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

Third Quarter 2009 Highlights
· Revenues decreased 2.0% during the third quarter of 2009 compared to the same period in 2008.

- Comparable store sales decreased 3.1%.

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

- Menu prices increased on average 1.5%.

· Company store operating costs as a percentage of Company store sales increased 0.2 percentage points during the third quarter of 2009 compared to the same period in 2008.

- Depreciation, amortization and rent expenses increased a combined 0.8 percentage points as a percentage of Company store sales, primarily due to ongoing capital initiatives, new store development and the effect of lower sales on our fixed costs.

- A 3.8% increase in average hourly wage rates was partially offset by improved labor productivity in our stores.

- Other store operating expenses were flat as higher repair and maintenance costs were offset by other operating expenses.

- The average price per pound of cheese decreased by approximately 33%.

· General and administrative expenses decreased to $11.3 million during the third quarter of 2009 compared to $16.1 million in the third quarter of 2008 primarily due to the non-recurrence of $3.0 million in aggregate loss contingencies related to prior year legal matters and a $0.9 million benefit from the reduction of a federal income tax penalty reserve we recognized in the third quarter of 2009.

· Interest expense decreased to $2.8 million during the third quarter of 2009 compared to $5.1 million in the third quarter of 2008 primarily due to a 110 basis point decrease in the average effective interest rates incurred on the outstanding balance of our revolving credit facility during the third quarter of 2009 compared to the third quarter of 2008, as well as a $56.2 million decrease in the average debt balance outstanding between the two quarters.

· Net income for the third quarter of 2009 increased 28.4% to $12.7 million from $9.9 million in the same period in 2008 and diluted earnings per share increased 27.9% to $0.55 compared to $0.43 in the same period in 2008. Earnings per share benefited from our repurchase of 494,400 shares of our common stock during the third quarter of 2009.

Financial Reporting Change

In the first quarter of 2009, we adopted the updated guidance of ASC topic 260, Earnings Per Share (formerly FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities"), which clarifies whether unvested share-based payment awards with nonforfeitable dividend rights should be included in the computation of basic 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 the updated guidance to ASC 260 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                         Nine Months Ended
                                            September 27,         September 28,       September 27,         September 28,
                                                2009                  2008                2009                  2008

Number of Company-owned stores:
Beginning of period                                    496                   490                 495                   490
New                                                      -                     2                   1                     3
Acquired from franchisees                                -                     2                   -                     2
Closed                                                  (1 )                  (1 )                (1 )                  (2 )
End of period                                          495                   493                 495                   493

Number of franchised stores:
Beginning of period                                     48                    47                  46                    44
New                                                      -                     1                   2                     4
Acquired by the Company                                  -                    (2 )                 -                    (2 )
Closed                                                   -                     -                   -                     -
End of period                                           48                    46                  48                    46

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. 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. 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 token 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, a fund that pays the costs of development, purchasing and placement of system-wide advertising programs, and the Media Fund, a fund designed primarily for the purchase of national network television advertising made by the International Association of CEC Entertainment, Inc. pursuant to our 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                                       Nine Months Ended
                                September 27, 2009          September 28, 2008          September 27, 2009          September 28, 2008
                                                                  (in thousands, except percentages)

Food and beverage sales       $    95,060        48.1 %   $   100,309        49.7 %   $   314,662        49.9 %   $   321,297        50.2 %
Entertainment and
merchandise sales                 101,860        51.5 %       100,569        49.8 %       313,117        49.6 %       315,154        49.3 %

Company store sales               196,920        99.5 %       200,878        99.5 %       627,779        99.5 %       636,451        99.5 %
Franchising activities                898         0.5 %         1,000         0.5 %         2,967         0.5 %         3,097         0.5 %

Total revenues                $   197,818       100.0 %   $   201,878       100.0 %   $   630,746       100.0 %   $   639,548       100.0 %


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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                                       Nine Months Ended
                                  September 27, 2009          September 28, 2008          September 27, 2009          September 28, 2008
                                                                    (in thousands, except percentages)
Company store operating
costs:
Cost of food and beverage (as
a percentage of food and
beverage sales)                 $     21,868       23.0 %   $     24,829       24.8 %   $     69,626       22.1 %   $     75,986       23.6 %
Cost of entertainment and
merchandise (as a percentage
of
entertainment and merchandise
sales)                                 8,947        8.8 %          8,426        8.4 %         28,071        9.0 %         26,468        8.4 %

