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 28, 2008. 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

Executive Overview

First Quarter 2009 Highlights
· Revenues increased 1.2% during the first quarter of 2009 compared to the same period in 2008.

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

- Menu prices increased approximately 2.0%.

- Comparable Company store sales decreased 0.1%.

· Company store operating costs as a percentage of Company store sales decreased 1.4% during the first quarter of 2009 compared to the same period in 2008.

- The average price per pound of cheese decreased by approximately 38%.

- Cheese usage declined as a result of Company initiatives implemented during the first two quarters of 2008.

- A 2.3% increase in average hourly wage rates was offset by improved labor utilization in our stores.

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

· General and administrative expenses increased to $14.5 million during the first quarter of 2009 compared to $13.3 million in the first quarter of 2008 primarily due to a $0.8 million forfeiture estimate adjustment with respect to stock-based compensation awards.

· Interest expense decreased to $3.1 million during the first quarter of 2009 compared to $3.8 million in the first quarter of 2008 primarily due to a 200 basis point decrease in the average effective interest rates incurred on the outstanding balance of our revolving credit facility during the first quarter of 2009 compared to the first quarter of 2008.

- $336.6 million was outstanding under our $550 million revolving credit facility at the end of the first quarter of 2009.

- We reduced the outstanding balance under our revolving credit facility by $65.3 million during the first quarter of 2009.

· Net income for the first quarter of 2009 increased 3.5% to $34.1 million from $32.9 million in the same period in 2008 and diluted earnings per share increased 19.4% to $1.48 compared to $1.24 in the same period in 2008.

· We made no repurchases of our common stock under our share repurchase program during the first quarter of 2009.

Financial Reporting Change

In the first quarter of 2009 we adopted FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," ("FSP EITF 03-6-1") which clarifies whether unvested share-based payment awards with nonforfeitable dividend rights should be included in the computation of earnings per share and requires that all prior-period EPS data presented be adjusted retrospectively. Refer to Note 7 "Earnings Per Share" of our condensed consolidated financial statements for a more complete discussion of FSP EITF 03-6-1 and its impact on our earnings per share.

Overview of Operations

We develop, operate and franchise family dining and entertainment centers under the name "Chuck E. Cheese'sŪ" 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:

                                      Three Months Ended
                                  March 29,        March 30,
                                     2009             2008

Number of Company-owned stores:
Beginning of period                      495              490
New                                        -                -
Acquired from franchisees                  -                -
Closed                                     -                -
End of period                            495              490

Number of franchised stores:
Beginning of period                       46               44
New                                        1                -
Acquired by the Company                    -                -
Closed                                     -                -
End of period                             47               44

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.

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.

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.); and

· Other store operating expenses which include utilities, repair costs, liability and property insurance, CAM charges, 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.

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 (if any) 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.

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 2009 fiscal year will consist of 53 weeks and our 2008 fiscal year consisted of 52 weeks.

Results of Operations

The following table summarizes our principal sources of revenues expressed in
dollars and as a percentage of total revenues for the periods presented:
                                                    Three Months Ended
                                         March 29, 2009            March 30, 2008
                                            (in thousands, except percentages)

Food and beverage sales               $ 128,479        51.8 %   $ 124,205        50.7 %
Entertainment and merchandise sales     118,581        47.8 %     120,014        49.0 %

Company store sales                     247,060        99.6 %     244,219        99.6 %
Franchising activities                    1,073         0.4 %         957         0.4 %

Total revenues $ 248,133 100.0 % $ 245,176 100.0 %

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:

                                                                         Three Months Ended
                                                               March 29, 2009            March 30, 2008
                                                                 (in thousands, except percentages)
Company store operating costs:
Cost of food and beverage (as a percentage of food and
beverage sales)                                            $    27,146       21.1 %   $  28,265       22.8 %
Cost of entertainment and merchandise (as a percentage
of
entertainment and merchandise sales)                            10,764        9.1 %       9,832        8.2 %

                                                                37,910       15.3 %      38,097       15.6 %
Labor expenses                                                  60,496       24.5 %      62,236       25.5 %
Depreciation and amortization                                   18,914        7.7 %      18,464        7.6 %
Rent expense                                                    16,914        6.8 %      16,496        6.8 %
Other store operating expenses                                  30,124       12.2 %      30,638       12.5 %
Total Company store operating costs                            164,358       66.5 %     165,931       67.9 %
Other costs and expenses (as a percentage of total
revenues):
Advertising expense                                             10,044        4.0 %      10,119        4.1 %
General and administrative expenses                             14,517        5.9 %      13,288        5.4 %
Total operating costs and expenses                             188,919       76.1 %     189,338       77.2 %

Operating income (as a percentage of total revenues)            59,214       23.9 %      55,838       22.8 %
Interest expense, net (as a percentage of total
revenues)                                                        3,074        1.2 %       3,833        1.6 %

Income before income taxes (as a percentage of total
revenues)                                                  $    56,140       22.6 %   $  52,005       21.2 %


