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 is presented in the following sections:

• Executive Overview

• Overview of Operations

• Results of Operations

• Financial Condition, Liquidity and Capital Resources

• Off-Balance Sheet Arrangements and Contractual Obligations

• Critical Accounting Policies and Estimates

• Recent Accounting Pronouncements

Our MD&A should be read in conjunction with our consolidated financial statements and related notes included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

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. References to 2008, 2007 and 2006 are for the fiscal years ended December 28, 2008, December 30, 2007, and December 31, 2006, respectively. Our 2008, 2007 and 2006 fiscal years each consisted of 52 weeks and our 2009 fiscal year will consist of 53 weeks.

Financial Reporting Changes

As described in Note 1 "Summary of Significant Accounting Policies - Revisions to Financial Statement Presentation" to our consolidated financial statements, we revised the presentation in our Consolidated Statements of Earnings to disaggregate Company store sales into separate amounts for "Food and beverage sales" and "Entertainment and merchandise sales" and to also present separate corresponding amounts for the cost related to each of these revenue captions. This revision had no impact on previously reported total revenues, total cost of food and beverage and entertainment and merchandise, operating income, net income, stockholders' equity, comprehensive income, or cash flows from operating activities.

Executive Overview

Fiscal 2008 Summary

• Revenues increased 3.7% during 2008 compared to 2007.

• Comparable Company store sales increased 2.3%.

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

• We lost approximately 265 store operating days resulting from temporary store closures related to hurricanes Gustav and Ike during the third quarter of 2008. As a result of these lost operating days, we estimate that comparable Company store sales were negatively impacted by approximately 0.2%.

• Menu prices increased on average 1.7%.

• Company store operating costs as a percentage of Company store sales increased 0.6% during 2008 compared to 2007.

• Increases in the average price per pound of cheese and dough, an increase in our 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 food and beverage sales of approximately 0.6% (or 1.2% as a percentage of food and beverage sales).

• Various company initiatives implemented during the year provided for a combined reduction in total pizza costs of approximately 0.4% as a percentage of Company store sales (or 0.8% as a percentage of food and beverage sales).

• A 3.6% increase in average hourly wage rates was partially offset by a 3.1% increase in revenue per hourly labor hour at our stores.

• An increase in group medical expenses (included in store labor expenses) and general insurance costs (included in other store operating expenses) represented a combined increase in costs as a percentage of Company store sales of 0.7% primarily due to favorable adjustments recorded in 2007 that did not recur in 2008.

• Depreciation and amortization and rent expenses increased a combined 0.2% as a percentage of Company store sales.

• Asset disposal costs declined approximately $3.1 million, or 0.4% as a percentage of Company store sales, during 2008 primarily attributable to a reduction in the number of major remodel initiatives during 2008 compared to 2007.

• Advertising expenses in 2008 increased to $34.7 million compared to $30.7 million in 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 $56.0 million in 2008 compared to $51.7 million in 2007 primarily due to higher performance based compensation costs associated with our financial performance in 2008 relative to 2007 and a 0.3% increase as a percentage of total revenues in litigation related costs.

• $401.9 million was outstanding under our $550 million revolving credit facility at the end of 2008.

• Average interest rates incurred on the outstanding balance of our revolving credit facility during 2008 decreased by approximately 240 basis points compared to last year.

• Net income in 2008 increased 1.0% to $56.5 million from $55.9 million in 2007 and diluted earnings per share increased 34.7% to $2.37 compared to $1.76 in 2007. Earnings per share growth benefited from our cumulative share repurchases of $408.9 million during the 2008 and 2007 fiscal years.

Impact of Share Repurchases

During 2008 and 2007, we repurchased 4,911,041 shares and 7,887,337 shares of our common stock under the repurchase plan authorized by our Board of Directors (the "Board"). These share repurchases reduced our weighted average diluted shares outstanding by 3,498,151 shares in 2008 and 2,393,932 shares in 2007. We estimate that the decrease in the number of weighted average diluted shares outstanding attributable solely to our 2008 share repurchases benefited our diluted earnings per share by approximately $0.26 in 2008. Additionally, we estimate that the decrease in the number of weighted average diluted shares outstanding attributed solely to our 2007 share repurchases benefited our diluted earnings per share by approximately $0.08 in 2007. 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 of prior year share repurchases.

Capital Initiatives

Our future capital expenditures will primarily be for the development of new stores and reinvestment into our existing store base through various capital initiatives. Our plan for new store development is primarily focused on opening high sales volume stores in densely populated areas. The cost of opening such new stores varies depending upon many factors including the size of the store, whether we acquire land and whether the store is an in-line or freestanding building.