                                      30,815       15.6 %         33,255       16.6 %         97,697       15.6 %        102,454       16.1 %
Labor expenses                        54,593       27.7 %         54,851       27.3 %        167,538       26.7 %        171,523       26.9 %
Depreciation and amortization         19,232        9.8 %         18,638        9.3 %         57,186        9.1 %         55,343        8.7 %
Rent expense                          17,010        8.6 %         16,741        8.3 %         50,643        8.1 %         49,594        7.8 %
Other store operating
expenses                              32,226       16.4 %         32,904       16.4 %         92,635       14.8 %         91,353       14.4 %
Total Company store operating
costs                                153,876       78.1 %        156,389       77.9 %        465,699       74.2 %        470,267       73.9 %
Other costs and expenses (as
a percentage of total
revenues):
Advertising expense                    9,179        4.6 %          8,660        4.3 %         27,860        4.4 %         26,681        4.2 %
General and administrative
expenses                              11,328        5.7 %         16,083        8.0 %         37,583        6.0 %         43,338        6.8 %
Asset impairments                          -        0.0 %              -        0.0 %              -        0.0 %            137        0.0 %
Total operating costs and
expenses                             174,383       88.2 %        181,132       89.7 %        531,142       84.2 %        540,423       84.5 %

Operating income (as a
percentage of total
revenues)                             23,435       11.8 %         20,746       10.3 %         99,604       15.8 %         99,125       15.5 %
Interest expense, net (as a
percentage of total
revenues)                              2,769        1.4 %          5,052        2.5 %          8,938        1.4 %         12,948        2.0 %

Income before income taxes
(as a percentage of total
revenues)                       $     20,666       10.4 %   $     15,694        7.8 %   $     90,666       14.4 %   $     86,177       13.5 %


______________

Three Months Ended September 27, 2009 Compared to Three Months Ended September 28, 2008

Revenues

Company store sales decreased 2.0% to $196.9 million during the third quarter of 2009 compared to $200.9 million in the third quarter of 2008 primarily due to a 3.1% decrease in comparable store sales, partially offset by a net increase in the number of Company-owned stores. The weighted average number of Company-owned stores open during the third quarter of 2009 increased by approximately six stores as compared to the same period in 2008. Menu prices increased on average 1.5% during the third quarter of 2009. We believe that our sales in the third quarter of 2009 were negatively impacted primarily by a restraint in consumer spending due to the current economic conditions, and to a lesser extent the outbreak of the H1N1 influenza A virus, commonly referred to as the "swine flu."

Our Company store sales mix was 48.3% food and beverage sales and 51.7% entertainment and merchandise sales during the third quarter of 2009 compared to 49.9% and 50.1%, respectively, in the third quarter of 2008. We believe the sales mix shift from food and beverage to entertainment and merchandise is primarily the result of birthday party packages in the current year containing greater components of game tokens and merchandise as compared to the third quarter in 2008 and a decline in stand-alone meal purchases in favor of promotional package deals that contain game tokens.

We believe that if economic conditions continue to impact consumer spending or if the outbreak of the "swine flu" continues or worsens during the last quarter of the year, our sales trends during the remainder of the 2009 fiscal year could be negatively impacted. The severity and duration of any impact to our financial results from these factors is currently uncertain.

Company Store Operating Costs

Cost of food and beverage as a percentage of food and beverage sales decreased 1.8 percentage points to 23.0% during the third quarter of 2009 from 24.8% in the third quarter of 2008 primarily due to a decline in cheese prices and the effect of a prior year adjustment of our beverage costs. During the third quarter of 2009, the average price per pound of cheese decreased approximately $0.62, or 33%, compared to prices paid in the third quarter of 2008 resulting in a 1.1 percentage point cost reduction. Cost of food and beverage in the third quarter of 2008 included the effect of a non-recurring charge to our vendor rebate allowance which increased beverage costs by approximately 0.9 percentage points during the prior year period.

Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales increased 0.4 percentage points to 8.8% during the third quarter of 2009 from 8.4% in the third quarter of 2008 primarily due to a 0.2 percentage point increase attributable to additional costs associated with an attraction that dispenses novelty photo cards and an estimated 0.1 percentage point increase attributable an in-store promotion involving the distribution of additional prize redemption tickets.

Labor expense as a percentage of Company store sales increased 0.4 percentage points to 27.7% during the third quarter of 2009 compared to 27.3% in the third quarter of 2008 primarily due to approximately a 0.3 percentage point increase in health benefit costs, a decline in comparable store sales and an increase in hourly wage rates, partially offset by improved productivity of our hourly labor force and a 0.3 percentage point reduction in store personnel performance-based compensation costs associated with our Company store sales decline during fiscal 2009. During the third quarter of 2009, a 3.8% increase in average hourly wage rates at our stores was partially offset by a 1.1% increase in revenue per hourly labor hour at our stores.

Depreciation and amortization expense related to our stores increased $0.6 million to $19.2 million during the third quarter of 2009 compared to $18.6 million in the third quarter of 2008 primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development.

Store rent expense increased $0.3 million to $17.0 million during the third quarter of 2009 compared to $16.7 million in the third quarter of 2008 primarily due to an increase in the number of 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 were flat at 16.4% for both the third quarter of 2009 and 2008. During the third quarter of 2009, higher repair and maintenance costs were offset by reductions in other operating expenses.

