As used in this report, the terms "CEC Entertainment," "we," "Company," "us" and "our" refer to CEC Entertainment, Inc. and its subsidiaries.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide the readers of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 30, 2007. Our MD&A is presented in the following sections:

• Executive Summary

• Results of Operations

• Financial Condition, Liquidity and Capital Resources

• Off-Balance Sheet Arrangements and Contractual Obligations

• Critical Accounting Policies and Estimates

• Recent Accounting Pronouncements

Executive Summary

Third Quarter 2008 Highlights

• Revenues increased 2.2% during the third quarter of 2008 compared to the same period in 2007.

• Comparable Company store sales increased 1.1%.

• Weighted average Company-owned store count increased by approximately three stores.

• We lost approximately 265 store operating days resulting from temporary store closures related to hurricanes Gustav and Ike. As a result of these lost operating days, we estimate that comparable Company store sales were negatively impacted by approximately 0.7%.

• Menu prices increased on average 1.8%.

• Company store operating costs as a percentage of Company store sales increased 2.0% during the third quarter of 2008 compared to the same period in 2007.

• An increase in the average price per pound of dough, an increase in buffalo wing usage resulting from an increase in food platter sales and an adjustment to vendor rebates represented a combined increase in food costs as a percentage of Company store sales of 0.9%.

• An increase in group medical expenses (included in store labor expense) and general insurance expenses (included in other store operating costs) represented a combined increase in costs as a percentage of Company store sales of 1.3% primarily due to favorable adjustments recorded in the third quarter of the prior year.

• Depreciation and amortization and rent expense increased a combined 0.4% as a percentage of Company store sales.

• A decrease in the average price per pound of cheese of approximately 4.4% and various company initiatives implemented during the year provided for a combined reduction in food costs as a percentage of Company store sales of 0.6%.

• A 4.1% increase in average hourly wage rates was offset by a 5.2% increase in revenue per hourly labor hour at our stores.

• Advertising expenses in the third quarter of 2008 increased to $8.7 million compared to $8.0 million in the third quarter of 2007 due to our recently enhanced marketing plan that incorporates both television and online media directed towards kids and moms and is further supported by our traditional newspaper insert coupon program.

• General and administrative expenses increased to $16.1 million in the third quarter of 2008 compared to $12.0 million in the third quarter of 2007 primarily due to the accrual of $3.0 million in aggregate loss contingencies related to ongoing litigation matters.

• Interest expense increased to $5.1 million for the third quarter of 2008 compared to $3.1 million in the third quarter of 2007 primarily due to an increase in the average debt balance outstanding under our revolving credit facility between the two periods. The additional funds were used by us to repurchase shares of our common stock during the first two quarters of 2008 and conduct our various capital initiatives.

• $392.9 million was outstanding under our $550 million revolving credit facility at the end of the third quarter 2008.

• Average interest rates incurred on our outstanding debt during the third quarter of 2008 decreased by approximately 240 basis points compared to the same period last year.

• Net income in the third quarter of 2008 declined 37.8% to $9.9 million from $15.9 million in the same period in 2007 and diluted earnings per share decreased 12% to $0.44 compared to the same period in 2007.

Overview of Operations

We develop, operate and franchise family entertainment-dining centers under the name "Chuck E. Cheese'sŪ" in 48 states and six foreign countries/territories. Our stores feature musical and comic entertainment by robotic and animated characters, games, rides and arcade-style activities intended to appeal to our primary customer base of families with children between two and 12 years of age. Additionally, our stores offer dining selections consisting of a variety of pizzas, sandwiches, appetizers, a salad bar, desserts and refreshments.

The following table summarizes information regarding our Company-owned and franchised stores:

                                             Three Months Ended                      Nine Months Ended
                                     September 28,        September 30,      September 28,        September 30,
                                         2008                 2007               2008                 2007
Number of Company-owned stores:
Beginning of period                            490                  487                490                  484
New                                              2                    1                  3                    8
Acquired from franchisees                        2                   -                   2                   -
Closed                                          (1 )                 -                  (2 )                 (4 )

End of period                                  493                  488                493                  488

Number of franchise stores:
Beginning of period                             47                   44                 44                   45
New                                              1                   -                   4                   -
Sold to Company                                 (2 )                 -                  (2 )                 -
Closed                                          -                    -                  -                    (1 )

End of period                                   46                   44                 46                   44

Our primary sources of revenues are from Company-owned store sales ("Company store sales") and franchise royalties and fees. Company store sales consist of revenue from the sale of food, beverages, games and merchandise at our Company-owned stores.