We believe that in order to maintain consumer demand for and the appeal of our concept, we must continually reinvest in our existing stores. For our existing stores, we currently utilize the following capital initiatives: (a) major remodels, (b) store expansions, and (c) game enhancements. We believe these capital initiatives are essential to preserving our existing sales and cash flows and provide a solid foundation for long term revenue growth.

The following table summarizes information regarding the number of capital initiatives we completed during each of the periods presented:

                                               Fiscal Year
                                            2008   2007   2006
                        Major remodels        15     52     55
                        Store expansions      20     19     15
                        Game enhancements    125     94     82

                        Total completed      160    165    152

Major remodels. We undertake periodic major remodels when there is a need to improve the overall appearance of a store or when we introduce concept changes or enhancements to our stores. The major remodel initiative typically includes increasing the space allocated to the playroom area, increasing the number of games and rides and developing a new exterior and interior identity. During 2008, our major remodels cost on average approximately $0.7 million per store.

Store expansions. Store expansions improve the quality of the guests' experience because it allows us to increase the variety of games, rides and other entertainment offerings in our stores. In addition to expanding the square footage of a store, store expansions typically include all components of a major remodel including an increase in the number of games and rides. A store expansion typically results in both an increase in the store's seat count and the space available for our various entertainment offerings. We consider our investments in store expansions to generally be discretionary in nature. In undertaking store expansions, our objective is to improve the appeal of our stores and to respond to sales growth opportunities as they arise. During 2008, our store expansions cost on average approximately $1.0 million per store.

Game enhancements. The primary components of the game enhancement initiative are to provide new games and rides. Game enhancements incorporate improvements in game technology and counteract general wear and tear on the equipment. During 2008, our game enhancements cost on average approximately $100 thousand to $150 thousand per store.

Since the lifecycles of our store format and our games are largely driven by changes in consumer behaviors and preferences, we believe that our capital initiatives involving major remodels and game enhancements are required in order to keep pace with consumer entertainment expectations. As a result, we view our major remodel and game enhancement initiatives as a means to

maintaining and protecting our existing sales and cash flows. While we are hopeful that our major remodels and game enhancements will contribute to incremental sales growth, we believe that our capital spending with respect to expansions of existing stores will more directly lead to growth in our comparable store sales and cash flow. We typically invest in expansions when we believe there is potential for sales growth and, in some instances, in order to maintain sales in stores that compete with other large-box competitors. We believe that expanding the square footage and entertainment space of a store increases our guest traffic and enhances the overall customer experience, which we believe will contribute to the growth of our long-term comparable store sales. The objective of an expansion or remodel that increases space available for entertainment is not intended to exclusively improve our entertainment sales, but rather is focused on impacting total Company store sales through increased guest traffic and satisfaction.

Overview of Operations

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

The following table summarizes information regarding the number of Company-owned and franchised stores for the periods presented:

                                                      Fiscal Year
                                                 2008     2007     2006
               Number of Company-owned stores:
               Beginning of period                490      484      475
               New                                  5       10       14
               Acquired from franchisees            2        1       -
               Closed                              (2 )     (5 )     (5 )

               End of period                      495      490      484


               Number of franchise stores:
               Beginning of period                 44       45       44
               New                                  4        1        1
               Acquired by the Company             (2 )     (1 )     -
               Closed                              -        (1 )     -

               End of period                       46       44       45

Comparable store sales. Comparable store sales (sales of domestic stores that were open for a period greater than 18 months at the beginning of each respective fiscal year or 12 months for acquired stores) is a key performance indicator used within our industry and is a critical factor when evaluating our performance as it is indicative of acceptance of our strategic initiatives and local economic and consumer trends.

The following table summarizes information regarding our average annual comparable store sales and comparable store base:

                                                                 Fiscal Year
                                                         2008          2007       2006
                                                         (in thousands, except store
                                                               number amounts)
 Average annual sales per comparable store (1)        $    1,633    $    1,602   $ 1,647
 Number of stores included in comparable store base          453           436       416

(1) Average annual sales per comparable store have been calculated based on the average weekly sales of our comparable store base. The amount of average annual sales per comparable store cannot be used to compute year-over-year comparable store sales increases or decreases due to the change in comparable store base.

