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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, 2002

Commission File Number 1-12367

MIDWAY GAMES INC.
(Exact name of registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(g) of the Act: None.

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        The aggregate market value of the 45,258,294 shares of Common Stock held by non-affiliates of the registrant on March 19, 2003 was $150,257,536. Solely for purposes of this calculation, all shares held by directors and executive officers of the registrant have been excluded. This exclusion should not be deemed an admission that these individuals are affiliates of the registrant. On that date, the number of shares of Common Stock outstanding, excluding 2,930,000 shares held as treasury shares, was 46,469,310 shares.

        As used in this Annual Report on Form 10-K, the terms "we," "us," "our" and "Midway" mean Midway Games Inc., a Delaware corporation, and its subsidiaries. The term "common stock" means our common stock, $.01 par value, and the term "preferred stock" means our Series B Convertible Preferred Stock, $.01 par value, unless the context indicates a different meaning. References to "fiscal year" for 2002 or later refer to our new fiscal year ending on December 31. References to "transition period" in this report are to the six-month transition period beginning on July 1, 2001 and ended on December 31, 2001. Other references to "fiscal year" in this report are to the fiscal years ended June 30 of each year prior to or ended on June 30, 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 federal securities laws. These statements may be found throughout this report, particularly in the materials set forth under "Item 1. Business" and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," among others. These statements describe our plans, strategies and goals and our beliefs concerning future business conditions and our business outlook based on currently available information. Where possible, we have identified these statements by the use of terms such as "may," "will," "should," "expect," "anticipate," "believe," "estimate," "intend" and similar words, although some forward-looking statements are expressed differently. 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 the financial strength of the interactive entertainment industry and the risks more fully described under "Item 1. Business—Risk Factors." We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1. Business.

Development of Our Business

        We develop and publish interactive entertainment software. Midway and our predecessors have been in the business of creating videogames for more than 20 years and have published over 400 titles in that time. We currently develop and publish games for play on all the major new generation home videogame consoles and handheld game platforms, including Sony's PlayStation 2 computer entertainment system, Microsoft's Xbox and Nintendo's GameCube and Game Boy Advance. Our titles include many of the most popular game genres such as action, adventure, driving, extreme sports, fighting, role-playing, sports and strategy.

        Over the years, we have released many successful videogames, including Mortal Kombat, a line of games that has sold over 20 million copies, MLB SlugFest, SpyHunter, NHL Hitz, Ready 2 Rumble Boxing, Hydro Thunder, San Francisco Rush Extreme Racing, NFL Blitz, Area 51, Cruis'n USA, NBA Jam, Rampage, Gauntlet, Joust, Defender, Centipede, Asteroids and Pong.

        In fiscal 2002, we released 42 videogames (directly, or under licensing arrangements, including all platforms). During the transition period, we released 12 videogames (directly, or under licensing arrangements, including all platforms). In fiscal 2001, we released 29 videogames (directly or under licensing arrangements, including all platforms). For information about our revenues, assets and results of operations, see our financial statements included near the end of this report, and "Item 6. Selected Financial Data."

        Midway is a Delaware corporation formed in 1988. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports are available through our website as soon as reasonably practicable after we electronically file such materials with the SEC. Our website is located at www.midway.com. Information contained on our website is not a part of this report.

Industry Overview

        The interactive entertainment industry is comprised of game hardware manufacturers and videogame software publishers. Home videogame software is played on game hardware platforms, including home game consoles which connect to a television set, self-contained handheld platforms and personal computers.

        Historically, a new generation of more technologically advanced game consoles has reached the market every four to five years. Each new generation, or cycle, of hardware has resulted in larger numbers of consoles being purchased than the previous cycle, resulting in a progressively larger "installed base" of hardware platforms. At the beginning of each cycle, during the period of rapid growth in the installed base of the new generation of consoles, the interactive entertainment software industry has historically experienced periods of rapid expansion, as buyers purchase videogames for their new consoles. At the end of each cycle, when the introduction of a new generation of home game consoles is announced, sales of the older generation of platforms and games generally diminish, as consumers defer purchases in anticipation of the new platforms and games.

        The industry recently completed a transition from 32- and 64-bit home game consoles to the new more powerful generation of game consoles, with the release of Sony's PlayStation 2 in 2000 and the release of the Nintendo GameCube and Microsoft Xbox in 2001. Similarly, the 8-bit Game Boy Color handheld platform has been succeeded by the 32-bit Game Boy Advance, introduced in 2001.

        Videogame software is created by the platform manufacturers and by many independent developers. Platform manufacturers license publishers to publish games for their platforms and retain a significant degree of control over the content, quality and manufacturing of these games. The developers, subject to the approval of the platform manufacturers, determine the types of games they will create. Software publishers either create their games in-house, through their own development teams, or outsource this function to independent developers.

        Software for game platforms is sold generally by mass merchandise retailers, such as Wal-Mart and Toys-R-Us, or by regional retailers, discount store chains, video rental retailers, software specialty retailers and entertainment software distributors. Software publishers either distribute their products directly to these retailers or sell them through national distributors.