Certain costs and expenses relate only to our Company-owned stores. These include:

• Cost of sales which include food, beverage and related supplies costs less rebates from suppliers; paper and birthday supplies; and the cost of merchandise sold to and related costs of prizes provided to customers;

• Labor expenses, which include all direct store labor costs, related payroll taxes and benefits;

• Depreciation and amortization expense directly related to store assets;

• Rent expense related to company store facilities, excluding common occupancy costs (e.g. common area maintenance ("CAM") charges, property taxes, etc.); and

• Other operating expenses which include utilities, repair costs, liability and property insurance, CAM, property taxes, preopening expenses, store asset disposal gains and losses, and all other costs directly related to the operation of a store.

Advertising expense includes production costs for television commercials, newspaper inserts, coupons and media expenses for national and local advertising, with offsetting contributions to an advertising fund made by our franchisees pursuant to its franchise agreements.

General and administrative costs represent all expenses associated with our corporate office operations, including regional and district management and corporate personnel payroll and benefits, depreciation and amortization of corporate assets and other administrative costs not directly related to the operation of a store facility.

Asset impairment, if any, represents non-cash charges related to long-lived assets within the stores that are not expected to generate sufficient projected cash flows in order to recover their net book value.

Comparable store sales (sales of domestic stores that were open for a period greater than 18 months at the beginning of each respective year or 12 months for acquired stores) are a critical factor when evaluating our performance.

Seasonality

Our sales volumes fluctuate seasonally and are generally higher during the first and third quarters of each fiscal year. Holidays, school operating schedules and weather conditions may affect sales volumes seasonally in some of our operating regions. Due to the seasonality of our business, the results of any particular quarter may not necessarily be indicative of the results that may be achieved for the full year or any other quarter.

Fiscal Year

We operate on a 52 or 53 week fiscal year that ends on the Sunday nearest to December 31. Each quarterly period has 13 weeks, except for a 53 week year when the fourth quarter has 14 weeks. Our 2008 fiscal year consists of 52 weeks and our upcoming 2009 fiscal year will consist of 53 weeks.

Financial Reporting Changes

We have reclassified prior year revenue and expense amounts presented in our unaudited condensed consolidated statements of earnings to conform to current year presentation as set forth in our Annual Report on Form 10-K for fiscal year 2007. The reclassifications had no impact on previously reported net income, shareholder's equity and cash flows and the change in total revenues was not material.

Upon a detailed review with regard to our current presentation of a single revenue caption entitled, "Company store sales", we have determined that commencing with our Annual Report on Form 10-K for fiscal year 2008, we will disaggregate this revenue caption into "Food and beverage sales" and "Games and merchandise sales," and present separate corresponding "Cost of sales" amounts for each. We will provide this disaggregation for our fiscal years 2006, 2007 and 2008, including appropriate discussions within our MD&A. We anticipate this disaggregation will have no impact on total revenues, total cost of sales, operating income, net income, financial position, shareholders' equity, comprehensive income, or cash flows from operating activities for the annual and interim reporting periods.