______________

Three Months Ended March 29, 2009 Compared to Three Months Ended March 30, 2008

Revenues

Company store sales increased 1.2% to $247.1 million during the first quarter of 2009 compared to $244.2 million in the first quarter of 2008 primarily due to a net increase in the number of Company-owned stores and an increase in menu prices of approximately 2.0%. The weighted average number of Company-owned stores open during the first quarter of 2009 increased by approximately five stores as compared to the same period in 2008. Comparable store sales decreased 0.1% during the first quarter of 2009, reflecting unfavorable timing of a number of school spring breaks which shifted to the second quarter of 2009 from the first quarter of last year. Despite the decline in comparable store sales, we believe that our comparable store sales results during the first quarter of 2009 reflect the continued successful execution of our sales strategies, including ongoing capital initiatives at our existing stores, an enhanced marketing plan, a suggestive sales program and our recent efforts to increase the number of birthday parties and fund raising events at our stores. During the first quarter of 2009, our birthday party sales as a percentage of total Company store sales increased to 12.8% from 11.6% in the first quarter of 2008, and fund raising sales as a percentage of total Company store sales increased to 1.2% from 1.0% in the first quarter of 2008. Even with the success of these strategies, we believe that our sales in the first quarter of 2009 were negatively impacted by a restraint in consumer spending due to the current economic conditions.

Our Company store sales mix was 52.0% food and beverage sales and 48.0% entertainment and merchandise sales during the first quarter of 2009 compared to 50.9% and 49.1%, respectively, in the first quarter of 2008. We believe the sales mix shift from entertainment and merchandise to food and beverage is primarily the result of increased menu pricing for food and beverage products.

Revenue from franchise fees and royalties increased 12.1% to $1.1 million during the first quarter of 2009 compared to $1.0 million in the first quarter of 2008 primarily due to our recognition of additional franchise fees attributable to the opening of a new franchise store during the first quarter of 2009.

We believe that the recent outbreak of the H1N1 influenza A virus, commonly referred to as the "swine flu," could unfavorably impact our sales trends during the 2009 fiscal year. To the extent that our guests have concerns visiting public locations, particularly public locations with a large number of children, due to a perceived increased risk of exposure to the virus, our sales during the year could be materially impacted. The severity and duration of any impact to our financial results from the recent outbreak of the H1N1 influenza A virus are currently uncertain.

Company Store Operating Costs

Cost of food and beverage as a percentage of food and beverage sales decreased 1.7% to 21.1% during the first quarter of 2009 from 22.8% in the first quarter of 2008 primarily due to a decline in cheese prices. During the first quarter of 2009, the average price per pound of cheese decreased approximately $0.72, or 38%, compared to prices paid in the first quarter of 2008.

Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales increased 0.9% to 9.1% during the first quarter of 2009 from 8.2% in the first quarter of 2008. This increase was primarily due to margin pressure associated with the liquidation of certain prize inventory during the first quarter of 2009.

Labor expense as a percentage of Company store sales decreased 1.0% to 24.5% during the first quarter of 2009 compared to 25.5% in the first quarter of 2008 primarily due to improved labor utilization, offsetting a 2.3% increase in average hourly wage rates at our stores.

Depreciation and amortization expense related to our stores increased $0.5 million to $18.9 million during the first quarter of 2009 compared to $18.5 million in the first quarter of 2008 primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development.

Store rent expense increased $0.4 million to $16.9 million during the first quarter of 2009 compared to $16.5 million in the first quarter of 2008 primarily due to an increase in the number of our leased properties resulting from our new store development and to a lesser extent expansions of existing stores.

Other store operating expenses as a percentage of Company store sales decreased 0.3% to 12.2% during the first quarter of 2009 compared to 12.5% in the first quarter of 2008 primarily due to decreases in various store operating costs.

Advertising Expense

Advertising expense as a percentage of total revenues decreased 0.1% to 4.0% during the first quarter of 2009 from 4.1% in the first quarter of 2008 primarily due to leverage from our sales increase.

General and Administrative Expenses

General and administrative expenses as a percentage of total revenues increased 0.5% to 5.9% during the first quarter of 2009 from 5.4% in the first quarter of 2008 primarily due to a $0.8 million forfeiture estimate adjustment with respect to stock-based compensation awards. Increases in various other corporate office expenses were partially offset by the non-recurrence of certain professional service fees related to legal matters in the prior year.

Interest Expense, Net

Interest expense decreased to $3.1 million during the first quarter of 2009 compared to $3.8 million in the first quarter of 2008 primarily due to a 200 basis point decrease in the average effective interest rates incurred on the outstanding balance of our revolving credit facility, partially offset by an increase in the average debt balance outstanding between the two periods. During the first quarter of 2009 the average debt balance outstanding under our revolving credit facility was $370.7 million compared to $300.7 million during the first quarter of 2008. We reduced the outstanding balance under our revolving credit facility by $65.3 million during the first quarter of 2009.

