




F-17



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##### Table of Contents







| |           
| | ----------
| | Inevitable

|                                        |  |             |           |  |       |   |           | 
|--------------------------------------- |  | ----------- | --------- |  | ----- | - | --------- | 
|                                        |  | Preliminary |           |  | Final |  
|                                        |  |             |           |  |       |  
|Net tangible assets, including software |  | $           | 1,259,000 |  |       | $ | 1,259,000 | 
|Non-compete agreements                  |  |             | 100,000   |  |       |   | 100,000   | 
|Goodwill                                |  |             | 1,216,000 |  |       |   | 1,192,000 | 
|                                        |  |             |           |  |       |  
|Total                                   |  | $           | 2,575,000 |  |       | $ | 2,551,000 | 
|                                        |  |             |           |  |       |  



| |        
| | -------
| | Paradox

|                                        |  |             |           |  |       |   |           | 
|--------------------------------------- |  | ----------- | --------- |  | ----- | - | --------- | 
|                                        |  | Preliminary |           |  | Final |  
|                                        |  |             |           |  |       |  
|Net tangible assets, including software |  | $           | 927,000   |  |       | $ | 966,000   | 
|Non-compete agreements                  |  |             | 400,000   |  |       |   | 400,000   | 
|Goodwill                                |  |             | 2,267,000 |  |       |   | 2,255,000 | 
|                                        |  |             |           |  |       |  
|Total                                   |  | $           | 3,594,000 |  |       | $ | 3,621,000 | 
|                                        |  |             |           |  |       |  

Summary of Restricted Stock Issued




|        |  |                              |         |  |                      |   |           |           |  |  |                  |  |  |   |           | 
|------- |  | ---------------------------- | ------- |  | -------------------- | - | --------- | --------- |  |  | ---------------- |  |  | - | --------- | 
|        |  | Purchase Price Consideration |         |  | Retention Incentives |  
|        |  |                              |         |  |                      |  
|        |  | Number of                    |         |  | Fair Value on        |   |           | Number of |  |  | Fair Value on    | 
|        |  | Shares                       |         |  | Date of Issuance     |   |           | Shares    |  |  | Date of Issuance | 
|        |  |                              |         |  |                      |   |           |           |  |  |                  | 
|Ratbag  |  |                              | 380,518 |  |                      | $ | 5,000,000 |           |  |  | 76,102           |  |  | $ | 1,000,000 | 
|Pitbull |  |                              | 112,288 |  |                      |   | 1,563,000 |           |  |  | 112,243          |  |  |   | 1,562,000 | 
|        |  |                              |         |  |                      |   |           |           |  |  |                  | 
|Total   |  |                              | 492,806 |  |                      | $ | 6,563,000 |           |  |  | 188,345          |  |  | $ | 2,562,000 | 
|        |  |                              |         |  |                      |   |           |           |  |  |                  | 



|      |  |                |         |  |                      |  |         |        |  |  |         |  |  |  |         | 
|----- |  | -------------- | ------- |  | -------------------- |  | ------- | ------ |  |  | ------- |  |  |  | ------- | 
|      |  | Purchase Price |         |  |                     
|      |  | Consideration  |         |  | Retention Incentives | 
|      |  |                |         |  |                      | 
|      |  | Ratbag         |         |  | Pitbull              |  |         | Ratbag |  |  | Pitbull | 
|      |  |                |         |  |                      |  |         |        |  |  |         | 
|2005  |  |                | 228,311 |  |                      |  | 112,288 |        |  |  |        |  |  |  |        | 
|2006  |  |                | 63,420  |  |                      |  |        |        |  |  | 25,367  |  |  |  | 44,278  | 
|2007  |  |                | 44,394  |  |                      |  |        |        |  |  | 25,367  |  |  |  | 33,983  | 
|2008  |  |                | 44,393  |  |                      |  |        |        |  |  | 25,368  |  |  |  | 33,982  | 
|      |  |                |         |  |                      |  |         |        |  |  |         | 
|Total |  |                | 380,518 |  |                      |  | 112,288 |        |  |  | 76,102  |  |  |  | 112,243 | 
|      |  |                |         |  |                      |  |         |        |  |  |         | 

Business Combinations.


F-18



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##### Table of Contents







|        |                              
|------- | -----------------------------
|NOTE 3: | NEW CONSOLIDATED SUBSIDIARIES







|        |                                      
|------- | -------------------------------------
|NOTE 4: | CAPITALIZED PRODUCT DEVELOPMENT COSTS



|                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                   |  | Years Ended December 31, |        
|                                   |  |                          |        
|                                   |  | 2005                     |         |   | 2004 |   |         | 2003 | 
|                                   |  |                          |         |   |      |   |         |      | 
|Beginning balance                  |  | $                        | 28,659  |   |      | $ | 11,292  |      |  | $ | 28,761  |  
|Additions                          |  |                          | 69,042  |   |      |   | 48,672  |      |  |   | 43,089  |  
|Amortization, including writedowns |  |                          | (67,474 | ) |      |   | (31,305 | )    |  |   | (56,883 | )
|Restructuring charges              |  |                          | (2,632  | ) |      |   |        |      |  |   | (3,675  | )
|                                   |  |                          |         |   |      |   |         |      | 
|Ending balance                     |  | $                        | 27,595  |   |      | $ | 28,659  |      |  | $ | 11,292  |  
|                                   |  |                          |         |   |      |   |         |      | 





|        |                       
|------- | ----------------------
|NOTE 5: | PROPERTY AND EQUIPMENT



|                                                             |  |              |         |   |      |   |         |  
|------------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                             |  | December 31, |        
|                                                             |  |              |        
|                                                             |  | 2005         |         |   | 2004 |  
|                                                             |  |              |         |   |      |  
|Land, land improvements, buildings and building improvements |  | $            | 6,001   |   |      | $ | 4,261   |  
|Leasehold improvements                                       |  |              | 6,331   |   |      |   | 5,950   |  
|Furniture, fixtures, equipment and software                  |  |              | 44,311  |   |      |   | 42,682  |  
|Construction-in-progress                                     |  |              | 946     |   |      |   | 1,814   |  
|                                                             |  |              |         |   |      |  
|                                                             |  |              | 57,589  |   |      |   | 54,707  |  
|Less accumulated depreciation and amortization               |  |              | (38,540 | ) |      |   | (39,237 | )
|                                                             |  |              |         |   |      |  
|Property and equipment, net                                  |  | $            | 19,049  |   |      | $ | 15,470  |  
|                                                             |  |              |         |   |      |  

F-19



---



##### Table of Contents







|        |                                  
|------- | ---------------------------------
|NOTE 6: | OTHER ACCRUED CURRENT LIABILITIES



|                                            |  |              |        |  |      |   |        | 
|------------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                                            |  | December 31, |       
|                                            |  |              |       
|                                            |  | 2005         |        |  | 2004 |  
|                                            |  |              |        |  |      |  
|Product development advance                 |  | $            | 5,351  |  |      | $ | 5,351  | 
|Current portion of capital lease obligation |  |              | 1,621  |  |      |   |       | 
|Accrued restructuring costs                 |  |              | 890    |  |      |   | 560    | 
|Other accrued liabilities                   |  |              | 5,962  |  |      |   | 5,338  | 
|                                            |  |              |        |  |      |  
|Other accrued current liabilities           |  | $            | 13,824 |  |      | $ | 11,249 | 
|                                            |  |              |        |  |      |  



|        |              
|------- | -------------
|NOTE 7: | CAPITAL LEASE



|                                          |      |   |        |       | 
|----------------------------------------- | ---- | - | ------ | ----- | 
|                                          | 2006 |   | $      | 1,700 | 
|                                          | 2007 |   |        | 400   | 
|                                          |      |   |       
|Total capital lease obligation            |      |   | 2,100  |      
|Less: Imputed interest                    |      |   | (92    | )    
|                                          |      |   |       
|Present value of capital lease obligation |      |   | 2,008  |      
|Current capital lease obligation          |      |   | (1,621 | )    
|                                          |      |   |       
|Long-term capital lease obligation        |      | $ | 387    |      
|                                          |      |   |       