Results of Operations

The following table summarizes our costs and expenses expressed as a percentage
of total revenues, except where otherwise noted, for the periods presented:



                                           Three Months Ended                       Nine Months Ended
                                    September 28,       September 30,       September 28,       September 30,
                                        2008                2007                2008                2007
Company store sales                          99.5 %              99.6 %              99.5 %              99.6 %
Franchise fees and royalties                  0.5 %               0.4 %               0.5 %               0.4 %

Total revenues                              100.0 %             100.0 %             100.0 %             100.0 %

Company store operating costs
(as a percentage of Company
store sales):
Cost of sales                                16.6 %              16.3 %              16.1 %              16.0 %
Labor expenses                               27.3 %              27.0 %              26.9 %              26.9 %
Depreciation and amortization                 9.3 %               9.0 %               8.7 %               8.5 %
Rent expense                                  8.3 %               8.2 %               7.8 %               7.9 %
Other operating expenses                     16.4 %              15.4 %              14.4 %              14.6 %

Total Company store operating
costs                                        77.9 %              75.9 %              73.9 %              73.8 %

Advertising expense                           4.3 %               4.1 %               4.2 %               3.9 %
General and administrative                    8.0 %               6.1 %               6.8 %               6.2 %
Asset impairment costs                        0.0 %               0.0 %               0.0 %               0.2 %

Total operating costs and
expenses                                     89.7 %              85.7 %              84.5 %              83.8 %

Operating income                             10.3 %              14.3 %              15.5 %              16.2 %
Interest expense, net                         2.5 %               1.6 %               2.0 %               1.4 %

Income before income taxes                    7.8 %              12.7 %              13.5 %              14.8 %

Due to rounding, percentages presented in the table above may not add.

Three Months Ended September 28, 2008 Compared to Three Months Ended September 30, 2007

Revenues

Company store sales increased 2.2% to $200.9 million for the third quarter of 2008 compared to $196.6 million for the same period in 2007 primarily due to a net increase in the number of Company-owned stores and a 1.1% increase in comparable store sales during the third quarter of 2008. Our Company store sales growth for the third quarter of 2008 includes the impact of temporary closures of 39 stores as a result of hurricanes Gustav and Ike. As a result of the hurricane related closures, we lost approximately 265 store operating days and we estimate that these temporary closures decreased our comparable store sales by approximately 0.7% in the third quarter of 2008. Including the affect of temporary store closures attributable to the 2008 hurricane season, the weighted average number of Company-owned stores open during the third quarter of 2008 increased by approximately three stores as compared to the same period in 2007. We believe that the increase in our comparable store sales during the third quarter of 2008 reflects the success of the various sales strategies we have implemented, including the ongoing capital initiatives at our existing stores, the continuation of an enhanced marketing plan implemented at the beginning of 2008, the continued development of a suggestive sales culture and our recent efforts to increase the number of birthday parties and fund raising events at our stores. Even with the success of these strategies and the increase in Company store sales, we believe that our sales during the third quarter of 2008 were negatively impacted by a restraint in consumer spending attributable to the weakening economy. Menu prices also increased on average 1.8% in the third quarter of 2008 compared to the third quarter of 2007.

Revenue from franchise fees and royalties increased 16.0% to $1.0 million for the third quarter of 2008 compared to $0.9 million for the same period in 2007 primarily due to an increase in the total number of franchise stores open in 2008 compared to the prior year period.

Costs and Expenses

Cost of sales as a percentage of Company store sales increased 0.3% to 16.6% for the third quarter of 2008 from 16.3% for the same period in 2007 primarily due to higher commodity prices and beverage costs. During the third quarter of 2008, the average price per pound of dough increased approximately $0.17, or 52%, compared to prices paid during the same period in 2007. These increases were partially offset by a reduction in the average price per pound of cheese which decreased approximately $0.09, or 4.4%, during the third quarter of 2008 compared to prices paid during the same period in 2007 and a reduction of approximately 0.5% as a percentage of Company store sales in total pizza costs attributable to our implementation of an enhanced cheese product and a reduction in the size of our medium and large pizzas earlier during the 2008 fiscal year. Also, during the third quarter of 2008, an increase in our buffalo wing usage resulting from an increase in our food platter sales increased our food costs by approximately 0.2% as a percentage of Company store sales. Beverage costs increased due to a non-cash charge of approximately $0.9 million, or 0.5% as a percentage of Company store sales, that we recorded in the third quarter of 2008 to adjust our vendor rebate allowance.

Labor expense as a percentage of Company store sales increased 0.3% to 27.3% for the third quarter of 2008 from 27.0% for the same period in 2007 primarily due to the non-recurrence of a $1.2 million prior year adjustment that reduced 2007 store employee benefit costs to reflect favorable medical claims trends. Also, during the third quarter of 2008, average hourly wage rates at our stores increased 4.1% which was offset by a 5.2% increase in revenue per hourly labor hour at our stores.