Revenues. Our primary source of revenues is from sales at our Company-owned stores ("Company store sales") and consists of the sale of food, beverages, game-play tokens and merchandise. Food and beverage sales include all revenue recognized with respect to stand-alone food and beverage sales as well as the portion of revenue that is allocated from package deals. Entertainment and merchandise sales include all revenue recognized with respect to stand-alone game sales as well as the portion of revenue that is allocated from package deals. This revenue caption also includes sales of merchandise at our stores.

A portion of Company store sales comes from sales of value-priced combination packages generally consisting of food, beverage and game tokens ("package deals") which we promote through in-store menu pricing or coupon offerings. Package deals

represent a significant value to our customers because they are priced at an amount lower than what our guests would pay if they were to purchase the packaged items individually. We allocate the revenue recognized from the sale of our package deals between "Food and beverage sales" and "Entertainment and merchandise sales" based upon our best estimate of each component's fair value, which we typically determine as the price charged for each component when it is sold separately. The maximum price our customers may pay for a game token is $0.25; however, we offer game tokens at reduced prices when purchased in large quantities or as part of a package deal. On a limited basis, we may also provide game tokens to our customers free of charge with the purchase of certain food and beverage items.

Franchise fees and royalties include area development and initial franchise fees received from franchisees to establish new stores and royalties charged to franchisees based on a percentage of a franchised store's sales.

Company store operating costs. Certain costs and expenses relate only to the operation of our Company-owned stores and are as follows:

• Cost of food and beverage includes all direct costs of food, beverages and costs of related paper and birthday supplies, less rebates from suppliers.

• Cost of entertainment and merchandise includes all direct costs of prizes provided and merchandise sold to our customers, as well as the cost of tickets dispensed to customers and redeemed for prize items.

• Labor expenses consist of salaries and wages, related payroll taxes and benefits for store personnel.

• Depreciation and amortization expense pertain directly to our store assets.

• Rent expense includes lease costs for Company stores, excluding common occupancy costs (e.g. common area maintenance ("CAM") charges, property taxes, etc.).

• Other store 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.

Our "Cost of food and beverage" and "Cost of entertainment and merchandise" mentioned above do not include an allocation of (i) store employee payroll, related taxes and benefit costs and (ii) depreciation and amortization expense associated with Company-store assets. We believe that presenting store-level labor costs and depreciation and amortization expense in the aggregate provides the most informative financial reporting presentation. Our rationale for excluding such costs is as follows:

• Based on the fact that our store employees are trained to sell and attend to both our dining and entertainment operations, we believe it would be difficult and potentially misleading to assign labor costs between food and beverage sales and entertainment and merchandise sales.

• While certain assets are individually dedicated to either our food service operations or game activities, we also have significant capital investments in shared depreciating assets, such as leasehold improvements, point-of-sale systems, animatronics, and showroom fixtures. Therefore, we believe it would be difficult and potentially misleading to assign depreciation and amortization expense between food and beverage sales and entertainment and merchandise sales.

Advertising expense. Advertising expense includes production costs for television commercials, newspaper inserts, Internet advertising, coupons and media expenses for national and local advertising, with offsetting contributions from the Advertising Fund and Media Fund made by the Association pursuant to franchise agreements.

General and administrative expenses. General and administrative expenses represent all costs 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 location.

Asset impairments. Asset impairments represent non-cash charges we record to write down the carrying amount of long-lived assets within stores that are not expected to generate sufficient projected cash flows in order to recover their net book value.

Results of Operations

Historical Results

The following table summarizes our principal sources of revenues expressed in
dollars and as a percentage of total revenues for the periods presented:



                                                                    Fiscal Year
                                                 2008                  2007                  2006
                                                        (in thousands, except percentages)
Food and beverage sales                    $ 409,895    50.3 %   $ 405,740    51.7 %   $ 411,080    53.2 %
Entertainment and merchandise sales          400,798    49.2 %     375,925    47.9 %     358,161    46.4 %

Company store sales                          810,693    99.5 %     781,665    99.5 %     769,241    99.6 %
Franchising activities                         3,816     0.5 %       3,657     0.5 %       3,312     0.4 %

Total revenues                             $ 814,509   100.0 %   $ 785,322   100.0 %   $ 772,553   100.0 %

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

The following table summarizes our costs and expenses expressed in dollars and as a percentage of Company store sales (except as otherwise noted) for the periods presented:

                                                                     Fiscal Year
                                                    2008                 2007                 2006
                                                          (in thousands, except percentages)
Company store operating costs:
Cost of food and beverage (as a percentage
of food and beverage sales)                   $  96,891   23.6 %   $  93,693   23.1 %   $  89,650   21.8 %
Cost of entertainment and merchandise (as a
percentage of entertainment and merchandise
sales)                                           34,525    8.6 %      32,720    8.7 %      32,158    9.0 %