Our Business Strategy

        Highlights of our business strategy include:

        Develop games for multiple new generation game platforms.    We are focusing on developing games for play on all the new platforms. The processing power of the new platforms allows for faster, more complex graphics and superior game design capabilities compared to the older platforms. We currently have over 90 new products in various stages of development for the new generation of platforms.

        Leverage our proven franchises and library value.    Many of our games have been best-sellers. We continue to hold these properties as valuable assets that may be leveraged in the future. The popularity of many of our games has enabled us to successfully market sequels, including sequels for Mortal Kombat, Spy Hunter, Gauntlet, NFL Blitz, NHL Hitz, MLB SlugFest, Rampage, Cruis'n USA, San Francisco Rush Extreme Racing and Ready 2 Rumble Boxing.

        Our most successful and profitable videogame franchise has been Mortal Kombat with over 20 million units sold. We have also licensed two television and two film adaptations of Mortal Kombat and granted merchandising licenses for toys, clothing, comic books, strategy guides and other product lines. We released a new sequel in the Mortal Kombat series, Mortal Kombat: Deadly Alliance, in the fourth quarter of 2002 and this was our top selling game of fiscal 2002.

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        We have also leveraged our large library of "hit" titles by releasing "arcade classics" collections and entering into syndication agreements. We have released 12 collections of arcade classic games for home consoles and nine arcade classic products for handheld platforms. Midway controls the intellectual property rights to hundreds of classic videogame titles, including titles originally released under the Midway, Williams and Atari brands. A number of these classic titles have been licensed for play on a variety of gaming mediums, including websites, interactive television, cellular telephones and other handheld wireless devices. We believe that we can continue to leverage our library of classic titles to produce additional successful titles in the future.

        Continue to expand our sports category.    We have enjoyed strong sales from our line of sports games. Our titles in this popular category, such as NFL Blitz, NHL Hitz, MLB SlugFest, NBA Hoopz and Ready 2 Rumble Boxing, are characterized by extreme game play and the superhuman 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 among sports videogame fans. We are planning to release new versions of these "over-the-top" games for various sports, including baseball, football, basketball and hockey, in 2003.

        Strategic management of our in-house development group.    We seek to enhance and retain our large in-house development staff, employing approximately 345 individuals who work in teams to create our games. Our creative teams have a long history of developing successful titles. We believe that employing in-house developers provides us with the following advantages over competitors that rely more heavily on third-party developers:

•

we have more control over product quality, scheduling and costs, enhancing our ability to release titles on time;



•

our in-house development teams are more likely to collaborate with each other, sharing development techniques and useful experience to form a strong collective and creative environment;



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we can focus their efforts quickly to meet the needs of key projects;



•

we can use the same producer for both an original game and its sequels; and



•

our in-house teams are not subject to the competing needs of other publishers, which is a particular benefit to us prior to the crucial year-end holiday selling season.

        Expand international sales.    We believe that we can expand our presence in foreign markets. In fiscal 2000, we opened an office in the United Kingdom to conduct sales of our products in Europe and Australia. To further expand our international presence, we are developing titles that we believe will have a global appeal.

Products

        We sell games for all of the major videogame platforms, including the PlayStation 2, Xbox, GameCube and Game Boy Advance platforms. We currently have over 90 new products in various stages of development. Our revenues from home videogames are show in "Item 6. Selected Financial Data." Most of our home videogames have suggested retail prices ranging from $39.95 to $49.95. Suggested retail prices for Game Boy Advance games are usually between $29.95 and $34.95.

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2002 Videogame Releases

        During fiscal 2002, we released the following videogames:

Transition Period Videogame Releases

        During the transition period, we released the following videogames:

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2001 Videogame Releases

        During fiscal 2001, we released the following videogames:

Product Development

        We seek to develop videogames that are action-packed and exciting, and which provide sufficient challenge at various levels of proficiency to encourage repeated play. Our game development personnel are organized into teams. The producers manage the work of the other team members and are responsible for the overall design of the game. Each concept is reviewed initially for technical feasibility and evaluated relative to several factors, including whether the proposed product fits within our general strategy and profitability objectives. Our management team meets regularly to formally review and evaluate the progress and quality of each title in development.

        The game design teams operate in a studio environment that encourages creativity, productivity and cooperation among design teams. We believe that this environment, together with a compensation structure that rewards design teams for the success of their games, enables us to attract and retain game designers that are among the best in the industry.

        The designers are supported by state-of-the-art design technology that allows for the creation of cutting-edge, three-dimensional graphics and advanced audio effects. We have developed and acquired a substantial library of proprietary software and development tools. Use of these tools streamlines the development process, allowing members of the development teams to focus their efforts on the play and simulation aspects of the product under development. We have also developed software tools to expedite conversion of software from one hardware format to another and to provide sound and special visual effects. We continually create and acquire new software and development tools and refine and upgrade our existing tools.

        Development of a new videogame generally takes 18 to 24 months or longer and generally costs between $2.0 million and $7.0 million, depending on the specific software requirements. Because of the increasingly complex technology and software involved, both the time and cost to develop games have increased during the past few years. We believe that we can generate significant incremental revenue from our games by introducing them on additional platforms at a much lower cost than the development cost for introducing the game on the first platform. Converting an existing game from one platform to another generally takes three to 12 months, which period may overlap with the

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development period of the original version of the game, and costs at least $300,000. We use both our own personnel and independent third parties to develop and convert videogames.