Income Taxes

Our effective income tax rate was 39.3% and 36.7% for the first quarters of 2009 and 2008, respectively. The increase in our effective tax rate was primarily due to the effect of favorable discrete state tax adjustments we made in the first quarter of 2008 and the effect of unfavorable discrete U.S. federal tax adjustments we made in the first quarter of 2009.

Diluted Earnings Per Share

Diluted earnings per share increased to $1.48 per share for the first quarter of 2009 from $1.24 per share in the first quarter of 2008 due to a 13.0% decrease in the number of weighted average diluted shares outstanding combined with the 3.5% increase in net income. The increase in diluted earnings per share between the two periods was impacted by our repurchase of approximately 4.9 million shares of our common stock since the first quarter of 2008. We estimate that the decrease in the number of weighted average diluted shares outstanding during the first quarter of 2009 attributable solely to these repurchases benefited our earnings per share in the first quarter of 2009 by approximately $0.21. Our estimate is based on the weighted average number of shares repurchased since the first quarter of 2008 and includes consideration of 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 share repurchases prior to the 2008 fiscal year.

Financial Condition, Liquidity and Capital Resources

Overview of Liquidity

Funds generated by our operating activities, available cash and cash equivalents, and our revolving credit facility continue to be our most significant sources of liquidity. We believe funds generated from our expected results of operations and available cash and cash equivalents will be sufficient to finance our business development strategies and capital initiatives for the next year. In addition, our revolving credit facility is available for additional working capital needs and investment opportunities. However, in light of the current weakened economic environment and volatility in the financial markets, there can be no assurance that we will generate cash flows at or above our current levels or that we will have adequate access to credit. Further restraint in consumer spending or disruptions in financial markets could require us to take measures to conserve cash until the economic climate stabilizes or, if needed, until we can secure alternative credit arrangements or other funding for our business needs. Such measures could include deferring or curtailing our capital expenditures and other discretionary uses of cash.

Our primary requirements for cash provided by operating activities relate to planned capital expenditures, servicing our debt and may include repurchases of our common stock.

We do not enter into any material development or contractual purchase obligations in connection with our business development strategy. As a result, with respect to our planned capital expenditures, including spending that pertains to our new store development and capital initiatives, we believe that we have the flexibility necessary to manage our liquidity by promptly deferring or curtailing our capital spending.

The following tables present summarized financial information that we believe is helpful in evaluating our liquidity and capital resources:

                                                     Three Months Ended
                                                  March 29,      March 30,
                                                     2009           2008
                                                       (in thousands)

Net cash provided by operating activities         $   81,746     $   81,479
Net cash used for investing activities               (15,925 )      (18,111 )
Net cash used for financing activities               (66,493 )      (65,366 )
Effect of foreign exchange rate changes on cash          (23 )            -

Change in cash and cash equivalents               $     (695 )   $   (1,998 )

Interest paid                                     $    3,564     $    3,695
Income taxes received, net                        $   (4,995 )   $     (339 )



                                                                    March 29,       December 28,
                                                                       2009             2008
                                                                           (in thousands)

Cash and cash equivalents                                           $   17,074     $       17,769
Revolving credit facility borrowings                                $  336,600     $      401,850
Unused commitments under revolving credit facility (1)              $  213,400     $      148,150

Cash Flows - Operating Activities

Net cash provided by operating activities increased $0.3 million to $81.7 million during the first quarter of 2009 from $81.5 million in the first quarter of 2008. The increase was primarily attributable to an increase in net income.

Our cash interest payments decreased $0.1 million to $3.6 million during the first quarter of 2009 from $3.7 million in the first quarter of 2008 primarily due to a reduction in the prevailing rates of interest incurred on our borrowings in 2009 as compared to the prior year, partially offset by payments of approximately $0.5 million we made in connection with various state tax settlements and an increase in the average debt balance outstanding under our credit facility between the two periods.

Our cash refunds received for income taxes, net of payments we made, increased $4.7 million to $5.0 million during the first quarter of 2009 compared to refunds received of $0.3 million in the first quarter of 2008. The increase was primarily attributable to the receipt of a $5.5 million refund of excess federal income tax payments made in the prior year, partially offset by settlement payments of approximately $0.4 million we made to various state tax authorities during the first quarter of 2009.

Cash Flows - Investing Activities

Net cash used in investing activities decreased $2.2 million to $15.9 million during the first quarter of 2009 from $18.1 million in the first quarter of 2008, primarily due to a $2.0 million reduction in our capital expenditures for general store activities.

Cash Flows - Financing Activities

Net cash used in financing activities increased $1.1 million to $66.5 million during the first quarter of 2009 from $65.4 million in the first quarter of 2008, primarily due to an increase in our repayment of borrowings under our revolving credit facility and an increase in the tax payments we incur for shares of stock tendered to us upon the vesting of restricted stock awards, partially offset by a reduction in our share repurchase activity. During the first quarter of 2009, our repayment of borrowings under our revolving credit . . .