|        |                
|------- | ---------------
|NOTE 8: | CREDIT FACILITY







F-20



---



##### Table of Contents













|        |             
|------- | ------------
|NOTE 9: | INCOME TAXES



F-21



---



##### Table of Contents





|                           |                |                          |        |         |      |   |       |        |   |   |        |         |  
|-------------------------- | -------------- | ------------------------ | ------ | ------- | ---- | - | ----- | ------ | - | - | ------ | ------- | -
|                           |                | Years Ended December 31, |       
|                           |                |                          |       
|                           |                | 2005                     |        |         | 2004 |   |       | 2003   |  
|                           |                |                          |        |         |      |   |       |        |  
|Current:                   |                |                          |        |         |      |   |       |        |   |   |        |        
|                           | Federal        |                          | $      | (52     | )    |   | $     |       |   |   | $      |        |  
|                           | State          |                          |        |        |      |   |       |       |   |   |        | (27     | )
|                           | Foreign        |                          |        |        |      |   |       |       |   |   |        | (23     | )
|                           |                |                          |        |         |      |   |       |        |  
|                           | Total current  |                          |        | (52     | )    |   |       |       |   |   |        | (50     | )
|Deferred:                  |                |                          |        |         |      |   |       |        |   |   |        |        
|                           | Federal        |                          |        | (39,821 | )    |   |       | (7,605 | ) |   |        | (38,260 | )
|                           | State          |                          |        | (2,519  | )    |   |       | (480   | ) |   |        | (2,416  | )
|                           | Foreign        |                          |        | (717    | )    |   |       | (448   | ) |   |        | (1,482  | )
|                           |                |                          |        |         |      |   |       |        |  
|                           | Total deferred |                          |        | (43,057 | )    |   |       | (8,533 | ) |   |        | (42,158 | )
|Valuation allowance        |                |                          | 44,370 |         |      |   | 9,847 |        |   |   | 43,472 |        
|                           |                |                          |        |         |      |   |       |        |  
|Provision for income taxes |                | $                        | 1,261  |         |      | $ | 1,314 |        |   | $ | 1,264  |        
|                           |                |                          |        |         |      |   |       |        |  





|                                           |  |                          |       |    |      |  |       |      |  |  |       |   
|------------------------------------------ |  | ------------------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                           |  | Years Ended December 31, |      
|                                           |  |                          |      
|                                           |  | 2005                     |       |    | 2004 |  |       | 2003 | 
|                                           |  |                          |       |    |      |  |       |      | 
|Statutory federal income tax rate          |  |                          | (35.0 | )% |      |  | (35.0 | )%   |  |  | (35.0 | )%
|State income taxes, net of federal benefit |  |                          | (2.2  | )% |      |  | (2.2  | )%   |  |  | (2.2  | )%
|Valuation allowance                        |  |                          | 39.9  | %  |      |  | 52.8  | %    |  |  | 38.1  | % 
|WMS settlement (See Note 16)               |  |                          |      |    |      |  | (10.0 | )%   |  |  |      |   
|Other, net                                 |  |                          | (1.6  | )% |      |  | 1.4   | %    |  |  | 0.2   | % 
|                                           |  |                          |       |    |      |  |       |      | 
|                                           |  |                          | 1.1   | %  |      |  | 7.0   | %    |  |  | 1.1   | % 
|                                           |  |                          |       |    |      |  |       |      | 



|              |  |              |   |      |  |   |    | 
|------------- |  | ------------ | - | ---- |  | - | -- | 
|              |  | December 31, |  
|              |  |              |  
|              |  | 2005         |   | 2004 | 
|              |  |              |   |      | 
|Federal       |  | $            |  |      |  | $ | 4  | 
|State         |  |              |  |      |  |   | 25 | 
|Foreign       |  |              |  |      |  |   |   | 
|              |  |              |   |      |  |  
|Total payable |  | $            |  |      |  | $ | 29 | 
|              |  |              |   |      |  |  



F-22



---



##### Table of Contents





|                                         |                                        |              |          |         |      |   |          |         | 
|---------------------------------------- | -------------------------------------- | ------------ | -------- | ------- | ---- | - | -------- | ------- | 
|                                         |                                        | December 31, |         
|                                         |                                        |              |         
|                                         |                                        | 2005         |          |         | 2004 |  
|                                         |                                        |              |          |         |      |  
|Deferred tax assets resulting from:      |                                        |              |          |         |      |   |          |        
|                                         | Tax loss carryforward                  |              | $        | 164,750 |      |   | $        | 114,549 | 
|                                         | Accrued items not currently deductible |              |          | 4,613   |      |   |          | 3,129   | 
|                                         | Receivable allowance                   |              |          | 3,915   |      |   |          | 1,704   | 
|                                         | Other                                  |              |          | 25      |      |   |          |        | 
|                                         |                                        |              |          |         |      |  
|Gross deferred tax assets                |                                        |              | 173,303  |         |      |   | 119,382  |        
|                                         |                                        |              |          |         |      |  
|Deferred tax liabilities resulting from: |                                        |              |          |         |      |   |          |        
|                                         | Tax over book depreciation             |              |          | 2,193   |      |   |          | 680     | 
|                                         | Goodwill                               |              |          | 8,086   |      |   |          | 6,773   | 
|                                         | Capitalized product development costs  |              |          | 10,268  |      |   |          | 10,664  | 
|                                         | Other                                  |              |          | 220     |      |   |          | 272     | 
|                                         |                                        |              |          |         |      |  
|Gross deferred tax liabilities           |                                        |              | 20,767   |         |      |   | 18,389   |        
|                                         |                                        |              |          |         |      |  
|Valuation allowance                      |                                        |              | (160,622 | )       |      |   | (107,766 | )      
|                                         |                                        |              |          |         |      |  
|Net deferred tax liabilities             |                                        | $            | (8,086   | )       |      | $ | (6,773   | )      
|                                         |                                        |              |          |         |      |  





|         |                         
|-------- | ------------------------
|NOTE 10: | CONVERTIBLE SENIOR NOTES







| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our controlling stockholder and his affiliates become the
    beneficial owner, directly or indirectly, of 90% or more of the
    aggregate fair value of our outstanding capital stock. In this
    event, the

F-23



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | conversion rate will increase by 4.4177 shares per $1,000
    principal amount of the notes. This conversion rate increase is
    subject to future adjustment in accordance with the provisions
    of the indenture governing the notes.                                                                                                                                                                                                                                                                                                             
|
| |  | On April 30, 2007, or in some circumstances,
    September 30, 2007, if the daily volume weighted average
    price of our common stock for the period that is 20 consecutive
    trading days prior to April 30, 2007, or in some
    circumstances, September 30, 2007, is less than $16.14, as
    adjusted for capital changes. In this event, the conversion rate
    will increase at varying amounts. However, after adjustment, the
    conversion rate cannot exceed 100 shares per $1,000
    principal amount of the notes.                 
|
| |  | 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 5.63 shares per $1,000 principal
    amount of the notes.
|
| |  | Issuance of additional rights to holders of our common stock,
    such as stock splits, declaration of dividends and certain other
    distributions and capital changes.                                                                                                                                                                                                                                                                                                                                                                              







Earnings per Share,






|         |                             
|-------- | ----------------------------
|NOTE 11: | PREFERRED STOCK AND WARRANTS



F-24



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##### Table of Contents



Series B Redeemable Convertible Preferred Stock and
Warrants






Series C and Series D Redeemable Convertible
Preferred Stock and Warrants












F-25



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##### Table of Contents

















|         |                                    
|-------- | -----------------------------------
|NOTE 12: | COMMON STOCK AND STOCK OPTION PLANS

Common Stock




|                                       |  |           |        | 
|-------------------------------------- |  | --------- | ------ | 
|                                       |  | Number of |       
|Description                            |  | Shares    |       
|                                       |  |           |       
|Common stock option plans              |  |           | 7,287  | 
|Convertible senior notes               |  |           | 8,254  | 
|Series D preferred stock conversion(a) |  |           | 4,023  | 
|Warrants                               |  |           | 555    | 
|                                       |  |           |       
|Total                                  |  |           | 20,119 | 
|                                       |  |           |       






|    |                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In 2006, we plan to remove these remaining shares from
    reservation since all shares of Series D preferred stock
    were converted into common stock as of December 31, 2005.