        We are generally obligated to submit games to the platform manufacturers for approval prior to publishing a game for their platforms. Additionally, prior to release, each product undergoes careful quality assurance testing which involves technical review of each component of the final product and testing on the applicable platforms.

        We incurred research and development expenses of $25.0 million in fiscal 2002, compared to $61.6 million in fiscal 2001 and $67.7 million in fiscal 2000. During the transition period, we incurred research and development expenses of $12.8 million. See Note 7 to the financial statements in this report for information about capitalized development costs.

        From time to time, we have purchased distribution rights to games under development by third parties for various home videogame platforms. Some of these games are sequels to games which have previously been successfully released. From time to time we may also purchase the right to adapt and market games owned by third parties from one platform to another, where we believe that success on the original platform suggests a probability of success on the other platform.

        We endeavor to comply with the rules established by a domestic ratings board voluntarily established by the videogame industry and some foreign countries' ratings boards, and we label our products with these ratings. We believe that ratings labels as to the violence contained in videogames will not have an adverse effect upon us so long as ratings are consistently applied throughout the industry.

Marketing and Distribution

        We market videogames for play on home and handheld platforms under the Midway trademark. We market through our internal sales staff and through independent sales representatives to over 20,000 stores, including:

•

mass merchandisers;



•

foreign, national and regional retailers;



•

discount store chains;



•

video rental retailers; and



•

entertainment software distributors and re-sellers.

        It is customary for the sales representatives and distributors of our home games who are assigned specific customers to also distribute games produced by other manufacturers. Distribution channels are dominated by a select group of companies, and a publisher's access to retail shelf space is a significant competitive factor.

        Our principal customers for home videogames are mass merchandisers such as Wal-Mart and Toys "R" Us. Sales to our largest customer in fiscal 2002, Wal-Mart, represented 14.5% of our total revenues in fiscal 2002. Sales to our second largest customer in fiscal 2002, Toys "R" Us, represented 11.6% of our total revenues in fiscal 2002. We warrant our videogames for a period of 90 days.

        Our distribution efforts are supported by marketing programs, which emphasize product awareness, brand recognition, dealer merchandising opportunities and celebrity endorsements. Our marketing activities include television and print advertising, retail store promotions, direct mailings, user support programs and our website. We also utilize a store-oriented marketing approach which includes point-of-purchase promotions, use of display cards and other forms of merchandise displays. We provide technical support for our home products through a customer support department, which is staffed by personnel trained to respond to customer inquiries.

        Our office in the United Kingdom sells both through distributors and directly to retailers in Europe and Australia. See Note 1 to the financial statements in this report for additional information regarding our foreign revenues.

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Manufacturing

        The manufacturers of the home and handheld game platforms manufacture our videogames for us, either themselves or through their designees, as required by the applicable platform license. Platform manufacturers retain the right to approve the games to be released under manufacturing and licensing arrangements. The platform manufacturers charge us a fixed amount for each software disc or cartridge that they manufacture or a royalty if third parties perform the manufacturing. This charge generally includes a manufacturing, printing and packaging fee, as well as a royalty for the use of the manufacturer's trademarks and proprietary information and technology. The platform manufacturer may change its fee amount without our consent. We are responsible in most cases for resolving, at our expense, any applicable warranty or repair claim. To date, we have not experienced any material costs from warranty or repair claims.

        Production is based upon estimated demand for each specific title. The level of the inventory of finished goods depends upon anticipated market demand during the life of a specific game title. At the time a product is approved for manufacturing, we must generally provide the platform manufacturer with a purchase order for that product and, for one platform manufacturer, an irrevocable letter of credit for 100% of the purchase price. Most of our products are manufactured for us on an "as is" and "where is" basis, and delivery is at our expense and risk. Initial orders generally require seven to 45 days to manufacture depending on the platform. Reorders of disc-based products generally require only seven to 14 days to manufacture, while reorders of cartridge-based products require approximately 30 to 40 days to manufacture. Shipping of orders requires an additional three to ten days, depending on the mode of transport and location of the manufacturer. Only the Nintendo Game Boy Advance uses cartridges, while the new generation home consoles are all disc-based.

        We lease a warehouse facility in Dallas, Texas, from which we distribute our videogames to North America. Some products are imported into the United States, cleared by customs and transferred to our warehouse facility, where they are unpacked and shipped to our customers. At times, some components of our products are assembled into finished products for us by third parties prior to their transfer to our warehouse facility. We participate in the electronic data interchange program maintained by most of our large customers for home games. We generally fill re-orders from inventory within two days. As a result, our videogames traditionally have no backlog of orders.

        We sometimes provide replacements, markdowns or other credits on varying terms to customers holding slow-moving inventory of our home videogames. At the time of product shipment, we establish reserves, including reserves under our policies for price protection and returns, which estimate the potential for future returns of products based on historical return rates, seasonality of sales, retailer inventories of our products and other factors. See "Item 1. Business—Risk Factors—Product returns and price adjustments could exceed our reserves".

