UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

Commission File Number 0-15782

CEC ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (972) 258-8507

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Act of 1933.    Yes   ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act.Act of 1934.    Yes   ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x¨    No  x¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    Yes  ¨    No10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Securities Exchange Act.Act of 1934.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act)Act of 1934).     Yes   ¨    No  x

At April 13,2007, an aggregate of 32,241,703 shares of the registrant’s common stock, par value of $.10 each (being the registrant’s only class of common stock), were outstanding.

At June 30, 2006,July 1, 2007, the aggregate market value of our common stock held by non-affiliates of the registrant was $1,099,974,421.$673,020,234.

At February 13, 2008, an aggregate of 26,641,444 shares of the registrant’s common stock, par value of $0.10 each (being the registrant’s only class of common stock), were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement, to be filed pursuant to Section 14(a) of the Securities Exchange Act of 1934 in connection n with the registrant’s 20072008 annual meeting of stockholders, have been incorporated by reference in Part III of this report.

CEC ENTERTAINMENT, INC.

FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2006

INDEXTABLE OF CONTENTS

PARTP A R T I

General

CEC Entertainment, Inc. (the “Company”) was incorporated in the state of Kansas in 1980 and is engaged in the family restaurant/entertainmententertainment-restaurant center business. The Company considers this to be its sole industry segment. Our principal executive offices are located at 4441 W. Airport Freeway, Irving, Texas 75062. The Company maintains a website at www.chuckecheese.com. Documents available on our website include the Company’s (i) Code of Business Conduct and Ethics, (ii) Code of Ethics for the Chief Executive Officer and Senior Financial Officers, (iii) Corporate Governance Guidelines, and (iv) Charters for the Audit, Compensation, and Nominating/Corporate Governance Committees of the Board.Board of Directors. These documents are also available in print to any stockholder who requests a copy. In addition, we make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronic filing or furnishing of such material with the Securities and Exchange Commission. Within this report, unless otherwise indicated, any use of the terms “our,” “we” and “us” refer to CEC Entertainment, Inc and its consolidated subsidiaries.

The Company operated, as of December 31, 2006, 484 Overview

Chuck E. Cheese’s ® restaurants. In addition, as of December 31, 2006, franchisees of the Company operated 45 Chuck E. Cheese’s restaurants.

Chuck E. Cheese’s Restaurants^®

Business Development

is a nationally recognized leader in full-service family entertainment and dining. Chuck E. Cheese’s restaurants offer a variety of pizzas, a salad bar, sandwiches, appetizers and desserts andstores feature musical and comic entertainment by robotic and animated characters, family oriented games, rides and arcade-style activities. The restaurants areactivities intended to appeal to families with children between the ages of two and 12. 12 and offers a variety of pizzas, sandwiches, appetizers, a salad bar and desserts. Each Chuck E. Cheese’s store typically employs a general manager, one or two managers, an electronic specialist who is responsible for repair and maintenance of the robotic characters, games and rides, and 45 to 75 food preparation and service employees, most of whom work part-time.

The Company opened its first restaurantlocation in March 1980.

As of December 30, 2007, the Company operated 490 Chuck E. Cheese’s stores and franchisees of the Company operated 44 Chuck E. Cheese’s stores. The Company and its franchisees operate in a total of 48 states and five foreign countries/territories. The Company owns and operates Chuck E. Cheese’s restaurants in 44 states and Canada. See “ItemItem 2. Properties.“Properties.”

The following table sets forth certain information with respect to the Chuck E. Cheese’s restaurants owned by the Company (excludes franchised restaurants and one TJ Hartford’s Grill and Bar).Bar

Business Development Strategy

The Company’s sales volumes fluctuate seasonallybusiness development plan involves a sharp focus on maintaining and are generally higher duringevolving its existing units, primarily developing high volume Company stores in densely populated areas and selling development rights to franchisees for markets the first and third quarters of each fiscal year. Holidays, school operating schedules and weather conditions may affect sales volumes seasonally in some operating regions. Because ofCompany does not intend on developing within the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.next five years.

Each Chuck E. Cheese’s restaurant typically employs a general manager, one or two managers, an electronic specialist who is responsible for repair and maintenance of the robotic characters and games, and 45 to 75 food preparation and service employees, most of whom work part-time.Existing Stores

To maintain a unique and exciting environment in the restaurants,stores, the Company believes it is essential to reinvest capital through the evolution of its games, rides and entertainment packages and continuing enhancement of its facilities. The Company utilizesinvests capital in its existing store base through the following strategies to increase revenues and earnings in its restaurants over the long-term that require capital expenditures:initiatives: (a) major remodels;remodels, (b) expansions ofexpanding the square footage of existing restaurants;the store, and (c) a game enhancement initiative that includes new games and rides; and (d) small market remodels. rides.

The major remodel initiative typically includes expansion ofincreasing the space allocated to the game room, an increase in the

number of games and rides and in most cases may includeincludes a new exterior and interior identity. A new exterior identity includes a revised Chuck E. CheeseCheese’s logo and signage, updating the exterior design of the buildings and, infor some restaurants,stores, colorful new awnings. The interior component includes painting,new paint, updating décor, a new menu board, enhanced lighting, remodeled restrooms and an upgraded salad bar. The Company expects to complete 20 to 24 major remodels during 2008. The average cost of major remodels in 20072008 will approximate $550,000$625,000 to $650,000. $675,000 per store.

In addition to expanding the square footage of existing restaurants,a store, store expansions typically include all components of a major remodel including an increase in the number of games and rides and on average range in cost from $800,000$1,000,000 to $900,000$1,100,000 per restaurant. store. The Company expects to complete 18 to 22 expansions in 2008.

The primary components of the game enhancement initiative are to provide new games and rides and therides. The average capital cost is currently approximately $100,000of a game enhancement in 2008 will approximate $125,000 to $150,000$175,000 per restaurant. Small market remodels primarily include new games and rides and typically the removal of seating. Small market remodels are expected to range in cost from $100,000 to $150,000.store. The Company believes the evolution of its games, rides and entertainment packages and continuing enhancement of its facilities improve the guest experience and increase the attractiveness of its product.expects to complete 120 to 130 game enhancements during 2008.