F-26



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##### Table of Contents



Common Stock Issuances to Investors




| |                  
| | -----------------
| | Private Placement





| |               
| | --------------
| | Shelf Offering







Restricted Stock and Stock Rights




|                                                    |  |      |         |  |      |   |         |      |  |   |         | 
|--------------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                                    |  | 2005 |         |  | 2004 |   |         | 2003 | 
|                                                    |  |      |         |  |      |   |         |      | 
|Common stock shares and common stock rights granted |  |      | 843,345 |  |      |   | 551,929 |      |  |   | 125,000 | 
|Weighted average grant date fair value              |  | $    | 14.92   |  |      | $ | 9.72    |      |  | $ | 3.57    | 





| |           
| | ----------
| | Management

10-K




F-27



---



##### Table of Contents







| |                                     
| | ------------------------------------
| | Key Employees of Acquired Businesses



Rights Agreement




Stock Option Plans






F-28



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##### Table of Contents









|                                                                                                               |                                                            |        |        |          |       |   |       |       | 
|-------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------ | ------ | -------- | ----- | - | ----- | ----- | 
|                                                                                                               |                                                            |        |        | Weighted |      
|                                                                                                               |                                                            |        |        | Average  |      
|                                                                                                               |                                                            |        |        | Exercise |      
|                                                                                                               |                                                            | Shares |        |          | Price |  
|                                                                                                               |                                                            |        |        |          |       |  
|Outstanding at December 31, 2002 (4,699 shares
    exercisable at a weighted average exercise price of $13.18) |                                                            |        | 9,053  |          |       | $ | 10.21 |      
|                                                                                                               | Granted with an exercise price equal to the market price   |        |        | 3,424    |       |   |       | 3.13  | 
|                                                                                                               | Exercised                                                  |        |        |         |       |   |       |      | 
|                                                                                                               | Forfeited                                                  |        |        | (1,247   | )     |   |       | 8.02  | 
|                                                                                                               |                                                            |        |        |          |       |  
|Outstanding at December 31, 2003 (7,486 shares
    exercisable at a weighted average exercise price of $10.05) |                                                            |        | 11,230 |          |       |   | 8.30  |      
|                                                                                                               | Granted with an exercise price equal to the market price   |        |        | 1,180    |       |   |       | 9.89  | 
|                                                                                                               | Granted with an exercise price lower than the market price |        |        | 35       |       |   |       | 4.05  | 
|                                                                                                               | Exercised(a)                                               |        |        | (4,245   | )     |   |       | 5.73  | 
|                                                                                                               | Forfeited                                                  |        |        | (617     | )     |   |       | 9.78  | 
|                                                                                                               |                                                            |        |        |          |       |  
|Outstanding at December 31, 2004 (4,811 shares
    exercisable at a weighted average exercise price of $12.38) |                                                            |        | 7,583  |          |       |   | 9.85  |      
|                                                                                                               | Granted with an exercise price equal to the market price   |        |        | 99       |       |   |       | 10.11 | 
|                                                                                                               | Exercised(b)                                               |        |        | (2,475   | )     |   |       | 9.90  | 
|                                                                                                               | Forfeited                                                  |        |        | (330     | )     |   |       | 12.43 | 
|                                                                                                               |                                                            |        |        |          |       |  
|Outstanding at December 31, 2005 (3,206 shares
    exercisable at a weighted average exercise price of $11.74) |                                                            |        | 4,877  |          |       | $ | 9.65  |      
|                                                                                                               |                                                            |        |        |          |       |  






|    |  |                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------
|(a) |  | This share amount includes 16,000 shares issued from
    treasury upon the exercise of stock options during 2004.
|   
|(b) |  | This share amount includes 10,000 shares issued from
    treasury upon the exercise of stock options during 2005.



F-29



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##### Table of Contents







|                |  |                           |       |                  |                |  |         |             |  |   |             |  |  |      |       |  |  |  |     | 
|--------------- |  | ------------------------- | ----- | ---------------- | -------------- |  | ------- | ----------- |  | - | ----------- |  |  | ---- | ----- |  |  |  | --- | 
|                |  |                           |       |                  |                |  |         | Weighted    | 
|                |  |                           |       | Weighted Average |                |  | Average |            
|                |  | Shares Covered by Options |       |                  | Exercise Price |  |         | Remaining   | 
|                |  |                           |       |                  |                |  |         | Contractual | 
|Exercise Prices |  | Outstanding               |       |                  | Exercisable    |  |         | Outstanding |  |   | Exercisable |  |  | Life |      
|                |  |                           |       |                  |                |  |         |             |  |   |             |  |  |      |      
|$ 2.32 - $ 3.45 |  |                           | 675   |                  |                |  | 245     |             |  | $ | 2.63        |  |  | $    | 2.78  |  |  |  | 7.5 | 
|3.57 -   5.20   |  |                           | 1,352 |                  |                |  | 715     |             |  |   | 3.62        |  |  |      | 3.61  |  |  |  | 7.4 | 
|5.24 -   7.75   |  |                           | 195   |                  |                |  | 159     |             |  |   | 5.84        |  |  |      | 5.73  |  |  |  | 6.3 | 
|7.90 -  11.75   |  |                           | 723   |                  |                |  | 219     |             |  |   | 9.86        |  |  |      | 9.92  |  |  |  | 7.5 | 
|11.79 -  16.83  |  |                           | 1,024 |                  |                |  | 960     |             |  |   | 13.67       |  |  |      | 13.70 |  |  |  | 4.2 | 
|20.00 -  23.13  |  |                           | 908   |                  |                |  | 908     |             |  |   | 20.00       |  |  |      | 20.00 |  |  |  | 0.8 | 
|                |  |                           |       |                  |                |  |         |             |  |   |             |  |  |      |      
|                |  |                           | 4,877 |                  |                |  | 3,206   |             |  | $ | 9.65        |  |  | $    | 11.74 |  |  |  | 5.5 | 
|                |  |                           |       |                  |                |  |         |             |  |   |             |  |  |      |      



|                                |  |                          |         |   |      |  |         |      |  |  |         |  
|------------------------------- |  | ------------------------ | ------- | - | ---- |  | ------- | ---- |  |  | ------- | -
|                                |  | Years Ended December 31, |        
|                                |  |                          |        
|                                |  | 2005                     |         |   | 2004 |  |         | 2003 | 
|                                |  |                          |         |   |      |  |         |      | 
|Dividend yield                  |  |                          | 0.0     | % |      |  | 0.0     | %    |  |  | 0.0     | %
|Expected stock price volatility |  |                          | 0.75    |   |      |  | 0.82    |      |  |  | 0.87    |  
|Risk-free interest rate         |  |                          | 3.73    | % |      |  | 3.43    | %    |  |  | 3.23    | %
|Expected lives                  |  |                          | 4 years |   |      |  | 4 years |      |  |  | 6 years |  



|                                                                                                                 |  |                          |      |  |      |   |      |      |  |   |      | 
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|                                                                                                                 |  | Years Ended December 31, |     
|                                                                                                                 |  |                          |     
|                                                                                                                 |  | 2005                     |      |  | 2004 |   |      | 2003 | 
|                                                                                                                 |  |                          |      |  |      |   |      |      | 
|Weighted average grant date fair value of options granted with
    an exercise price equal to the market price   |  | $                        | 5.74 |  |      | $ | 6.28 |      |  | $ | 2.30 | 
|Weighted average grant date fair value of options granted with
    an exercise price lower than the market price |  | $                        |     |  |      | $ | 7.92 |      |  | $ |     | 



|         |                                
|-------- | -------------------------------
|NOTE 13: | RESTRUCTURING AND OTHER CHARGES