Licenses and Intellectual Property

        Platform Licenses.    The major platform manufacturers require that publishers obtain a license from them to publish games for play on their platforms. We have non-exclusive licenses from Nintendo, Sony and Microsoft under which we develop and market software products for their current major platforms. Each platform manufacturer requires that the software and a prototype of each title, together with all related artwork and documentation, be submitted for its pre-publication approval. This approval is generally discretionary.

        Upon expiration of a platform license, we usually have a limited period to sell off our inventory subject to that license, after which time any remaining inventory is generally required to be destroyed. Nintendo, Microsoft and Sony are among the largest publishers of software for use on their respective systems, and they compete directly with us. See "Risk Factors—We depend on game platform manufacturers" below.

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        Intellectual Property Licenses.    While we develop original proprietary games, some of our games are licensed from third party developers or based on trademarks and other rights and properties owned by third parties, such as the National Basketball Association, National Hockey League, Major League Baseball and the National Football League or various players' associations. Typically, we are obligated to make minimum guaranteed royalty payments over the term of these licenses and to advance payment against these guarantees. License agreements generally extend for a term of two to three years, are terminable in the event of a material breach by us, including failure to pay any amounts owing to the licensor in a timely manner, and other events. Some licenses are limited to specific territories or platforms. Each license typically provides that the licensor retains the right to leverage the licensed property for all other purposes, including the right to license the property for use with other products and, in some cases, software for other interactive hardware platforms.

        Patent, Trademark and Copyright Protection.    Each software title may embody a number of separately protected intellectual property rights, including:

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trademarks associated with elements of the game, such as team logos;



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trademarks under which the game is marketed;



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the copyrights for the game software, including the game's audiovisual elements; and



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the patents for inventions in the game software.

        We have hundreds of trademark registrations worldwide for our games, and we apply for trademark protection for all of our game titles, other than those licensed from third parties. Notwithstanding our patent, copyright and trademark protection, preventing and/or bringing infringement actions against unauthorized duplication of software products is difficult and costly.

        Each game also includes patents, copyrights and trademarks licensed from the platform manufacturer. Elements of some of our titles are owned by third parties and licensed to us. We rely on these third parties for protection of our licensed intellectual property rights. Their failure to adequately protect these rights could have a material adverse effect on us.

        The platform manufacturers incorporate security devices in the games that they manufacture for us, and also in their platforms, which seek to prevent unlicensed software products from being played on their platforms. We rely upon each platform manufacturer for protection of this intellectual property from infringement. We bear the risk of claims of infringement brought by third parties arising from the sale of software with respect to intellectual property supplied by third party developers and embodied in our software products. Our agreements with these outside developers generally require the developers to indemnify us for costs and damages incurred in connection with these claims. These software developers, however, may not have sufficient resources to indemnify us for any claims that may arise.

Competition

        The interactive entertainment software business is highly competitive. It is characterized by the continuous introduction of new titles and the development of new technologies. Our competitors vary in size from very small companies with limited resources to very large corporations with greater financial, marketing and product development resources than ours. The principal factors of competition in our industry are the ability to:

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select and develop popular titles;



•

identify and obtain rights to commercially marketable intellectual properties; and



•

adapt products for use with new technologies.

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        Successful competition in our market is also based on:

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price;



•

access to retail shelf space;



•

product quality;



•

product enhancements;



•

brand recognition;



•

marketing support; and



•

access to distribution channels.

        We compete with Nintendo, Microsoft and Sony, who publish software for their respective systems. We also compete with numerous companies licensed by the platform manufacturers to develop or publish software products for use with their respective systems. These competitors include Acclaim, Activision, Capcom, Eidos, Electronic Arts, Infogrames, Konami, Lucas Arts, Namco, Sega, Take-Two Interactive, THQ, 3DO and Ubi Soft, among others. We face additional competition from the entry of new companies, including large diversified entertainment companies, into our market.

Coin-operated Products

        Until June 2001, we sold coin-operated videogames under the Midway trademark. Although coin-operated games were a traditional strength of ours, because of the contraction of the arcade game market, in June 2001 we decided to exit the coin-operated amusement games business, and to discontinue developing and manufacturing coin-operated videogame products. Our revenues from coin-operated videogames are shown in "Item 6. Selected Financial Data".

Seasonality

        The home videogame business is highly seasonal and historically has resulted in higher revenues and operating profit in the quarters ended September 30 and December 31 due to customer purchases preceding the year-end retail holiday selling season.

Employees

        As of March 19, 2003, we had approximately 550 employees, approximately 345 of whom are members of our development staff. We believe that our relations with our employees are satisfactory.

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Risk Factors

        Some of the risks and uncertainties that may cause our operating results to vary from anticipated results or which may materially and adversely affect our operating results or the value of our common stock are listed below. There may be other important risk factors that we have not recognized.

