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

Second Quarter 2009 Highlights
· Revenues decreased 4.0% during the second quarter of 2009 compared to the same period in 2008.

- Comparable store sales decreased 5.4%.

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

- Menu prices increased on average 1.5%.

· Company store operating costs as a percentage of Company store sales increased 2.9 percentage points during the second quarter of 2009 compared to the same period in 2008.

- Other store operating expenses increased due to the deleveraging effects associated with the decline in comparable store sales, an increase in repair and maintenance costs and a 0.4 percentage point impact from a $0.9 million gain recognized upon the sale of a restaurant property in the second quarter of 2008.

- Depreciation, amortization and rent expenses increased a combined 1.4 percentage points as a percentage of Company store sales, primarily due to ongoing capital initiatives and the effect of lower sales on our fixed costs.

- These increases were partially offset by a decrease in the average price per pound of cheese of approximately 41%.

† General and administrative expenses decreased to $11.7 million during the second quarter of 2009 compared to $14.0 million in the second quarter of 2008 primarily due to lower performance-based compensation costs and a reduction in legal costs attributable to the non-recurrence of prior year legal matters.

· Interest expense decreased to $3.1 million during the second quarter of 2009 compared to $4.1 million in the second quarter of 2008 primarily due to a 90 basis point decrease in the average effective interest rates incurred on the outstanding balance of our revolving credit facility during the second quarter of 2009 compared to the second quarter of 2008, as well as a decrease in the average debt balance outstanding between the two quarters.

· Net income for the second quarter of 2009 decreased 20.5% to $9.0 million from $11.3 million in the same period in 2008 and diluted earnings per share decreased 17.0% to $0.39 compared to $0.47 in the same period in 2008. Earnings per share benefited from our repurchase of 645,000 shares of our common stock during the second 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'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:

                                     Three Months Ended              Six Months Ended
                                  June 28,        June 29,      June 28,         June 29,
                                    2009            2008          2009             2008

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

Number of franchised stores:
Beginning of period                      47              44            46               44
New                                       1               3             2                3
Acquired by the Company                   -               -             -                -
Closed                                    -               -             -                -
End of period                            48              47            48               47

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 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 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                                   Six Months Ended
                                          June 28, 2009             June 29, 2008             June 28, 2009             June 29, 2008
                                                                      (in thousands, except percentages)

Food and beverage sales               $  91,123        49.3 %   $  96,783        50.3 %   $ 219,602        50.7 %   $ 220,988        50.5 %
Entertainment and merchandise sales      92,676        50.2 %      94,571        49.1 %     211,257        48.8 %     214,585        49.0 %

Company store sales                     183,799        99.5 %     191,354        99.4 %     430,859        99.5 %     435,573        99.5 %
Franchising activities                      996         0.5 %       1,140         0.6 %       2,069         0.5 %       2,097         0.5 %

Total revenues $ 184,795 100.0 % $ 192,494 100.0 % $ 432,928 100.0 % $ 437,670 100.0 %

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                                      Six Months Ended
                                        June 28, 2009              June 29, 2008               June 28, 2009               June 29, 2008
                                                                       (in thousands, except percentages)

Cost of food and beverage (as a
percentage of food and beverage
sales)                              $    20,612       22.6 %   $    22,892       23.7 %   $     47,758       21.7 %   $     51,157       23.1 %
Cost of entertainment and
merchandise (as a percentage of
entertainment and merchandise
sales)                                    8,360        9.0 %         8,210        8.7 %         19,124        9.1 %         18,042        8.4 %

                                         28,972       15.8 %        31,102       16.3 %         66,882       15.5 %         69,199       15.9 %
Labor expenses                           52,449       28.5 %        54,436       28.4 %        112,945       26.2 %        116,672       26.8 %
Depreciation and amortization            19,040       10.4 %        18,241        9.5 %         37,954        8.8 %         36,705        8.4 %
Rent expense                             16,719        9.1 %        16,357        8.5 %         33,633        7.8 %         32,853        7.5 %
Other store operating expenses           30,285       16.5 %        27,811       14.5 %         60,409       14.0 %         58,449       13.4 %
Total Company store operating
costs                                   147,465       80.2 %       147,947       77.3 %        311,823       72.4 %        313,878       72.1 %
Other costs and expenses (as a
percentage of total revenues):
Advertising expense                       8,637        4.7 %         7,902        4.1 %         18,681        4.3 %         18,021        4.1 %
General and administrative
expenses                                 11,738        6.4 %        13,967        7.3 %         26,255        6.1 %         27,255        6.2 %
Asset impairments                             -        0.0 %           137        0.1 %              -        0.0 %            137        0.0 %
Total operating costs and
expenses                                167,840       90.8 %       169,953       88.3 %        356,759       82.4 %        359,291       82.1 %