Previously Completed Restructuring Plans




F-30



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##### Table of Contents





2005 Workforce Reductions and Consolidation of Development
Teams






|                                                                                                                      |  |               |       |  |           |   |             |           |  |              |             |  |  |       |       |  |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----- |  | --------- | - | ----------- | --------- |  | ------------ | ----------- |  |  | ----- | ----- |  |  | - | ------ | 
|                                                                                                                      |  | Impairment of |       |  |           |   | Lease and   |           |  | Impairment   |             |  | 
|                                                                                                                      |  | Capitalized   |       |  |           |   | Long-Term   |           |  | of Fixed and |             |  | 
|                                                                                                                      |  | Product       |       |  |           |   | Commitments |           |  | Intangible   |             |  | 
|                                                                                                                      |  | Development   |       |  | Severance |   |             | and Other |  |              | Assets and  |  |  |      
|                                                                                                                      |  | Costs         |       |  | Costs     |   |             | Costs(a)  |  |              | Goodwill(b) |  |  | Total |      
|                                                                                                                      |  |               |       |  |           |   |             |           |  |              |             |  |  |       |      
|Anticipated total expense to be incurred and cumulative amount
    expensed for all periods through December 31, 2005 |  | $             | 2,632 |  |           | $ | 1,326       |           |  | $            | 1,410       |  |  | $     | 5,416 |  |  | $ | 10,784 | 
|                                                                                                                      |  |               |       |  |           |   |             |           |  |              |             |  |  |       |      






|    |  |                                                                                                      
|--- |  | -----------------------------------------------------------------------------------------------------
|(a) |  | Includes $98,000 write-off of accumulated cumulative translation
    adjustment.                     
|   
|(b) |  | Includes the impairment of $4,867,000 goodwill initially
    recorded upon the acquisition of Ratbag.



F-31



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##### Table of Contents



Rollforward of All Restructuring Activity




|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |        |   |  |   |         |  
|----------------------------- |  | ------------- | ------ | - | --------- | - | ----------- | --------- |  | ------------ | ---------- | - |  | ----- | ------ | - |  | - | ------- | -
|                              |  | Impairment of |        |   |           |   | Lease and   |           |  | Impairment   |            |   | 
|                              |  | Capitalized   |        |   |           |   | Long-Term   |           |  | of Fixed and |            |   | 
|                              |  | Product       |        |   |           |   | Commitments |           |  | Intangible   |            |   | 
|                              |  | Development   |        |   | Severance |   |             | and Other |  |              | Assets and |   |  |      
|                              |  | Costs         |        |   | Costs     |   |             | Costs     |  |              | Goodwill   |   |  | Total |       
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Balances at December 31, 2002 |  | $             |       |   |           | $ | 900         |           |  | $            | 642        |   |  | $     |       |   |  | $ | 1,542   |  
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Provision(a)                  |  |               | 4,998  |   |           |   | 2,962       |           |  |              | 1,478      |   |  |       | 215    |   |  |   | 9,653   |  
|Usage/payouts                 |  |               | (4,998 | ) |           |   | (3,236      | )         |  |              | (536       | ) |  |       | (215   | ) |  |   | (8,985  | )
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Balances at December 31, 2003 |  |               |       |   |           |   | 626         |           |  |              | 1,584      |   |  |       |       |   |  |   | 2,210   |  
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Provision(b)                  |  |               |       |   |           |   | (28         | )         |  |              | (78        | ) |  |       |       |   |  |   | (106    | )
|Usage/payouts                 |  |               |       |   |           |   | (598        | )         |  |              | (946       | ) |  |       |       |   |  |   | (1,544  | )
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Balances at December 31, 2004 |  |               |       |   |           |   |            |           |  |              | 560        |   |  |       |       |   |  |   | 560     |  
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Provision                     |  |               | 2,632  |   |           |   | 1,326       |           |  |              | 1,410      |   |  |       | 5,416  |   |  |   | 10,784  |  
|Usage/payouts                 |  |               | (2,632 | ) |           |   | (1,326      | )         |  |              | (684       | ) |  |       | (5,416 | ) |  |   | (10,058 | )
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       
|Balances at December 31, 2005 |  | $             |       |   |           | $ |            |           |  | $            | 1,286      |   |  | $     |       |   |  | $ | 1,286   |  
|                              |  |               |        |   |           |   |             |           |  |              |            |   |  |       |       






|    |  |                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | During 2003, we recorded reversals of previously accrued charges
    totaling $746,000 related to changes in estimates of severance
    costs and sublease income.                        
|   
|(b) |  | During 2004, we recorded reversals of previously accrued charges
    totaling $182,000 related to changes in estimates of severance
    costs, facility lease expense and sublease income.





|         |            
|-------- | -----------
|NOTE 14: | COMMITMENTS



|           |  |   |        | 
|---------- |  | - | ------ | 
|2006       |  | $ | 3,679  | 
|2007       |  |   | 2,821  | 
|2008       |  |   | 1,432  | 
|2009       |  |   | 775    | 
|2010       |  |   | 535    | 
|Thereafter |  |   | 1,114  | 
|           |  |   |       
|           |  | $ | 10,356 | 
|           |  |   |       





F-32



---



##### Table of Contents





|           |  |   |        | 
|---------- |  | - | ------ | 
|2006       |  | $ | 15,939 | 
|2007       |  |   | 6,945  | 
|2008       |  |   | 15,130 | 
|2009       |  |   | 1,080  | 
|2010       |  |   | 7,080  | 
|Thereafter |  |   | 1,160  | 
|           |  |   |       
|           |  | $ | 47,334 | 
|           |  |   |       



|         |                  
|-------- | -----------------
|NOTE 15: | LEGAL PROCEEDINGS











|         |                           
|-------- | --------------------------
|NOTE 16: | RELATED PARTY TRANSACTIONS

Majority Shareholder and Directors




F-33



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##### Table of Contents



L.A.
RUSH, L.A. RUSH












| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | William C. Bartholomay, a member of our board of directors, is
    Group Vice Chairman of Willis Group Holdings, Ltd. and Vice
    Chairman of Willis North America, Inc. and was formerly
    president of Near North National Group. Mr. Califano also
    serves as a director for Willis Group Holdings, Ltd. We have
    retained these companies or their affiliates as insurance
    brokers and have paid premiums to obtain insurance placed by
    these brokers totaling in the aggregate $1,513,000, $2,193,000,
    and $1,801,000 for 2005, 2004 and 2003, respectively. No amounts
    were owed to Willis Group Holdings, Ltd. and affiliates or Near
    North National Group at the balance sheet dates.
|
| |  | Gerald O. Sweeney, Jr., was a member of our board of
    directors from 1996 until 2003. Mr. Sweeney is a member of
    the law firm of Lord, Bissell & Brook, which performs
    legal services for us from time to time. Legal costs incurred
    were $322,000, $480,000 and $858,000 for 2005, 2004 and 2003,
    respectively. Amounts owed Lord, Bissell & Brook at
    December 31, 2005 and 2004 totaled $30,000 and $15,000,
    respectively, and are included in other accrued liabilities.                                                                                                                                                                                                                    
|
| |  | Ira S. Sheinfeld, a member of our board of directors, is a
    member of the law firm of Hogan & Hartson L.L.P. (and
    was formerly a member of Squadron, Ellenoff, Plesent &
    Sheinfeld LLP, which merged into Hogan & Hartson
    L.L.P.), which provided tax services for us. Professional costs
    incurred were $0, $123,000 and $60,000 for 2005, 2004 and 2003,
    respectively. Amounts owed                                                                                                                                                                                                                                                                                                               

F-34



---



##### Table of Contents



| |  |                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hogan & Hartson L.L.P. at December 31, 2005 and
    2004 totaled $0 and $8,000, respectively, and are included in
    other accrued liabilities. We do not plan to retain
    Hogan & Hartson, L.L.P. in 2006.

New Consolidated Subsidiary Management




Australia Subsidiary Management




WMS Industries Inc.