                                                131,416   16.2 %     126,413   16.2 %     121,808   15.8 %
Labor expenses                                  223,331   27.5 %     214,147   27.4 %     210,010   27.3 %
Depreciation and amortization                    74,805    9.2 %      70,701    9.0 %      64,292    8.4 %
Rent expense                                     65,959    8.1 %      63,734    8.2 %      60,333    7.8 %
Other store operating expenses                  119,990   14.8 %     113,789   14.6 %     106,025   13.8 %

Total Company store operating costs             615,501   75.9 %     588,784   75.3 %     562,468   73.1 %
Other costs and expenses (as a percentage
of total revenues):
Advertising expense                              34,736    4.3 %      30,651    3.9 %      32,253    4.2 %
General and administrative expenses              55,970    6.9 %      51,705    6.6 %      53,037    6.9 %
Asset impairments                                   282    0.0 %       9,638    1.2 %       3,910    0.5 %

Total operating costs and expenses              706,489   86.7 %     680,778   86.7 %     651,668   84.4 %

Operating income (as a percentage of total
revenues)                                       108,020   13.3 %     104,544   13.3 %     120,885   15.6 %
Interest expense, net (as a percentage of
total revenues)                                  17,389    2.1 %      13,170    1.7 %       9,508    1.2 %

Income before income taxes (as a percentage
of total revenues)                            $  90,631   11.1 %   $  91,374   11.6 %   $ 111,377   14.4 %

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

Fiscal Year 2008 Compared to Fiscal Year 2007

Revenues

Company store sales increased 3.7% to $810.7 million during 2008 compared to $781.7 million in 2007 primarily due to a 2.3% increase in comparable store sales during 2008, a net increase in the number of our Company-owned stores and an average increase in menu prices of 1.7% in 2008 compared to 2007. The weighted average number of Company-owned stores open during 2008 increased by approximately five stores as compared to 2007. We believe that our comparable store sales in 2008 reflect the impact 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. During 2008, our birthday party sales as a percentage of total Company store sales increased 12.0% to 12.9%, and fund raising sales as a percentage of total Company store sales increased from 0.7% to 0.9%. Even with the success of these strategies and the increase in Company store sales, we believe that our sales in 2008 were negatively impacted by a restraint in consumer spending attributable to the weakening economy particularly in the last two quarters of 2008. The increase in our comparable store sales growth was also partially offset by the impact of temporary closures of 39 stores (representing approximately 265 store operating days) in the third quarter of 2008 as a result of hurricanes Gustav and Ike. We estimate that these temporary closures decreased our 2008 comparable store sales by approximately 0.2%.

Our Company store sales mix was 50.6% food and beverage and 49.4% entertainment and merchandise for fiscal 2008 compared to 51.9% and 48.1%, respectively, for 2007.

Revenue from franchise fees and royalties increased 4.3% to $3.8 million during 2008 compared to $3.7 million in 2007 primarily due to our recognition of additional franchise fees attributable to the increase in the number of new franchise stores that opened during 2008. During 2008, four new franchise stores opened and we acquired two franchise stores. Domestic franchise comparable store sales decreased 2.4% in 2008 as compared to 2007.

Company Store Operating Costs

Cost of food and beverage as a percentage of food and beverage sales increased 0.5% to 23.6% during 2008 from 23.1% in 2007 primarily due to higher commodity prices and beverage costs. During 2008, the average price per pound of cheese increased approximately $0.13, or 8%, and the average price per pound of dough increased approximately $0.12, or 29%, compared to prices paid in 2007. Increases attributable to the average prices per pound of cheese and dough and our increased buffalo wing usage represented approximately a 1.0% combined increase in food costs as a percentage of food and beverage sales. These increases were partially offset by a reduction of approximately 9.0% as a percentage of food and beverage sales in total pizza costs attributable to our implementation of an enhanced cheese product and a resizing of our medium and large pizzas during the first two quarters of 2008. Beverage costs increased due to a non-cash charge of approximately $0.9 million, or approximately 0.2% as a percentage of food and beverage sales, that we recorded in the third quarter to adjust our vendor rebate allowance. Additionally, an enhanced birthday party package we introduced during 2008 increased costs approximately 0.2% as a percentage of food and beverage sales.

Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales decreased 0.1% to 8.6% during 2008 from 8.7% in 2007.

Labor expense as a percentage of Company store sales increased 0.1% to 27.5% during 2008 compared to 27.4% in 2007 primarily due to a 3.6% increase in . . .