In July 2006,New Company Store Development

During 2007, the Company announced it had made enhancements to its strategic plan to increase focus on its existing restaurants and slowadded 10 new restaurant development. The Company believes reducing the number of new restaurants opened will enableCompany-owned stores, including three relocations. In 2008, the Company to reallocate capital to its existing restaurants and enhance return on investment. The Company plans to increase its capital reinvestment in existing restaurants, primarily in the form of major remodels, expansions and game enhancement remodels, to approximately $56 million in 2007 compared to an average of $29 million per year over the last five years. Capital initiatives are expected to impact 155 existing restaurants in 2007. The Company plans to execute a more targeted new restaurant development focused on opening high volume stores in densely populated areas in the best performing geographic markets. The Company is expectedexpects to open approximately 10six to seven new restaurantsCompany stores, with an average cost of approximately $2.5 million to $2.7 million per store. The Company currently expects these stores will generate average annual unit volumes of $2.0 million representing a 25% increase over the comparable company store average of $1.6 million in 2007,2007.

The Company currently projects it will open 30 to 40 Company-owned stores, including 3store relocations, and approximately 8 to 12 new restaurants per year thereafter.during the next five years.

The Company periodically reevaluates the site characteristics of its restaurants.stores. The Company will consider relocating the restauranta store to a more desirable sitelocation in the event certain site characteristics considered essential for the success of a restaurantstore deteriorate or the Company is unable to negotiate acceptable lease terms with the existing landlord.

New Franchise Store Development

The Company believes its ownership of trademarksadded one new franchise store in 2007, and in 2008 expects to open four franchise stores.

The Company is currently selling the names and character likenesses featured indevelopment rights for approximately 40 domestic franchise locations. The Company is currently projecting it will open 20 to 30 franchise stores during the operation of its restaurants are an important competitive advantage.next five years.

RestaurantStore Design and Entertainment

Chuck E. Cheese’s restaurants are typically located in shopping centers or in free-standing buildings near shopping centers and generally occupy 7,0009,000 to 14,000 square feet in area.area, or an average of approximately 11,000 square feet. Chuck E. Cheese’s restaurantsstores are typically divided into three areas: (1) a kitchen and related areas (cashier and prize area, salad bar, manager’s office, technician’s office, restrooms, etc.) occupies approximately 35% of the space, (2) a diningshowroom area occupies approximately 25% of the space, and (3) a playroom area occupies approximately 40% of the space. Total table and chair seating in both the showroom and playroom areas averages 325 to 425 guests per store.

The diningshowroom area of each Chuck E. Cheese’s restaurant features a variety of comic and musical entertainment by computer-controlled robotic characters, together with video monitors and animated props, located on various stage typestage-type settings. The dining area typically provides table and chair seating for 250 to 375 customers.

Each Chuck E. Cheese’s restaurant typicallystore generally contains a family oriented playroom area offering approximately 45 coin and token-operated attractions, including arcade-style games, kiddie rides, video games, skill oriented games and other similar entertainment. MostA limited number of tokens are included as part of food orders, however additional tokens may be separately purchased. Tokens are used to activate the games and rides in the playroom area. A number of games dispense tickets that can be redeemed by guests for prize merchandise such as toys and dolls. Also included in the playroom area are tubes and tunnels suspended from or reaching to the ceiling known as SkyTubes®SkyTubes^® or other free attractions for young children, with booth and table seating for the entire family. The playroom area normally occupies approximately 60% of the restaurant’s customer area. A limited number of free tokens are furnished with food orders or in connection with a sales promotion. Additional tokens may be purchased. Tokens are used to play the games and rides in the playroom.

Food and Beverage Products

Each Chuck E. Cheese’s restaurant offers a variety of pizzas, sandwiches, appetizers, a salad bar sandwiches, appetizers and desserts. Soft drinks, coffee and tea are also served, along withand beer and wine where permitted by local laws. The Company believes that the quality of its food compares favorably with that of its competitors.

The majority of food, beverages and other supplies used in the Company-operated restaurants isstores are currently distributed under a system-wide agreement with a major food distributor. The Company believes that this distribution system creates certain cost and operational efficiencies for the Company.

Marketing

The primary customer base for the Company’s restaurantsstores consists of families having children between the ages of two and 12. The Company conducts advertising campaigns which are targeted at families with young children that feature the family entertainment experiences available at Chuck E. Cheese’s restaurants and are primarily aimed at increasing the frequency of customer visits. The primary advertising medium continues to be television, due to its broad access to family audiences and its ability to communicate the Chuck E. Cheese’s experience. The television advertising campaigns are supplemented by promotional offers in newspapers, cross promotions with companies targeting a similar customer base, the Company’s website, internet advertising campaigns and direct e-mail.

Franchising

The Company began franchising its restaurants in October 1981 and the first franchised restaurant opened in June 1982. At December 31, 2006, 4530, 2007, 44 Chuck E. Cheese’s restaurants were operated by a total of 24 different franchisees, as compared to 44 of such restaurants45 at January 1,December 31, 2006. Currently, franchisees have expansion rights to open an additional six16 franchise restaurants.stores.

The Chuck E. Cheese’s standard franchise agreements grantagreement grants to the franchisee the right to construct and operate a restaurantstore and use the associated trade names, trademarks and service marks within the standards and guidelines established by the Company. The franchise agreement presently offered by the Company has an initial term of 15 years and includes a 10-year renewal option. The standard agreement provides the Company with a right of first refusal should a franchisee decide to sell a restaurant.store. The earliest expiration dates of outstanding Chuck E. Cheese’s franchises are in 2007.2009.

The Company and its franchisees created The International Association of CEC Entertainment, Inc., (the “Association”), to discuss and consider matters of common interest relating to the operation of corporate and franchised Chuck E. Cheese’s, restaurants, to serve as an advisory council to the Company and to plan and approve contributions to and expenditures from the Advertising Fund, a fund established and managed by the Association that pays the costs of system-wide advertising, and the Entertainment Fund, a fund established and managed by the Association to further develop and improve entertainment attractions. Routine business matters of the Association are conducted by a Board of Directors of the Association, composed of five members appointed by the Company and five members elected by the franchisees. The Association is included in the Company’s consolidated financial statements.