Former Chairman and Chief Executive Officer




F-35



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##### Table of Contents













|         |                                                       
|-------- | ------------------------------------------------------
|NOTE 17: | SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)



|                                                       |  |                 |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|------------------------------------------------------ |  | --------------- | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                       |  | Quarters Ended, |        
|                                                       |  |                 |        
|                                                       |  | March 31,       |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|                                                       |  | 2005            |         |   | 2005     |   |         | 2005          |  |   | 2005(1)      |  
|                                                       |  |                 |         |   |          |   |         |               |  |   |              |  
|Net revenues                                           |  | $               | 13,815  |   |          | $ | 36,926  |               |  | $ | 29,527       |   |  | $ | 69,810  |  
|Gross profit (loss)(2)                                 |  |                 | 5,219   |   |          |   | 1,857   |               |  |   | (2,412       | ) |  |   | 13,350  |  
|Research and development expense                       |  |                 | 8,966   |   |          |   | 10,444  |               |  |   | 8,756        |   |  |   | 11,527  |  
|Restructuring and other charges                        |  |                 |        |   |          |   |        |               |  |   |             |   |  |   | 10,784  |  
|Loss applicable to common stock                        |  |                 | (15,958 | ) |          |   | (29,914 | )             |  |   | (29,083      | ) |  |   | (37,820 | )
|Basic and diluted loss per share of common stock       |  | $               | (0.19   | ) |          | $ | (0.35   | )             |  | $ | (0.33        | ) |  | $ | (0.42   | )
|Basic and diluted average number of shares outstanding |  |                 | 85,642  |   |          |   | 85,941  |               |  |   | 87,068       |   |  |   | 89,062  |  

F-36



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##### Table of Contents








|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Restructuring and other charges for the quarter ended
    December 31, 2005 relate to managements plan to
    improve our cost structure and product development efficiency
    through workforce reductions including closing our recently
    acquired Adelaide, Australia development studio. See
    Note 13.                                                                                                                                                                
|   
|(2) | Gross profit includes $0, $2,044,000, $6,560,000 and $3,453,000
    related to writedowns of capitalized product development costs
    reflected in cost of sales for the quarters ended March 31,
    June 30, September 30 and December 31, 2005,
    respectively. The amount for the quarter ended December 31,
    2005 excludes $2,632,000 related to writedowns of capitalized
    product development costs that were included in the
    restructuring and other charges.

|                                                |  |                 |         |   |          |   |         |               |  |   |              |   |  |   |        | 
|----------------------------------------------- |  | --------------- | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------ | 
|                                                |  | Quarters Ended, |        
|                                                |  |                 |        
|                                                |  | March 31,       |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|                                                |  | 2004            |         |   | 2004     |   |         | 2004          |  |   | 2004(1)      |  
|                                                |  |                 |         |   |          |   |         |               |  |   |              |  
|Net revenues                                    |  | $               | 20,131  |   |          | $ | 47,286  |               |  | $ | 16,951       |   |  | $ | 77,227 | 
|Gross profit(2)                                 |  |                 | 4,631   |   |          |   | 16,596  |               |  |   | 585          |   |  |   | 35,766 | 
|Research and development expense                |  |                 | 5,069   |   |          |   | 8,518   |               |  |   | 6,071        |   |  |   | 5,963  | 
|Restructuring and other charges                 |  |                 | (77     | ) |          |   | (77     | )             |  |   | 27           |   |  |   | 21     | 
|(Loss) income applicable to common stock        |  |                 | (14,984 | ) |          |   | (11,203 | )             |  |   | (16,122      | ) |  |   | 17,565 | 
|Basic (loss) income per share of common stock   |  | $               | (0.27   | ) |          | $ | (0.17   | )             |  | $ | (0.20        | ) |  | $ | 0.20   | 
|Diluted (loss) income per share of common stock |  |                 | (0.27   | ) |          |   | (0.17   | )             |  |   | (0.20        | ) |  |   | 0.19   | 
|Basic average number of shares outstanding      |  |                 | 55,830  |   |          |   | 67,177  |               |  |   | 81,276       |   |  |   | 85,720 | 
|Diluted average number of shares outstanding    |  |                 | 55,830  |   |          |   | 67,177  |               |  |   | 81,276       |   |  |   | 89,253 | 






|    |                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The quarter ended December 31, 2004 includes other income
    of $4,987,000 related to the gain on settlement with WMS as
    described in Note 16 and a $1,750,000 reduction of expenses
    previously recorded in 2003 related to legal proceedings.              
|   
|(2) | Gross profit includes $2,801,000, $0, $1,431,000 and $5,611,000
    related to writedowns of capitalized product development costs
    reflected in cost of sales for the quarters ended March 31,
    June 30, September 30 and December 31, 2004,
    respectively.

F-37



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##### Table of Contents



MIDWAY GAMES INC.





SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                             |  |                                                       |  |              |             |          |            |   |            |            |  |   |              |  |  |            |            |  |  |   |             | 
|---------------------------- |  | ----------------------------------------------------- |  | ------------ | ----------- | -------- | ---------- | - | ---------- | ---------- |  | - | ------------ |  |  | ---------- | ---------- |  |  | - | ----------- | 
|                             |  |                                                       |  |              |             | Column C |            |   |            |            | 
|                             |  | Column A                                              |  | Column B     |             |          | Additions  |   |            | Column D   |  |   | Column E     | 
|                             |  |                                                       |  |              |             |          |            |   |            |            |  |   |              | 
|                             |  |                                                       |  | Balance at   |             |          | Charged to |   |            | Charged to |  |   | Deductions - |  |  | Balance at |           
|                             |  |                                                       |  | Beginning of |             |          | Costs and  |   |            | Other      |  |   | Amounts      |  |  | End of     |           
|Period                       |  | Description                                           |  | Period       |             |          | Expenses   |   |            | Accounts   |  |   | Written Off  |  |  | Period     |           
|                             |  |                                                       |  |              |             |          |            |   |            |            |  |   |              |  |  |            |           
|                             |  | Years ended December 31, 2005, 2004 and 2003          | 
|Year Ended December 31, 2005 |  | Allowance for doubtful accounts                       |  | $            | 714,000     |          |            | $ | 692,000    |            |  | $ |             |  |  | $          | 143,000    |  |  | $ | 1,263,000   | 
|                             |  | Allowance for price protection, returns and discounts |  |              | 8,122,000   |          |            |   | 26,650,000 |            |  |   |             |  |  |            | 19,905,000 |  |  |   | 14,867,000  | 
|                             |  | Deferred tax asset valuation allowance                |  |              | 107,766,000 |          |            |   | 44,370,000 |            |  |   | 8,486,000    |  |  |            |           |  |  |   | 160,622,000 | 
|Year Ended December 31, 2004 |  | Allowance for doubtful accounts                       |  | $            | 2,410,000   |          |            | $ | (448,000   | )          |  | $ |             |  |  | $          | 1,248,000  |  |  | $ | 714,000     | 
|                             |  | Allowance for price protection, returns and discounts |  |              | 7,002,000   |          |            |   | 16,904,000 |            |  |   |             |  |  |            | 15,784,000 |  |  |   | 8,122,000   | 
|                             |  | Deferred tax asset valuation allowance                |  |              | 88,856,000  |          |            |   | 9,847,000  |            |  |   | 9,063,000    |  |  |            |           |  |  |   | 107,766,000 | 
|Year Ended December 31, 2003 |  | Allowance for doubtful accounts                       |  | $            | 2,590,000   |          |            | $ | 312,000    |            |  | $ |             |  |  | $          | 492,000    |  |  | $ | 2,410,000   | 
|                             |  | Allowance for price protection, returns and discounts |  |              | 10,319,000  |          |            |   | 15,802,000 |            |  |   |             |  |  |            | 19,119,000 |  |  |   | 7,002,000   | 
|                             |  | Deferred tax asset valuation allowance                |  |              | 45,384,000  |          |            |   | 43,472,000 |            |  |   |             |  |  |            |           |  |  |   | 88,856,000  | 