Operating income (as a percentage
of total revenues)                       16,955        9.2 %        22,541       11.7 %         76,169       17.6 %         78,379       17.9 %
Interest expense, net (as a
percentage of total revenues)             3,095        1.7 %         4,063        2.1 %          6,169        1.4 %          7,896        1.8 %

Income before income taxes (as a
percentage of total revenues)       $    13,860        7.5 %   $    18,478        9.6 %   $     70,000       16.2 %   $     70,483       16.1 %


______________

Three Months Ended June 28, 2009 Compared to Three Months Ended June 29, 2008

Revenues

Company store sales decreased 3.9% to $183.8 million during the second quarter of 2009 compared to $191.4 million in the second quarter of 2008 primarily due to a 5.4% 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 second quarter of 2009 increased by approximately five stores as compared to the same period in 2008. Menu prices increased on average 1.5% during the second quarter of 2009. We believe that our sales in the second quarter 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," during the middle part of the second quarter of 2009 unfavorably impacted our sales results during the second quarter of 2009.

Our Company store sales mix was 49.6% food and beverage sales and 50.4% entertainment and merchandise sales during the second quarter of 2009 compared to 50.6% and 49.4%, respectively, in the second quarter 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.

Revenue from franchise fees and royalties decreased to $1.0 million during the second quarter of 2009 compared to $1.1 million in the second quarter of 2008 primarily due to a decline in franchise fees recognized upon the opening of new franchise stores. Two fewer franchise stores were opened during the second quarter of 2009 than in the second quarter of 2008.

We believe that if economic conditions continue to cause a decrease in consumer spending or if the outbreak of the "swine flu" continues or worsens during the last two quarters of the year, these factors may unfavorably impact our sales trends during the remainder of the 2009 fiscal year. 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 1.1 percentage points to 22.6% during the second quarter of 2009 from 23.7% in the second quarter of 2008 primarily due to a decline in cheese prices. During the second quarter of 2009, the average price per pound of cheese decreased approximately $0.82, or 41%, compared to prices paid in the second quarter of 2008.

Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales increased 0.3 percentage points to 9.0% during the second quarter of 2009 from 8.7% in the second quarter of 2008. This increase was primarily due to additonal costs associated with an attraction that dispenses novelty photo cards and the distribution of more game tokens during the second quarter of 2009 from a specific birthday party promotion which resulted in the recognition of additional prize merchandise costs attributable to increased ticket redemptions.

Labor expense as a percentage of Company store sales increased 0.1 percentage points to 28.5% during the second quarter of 2009 compared to 28.4% in the second quarter of 2008 primarily due to the decline in comparable store sales and a 3.1% increase in average hourly wage rates at our stores. These were partially offset by improved utilization of our hourly labor force and a reduction in performance-based compensation.

Depreciation and amortization expense related to our stores increased $0.8 million to $19.0 million during the second quarter of 2009 compared to $18.2 million in the second 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 $16.7 million during the second quarter of 2009 compared to $16.4 million in the second 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 increased 2.0 percentage points to 16.5% during the second quarter of 2009 compared to 14.5% in the second quarter of 2008 primarily due to the deleveraging effects associated with the decline in comparable store sales, higher repair and maintenance costs, and the effect of 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 ("TJ Hartford's").

Advertising Expense

Advertising expense as a percentage of total revenues increased 0.6 percentage points to 4.7% during the second quarter of 2009 from 4.1% in the second quarter of 2008 primarily due to increased television advertising expenditures in the second quarter of 2009 associated with our enhanced media marketing programs in 2009.