The franchise agreements governing existing franchised Chuck E. Cheese’s restaurants in the United States currently require each franchisee to pay: (i) to the Company, in addition to an initial franchise fee of $50,000, a continuing monthly royalty fee equal to 3.8% of gross sales; (ii) to the Advertising Fund an amount equal to 2.9% of gross sales; and (iii) to

the Entertainment Fund an amount equal to 0.2% of gross sales. Under the Chuck E. Cheese’s franchise agreements,agreement, the Company is required, with respect to Company-operated restaurants,stores, to spend for local advertising and to contribute to the Advertising Fund and the Entertainment Fund at the same rates as franchisees. The Company and its franchisees could be required to make additional contributions to the Association to fund any cash deficits that may be incurred by the Association.

Competition

The restaurantfamily entertainment and family entertainmentdining industries are highly competitive, with a number of major national and regional chains operating in the restaurant or family entertainment business.these spaces. Although other restaurant chains presently utilize the combined family restaurant/entertainmententertainment-dining concept, these competitors primarily operate on a regional, market-by-market basis.

The Company believes that it will continue to encounter competition in the future. Major national and regional chains, some of which may have capital resources as great or greater than the Company, are competitors of the Company. The Company believes that theits principal competitive factors affecting Chuck E. Cheese’s restaurantsstrengths are an established recognized brand, recognition, the relative quality of food and service, quality and variety of offered entertainment, and location and attractiveness of the restaurantsits stores as compared to its competitors in the restaurant or entertainmentfamily entertainment-dining industries.

TJ Hartford’s Grill and Bar

In 2001, the Company opened a full service casual dining restaurant with a game room area named TJ Hartford’s Grill and Bar aimed at a broad demographic target offering medium priced, high quality food, including alcoholic beverages, in a relaxed entertaining atmosphere.

Trademarks

The Company, through a wholly owned subsidiary, owns various trademarks, including “Chuck E. Cheese’s” and “TJ Hartford’s Grill and Bar” that are used in connection with the restaurantsits stores and have been registered with the appropriate patent and trademark offices. The duration of such trademarks is unlimited, subject to continued use. The Company believes that it holds the necessary rights for protection of the markstrademarks considered essential to conduct its present restaurant operations. The Company believes its ownership of trademarks in the names and character likenesses featured in the operation of its stores are an important competitive advantage.

Government RegulationSeasonality

The developmentCompany’s sales volumes fluctuate seasonally and operationare generally higher during the first and third quarters of Chuck E. Cheese’s restaurantseach fiscal year. Holidays, school operating schedules and weather conditions may affect sales volumes seasonally in some operating regions. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Government Regulation

The Company and its franchisees are subject to various federal, state and local laws and regulations affecting the development and operation of Chuck E. Cheese’s, including, but not limited to, those that impose restrictions, levy a fee or tax, or require a permit or license, onor other regulatory approval, relating to the operation of video and arcade games and rides, the preparation and sale of food and beverages, the sale and service of alcoholic beverages, and those relating to building and zoning requirements. Difficulties or failures in obtaining required permits, licenses or other regulatory approvals could delay or prevent the operationopening of gamesa new store, and rides.the suspension of, or inability to renew, a license or permit could interrupt operations at an existing store. The Company and its franchisees are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working and safety conditions, and immigration status requirements. A significant portion of the Company’s store personnel are paid at rates related to the minimum wage established by federal, state and municipal law and, accordingly, increases in such minimum wage result in higher labor costs to the Company. In addition, the Company is subject to regulation by the Federal Trade Commission, Federal Communications Commission and must comply with certain state laws which govern the offer, sale and termination of franchises and the refusal to renew franchises. The Company is also subject to the Fair Labor Standards Act, the Americans with Disabilities Act, and Family Medical Leave Act mandates. A significant portion of the Company’s restaurant personnel are paid at rates related to the minimum wage established by federal and state law. Increases in such minimum wage result in higher labor costs to the Company, which may be partially offset by price increases and operational efficiencies.

Working Capital Practices

The Company attempts to maintain only sufficient inventory of supplies in its restaurantsstores to satisfy current operational needs. The Company’s accounts receivable typically consistconsists of credit card receivables, tax receivables, vendor rebates and leasehold improvement incentives.

Employees

The Company’s employment varies seasonally, with the greatest number of people being employed during the summer months. On December 31, 2006,30, 2007, the Company employed 18,395approximately 18,500 employees, including 18,000approximately 18,100 in the operation of Chuck E. Cheese’sits stores and TJ Hartford’s Grill and Bar restaurants and 395approximately 400 employed by the Company in its executive offices. None of the Company’s employees are members of any union or collective bargaining group. The Company considers its employee relations to be good.

Item 1A.

Risk Factors

Our business operations and the implementation of our business strategy are subject to significant risks inherent in our business, including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties described below and elsewhere in this Annual Report on Form 10-K could have a material adverse effect on our financial condition, results of operations and cash flows. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position and financial performance in the future. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different.

Risks Related to Our Industry

We may be negatively affected by trends in the family entertainment/dining industry and national, regional and local economic conditions.

The family entertainment/dining industry is affected by national, regional and local economic conditions, demographic trends and consumer preferences. The performance of individual stores may be affected by factors such as changes in consumer disposable income, demographic trends, weather conditions, traffic patterns and the type, number and location of competing businesses. Dependence on frequent deliveries of fresh food products also subjects businesses such as ours to the risk that shortages or interruptions in food supplies caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. In addition, factors such as inflation, increased food, labor and employee benefit costs, fluctuations in price of utilities, interest rates, consumer confidence, consumers’ disposable income and spending levels, energy prices, job growth, unemployment rates, insurance costs and the availability of experienced management and hourly employees may also adversely affect the restaurant industry in general and our stores in particular. The entertainment industry is affected by many factors, including changes in customer preferences and increases in the type and number of competing entertainment offerings. Operating costs may also be affected by further increases in the minimum hourly wage, unemployment tax rates, sales taxes and similar matters over which we have no control.

Changes in consumers’ health, nutrition and dietary preferences could adversely affect our financial results.

Our industry is affected by consumer preferences and perceptions. Changes in prevailing health or dietary preferences and perceptions may cause consumers to avoid certain products we offer in favor of alternative or healthier foods. If consumer eating habits change significantly and we are unable to respond with appropriate menu offerings, it could adversely affect our financial results.