F-38



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##### Table of Contents



SIGNATURES






| |                  
| | -----------------
| | MIDWAY GAMES INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ David F. Zucker

| |                                      
| | -------------------------------------
| |                                      
| | David F. Zucker                      
| | President and Chief Executive Officer



|                                                       |  |                                                                                                    |  |                |  | 
|------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                                   |  | Title                                                                                              |  | Date          
|                                                       |  |                                                                                                    |  |               
|                                                      
|/s/ David F. ZuckerDavid F. Zucker                     |  | President and Chief Executive Officer (Principal Executive
    Officer)                            |  | March 14, 2006
|                                                      
|/s/ Thomas E. PowellThomas E. Powell                   |  | Executive Vice President  Chief Financial Officer and
    Treasurer (Principal Financial Officer) |  | March 14, 2006
|                                                      
|/s/ James R. BoyleJames R. Boyle                       |  | Vice President  Finance, Controller and Assistant
    Treasurer (Principal Accounting Officer)    |  | March 14, 2006
|                                                      
|/s/ William C.
    BartholomayWilliam C. Bartholomay   |  | Director                                                                                           |  | March 14, 2006
|                                                      
|/s/ Peter C. BrownPeter C. Brown                       |  | Director                                                                                           |  | March 14, 2006
|                                                      
|/s/ Joseph A.
    Califano, Jr.Joseph A. Califano, Jr. |  | Director                                                                                           |  | March 14, 2006
|                                                      
|/s/ Kenneth D. CronKenneth D. Cron                     |  | Director                                                                                           |  | March 14, 2006
|                                                      
|/s/ Shari E. RedstoneShari E. Redstone                 |  | Director                                                                                           |  | March 14, 2006
|                                                      
|/s/ Ira S. SheinfeldIra S. Sheinfeld                   |  | Director                                                                                           |  | March 14, 2006
|                                                      
|/s/ Robert N. WaxmanRobert N. Waxman                   |  | Director                                                                                           |  | March 14, 2006



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##### Table of Contents



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .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 (the S-1 Registration Statement)
|        | 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 Registrants
    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 an exhibit
    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, initially
    filed on June 10, 2004 (the 6/10/04 S-3)                                                                                                                  
|        | 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          |  | Tax Sharing Agreement dated as of July 1, 1996 among WMS
    Industries Inc., the Registrant, Midway Home Entertainment Inc.,
    Midway Interactive Inc., Atari Games Corporation and Tengen
    Inc., incorporated herein by reference to the S-1
    Registration Statement                                                                  
|        | 10 | .2          |  | Employment Agreement dated as of July 1, 1996 between Neil
    D. Nicastro and the Registrant, incorporated herein by reference
    to the S-1 Registration Statement                                                                                                                                                                           
|        | 10 | .3          |  | 1996 Stock Option Plan, incorporated herein by reference to
    the S-1 Registration Statement                                                                                                                                                                                                                                                  
|        | 10 | .4          |  | Old form of Indemnity Agreement authorized to be entered into
    between the Registrant and officers and directors of the
    Registrant, incorporated herein by reference to the S-1
    Registration Statement                                                                                                                               
|        | 10 | .5          |  | 1998 Non-Qualified Stock Option Plan, incorporated herein by
    reference to the Registrants Registration Statement on
    Form S-8, filed on June 24, 1998 (File
    No. 333-57583)                                                                                                                                                          
|        | 10 | .6          |  | Letter Agreement dated March 5, 1998 between the Registrant
    and Neil D. Nicastro amending Mr. Nicastros
    Employment Agreement with Midway, incorporated herein by
    reference to the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 1998 (the
    1998 10-K)                                        
|        | 10 | .7          |  | Tax Separation Agreement dated as of April 6, 1998 between
    WMS Industries Inc. and the Registrant, incorporated herein by
    reference to the 1998 10-K                                                                                                                                                                                    
|        | 10 | .8          |  | 1998 Stock Incentive Plan, incorporated herein by reference to
    the Registrants Registration Statement on Form S-8,
    filed on December 4, 1998 (File No. 333-68373)                                                                                                                                                                      
|        | 10 | .9          |  | 1999 Stock Option Plan, incorporated herein by reference to the
    Registrants Registration Statement on Form S-8, filed
    on March 5, 1999 (File No. 333-73451)                                                                                                                                                                            
|        | 10 | .10         |  | Employment Agreement dated as of June 1, 1999 between
    Kenneth J. Fedesna and the Registrant, incorporated herein by
    reference to the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 1999                                                                                                                
|        | 10 | .11         |  | Letter Agreement dated November 5, 1999 between the
    Registrant and Neil D. Nicastro further amending
    Mr. Nicastros Employment Agreement with the
    Registrant, incorporated herein by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended March 31, 2000                                
|        | 10 | .12         |  | Letter Agreement dated May 4, 2000 between the Registrant
    and Neil D. Nicastro further amending Mr. Nicastros
    Employment Agreement with the Registrant, incorporated herein by
    reference to the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 2000 (the
    2000 10-K)                          



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .13         |  | 2000 Non-Qualified Stock Option Plan, incorporated herein by
    reference to the 2000 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .14         |  | Letter Agreement dated as of October 30, 2000 between the
    Registrant and Neil D. Nicastro further amending
    Mr. Nicastros Employment Agreement with the
    Registrant, incorporated by reference to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    September 30, 2000.                                                                                                                                                                                            
|        | 10 | .15         |  | Form of Warrants to purchase common stock of the Registrant,
    issued to Gerard Klauer Mattison & Co., Inc.,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on May 22, 2001.                                                                                                                                                                                                                                                                                   
|        | 10 | .16         |  | Tax Separation Agreement Letter dated September 24, 2001
    between the Registrant and WMS Industries Inc., incorporated
    herein by reference to the WMS Industries Inc. Annual Report on
    Form 10-K for the fiscal year ended June 30, 2001.                                                                                                                                                                                                                                                            
|        | 10 | .17         |  | Amendment to 1998 Stock Incentive Plan, incorporated herein by
    reference to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended September 30,
    2001.                                                                                                                                                                                                                                                                                                                         
|        | 10 | .18         |  | 2002 Stock Option Plan, incorporated herein by reference to the
    Registrants definitive proxy statement filed on
    December 5, 2001.                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .19         |  | Letter Agreement dated as of March 21, 2001, between the
    Registrant and Thomas E. Powell regarding Mr. Powells
    employment by the Registrant, incorporated herein by reference
    to the Registrants Transition Report on Form 10-K for
    the six-month transition period ended December 31, 2001.                                                                                                                                                                                                  
|        | 10 | .20         |  | 2002 Non-Qualified Stock Option Plan, incorporated herein by
    reference to the Registrants Registration Statement on
    Form S-8, filed on August 26, 2002 (File
    No. 333-98745).                                                                                                                                                                                                                                                                                                                       
|        | 10 | .21         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and Thomas E. Powell regarding Mr. Powells
    employment by the Registrant, incorporated herein by reference
    to the Registrants Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002 filed with the SEC on
    March 28, 2003 (the 2002 10-K).                                                                                                                                                         
|        | 10 | .22         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and Mark S. Beaumont regarding
    Mr. Beaumonts employment by the Registrant,
    incorporated herein by reference to the 2002 10-K.                                                                                                                                                                                                                                                                                                
|        | 10 | .23         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and David W. Nichols regarding
    Mr. Nicholss employment by the Registrant,
    incorporated herein by reference to the 2002 10-K.                                                                                                                                                                                                                                                                                                 
|        | 10 | .24         |  | Amendment and Waiver dated as of May 16, 2003, among The
    Registrant, Peconic Fund, Ltd., Smithfield Fiduciary LLC and
    Neil D. Nicastro, incorporated herein by reference to the
    Registrants Current Report on Form 8-K filed on
    May 19, 2003 (the 5/19/03 8-K).                                                                                                                                                                                                                              
|        | 10 | .25         |  | Executive Employment Agreement made as of the 6th day of
    May, 2003, between the Registrant and David Zucker, incorporated
    herein by reference to the Registrants Current Report on
    Form 8-K filed on May 7, 2003 (the
    5/7/03 8-K).                                                                                                                                                                                                                                                           
|        | 10 | .26         |  | Stock Option Agreement made as of the 6th day of May, 2003,
    between the Registrant and David Zucker, incorporated herein by
    reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .27         |  | Stock Option Agreement under 2002 Stock Option Plan made as of
    the 6th day of May, 2003, between the Registrant and David
    Zucker, incorporated herein by reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                   
|        | 10 | .28         |  | Restricted Stock Agreement entered into as of the 6th day
    of May, 2003, between the Registrant and David Zucker,
    incorporated herein by reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .29         |  | Severance Agreement dated as of the 6th day of May, 2003,
    between the Registrant and Neil D. Nicastro, incorporated herein
    by reference to the 5/7/03 8-K.                                                                                                                                                                                                                                                                                                                                              
|        | 10 | .30         |  | Securities Purchase Agreement dated as of May 16, 2003
    among the Registrant and the investors listed on the Schedule of
    Buyers attached thereto, incorporated herein by reference to the
    5/19/03 8-K.                                                                                                                                                                                                                                                                                               
|        | 10 | .31         |  | Xbox Publisher License Agreement dated October 30, 2000
    between Microsoft Licensing Inc. and Midway Home Entertainment
    Inc., incorporated by reference to the Registrants
    Registration Statement on Form S-3, as amended, File
    No. 333-106643, initially filed on June 30, 2003 (the
    June 2003 S-3). (Portions of this exhibit have
    been omitted pursuant to a request for confidential treatment in
    accordance with Rule 406 under the Securities Act of 1933,
    as amended.).