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

        Midway has not reported a net or operating profit since the second quarter of fiscal 2000. We reported an operating loss in fiscal 2002 of $52.3 million, in fiscal 2001 of $78.4 million and in fiscal 2000 of $20.9 million. We also reported an operating loss in the transition period of $6.9 million. We believe that our losses have been primarily attributable to:

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a weakness in the home videogame industry during the transition to the new generation of home videogame platforms;



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our transition strategy to discontinue games under development for older platforms and concentrate instead on the development of games for these new platforms;



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a decline in the market for coin-operated videogames in fiscal 2000 and 2001;



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a tendency for retailers and consumers to only order and purchase top-tier videogames during late 2002; and



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slower than expected sales of some of our games in fiscal 2002.

        We cannot assure you that we will become profitable again.

We depend on market acceptance of new products.

        Our success depends on generating revenue from new products. Videogame products typically have market life spans of only three to 12 months. Our new products may not achieve and sustain market acceptance during the short life cycle sufficient to generate revenue to recover our investment in developing the products and to cover our other costs. The cost of developing new games for the new generation of platforms is generally between $2 million and $7 million. The cost of converting an existing game from one platform to another is at least $300,000. If our new products fail to gain market acceptance, our operating results and financial condition would be adversely affected.

We may experience delays in introducing new products.

        From time to time, we have experienced delays in product introductions. The timing of a creative process is difficult to predict. Unanticipated delays could cause us to miss an important selling season. A delay in introducing products could also affect our development schedule for other products. In either case, we may not achieve anticipated revenues.

Our market is subject to rapid technological change.

        Technology changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products to emerging technologies, including new hardware platforms, operating systems, online game play and media formats. When we choose to incorporate a new technology into our products or to publish or develop a product for a new platform, we may make a substantial development investment one to two years in advance of initial shipment of these products. We may not be able to identify accurately which emerging technologies will gain widespread acceptance. If we invest in the development of a videogame incorporating a new technology or for a new platform that does not achieve significant commercial success, our revenues from that product will be adversely affected. If, on the other hand, we do not choose to pursue the development of products

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incorporating new technology or for new platforms that achieve significant commercial success, our revenues may also be adversely affected.

        In addition, consumers may defer purchasing home game software for use on existing platforms following the announcement of an introduction date for hardware platforms incorporating new technologies. Once new platform introduction dates have been announced, retail videogame prices may decrease as the market makes the transition to the new generation of hardware and software, resulting in lower revenues for us during that transition period. Accordingly, these announcements could adversely affect sales of our existing videogames.

Our operating results may fluctuate from quarter to quarter.

        We have experienced and expect to continue to experience significant quarterly fluctuations in net sales and other operating results due to a variety of factors, including:

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variations in the level of market acceptance of our products;



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delays and timing of product introductions;



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fluctuations in our mix of products with varying profit margins;



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introduction and market penetration of game platforms;



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development and promotional expenses relating to the introduction of our products;



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peak demand during the year-end retail holiday selling season;



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changes in our pricing policies and those of our competitors;



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the accuracy of the forecasts of consumer demand made by retailers and by us; and



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the timing of orders from major customers, order cancellations and delays in shipment.

        Our purchasing and marketing levels are based, in part, on our expectations regarding future sales. As a result, operating results in any particular quarter may be adversely affected by a decrease in sales or a failure to meet our sales expectations in that quarter.

We may need to seek additional capital.

        If we continue to generate operating losses, our working capital and cash resources may not be adequate. This may cause us to seek additional capital, including through the issuance of debt or equity, or through other financing. If we borrow funds, we likely will be obligated to make periodic interest or other debt service payments. If we seek financing through the sale of equity securities, our current stockholders may suffer dilution in their percentage ownership of common stock. Additionally, we are not certain as to our ability to raise additional capital in the future or under what terms capital would be available.

Our market is highly competitive.

        The interactive entertainment software business is highly competitive. Our ability to compete successfully in this market is based, in large part, upon our ability to:

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select and develop popular titles;



•

identify and obtain rights to commercially marketable intellectual properties; and



•

adapt products for use with new technologies.

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        Successful competition in our market is also based on:

•

price;



•

access to retail shelf space;



•

product quality;



•

product enhancements;



•

brand recognition;



•

marketing support; and



•

access to distribution channels.

        Our competitors vary in size from very small companies with limited resources to large corporations with greater financial, marketing and product development resources than ours. We compete with the platform manufacturers, including Nintendo, Sony and Microsoft. We also compete with companies that we depend upon for foreign distribution or other services. These companies may have an incentive to promote their own products in preference to ours. In addition, due to their dominant position in the industry, the manufacturers of platform hardware have a competitive advantage with respect to retail pricing, acquiring intellectual property licenses and securing shelf space.

        We believe that large diversified entertainment, cable and telecommunications companies, in addition to large software companies, are increasing their focus on the interactive entertainment software market, which will result in greater competition for us. Many of our competitors are developing on-line interactive games and interactive networks. We may not be able to compete successfully against current or future competitors.

Product returns and price adjustments could exceed our reserves.

        We sometimes accept product returns and sometimes provide replacements, markdowns or other credits to customers that hold slow-moving inventory of our home videogames. At the time of product shipment, we establish reserves, including reserves under our policies for price protection and returns. These reserves are established according to estimates of the potential for future returns of products based on historical return rates, seasonality of sales, retailer inventories of our products and other factors. If product returns, markdowns and credits exceed our reserves, our operating results and financial condition could be adversely affected.