Risks Related to Our Company

We may not be successful in the implementation of our growthbusiness development strategies.

Our continued growth depends, to a significant degree, on our ability to successfully implement our long-term growth strategies. Among such strategies, we plan to continue to open new restaurantsstores in selected markets and for existing stores we plan to enhanceremodel and expand our facilities and upgrade the games, rides and entertainment at existing restaurants.entertainment. The opening and success of such new Chuck E. Cheese’s restaurants will dependstores is dependant on various factors, including the availability of suitable sites, the negotiation of acceptable lease terms for such locations, store sales cannibalization, the ability to meet construction schedules, our ability to manage such expansion and hire and train personnel to manage the new restaurants,stores, as well as general economic and business conditions. Our ability to successfully open new restaurantsstores or remodel, expand or upgrade the entertainment at existing stores will also depend upon the availability of sufficient fundscapital for such purpose,purposes, including funds from operations,operating cash flow, our existing credit facility, future debt financings, future equity offerings or a combination thereof. There can be no assurance that we will be successful in opening and operating the number of anticipated new restaurantsstores on a timely or profitable basis. There can be no assurance that we can continue to successfully remodel or expand our existing facilities or upgrade the games and entertainment at existing restaurants.entertainment. Our growth is also dependent on management’sour ability to continually evolve and update our business model to anticipate and respond to changing customer needs and competitive conditions. There can be no assurance that managementwe will be able to successfully anticipate changes in competitive conditions or customer needs or that the market will accept our business model.

Part of our growth strategy depends on our ability to attract new franchisees to recently opened markets and the ability of these franchisees to open and operate new stores on a profitable basis. Delays or failures in opening new franchised stores could adversely affect our planned growth. Our new franchisees depend on the availability of financing to construct and open new stores. If these franchisees experience difficulty in obtaining adequate financing for these purposes, our growth strategy and franchise revenues may be adversely affected.

We may be unsuccessful in opening closing and remodeling our restaurants.stores.

Our long-term growth is dependent on the success of strategic initiatives to increase the number of our restaurantsstores and enhance the facilities of existing restaurants.stores. We incur significant pre-opening expensescosts each time we open a new restaurantstore and other expenses when we close, relocate or remodel existing restaurants.stores. The expenses of opening, closing, relocating or remodeling any of our restaurants,stores may be higher than anticipated. If we are unable to open or are delayed in opening new restaurants,stores, we may incur significant costs which may adversely affect our financial results. If we are unable to remodel or are delayed in remodeling restaurants,stores, we may incur significant costs which may adversely affect our financial results.

We are dependent on the service of certain key personnel.

The success of our business will continue to be highly dependent upon the continued employment of Richard M. Frank, the Chairman of the Board of Directors and Chief Executive Officer of the Company, Michael H. Magusiak, the President of the Company, and other members of our senior management team. Although the Company has entered into employment agreements with each of Mr. Frank and Mr. Magusiak, the loss of the services of either of such individuals could have a material adverse effect upon our business and development. Our success will also depend upon our ability to retain and attract additional skilled management personnel to our senior management team and at our operational level. There can be no assurances that we will be able to retain the services of Messrs. Frank or Magusiak, senior members of our management team or the required operational support at the store level in the future.

Our business is highly seasonal and quarterly results may fluctuate significantly as a result of this seasonality.

We have experienced, and in the future could experience, quarterly variations in revenues and profitability as a result of a variety of factors, many of which are outside our control, including the timing and number of new store openings, the timing of capital investments in existing stores, the timing of school vacations and holidays, weather conditions and natural disasters. We typically experience lower net salesrevenues and profitability in the second and fourth quarters than in the first and third quarters. If revenues are below expectations in any given quarter, our operating results wouldwill likely be materially adversely affected for that quarter.

We may be negatively affected by trends in the family restaurant/entertainment industry and national, regional and local economic conditions.

The family restaurant/entertainment industry is affected by national, regional and local economic conditions, demographic trends and consumer tastes. The performance of individual restaurants may be affected by factors such as changes in consumer disposable income, demographic trends, weather conditions, traffic patterns and the type, number and location of competing restaurants. Dependence on frequent deliveries of fresh food products also subjects food service businesses, such as ours, to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. In addition, factors such as inflation, increased food, labor and employee benefit costs, fluctuations in price of utilities, insurance costs and the availability of experienced management and hourly employees may also adversely affect the restaurant industry in general and our restaurants in particular. The entertainment industry is affected by many factors, including changes in customer preferences and increases in the type and number of entertainment offerings. Operating costs may also be affected by further increases in the minimum hourly wage, unemployment tax rates, sales taxes and similar matters over which we have no control.

We are subject to intense competition in both the restaurant and entertainment industries.

We believe that our combined restaurant and entertainment center concept puts us in a niche which combines elements of both the restaurant and entertainment industries. As a result, the Company, to some degree, competes with entities in both industries. Although other restaurant chains presently utilize the concept of combined family restaurant/entertainmententertainment-dining operations, we believe these competitors operate primarily on a local, regional or regional, market-by-market basis. Within the traditional restaurant sector, we compete with other casual dining restaurants on a nationwide basis with respect to price, quality and speed of service, personnel, type and quality of food, personnel, the number and location of restaurants, quality and speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product development. Our high operating leverage may make the Company particularly susceptible to competition. Such competitive market conditions, including the effectiveness of our advertising and promotion and the emergence of significant new competition, could adversely affect our ability to successfully increase our results of operations.

Changes in consumers’ health, nutrition and dietary preferences could adversely affect our financial results.

Our industry is affected by consumer preferences and perceptions. Changes in prevailing health or dietary preferences and perceptions may cause consumers to avoid certain products we offer in favor of alternative or healthier foods. If consumer eating habits change significantly and we are unable to respond with appropriate menu offerings, it could adversely affect our financialoperating results.

Negative publicity concerning food quality, health and other issues could adversely affect our financial results.