Depreciation and amortization expense related to our stores increased $0.8 million to $18.6 million for the third quarter of 2008 compared to $17.8 million for the same period in 2007 primarily due to the ongoing capital investment initiatives occurring at our existing stores and our new store development.

Store rent expense increased $0.6 million to $16.7 million for the third quarter of 2008 compared to $16.1 million for the same period in 2007 primarily due to the rental of additional facilities for new stores and expansions of existing stores.

Other store operating expenses as a percentage of Company store sales increased 1.0% to 16.4% for the third quarter of 2008 compared to 15.4% for the same period in 2007 primarily due to increases in insurance related costs and to a lesser extent increases in other general store operating expenses. Insurance related costs were approximately $1.9 million higher in the third quarter of 2008 compared to the same period in 2007 primarily due to the non-recurrence of a favorable prior year adjustment to workers compensation and general liability reserves recorded in 2007 and losses we incurred from hurricanes Gustav and Ike during the third quarter of 2008 which were not covered by our insurance. This increase was partially offset by an improvement in asset disposal costs which declined as a percentage of Company store sales during the third quarter of 2008 primarily due to prior year charges attributable to our store remodeling initiatives which have not recurred to the same extent as incurred in the third quarter of 2007.

Advertising expense as a percentage of total revenues increased 0.2% to 4.3% for the third quarter of 2008 from 4.1% for the same period in 2007 primarily due to increased television advertising and online media costs associated with our enhanced marketing programs in 2008.

General and administrative expenses as a percentage of total revenues increased 1.9% to 8.0% for the third quarter of 2008 from 6.1% for the same period in 2007 primarily due to the accrual of $3.0 million in aggregate loss contingencies related to ongoing litigation matters during the third quarter of 2008 and to a lesser extent increases in other corporate office expenses.

Interest Expense, Net

Interest expense increased to $5.1 million for the third quarter of 2008 compared to $3.1 million for the same period in 2007 primarily due to an increase in the average debt balance outstanding under our revolving credit facility during the third quarter of 2008 as compared to the same period in the prior year. The increase in debt balance was primarily attributable to our repurchases of our common stock during the first two quarters of 2008. The effect of the debt increase was partially offset by lower average interest rates in the third quarter of 2008, which declined by approximately 240 basis points compared to average rates experienced in the same period of last year.

Income Taxes

Our effective income tax rate was 36.9% and 36.6% for the third quarter of 2008 and 2007, respectively. The increase in our effective income tax rate was primarily due to the benefit of foreign tax credits recognized in the third quarter of 2007.

Net Income and Earnings Per Share

We reported net income of $9.9 million for the third quarter of 2008 compared to $15.9 million for the same period in 2007 due to the changes in revenues and expenses discussed above. Diluted earnings per share decreased 12% to $0.44 per share for the third quarter of 2008 from $0.50 per share for the same period in 2007 due to the 37.8% decrease in net income combined with a 28.6% decrease in the number of weighted average diluted shares outstanding. We did not repurchase any shares of our common stock under the plan authorized by our Board of Directors (the "Board") during the three months ended September 28, 2008. However, we estimate that the decrease in the number of weighted average diluted shares outstanding attributed to our repurchase of 4,911,041 shares of our common stock in the first two quarters of 2008 benefited our diluted earnings per share by approximately $0.06 per share during the third quarter of 2008. Our estimate is based on the weighted average number of shares repurchased during the period and includes an adjustment for the estimated additional interest expense attributable to increased borrowings under our revolving credit facility to finance the repurchases. Our computation does not include the effect prior year share repurchases have had on the current year.