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .32         |  | Amendment to the Xbox Publisher Licensing Agreement effective
    January 31, 2003 between Microsoft Licensing Inc. and
    Midway Home Entertainment Inc., incorporated herein by reference
    to the June 2003 S-3. (Portions of this exhibit have been
    omitted pursuant to a request for confidential treatment in
    accordance with Rule 406 under the Securities Act of 1933,
    as amended.).                                            
|        | 10 | .33         |  | Confidential License Agreement for Nintendo GameCube dated
    February 19, 2002 between Nintendo of America Inc. and
    Midway Home Entertainment Inc., incorporated herein by reference
    to the June 2003 S-3. (Portions of this exhibit have been
    omitted pursuant to a request for confidential treatment in
    accordance with Rule 406 under the Securities Act of 1933,
    as amended.).                                              
|        | 10 | .34         |  | PlayStation 2 CD-ROM/ DVD-ROM Licensed Publisher Agreement dated
    April 1, 2002 between Sony Computer Entertainment America
    Inc. and Midway Home Entertainment Inc., incorporated herein by
    reference to the June 2003 S-3. (Portions of this exhibit
    have been omitted pursuant to a request for confidential
    treatment in accordance with Rule 406 under the Securities
    Act of 1933, as amended.).                            
|        | 10 | .35         |  | PlayStation 2 Licensed Publisher Agreement dated
    November 14, 2000 between Sony Computer Entertainment
    Europe Limited and Midway Games Limited., incorporated herein by
    reference to the June 2003 S-3. (Portions of this exhibit
    have been omitted pursuant to a request for confidential
    treatment in accordance with Rule 406 under the Securities
    Act of 1933, as amended.).                                               
|        | 10 | .36         |  | Amendment and Exchange Agreement dated as of October 14,
    2003 between the Registrant and Smithfield Fiduciary LLC,
    incorporated herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                                       
|        | 10 | .37         |  | Amendment and Exchange Agreement dated as of October 14,
    2003 between the Registrant and Portside Growth and Opportunity
    Fund, incorporated herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                           
|        | 10 | .38         |  | Amendment and Exchange Agreement dated as of October 14,
    2003 between the Registrant and Lighthouse LLC, incorporated
    herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                                                 
|        | 10 | .39         |  | Registration Rights Agreement dated as of October 14, 2003
    between the Registrant and the investors in the Series D
    stock, incorporated herein by reference to the 10/15/03 8-K.                                                                                                                                                                                                                                                               
|        | 10 | .40         |  | Securities Purchase Agreement dates as of October 14, 2003
    among the Registrant and the investors listed on the Schedule of
    Buyers attached thereto, incorporated herein by reference to the
    10/15/03 8-K.                                                                                                                                                                                                                                 
|        | 10 | .41         |  | Loan and Security Agreement by and among the Registrant,
    specified subsidiaries of the Registrant, the lenders
    signatories thereto, and Wells Fargo Foothill, Inc., dated as of
    March 3, 2004, incorporated herein by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2003 (the
    2003 10-K).                                                                                  
|        | 10 | .42         |  | Continuing Guaranty dated as of March 3, 2004, between the
    Registrant and specified subsidiaries in favor of Wells Fargo
    Foothill, Inc., incorporated herein by reference to the
    2003 10-K.                                                                                                                                                                                                                                                
|        | 10 | .43         |  | Intercompany Subordination Agreement dated as of March 3,
    2004 among the Registrant, specified subsidiaries of the
    Registrant and Wells Fargo Foothill, Inc., incorporated herein
    by reference to the 2003 10-K.                                                                                                                                                                                                                           
|        | 10 | .44         |  | Form of Pledge Agreement dated as of March 3, 2004, between
    the Registrant, specified subsidiaries of the Registrant and
    Wells Fargo Foothill, Inc., incorporated herein by reference to
    the 2003 10-K.                                                                                                                                                                                                                                    
|        | 10 | .45         |  | Xbox Live Distribution Amendment to the Xbox Publisher License
    Agreement entered into as of December 8, 2003 by and among
    Microsoft Licensing, GP and Midway Home Entertainment Inc.
    (Portions of this exhibit have been omitted pursuant to a
    request for confidential treatment in accordance with
    Rule 24b-2 under the Securities Exchange Act of 1934, as
    amended.), incorporated herein by reference to the
    2003 10-K.
|        | 10 | .46         |  | Settlement Agreement dated August 11, 2003 between WMS and
    Midway, incorporated herein by reference to the 2003 10-K.                                                                                                                                                                                                                                                                                                                              
|        | 10 | .47         |  | Waiver, dated as of April 5, 2004, by David F. Zucker,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on April 13, 2004.                                                                                                                                                                                                                                                                                
|        | 10 | .48         |  | Form of Purchase Agreement between Midway and each investor in
    the April 2004 shelf offering, incorporated herein by reference
    to the Registrants Current Report on Form 8-K filed
    on April 13, 2004.                                                                                                                                                                                                                                     