Food service businesses can be adversely affected by litigation and complaints from guests, consumer groups or government authorities resulting from food quality, illness, injury or other health concerns or operating issues stemming from one restaurantstore or a limited number of restaurants.stores. Publicity concerning food-borne illnesses and injuries caused by food tampering may negatively affect our operations, reputation and brand. Such publicity may have a significant adverse impact on the financial results of the Company. We could incur (i) significant liabilities if a lawsuit or claim resulted in a judgment against us, or in(ii) significant litigation costs, regardless of the result.

We may experience an increase in food, labor and other costs.

An increase in food, labor, utilities, insurance and/or other operating costs may adversely affect the financial results of the Company. Such an increase may adversely affect the Company directly or adversely affect theour vendors, franchisees and others whose performance hashave a significant impact on our financial results.

Specifically, any increase in the prices for food commodities, including cheese, could adversely affect our financial results. The performance of our restaurantsstores is also adversely affected by increases in the price of utilities on which the restaurantsstores depend, such as natural gas, whether as a result of inflation, shortages or interruptions in supply, or otherwise. Our business also incurs significant costs for and including among other things, insurance, marketing, taxes, real estate, borrowing and litigation, all of which could increase due to inflation, rising interest rates, changes in laws, competition, or other events beyond our control.

In addition, a number of our employees are subject to various minimum wage requirements. Several states and cities in which we operate restaurantsstores have established a minimum wage higher than the federally mandated minimum wage. There may be similar increases implemented in other jurisdictions in which we operate or seek to operate. These minimum wage increases may have an adverse effect on our financial results.

We are subject to risks from disruption of our commodity distribution system

Any disruption in our commodity distribution system could adversely affect our financial results. We use a single vendor to distribute most of the products and supplies used in our restaurants.stores. Any failure by this vendor to adequately distribute products or supplies to our restaurantsstores could increase our costs and have a material adverse affect on our financial results.

Our restaurantsstores may be adversely affected by local conditions, events and natural disasters.

Certain regions in which our restaurantsstores are located may be subject to adverse local conditions, events or natural disasters. A natural disaster may damage our stores or other operations which may adversely affect the financial results of the Company. In addition, if severe weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our stores, our sales could be adversely affected. If severe weather occurs during the first and third quarters of the year, the adverse impact to our sales and profitability could be even greater than at other times during the year because we generate a significant portion of our sales and profits during these periods.

Unanticipated conditions in foreign markets may adversely affect our ability to operate effectively in those markets.

In addition to our restaurantsstores in the United States, we currently own or franchise restaurantsstores in Canada, Chile, Guatemala, Puerto Rico and Saudi Arabia. We may in the future expand into additional foreign markets. We are subject to the regulation and economic and political conditions of any foreign market in which we operate our restaurantsstores and any change in the regulation or conditions of these foreign markets may adversely affect our financial results. Changes in foreign markets that may affect our financial results include, but are not limited to, taxation, inflation, currency fluctuations, political instability, war, increased regulations and quotas, tariffs and other protectionist measures.

We are subject to risks in connection with owning and leasing real estate.

As owner and lessorlessee of the land and/or building for our restaurantsstores we are subject to all of the risks generally associated with owning and leasing real estate, including changes in the supply and demand for real estate in general and the supply and demand for the use of the restaurants.stores. Any obligation to continue making rental payments with respect to leases for closed restaurantsstores could adversely affect our financial results.

We may not be able to adequately protect our trademarks or other proprietary rights.

We own certain common law trademark rights and a number of federal and international trademark and service mark registrations and proprietary rights relating to our operations. We believe that our trademarks and other proprietary rights are important to our success and our competitive position. We, therefore, devote appropriate resources to the protection of our trademarks and proprietary rights. The protective actions that we take, however, may not be enough to prevent unauthorized usage or imitation by others, which could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us towe may incur significant legal fees.

We cannot assure yoube assured that third parties will not claim that our trademarks or menu offerings infringe upon their proprietary rights. Any such claim, whether or not it has merit, could be time-consuming,may result in costly litigation, cause delays in introducing new menu items in the future or require us to enter into royalty or licensing agreements. As a result, any such claim could have a material adverse effect on our business, results of operations, and financial condition or liquidity.position.

We are dependent on certain systems and technologies which may be disrupted.

The Company’s operations are dependent upon the successful functioning of our computer and information system.systems. Damage, interruption or failure of our systems may result in additional development costs, loss of customers, loss of customer data, negative publicity, harm to our business and reputation and exposure to losses or other liabilities.

We may be adversely affected by negative publicity relating to our target market.

The Company’s target market of children between the ages of two to twelve year old childrenand 12 and families with small children is potentiallymay be highly sensitive to adverse publicity.publicity that may arise from an actual or perceived negative isolated event within one of our stores. We are also subject to risks of litigation and regulatory action regarding advertising to our target market. Any such litigation or regulatory action may adversely affect our financial results. There can be no assurance that the Company will not experience negative publicity regarding one or more of its restaurants.stores. The occurrence of negative publicity regarding one or more of the Company’s locations could materially and adversely affect the Company’s image with its customers and its results of operations.

We are subject to various government regulations.regulations which may adversely affect our operations and financial performance.

The Companydevelopment and its franchiseesoperation of our stores are subject to various federal, state and local laws and regulations affecting operations,in many areas of our business, including, but not limited to, those relating to the use of video and arcade games and rides, the preparation and sale of food and beverages, and those relating to building and zoning requirements. The Company and its franchisees are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working and safety conditions, and citizenship requirements. In addition, the Company is subject to regulation by the Federal Trade Commission, Federal Communication Commission and must comply with certain state laws which govern the offer, sale and termination of franchises and the refusal to renew franchises.that impose restrictions, levy a fee or tax, or require a permit or license, or other regulatory approval. Difficulties or failuresfailure in obtaining required permits, licenses or other regulatory approvals could delay or prevent the opening of a new restaurant,store, and the suspension of, or inability to renew, a license or permit could interrupt operations at an existing restaurant.store. The Company is also subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions, and immigration status requirements. A significant portion of the Company’s store personnel are paid at rates related to the minimum wage established by federal, state and municipal law. Increases in such minimum wage result in higher labor costs to the Company, which may be partially offset by price increases and operational efficiencies. While the Company endeavors to comply with all applicable laws and regulations, governmental and regulatory bodies may change such laws and regulations in the future, which may require the Company to incur substantial cost increases. If the Company fails to comply with applicable laws and regulations, it may be subject to various sanctions, and/or penalties and fines. Additionally, failure to protect the integrity and security of our customers’ personal information could expose us to litigation, as well as materially damage our standing with our customers.