General and Administrative Expenses

General and administrative expenses as a percentage of total revenues decreased 0.9 percentage points to 6.4% during the second quarter of 2009 from 7.3% in the second quarter of 2008 primarily due to lower performance-based compensation costs associated with our financial performance for fiscal year 2009 and a reduction in legal costs attributable to the non-recurrence of certain professional services related to prior year legal matters.

Interest Expense, Net

Interest expense decreased to $3.1 million during the second quarter of 2009 compared to $4.1 million in the second quarter of 2008 primarily due to a 90 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 second quarter of 2009, the average debt balance outstanding under our revolving credit facility was $337.6 million compared to $352.8 million during the second quarter of 2008.

Income Taxes

Our effective income tax rate was 35.1% and 38.8% for the second quarters of 2009 and 2008, respectively. The decrease in our effective tax rate was primarily due to favorable state tax adjustments made during the second quarter of 2009.

Diluted Earnings Per Share

Diluted earnings per share decreased to $0.39 per share for the second quarter of 2009 from $0.47 per share in the second quarter of 2008 due to the 20.5% decrease in net income between the two quarters which was partially offset by a 3.7% decrease in the number of weighted average diluted shares outstanding. The decrease in diluted earnings per share between the two quarters was impacted by our repurchase of approximately 3.4 million shares of our common stock since the beginning of the second quarter of 2008. We estimate that the decrease in the number of weighted average diluted shares outstanding during the second quarter of 2009 attributable solely to these repurchases benefited our earnings per share growth in the second quarter of 2009 by approximately $0.02. Our estimate is based on the weighted average number of shares repurchased since the beginning of the second 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 second quarter of 2008, or the effect of the issuance of restricted stock or exercise of stock options subsequent to the second quarter of 2008.

Six Months Ended June 28, 2009 Compared to Six Months Ended June 29, 2008

Revenues

Company store sales decreased 1.1% to $430.9 million during the first six months of 2009 compared to $435.6 million in the first six months of 2008 primarily due to a 2.4% 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 six months of 2009 increased by approximately five stores as compared to the same period in 2008. Menu prices increased on average 1.8% during the first six months of 2009. We believe that our sales in the first six 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," during the middle part of the second quarter of 2009 unfavorably impacted our sales results during the first six months of 2009.

Our Company store sales mix was 51.0% food and beverage sales and 49.0% entertainment and merchandise sales during the first six months of 2009 compared to 50.7% and 49.3%, respectively, in the first six months 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, partially offset by increased sales of promotional package deals and birthday parties containing greater components of game tokens and merchandise.

Revenue from franchise fees and royalties were $2.1 million in both the first six months of 2009 and the first six months of 2008.

We believe that if economic conditions continue to cause a decrease in consumer spending or if the outbreak of the "swine flu" continues or worsens during the last six months of the year, these factors may unfavorably impact our sales trends during the remainder of the 2009 fiscal year. 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 1.4 percentage points to 21.7% during the first six months of 2009 from 23.1% in the first six months of 2008 primarily due to a decline in cheese prices. During the first six months of 2009, the average price per pound of cheese decreased approximately $0.77, or 39%, compared to prices paid in the first six months of 2008.

Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales increased 0.7 percentage points to 9.1% during the first six months of 2009 from 8.4% in the first six months of 2008. This increase was primarily due to the liquidation of certain prize inventory during the first quarter of 2009 and the distribution of more game tokens related to a specific birthday party promotion during the first six months of 2009 which resulted in the recognition of additional prize merchandise costs attributable to increased ticket redemptions. In addition, we incurred additional costs associated with an attraction that dispenses novelty photo cards.

Labor expense as a percentage of Company store sales decreased 0.6 percentage points to 26.2% during the first six months of 2009 compared to 26.8% in the first six months of 2008 primarily due to improved utilization of our hourly labor force and a reduction in performance-based compensation, offsetting a 2.7% increase in average hourly wage rates at our stores.

Depreciation and amortization expense related to our stores increased $1.2 million to $38.0 million during the first six months of 2009 compared to $36.7 million in the first six months of 2008 primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development.

Store rent expense increased $0.8 million to $33.6 million during the first six months of 2009 compared to $32.9 million in the first six months 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 increased . . .