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .49         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Surreal Software, incorporated by reference
    to the Registrants Registration Statement on
    Form S-3, File No. 333-115055, initially filed on
    April 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .50         |  | Consent and First Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    April 5, 2004, incorporated herein by reference to the
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2004 (the
    3/31/04 10-Q)                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .51         |  | Second Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of April 14,
    2004, incorporated herein by reference to the 3/31/04 10-Q                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .52         |  | Amendment to Stock Option Plans of the Registrant, incorporated
    herein by reference to the 6/10/04 S-3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .53         |  | Settlement Agreement and General Release between the Registrant
    and Kenneth J. Fedesna, dated as of July 6, 2004,
    incorporated herein by reference to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2004 (the 6/30/04 10-Q)                                                                                                                                                                                                                                                                                                                                                                     
|        | 10 | .54         |  | Letter Agreement dated as of June 29, 2004 between the
    Registrant and Mr. Nicastro amending the Severance
    Agreement dated May 6, 2003 between the Registrant and
    Mr. Nicastro, incorporated herein by reference to the
    6/30/04 10-Q                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .55         |  | Third Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of August 30,
    2004, incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on September 3, 2004                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .56         |  | Fourth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of
    September 15, 2004, incorporated herein by reference to the
    Registrants Current Report on Form 8-K filed on
    September 20, 2004                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .57         |  | Letter Agreement entered into as of September 20, 2004
    amending the
    PlayStation®2
    CD-ROM/ DVD-ROM Licensed Publisher Agreement effective as of
    April 1, 2000 between Sony Computer Entertainment America
    Inc. and Midway Home Entertainment Inc., incorporated herein by
    reference to the Registrants Quarterly Report on
    Form 10-Q for the fiscal quarter ended on
    September 30, 2004 (the 9/30/2004 10-Q).
    (Portions of this exhibit have been omitted pursuant to a
    request for confidential treatment in accordance with
    Rule 24b-2 under the Securities Exchange Act of 1934, as
    amended.)
|        | 10 | .58         |  | Fifth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of October 5,
    2004, incorporated herein by reference to the 9/30/2004 10-Q                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .59         |  | First Amendment made as of October 18, 2004, to Restricted
    Stock Agreement entered into as of May 6, 2003 between the
    Registrant and David F. Zucker, incorporated herein by reference
    to the 9/30/2004 10-Q                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .60         |  | Sixth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of November 1,
    2004, incorporated herein by reference to the
    9/30/2004 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .61         |  | 2000 Stock Option/ Stock Issuance Plan for Midway
    Studios  Austin Inc. and Form of Option Agreement,
    incorporated herein by reference to the Registrants
    Registration Statement on Form S-8, File
    No. 333-120347, filed on November 10, 2004.                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .62         |  | Term Extensions to Xbox Publisher License Agreement,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on November 18, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .63         |  | Letter Agreement, signed November 19, 2004, between the
    Registrant and WMS Industries terminating tax agreements,
    incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on November 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10 | .63         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Midway Studios  Austin Inc.,
    incorporated by reference to the Registrants Registration
    Statement on Form S-3, File No. 333-120952, initially
    filed on December 2, 2004.                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .65         |  | Seventh Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of November 1,
    2004, incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on November 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .66         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Inevitable Entertainment, incorporated by
    reference to the Registrants Registration Statement on
    Form S-3, File No. 333-120952, initially filed on
    December 2, 2004.                                                                                                                                                                                                                                                                                                                                                                           



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .67         |  | Form of Restricted Stock Agreement between the Registrant and
    former employees of Paradox Development, incorporated by
    reference to the Registrants Registration Statement on
    Form S-3, File No. 333-121523, initially filed on
    December 22, 2004                                                                                                                                                                                                                                                           
|        | 10 | .68         |  | Restricted Stock Agreement between the Registrant and Christine
    Hsu, dated as of November 23, 2004, incorporated by
    reference to Amendment No. 1 to the Registrants
    Registration Statement on Form S-3, File
    No. 333-121523, filed on January 31, 2004                                                                                                                                                                                                                                                      
|        | 10 | .69         |  | 2004 Form of Indemnity Agreement authorized to be entered into
    between the Registrant and officers and directors of the
    Registrant, incorporated herein by reference to the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended December 31, 2004 (the
    2004 10-K)                                                                                                                                                                                                                        
|        | 10 | .70         |  | Eighth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of
    December 28, 2004,incorporated herein by reference to the
    2004 10-K                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .71         |  | Ninth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of January 19,
    2005, incorporated herein by reference to the 2004 10-K                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .72         |  | Form of Stock Option Agreement used currently by the Registrant
    for directors under its stock option plans, incorporated herein
    by reference to the 2004 10-K                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .73         |  | Form of Stock Option Agreement used currently by the Registrant
    for employees under its stock option plans, incorporated herein
    by reference to the 2004 10-K                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .74         |  | Amended and Restated Midway Incentive Plan, incorporated herein
    by reference to the 2004 10-K                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .75         |  | Amendment to the
    XboxPublisher Licensing Agreement dated as of
    January 10, 2005 between Microsoft Licensing, GP and Midway
    Home Entertainment, Inc., incorporated herein by reference to
    the Registrants Quarterly Report on Form 10-Q for the
    fiscal quarter ended on March 31, 2005 (the
    3/31/2005 10-Q), (portions of this exhibit have
    been omitted pursuant to a request for confidential treatment in
    accordance with Rule 24b-2 under the Securities Exchange
    Act, as amended)
|        | 10 | .76         |  | Amendment to the
    XboxPublisher Licensing Agreement dated as of
    March 1, 2005 between Microsoft Licensing, GP and Midway
    Home Entertainment, Inc., incorporated herein by reference to
    the 3/31/2005 10-Q, (portions of this exhibit have been
    omitted pursuant to a request for confidential treatment in
    accordance with Rule 24b-2 under the Securities Exchange
    Act, as amended)                                                                                                             
|        | 10 | .77         |  | Tenth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of March 11. 2005,
    incorporated herein by reference to the 3/31/2005 10-Q                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .78         |  | Eleventh Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of April 26,
    2005, incorporated herein by reference to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    on June 30, 2005 (the 6/30/2005 10-Q)                                                                                                                                                                                                                        
|        | 10 | .79         |  | 2005 Long-Term Incentive Plan, incorporated herein by reference
    to the Registrants Registration Statement on
    Form S-8, filed on June 15, 2005 (File
    No. 333-125830)                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .80         |  | Form of Stock Option Agreement used currently by the Registrant
    for employees under its 2005 Long-Term Incentive Plan,
    incorporated herein by reference to the 6/30/2005 10-Q                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .81         |  | Separation Agreement by and between the Registrant and Mark S.
    Beaumont, dated as of July 28, 2005 and effective as of
    August 19, 2005, incorporated herein by reference to the
    Registrants Current Report on Form 8-K filed on
    August 5, 2005                                                                                                                                                                                                                                                              
|        | 10 | .82         |  | Twelfth Amendment to Loan and Security Agreement between the
    Registrant and Wells Fargo Foothill dated as of August 4,
    2005, incorporated herein by reference to the Registrants
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    on September 30, 2005 (the 9/30/2005 10-Q)                                                                                                                                                                                                                    
|        | 10 | .83         |  | Purchase Agreement, dated as of September 13, 2005, among
    Midway and the Initial Purchasers, incorporated herein by
    reference to the Registrants Current Report on
    Form 8-K filed on September 19, 2005 (the
    9/19/2005 8-K)                                                                                                                                                                                                                                                                               
|        | 10 | .84         |  | Indenture, dated as of September 19, 2005, between the
    Registrant and Wells Fargo Bank, National Association,
    incorporated herein by reference to the 9/19/2005 8-K)                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .85         |  | Registration Rights Agreement, dated as of September 19,
    2005 between the Registrant and Banc of America Securities, LLC,
    as representative of the Initial Purchasers, incorporated herein
    by reference to the 9/19/2005 8-K                                                                                                                                                                                                                                                                                     



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 10 | .86         |  | Consent and Thirteenth Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    September 19, 2005, incorporated herein by reference to the
    9/19/2005 8-K                                
|        | 10 | .87         |  | Form of Restricted Stock Agreement used currently by the
    Registrant for management under its 2005 Long-Term Incentive
    Plan, incorporated herein by reference to the Registrants
    Current Report on Form 8-K filed on October 7, 2005.
|        | 10 | .88         |  | Consent and Fourteenth Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    October 3, 2005.                                                                                             
|        | 10 | .89         |  | Waiver, Consent and Fifteenth Amendment to Loan and Security
    Agreement between the Registrant and Wells Fargo Foothill dated
    as of October 17, 2005.                                                                                     
|        | 10 | .90         |  | Consent and Sixteenth Amendment to Loan and Security Agreement
    between the Registrant and Wells Fargo Foothill dated as of
    November 3, 2005.                                                                                             
|        | 10 | .91         |  | Letter Agreement dated as of February 10, 2003 between the
    Registrant and Miguel Iribarren regarding
    Mr. Iribarrens employment by the Registrant.                                                                                       
|        | 21 |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                  
|        | 23 |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                    
|        | 31 |             |  | Certifications of Chief Executive Officer and Chief Financial
    Officer Pursuant to Rule 13a-14(a) under the Securities
    Exchange Act of 1934, as amended, 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.