We face litigation risks from customers, franchisees, employees and other third parties in the ordinary course of business.

The Company’s business is subject to the risk of litigation by current and former employees, consumers, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services,food or entertainment offerings, regardless of whether the allegations are valid or whether we are ultimately found liable.

Specifically, weWe are continually subject to risks from litigation and regulatory action regarding advertising to our market of children between the ages of two to twelve year old children.and 12 years old. In addition, since certain of our restaurantsstores serve alcoholic beverages, we are subject to “dram shop” statutes. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes.

Under certain circumstances plaintiffs may file certain types of claims which may not be covered by insurance. In some cases, plaintiffs may seek punitive damages which may not be covered by insurance. Any litigation the Company faces could have a material adverse effect on the Company’s business, financial condition and results of operations.

A failureWe face risks with respect to establish, maintainproduct liability claims and apply adequate internal control over financial reporting could have a materially adverse affect on our business.

The Company is subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. We have identified a material weakness relating to our historical stock option granting process, and we have taken steps to improve our corporate governance process for equity compensation awards in the future. Should the Company identify other material weaknesses in internal control, there can be no assurance that the Company will be able to remediate any future material weaknesses that may be identified in a timely manner or maintain all of the controls necessary to remain in compliance. Any failure to maintain an effective system of internal control over financial reporting could limit the Company’s ability to report financial results accurately and timely or to detect and/or prevent fraud.

Our anti-takeover provisions may limit shareholder value.product recalls.

We have certain provisions in our corporate governance document which may make it difficult, discouragepurchase merchandise from third-parties and offer this merchandise to customers for sale or otherwise prevent a third party from acquiring control of the Company without certain approvals. These provisions may result in shareholders receiving less in exchange for their stock than they otherwise would withoutprize tickets. This third-party merchandise could be subject to recalls and other actions by regulatory authorities. We have experienced, and may in the provisions.future experience, issues that result in recalls of merchandise. In addition, individuals have asserted claims, and may in the future assert claims, that they have sustained injuries from third-party merchandise offered by us, and we may be subject to future lawsuits relating to these provisionsclaims. There is a risk that these claims or liabilities may delay, preventexceed, or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwisefall outside of the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to our shareholders receiving a premium over the market price for their common stock.reputation, diversion of development and management resources, reduced sales and increased costs, any of which could harm our business.

Changes in financial accounting standards or interpretations of existing standards could affect reported results of operations.

Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business are highly complex and involve subjective judgments. Changes in these accounting standards, new accounting pronouncements and interpretations may occur that could adversely affect the Company’s reported financial position, results of operations and/or cash flows.

Other risk factors may adversely affect our financial performance.

Other risk factors that could cause our actual results to differ materially from those indicated in the forward-looking statements by affecting, among many things, pricing, consumer spending and consumer confidence, include, without limitation, changes in economic conditions, increased fuel costs and availability for our employees, customers and suppliers, health epidemics or pandemics or the prospects of these events, (such as recent reports on avian flu), consumer perceptions of food safety, changes in consumer tastespreferences and behaviors, governmental monetary policies, changes in demographic trends, availability of employees, terrorist acts, energy shortages and rolling blackouts, and weather (including major hurricanes and regional snow storms) and other acts of God.

Risks Related to Our Common Stock

A failure to establish, maintain and apply adequate internal control over financial reporting could have a material adverse affect on our business and/or market valuation of our common stock.

The Company is subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. We had previously identified a material weakness relating to our historical stock option granting process, and have taken steps to improve our corporate governance process in regards to granting of equity compensation awards in the future. As of December 30, 2007, we have concluded that our internal controls over financial reporting are effective; however there can be no assurance that we will be able to maintain all of the controls necessary to remain in compliance with Sarbanes-Oxley in the future. Should the Company identify any material weaknesses in internal control over financial reporting in the future, there can be no assurance that we will be able to remediate such material weaknesses in a timely manner. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report financial results accurately and timely or to detect and/or prevent fraud. A failure to maintain an effective system of internal control may also result in a negative market reaction in regards to the valuation of our common stock.

None.

Item 2.

Properties.

The following table sets forth certain information regarding the Chuck E. Cheese’s restaurants operated by the Company as of December 31, 2006.30, 2007.

Of the 484490 Chuck E. Cheese’s restaurants owned by the Company as of December 31, 2006, 42530, 2007, 431 occupy leased premises and 59 occupy owned premises. The primary lease terms of these restaurantsstores will expire at various times from 20072008 to 2028 and available lease terms, including options to renew, expire at various times from 20072008 to 2040, as described in the table below.

The leases of Chuck E. Cheese’s restaurantsstores contain terms that vary from lease to lease, although a typical lease provides for a primary term of 10 years, with two additional five-year options to renew, and provides for annual minimum rent payments of approximately $2.99$5.00 to $36.87$38.73 per square foot, subject to periodic adjustment. It is common for the Company to take possession of leased premises prior to the commencement of rentsrent payments for the purpose of constructing leasehold improvements. The restaurant leases require the Company to pay the cost of repairs, insurance and real estate taxes and, in many instances, provide for additional rent equal to the amount by which a percentage (typically 6%) of gross revenues exceeds the minimum rent.