We depend on game platform manufacturers.

        We sell our products for use on proprietary game platforms manufactured by other companies. We depend upon these companies for the following reasons:

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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;



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platform manufacturers set the prices for their platform licenses, which may be economically prohibitive;



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we must obtain their prior review and approval to publish games on their platforms;



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if the popularity of a game platform declines, or the manufacturer stops manufacturing, or 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;

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•

these manufacturers control the manufacture of, or approval to manufacture, our game discs and cartridges; and



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these companies have the exclusive right to protect the intellectual property rights to their respective hardware platforms and technology and to discourage others from producing unauthorized software for their platforms that compete with our games.

        Because these manufacturers compete against us in the videogame publishing markets, they could be motivated to give preference to their own products over ours in product approval and manufacturing, in promotion and in granting licenses to us for products that might compete with their products.

We depend on third parties to manufacture our products.

        We depend on third parties, including the platform manufacturers, to manufacture our products. Manufacturing delays or interruptions could cause delays or interruptions in product delivery. If any significant delays occur, we may not achieve anticipated revenues. This is particularly true if any of our products miss an important selling season. Unanticipated price changes from these manufacturers also could adversely affect us.

We depend on third parties to develop some of our game titles.

        Some of our games are developed by third parties. The number of titles developed for us by third parties varies from quarter to quarter. We have less control of a game being developed by a third party because we cannot control the developer's personnel, schedule or resources. This may lead to a game not being completed on time or not at all if the third party's business fails or it experiences delays. If this happens with a game under development, we would lose revenues from the game and could lose our investment in the game.

We may not be able to maintain or acquire licenses for intellectual property.

        Some of our games are based on properties or trademarks owned by third parties, such as Major League Baseball, the National Basketball Association, National Hockey League and National Football League or various players' associations. Our future success may depend upon our ability to maintain existing licenses and to acquire additional licenses for popular intellectual properties. There is competition for these licenses, and we may not be successful in maintaining or acquiring intellectual property rights with significant commercial value.

        Our intellectual property licenses generally require that we submit new products developed under licenses to the licensor for approval prior to release. This approval is generally discretionary. Rejection or delay in approval of a product by a licensor could prevent us from selling the product. As a result, we might not recover our investment in the product. The owners of intellectual property licensed by us generally reserve the right to protect the intellectual property against infringement. If any of these owners fails to protect its own, or infringes someone else's, intellectual property, it could have a material adverse effect on us.

We depend on our key personnel.

        Our success depends to a significant extent upon the performance of senior management and on our ability to continue to attract, motivate and retain highly qualified software developers. The loss of the services of a number of senior management personnel or highly qualified software developers could have a material adverse effect on us. Competition for highly skilled employees is intense in our industry, and we may not be successful in attracting and retaining these personnel. Specifically, we may experience increased costs in order to attract and retain skilled employees.

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Sumner Redstone and Phyllis Redstone together control 36.6% of our common stock and may dispose of it at any time.

        Based on his most recent public report filed on January 2, 2003, Sumner Redstone owns, individually and through his affiliate, a total of 13,324,053 shares, or 28.7%, of our currently outstanding common stock. Mr. Redstone's former wife, Phyllis Redstone, owns a total of 3,659,783 shares, or 7.9%, of our currently outstanding common stock, based on her most recent public report filed on October 1, 2002. Mr. Redstone or Mrs. Redstone could sell some or all of these shares at any time on the open market or otherwise. The sale either by Mr. Redstone or Mrs. Redstone of a large number of shares would likely have an adverse effect on the market price of our common stock. Although Mr. Redstone and Mrs. Redstone have each stated that they have no plans to acquire control of Midway, they could change their positions or could sell their stock to a person who wishes to acquire control of Midway. Such a person may not agree with our business strategies and goals. These substantial interests in Midway could discourage a third party from making an acquisition of Midway favorable to our other stockholders.

Shares available for sale in the future could have an adverse effect on the market price of our common stock.

        We have 100,000,000 authorized shares of common stock, of which 49.4 million shares were issued and outstanding as of March 19, 2003. As of that date, another 11.8 million shares were reserved for issuance under our stock option plans, 1.7 million shares are issuable under outstanding warrants, and 1.2 million additional shares are issuable under convertible preferred stock at the current conversion price of $10.60.

        If the preferred stock is not converted at the election of the holders prior to November 22, 2003, however, we will be required to redeem the preferred stock in cash, unless we have elected, at least 125 trading days prior to November 22, 2003, to convert all or some of the shares of preferred stock into common stock at a conversion price that will be based on the average trading price of our common stock over a measuring period provided for by the terms of the convertible preferred stock. Assuming that the average trading price of our common stock during the measuring period is the same as the common stock's closing price on March 19, 2003, or $3.32 per share, and assuming that we elect to convert all of the preferred stock into common stock, then we would be required to issue approximately 4.0 million shares of common stock on November 22, 2003.