Advertising Expense

Advertising expense as a percentage of total revenues increased 0.3 percentage points to 4.6% during the third quarter of 2009 from 4.3% in the third quarter of 2008 primarily due to a combined 0.2 percentage point increase in television and Internet-based media expenditures associated with our marketing programs in 2009 and a 0.1 percentage point increase attributable to the costs of certain promotional activities that took place during the third quarter of 2009.

General and Administrative Expenses

General and administrative expenses as a percentage of total revenues decreased 2.3 percentage points to 5.7% during the third quarter of 2009 from 8.0% in the third quarter of 2008 primarily due to the non-recurrence of prior year legal related costs and a favorable adjustment to a tax penalty reserve during the third quarter of 2009. Prior year legal related costs included the unfavorable effect of an accrual in the third quarter of 2008 of $3.0 million in aggregate loss contingencies. During the third quarter of 2009, we settled certain issues related to a federal income tax examination of our 2003 through 2005 tax years and realized a $0.9 million benefit from the reduction of a tax penalty reserve.

Interest Expense, Net

Interest expense decreased to $2.8 million during the third quarter of 2009 compared to $5.1 million in the third quarter of 2008 primarily due to a 110 basis point decrease in the average effective interest rates incurred on the outstanding balance of our revolving credit facility and a decrease in the average debt balance outstanding between the two quarters. During the third quarter of 2009, the average debt balance outstanding under our revolving credit facility was $334.1 million compared to $390.3 million during the third quarter of 2008.

Income Taxes

Our effective income tax rate was 38.5% and 36.9% for the third quarters of 2009 and 2008, respectively. The increase in our effective income tax rate was primarily due to the effect of favorable state and U.S. federal tax adjustments in the third quarter of 2008, and to a lesser extent unfavorable tax adjustments in the third quarter of 2009.

Diluted Earnings Per Share

Diluted earnings per share increased to $0.55 per share for the third quarter of 2009 from $0.43 per share in the third quarter of 2008 due to a 28.4% increase in our net income between the two quarters. The increase in diluted earnings per share between the two quarters was impacted by our repurchase of approximately 1.1 million shares of our common stock since the beginning of the third quarter of 2008. We estimate that the decrease in the number of weighted average diluted shares outstanding during the third quarter of 2009 attributable solely to these repurchases benefited our earnings per share growth in the third quarter of 2009 by approximately $0.01. Our estimate is based on the weighted average number of shares repurchased since the beginning of the third 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 third quarter of 2008, or the effect of the issuance of restricted stock or exercise of stock options subsequent to the third quarter of 2008.

Nine Months Ended September 27, 2009 Compared to Nine Months Ended September 28, 2008

Revenues

Company store sales decreased 1.4% to $627.8 million during the first nine months of 2009 compared to $636.5 million in the first nine months of 2008 primarily due to a 2.7% decrease in comparable store sales, partially offset by a net increase in the number of Company-owned stores. The weighted average number of Company-owned stores open during the first nine months of 2009 increased by approximately five stores as compared to the same period in 2008. Menu prices increased on average 1.7% during the first nine months of 2009. We believe that our sales in the first nine months of 2009 were negatively impacted by a restraint in consumer spending due to the current economic conditions. Additionally, we believe that the outbreak of the H1N1 influenza A virus, commonly referred to as the "swine flu," unfavorably impacted our sales results during the first nine months of 2009 primarily from the last week of April through the first week of June 2009.

Our Company store sales mix was 50.1% food and beverage sales and 49.9% entertainment and merchandise sales during the first nine months of 2009 compared to 50.5% and 49.5%, respectively, in the first nine months of 2008. We believe the sales mix shift from food and beverage to entertainment and merchandise is primarily the result of increased sales of promotional package deals and birthday parties containing greater components of game tokens and merchandise.

We believe that if economic conditions continue to impact consumer spending or if the outbreak of the "swine flu" continues or worsens during the last three months of the year, our sales trends during the remainder of the 2009 fiscal year could be negatively impacted. The severity and duration of any impact to our financial results from these factors is currently uncertain.

Company Store Operating Costs

Cost of food and beverage as a percentage of food and beverage sales decreased 1.5 percentage points to 22.1% during the first nine months of 2009 from 23.6% in the first nine months of 2008 primarily due to a decline in cheese prices and the effect of a prior year adjustment of our beverage costs recorded in the third quarter of 2008. During the first nine months of 2009, the average price per pound of cheese decreased approximately $0.72, or 38%, compared to prices paid in the first nine months of 2008. Cost of food and beverage in the first nine months of 2008 included the effect of a non-recurring charge to our vendor rebate allowance we recorded in the third quarter of 2008 which increased beverage costs by approximately 0.3 percentage points during the prior year period.

Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales increased 0.6 percentage points to 9.0% during the first nine months of 2009 from 8.4% in the first nine months of 2008 primarily due to a 0.2 percentage point increase attributable to additional costs associated with an attraction that dispenses novelty photo cards and a estimated 0.1 percentage point increase attributable to an in-store promotion involving the distribution of additional prize redemption tickets. Additionally, the distribution of more game tokens related to a specific birthday party promotion in the second quarter . . .