On July 25,June 19, 2006, a lawsuit was filed by a personal representative of the estates of Robert Bullock, II and Alysa Bullock against CEC Entertainment, Inc., Manley Toy Direct, LLC (“Manley Toy”), et. al. in the Circuit Court for the Fourth Judicial Circuit, Duval County, Florida, Case No. 2006 CA 004378 (“Bullock Litigation”). In his complaint, the Bullock Litigation’s plaintiff alleges that the May 8, 2006 mobile home fire which resulted in the deaths of his two children, Robert Bullock, II and Alysa Bullock, was caused by a defective disco light product that was purchased at a Chuck E. Cheese’s. The Bullock Litigation’s plaintiff is seeking an unspecified amount of damages. The Company tendered its defense of this matter to Manley Toy, from which the Company announced a review by its Audit Committee of stock option granting procedures. On July 27, 2006,had purchased certain disco light products. Manley Toy accepted the Company’s tender and has indicated it will indemnify the Company notifiedin the SECevent of any judgment or settlement that exceeds coverage afforded under Manley Toy’s insurance policies. The Company filed its answer to the Audit Committee was conducting a review of the Company’s stock option granting practices.complaint on September 7, 2006, and discovery has commenced. The SEC notifiedBullock Litigation’s ultimate outcome, and any ultimate effect on the Company, on August 1, 2006,cannot be precisely determined at this time. However, the Company believes that it was conducting an informal inquiry into various accounting matters relatedhas meritorious defenses to this lawsuit and is asserting a vigorous defense against it. Having considered its available insurance coverage and indemnification from Manley Toy, the Company includingdoes not expect this matter to have a material impact on its stock option practices. The Company has and will continue to fully cooperate with the SEC in the informal inquiry. Given the preliminary naturefinancial position or results of the matter, the Company is not able to predict what impact, if any, this inquiry will have on the Company.operations.

On January 23, 2007, a purported class action lawsuit against the Company, entitled Blanco v. CEC Entertainment, Inc., et. al., Cause No. CV-07-0559 (“Blanco Litigation”), was filed in the United States District Court for the Central District of California. The Blanco Litigation was filed by an alleged customer of one of the Company’s Chuck E. Cheese’s restaurantsstores purporting to represent all individuals in the United States who, on or after December 4, 2006, were knowingly and intentionally provided at the point of sale or transaction with an electronically-printed receipt by the Company that was in violation of U.S.C. Section 1681c(g) of the Fair and Accurate Credit Transactions Act (“FACTA”). The Blanco Litigation is not seeking actual damages, but is only seeking statutory damages for each willful violation under FACTA. TheOn January 10, 2008, the Court denied class certification without prejudice and stayed the case pending the appellate outcome of the Soualian v. Int’l Coffee & Tea LLC case; which is presently pending before the Ninth Circuit. Thus, the Blanco Litigation is still in its preliminary stages and discovery has not yet begun. Thus, itsLitigation’s ultimate outcome, and any ultimate effect on the Company, cannot be precisely determined at this time. However, the Company believes that it has meritorious defenses to this lawsuit and intends to vigorously defend against it, including the Blanco Litigation plaintiffs’ further efforts, if any, to certify a nationwide class action.

On February 8,November 19, 2007, a purported class action lawsuit against the Company, entitled PriceAna Chavez v. CEC Entertainment, Inc., et. al., Cause No. CV-07-00923BC380996 (“PriceChavez Litigation”), was filed in the United States District Court for the Central District Superior Court of California.California in Los Angeles County. The PriceCompany received service of process on December 21, 2007. The Chavez Litigation was filed by an alleged customer of one of the Company’s Chuck E. Cheese’s restaurantsa former store employee purporting to represent the following two classesother similarly situated employees and former employees of individuals in the United States: (i) all persons to whom, on or after January 1, 2005, the Company provided, through usein California from 2003 to the present. The lawsuit alleges violations of a machine that was first put into use bythe state wage and hour laws involving unpaid vacation wages, meal and rest periods, wages due upon termination, waiting time penalties and seeks an unspecified amount in damages. On January 18, 2008, the Company on or after January 1, 2005, an electronically printed receipt which was in violation of U.S.C. Section 1681c(g) ofremoved the Fair and Accurate Credit Transactions Act (“FACTA”); and (ii) all personsChavez Litigation to whom, on or after December 4, 2006, the Company provided, through use of a machine that was being used by the Company before January 1, 2005, an electronically printed receipt which was in violation of FACTA.Federal Court. The Price Litigation is not seeking actual damages, but is only seeking statutory damages for each willful violation under FACTA and a permanent injunction enjoining the Company from engaging in

unlawful violations of FACTA. The Price Litigation is still in its preliminary stages and discovery has not yet begun. Thus, its ultimate outcome, and any ultimate effect on the Company, cannot be precisely determined at this time. However, the Company believes that it has meritorious defenses to this lawsuit and intends to vigorously defend against it, including the Price plaintiffs’Chavez Litigation plaintiff’s efforts to certify a nationwideCalifornia class action. However, the Chavez Litigation’s ultimate outcome, and any ultimate effect on the Company cannot be determined at this time.

On January 9, 2008, a purported class action lawsuit against the Company, entitled Cynthia Perez et. al. v. CEC Entertainment, Inc., et. al., Cause No. BC3853527 (“Perez Litigation”), was filed in the Central District Superior Court of California in Los Angeles County. The Company was served with the complaint on January 30, 2008. The Perez Litigation was filed by former store employees purporting to represent other similarly situated employees and former employees of the Company in California from 2004 to the present. The lawsuit alleges violations of the state wage and hour laws involving unpaid overtime wages, meal and rest periods, itemized wage statements, waiting time penalties and seeks an unspecified amount in damages. The Company believes that it has meritorious defenses to this lawsuit and intends to vigorously defend against it, including the Perez Litigation plaintiff’s efforts to certify a California class action. However, the Perez Litigation’s ultimate outcome, and any ultimate effect on the Company cannot be determined at this time.

No matters were submitted to a vote of security holders during the fourth quarter of 2006.2007.

PART II

As of April 13, 2007, there were an aggregate of 32,241,703 shares of the Company’s common stock outstanding and approximately 2,220 stockholders of record.

The Company’s common stock is listed on the New York Stock Exchange under the symbol “CEC.” The following table sets forth the highest and lowest price per share of the common stock during each quarterly period within the two most recent years, as reported on the New York Stock Exchange:

As of February 13, 2008, there were an aggregate of 26,641,444 shares of the Company’s common stock outstanding and approximately 2,120 stockholders of record.

The Company has not paid any cash dividends on its common stock and has no present intention of paying cash dividends thereon in the future.future; however, the Company’s intent in regards to paying cash dividends is subject to continual review. The Company currently plans to retain any earnings to finance anticipated capital expenditures, repurchase the Company’s common stock and reduce its long-term debt. The future dividend policy with respectIn addition, pursuant to the common stock willCompany’s revolving credit facility agreement, there are restrictions on the amount of dividends that may be determined by the Board of Directors of the Company, taking into consideration factors such as future earnings, capital requirements, potential loan agreement restrictionspaid based on certain financial covenants and the financial condition of the Company.criteria.