Nine Months Ended September 28, 2008 Compared to Nine Months Ended September 30, 2007

Revenues

Company store sales increased 4.8% to $636.5 million for the first nine months of 2008 compared to $607.6 million for the same period in 2007 primarily due to a net increase in the number of Company-owned stores and a 3.4% increase in comparable store sales during the first nine months of 2008. The weighted average number of Company-owned stores open during the first nine months of 2008 increased by approximately four stores as compared to the same period in 2007. We believe that our comparable store sales in the first nine months of 2008 reflect the success of the various strategies we have implemented during the year, including the ongoing capital initiatives at our existing stores, an enhanced marketing plan implemented at the beginning of 2008, implementation of a suggestive sales program and our recent efforts to increase the number of birthday parties and fund raising events at our stores. Even with the success of these strategies and the increase in Company store sales, we believe that our sales during the first nine months of 2008 were negatively impacted by a restraint in consumer spending attributable to the weakening economy in the third quarter of 2008. The increase in our comparable store sales growth was also partially offset by the impact of temporary closures of 39 stores in the third quarter of 2008 as a result of hurricanes Gustav and Ike. We estimate that these temporary closures decreased our comparable store sales by approximately 0.2% during the first nine months of 2008. Menu prices also increased on average 1.6% in the first nine months of 2008 compared to the first nine months of 2007.

Revenue from franchise fees and royalties increased 17.5% to $3.1 million for the first nine months of 2008 compared to $2.6 million for the same period in 2007 primarily due to an increase in the total number of franchise stores open in 2008 compared to the prior year and also an increase in the number of new franchise stores that opened during the first nine months of 2008 compared to the same period in 2007.

Costs and Expenses

Cost of sales as a percentage of Company store sales increased 0.1% to 16.1% for the first nine months of 2008 from 16.0% for the same period in 2007 primarily due to higher commodity prices and beverage costs. During the first nine months of 2008, the average price per pound of cheese increased approximately $0.25, or 15%, and the average price per pound of dough increased approximately $0.12, or 36%, compared to prices paid during the same period in 2007. These increases were partially offset by a reduction of approximately 0.4% as a percentage of Company store sales in total pizza costs attributable to our implementation of an

enhanced cheese product and a reduction in the size of our medium and large pizzas during the first two quarters of the 2008 fiscal year. Beverage costs increased due to a non-cash charge of approximately $0.9 million, or approximately 0.1% as a percentage of Company store sales, that we recorded in the third quarter to adjust our vendor rebate allowance.

Labor expense as a percentage of Company store sales remained consistent at 26.9% for the first nine months of 2008 and 2007 primarily due to leverage from our sales increase offsetting increases in hourly wage rates. During the first nine months of 2008, we experienced a 3.6% increase in revenue per hourly labor hour partially offsetting a 4.4% increase in average hourly wage rates at our stores.

Depreciation and amortization expense related to our stores increased $3.4 million to $55.3 million for the first nine months of 2008 compared to $51.9 million for the same period in 2007 primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development.

Store rent expense increased $1.8 million to $49.6 million for the first nine months of 2008 compared to $47.8 million for the same period in 2007 primarily due to the rental of additional facilities for new stores and expansions of existing stores.

Other store operating expenses as a percentage of Company store sales decreased 0.2% to 14.4% for the first nine months of 2008 compared to 14.6% for the same period in 2007 primarily due to leverage from our sales increase. Insurance related costs were approximately $1.9 million higher in 2008 compared to the same period in 2007 due to a favorable prior year adjustment to workers compensation and general liability reserves recorded in 2007 and losses we incurred from hurricanes Gustav and Ike during the third quarter of 2008 which were not covered by our insurance. This increase was partially offset by an improvement in asset disposal costs which declined as a percentage of Company store sales during the first nine months of 2008 primarily due to charges attributable to our store remodeling initiatives which have not recurred to the same extent as incurred in the same period of 2007. Other store operating costs for the first nine months of 2008 also benefited from a $0.9 million gain that we recognized in the second quarter of 2008 from the sale of property related to our TJ Hartford's Grill and Bar.

Advertising expense as a percentage of total revenues increased 0.3% to 4.2% for the first nine months of 2008 from 3.9% for the same period in 2007 primarily due to increased television advertising, newspaper inserts and online media costs associated with our enhanced marketing programs in 2008.

General and administrative expenses as a percentage of total revenues increased . . .