        Our Board of Directors has broad discretion with respect to the issuance of the remaining authorized but unissued shares, including discretion to issue shares in compensatory and acquisition transactions. In addition, if we seek further financing through the sale of our securities, our then current stockholders may suffer dilution in their percentage ownership of common stock. The future issuance, or even the potential issuance, of shares at a price below the then current market price may depress the future market price of our common stock.

Conversion of our preferred stock and exercise of warrants will dilute our common stock, and the sale of the underlying shares may depress the market price of our common stock.

        We have 1,312.5 shares of Series B Convertible Preferred Stock outstanding, which were issued in a private placement. The shares of preferred stock are convertible into common stock until November 21, 2003, subject to limited redemption rights. These preferred shares are convertible at a conversion price of $10.60 per share into a total of 1,238,208 shares of common stock, subject to anti-dilution adjustments. If we elect to convert the preferred shares into common stock on the maturity date, and assuming that the average trading price of our common stock during the conversion price measuring period is the same as the common stock's closing price on March 19, 2003, or $3.32 per share, then we would be required to issued approximately 4.0 million shares of common stock on

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November 22, 2003. We also issued three-year warrants to purchase 1,050,000 shares of common stock and five-year warrants to purchase 555,161 shares of common stock, exercisable at $9.33 per share, subject to anti-dilution adjustments. Finally, we issued five-year warrants to purchase 123,821 shares of common stock, exercisable at $10.60 per share, subject to anti-dilution adjustments.

        The conversion or exercise of these securities will likely have a dilutive effect on the price of our common stock. If the holders of the preferred stock and warrants were to sell a large number of their shares over a short period of time, those sales would likely have an adverse effect on the market price of our common stock. Even the potential sale of a large number of shares may depress the future market price of our common stock.

If we fail to fulfill covenants made to the holders of our preferred stock, we may experience adverse financial effects.

        If we breach our agreements with the holders of the preferred stock, or upon a change of control of Midway, the holders of the preferred stock may require us to repurchase the preferred stock at a premium. If we were required to repurchase the preferred stock at a premium, we might suffer serious adverse financial consequences. The premium is 25% above the stated value in the case of a change of control. The premium is 20% above the stated value upon the occurrence of default events including:

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our failure to maintain an effective registration statement for the underlying common stock beyond permitted grace periods;



•

suspension from trading or failure of our common stock to be listed on the NYSE or the Nasdaq National Market for five consecutive trading days or for more than ten trading days in any 365-day period; and



•

our statement of an intention not to comply with the conversion requirements of the preferred stock or our failure to deliver common stock upon conversion within the allowable time periods.

        The premium is 10% above the stated value upon our breach of any other agreement with, or representation or warranty made to, the selling stockholders, except if the breach would not have a material adverse effect on our business.

The exercise of outstanding stock options may dilute our common stock and depress its market price.

        As of March 19, 2003, we had outstanding options to purchase an aggregate of 8.7 million shares of common stock. Our stock options are generally exercisable for a period of nine years, beginning one year after the date of grant. Stock options are exercised, and the underlying common stock is generally sold, at a time when the exercise price of the options is below the market price of the common stock. Therefore, the exercise of these options generally has a dilutive effect on our common stock outstanding at the time of sale. Such exercises may have an adverse effect on the market price of our common stock. Even the potential for the exercise of a large number of options with an exercise price significantly below the market price may depress the future market price of common stock.

Effects of anti-takeover provisions could inhibit the acquisition of Midway.

        Our Board of Directors or management could use several charter or statutory provisions and agreements as anti-takeover devices to discourage, delay or prevent a change in control of Midway. The use of these provisions and agreements could adversely affect the market price of our common stock:

        Blank Check Preferred Stock.    Our certificate of incorporation authorizes the issuance of 5,000,000 shares of preferred stock with designations, rights and preferences that may be determined from time to time by the Board of Directors. Accordingly, our Board has broad power, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which

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could adversely affect the voting power or other rights of the holders of our common stock. Other than the 1,312.5 shares of our Series B Convertible Preferred Stock owned by the preferred stockholders, our Board has no current plans, agreements or commitments to issue any shares of preferred stock.

        Rights Plan.    Under a rights agreement with The Bank of New York, each share of our common stock has an accompanying right to purchase, if a person acquires beneficial ownership of 15% or more of our common stock without the prior approval of our Board, convertible preferred stock that permits each holder, other than the acquiror, to purchase a number of shares of common stock at half the market price. The effect of our rights plan is to discourage a hostile takeover by diluting the acquiror's percentage interest in our common stock. We can redeem the rights at $0.01 per right, subject to limited conditions, at any time. The rights expire on December 31, 2006.

        Classified Board.    Our certificate of incorporation provides for a classified Board of Directors. Upon the expiration of staggered terms, one third of Midway's directors are elected at each annual meeting to succeed those directors whose terms expire. This means that a person would not obtain control of our Board until the second annual stockholders' meeting after acquiring a majority of the voting stock.

        Other Charter Provisions.    Our certificate of incorporation and bylaws also provide that:

•

directors may be removed by a vote of the stockholders, only for cause;



•

any vacancy on the Board may be filled only by a vote of a majority of the remaining directors then in office;



•

there may be no stockholder action by written consent;



•

only the President, the Chairman of the Board or the entire Board may call special meetings of stockholders, and the only business permitted to be conducted at stockholder meetings is business brought before the meeting by or at the direction of the Board;



•

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;



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either a majority vote of the Board or an affirmative vote of at least 80% of outstanding common stock is needed in order to adopt, amend or repeal our bylaws; and



•

an affirmative vote of 80% of outstanding common stock is needed in order to amend or repeal the above provisions.

        Section 203 of the Delaware General Corporation Law.    In general, this statute prohibits a publicly-held Delaware corporation from engaging in a business combination with anyone who owns at least 15% of its common stock. This prohibition lasts for a period of three years after that person has acquired the 15% ownership. The corporation may, however, engage in a business combination if it is approved by the Board before the person acquires the 15% ownership or later by the Board and two-thirds of the stockholders of the public corporation.

Item 2. Properties.

        Our principal corporate office is located at 2704 West Roscoe Street, Chicago, Illinois, in premises which we recently purchased from WMS Industries Inc. See "Item 13. Certain Relationships and Related Transactions." Our design and development studios are located in facilities in San Diego, California, and in Chicago, Illinois. We principally conduct our sales and marketing operations out of offices in Milpitas, California and London, England. We also lease a warehouse and distribution facility in Dallas, Texas. With the exception of our principal corporate office and some surrounding parking lots, all of our properties are leased. See Note 12 to the financial statements in this report for additional information regarding our lease commitments.

        We believe that our facilities and equipment are suitable for the purposes for which they are employed, are adequately maintained and will be adequate for current requirements and projected growth.

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Item 3. Legal Proceedings.

        On April 12, 1999, a wrongful death action was commenced against us and other companies by the administrators for three children who were murdered in 1997 by Michael Carneal at the Heath High School in McCracken County, Kentucky. The action, entitled James, et al. v. Meow Media, et al. was brought in the U.S. District Court for the Western District of Kentucky, Paducah Division, Civil Action No. 5:99CV96-J against 25 defendants. The defendants included 18 companies in the videogame business, five companies that produced or distributed the movie "The Basketball Diaries" and two companies that allegedly provide obscene Internet content. The complaint alleged, with respect to Midway and other videogame companies, that Carneal, then 14 years old, was influenced by the allegedly violent content of unspecified videogames and that the videogame manufacturers and suppliers were liable for Carneal's conduct. The complaint sought $10 million in compensatory damages with respect to each of the three children and $100 million in punitive damages.

        The action was dismissed against all defendants by order entered April 6, 2000. On August 13, 2002, the U.S. Court of Appeals for the Sixth Circuit affirmed the trial court's dismissal of all actions. On January 21, 2003, the United States Supreme Court entered an order denying the plaintiffs' Petition for a Writ of Certiorari. Plaintiffs have now exhausted all appeal possibilities, and this matter has ended.

        On April 19, 2001, a class action was commenced against us and other companies by individuals representing the victims (parents, teachers, students living, injured and deceased) of the shootings by Eric Harris and Dyland Klebold on April 20, 1999 at Columbine High School in Jefferson County, Colorado. The action, entitled Sanders, et al. v. Meow Media, et al., was brought in the U.S. District Court for the District of Colorado, Civil Action No. 01—0728 against 25 defendants. The defendants include 18 companies in the videogame business, five companies that produced or distributed the movie "The Basketball Diaries" and two companies that allegedly provided obscene Internet content. The complaint alleges, with respect to Midway and other videogame companies, that Harris and Klebold, then 17 years old, were influenced by the allegedly violent content of unspecified videogames and that the videogame manufacturers and suppliers are liable for Harris' and Klebold's conduct. The complaint seeks up to $10 million in compensatory damages for each of the members of the plaintiff class and $5 billion in punitive damages and relief "necessary to correct the abuses of the violent videogame industry & its marketing of these wares to children." On March 4, 2002, the court entered an opinion and order dismissing plaintiff's complaint in its entirety as to Midway and the other defendants. Plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Tenth Circuit on April 5, 2002. The parties have stipulated to a dismissal agreement, which was filed with the U.S. Court of Appeals for the Tenth Circuit. Accordingly, the appeal in the U.S. Court of Appeals for the Tenth Circuit was dismissed on December 10, 2002. This matter is now concluded.

        We currently and from time to time are involved in other litigation incidental to the conduct of our business, none of which, in our opinion, is likely to have a material adverse effect on us.

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

        Not Applicable.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

        Our common stock trades publicly on the NYSE under the symbol MWY. The following table shows the high and low sales prices of our common stock for the periods indicated as reported on the NYSE:

         On March 19, 2003, there were approximately 1,100 holders of record of our common stock.

        No cash dividends with respect to the common stock were declared or paid during fiscal 2001, the transition period or fiscal 2002. Under the agreements with our bank and with our preferred stockholders, we are prohibited from paying cash dividends on the common stock. We plan to retain any earnings from operations to fund our business.

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Item 6. Selected Financial Data.

(In thousands, except per share amounts)