From time to time, the Company repurchases shares of its common stock under a plan authorized by its Board of Directors. SeeFor further discussion of this matter, see the section titled Financial“Financial Condition, Liquidity and Capital ResourcesResources” under Item 7. Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations. There were no”

The following table presents information related to repurchases of common stock made by the Company made during the fourth quarter of 2006.2007 pursuant to a repurchase program authorized by the Company’s Board of Directors in July 2005, and increased in October 2007:

Stock Performance Graph

The following graph compares the annual change in the Company’s cumulative total stockholder return for the five fiscal years ended December 31, 200630, 2007 based upon the market price of the Company’s common stock, compared with the cumulative total return on the NYSE Market Index and an industry peer group index assuming $100 was invested. Prior to 2007, the Company used the NYSE Index for U.SU.S. companies with a standard industrial classification (“SIC”) for eating and drinking places assuming $100(“NYSE Eating and Drinking Places Index”) as its comparative peer group. In 2007, the comparative peer group was invested.changed to the S&P SmallCap 600 Restaurants Index because the NYSE Eating and Drinking Places Index includes several companies which are substantially larger than the Company in terms of number of stores, revenues and market capitalization. The S&P SmallCap 600 Restaurant Index, of which the Company is a member, is comprised of companies that are more comparable to the Company in terms of size of operations and market capitalization, and thus considered a more comparable peer group.

Item 6.

Selected Financial Data.

The following selected financial data presented below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements under Item 8. “Financial Statements and Supplementary Data.” The Company operates on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. Fiscal year 2004 was 53 weeks in length and all other fiscal years presented were 52 weeks.

		2007				2006				2005				2004				2003
		(in thousands, except store count data)
Cash flow data:
Cash provided by operating activities		$	162,742			$	149,602			$	134,998			$	162,974			$	155,588
Cash used in investing activities			(108,647	)			(115,516	)			(91,247	)			(80,327	)			(94,226	)
Cash used in financing activities			(54,030	)			(27,962	)			(43,365	)			(78,916	)			(65,506	)
Number of stores at year end:
Company-owned			490				484				475				449				418
Franchise			44				45				44				46				48
			534				529				519				495				466

Non-GAAP Performance Measures

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States (“GAAP”). From time to time in the course of financial presentations, earnings conference calls or otherwise, the Company may disclose certain non-GAAP performance measures such as Adjusted EBITDA or Free Cash Flow, both of which are defined below. The Company believes that the presentation of non-GAAP measures provides useful information to investors and other interested parties regarding the Company’s operating performance, its capacity to incur and service debt, fund capital expenditures and other corporate uses. Non-GAAP performance measures should not be viewed as alternatives or substitutes for the Company’s reported GAAP results.

The following table sets forth a reconciliation of the Company’s historical net income to Adjusted EBITDA and certain other supplemental financial data for the periods shown:

Adjusted EBITDA, a non-GAAP measure, is defined by the Company as net income excluding income taxes, net interest expense, depreciation, amortization, long-lived asset disposal and impairment losses, and stock-based compensation. Adjusted EBITDA Margin represents Adjusted EBITDA divided by total revenues expressed as a percentage. Free Cash Flow, also a non-GAAP measure, is defined by the Company as cash provided by operating activities less capital expenditures. Adjusted EBITDA and Free Cash Flow as defined herein may differ from similarly title measures presented by other companies.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The Company operates on a 52 or 53 week fiscal year ending on the Sunday nearest December 31. The fiscal years are as follows:

Overview

The Company and its subsidiaries develop, operate and franchise restaurantsfamily entertainment-restaurant centers under the name “Chuck E. Cheese’s” in 48 states and five foreign countries/territories. The primary sources of the Company’s revenues are from Company restaurantCompany-owned store sales (food, beverage, game and merchandise)merchandise, collectively “Company store sales”) and franchise royalties and fees.

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

Selling, general and administrative costs include both restaurant costs and corporate overhead costs including advertising.

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

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

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

Comparable store sales (sales of domestic restaurantsstores that were open for a period greater than eighteen consecutive months at the beginning of each respective year or twelve months for acquired restaurants)stores) are a critical factor when evaluating the Company’s business. In order to positively impactA summary of average annual comparable store sales is shown below:

The following table summarizes information regarding Company-owned and earnings per share, the Company plans to significantly increase its capital reinvestment in existing stores, slow new store development and enhance value to its guests with improved and increased distribution of coupons, cross promotions and e-marketing.franchised stores:

A critical component of the Company’s strategic plan to increase long-term shareholder value is through capital reinvestment. The Company projects that it will reinvest approximately $56 million of capital impacting 155 stores in 2007. This plan includes 55 major remodels, 15 store expansions, 65 game enhancements and 20 small market remodels.

Results of Operations

A summary ofThe following table summarizes the results of operations of the CompanyCompany’s costs and expenses expressed as a percentage of total revenues, except where otherwise noted:

Fiscal Year 2007 Compared to Fiscal Year 2006

Revenues

Company store sales increased 1.6% to $781.7 million in 2007 compared to $769.2 million for the last three fiscal years is shown below.same period in 2006 primarily due to the net increase in the number of Company-owned stores in 2007, partially offset by a 1.4% decrease in comparable store sales during the year. In 2007, the weighted average number of Company-owned stores open during the year increased by 11 stores as compared to 2006. We believe that comparable store sales in 2007 were negatively affected by a weak consumer environment and a significant increase in competition including family movies. Menu prices increased 2.2% between the two years.

Revenue from franchise fees and royalties were $3.7 million in 2007 compared to $3.3 million in 2006. During 2007, one new franchise store opened, one franchise store was acquired by the Company and one franchise store closed. Domestic franchise comparable store sales decreased 0.7% between the two years.

Costs and Expenses

Cost of sales as a percentage of store sales increased 0.4% to 16.2% in 2007 from 15.8% for the same period in 2006 primarily due to higher cheese prices and a larger beverage rebate received in the prior year as compared to 2007. These increases were partially offset by higher menu prices. The average price per pound of cheese in 2007 increased approximately $0.50 compared to prices paid in 2006.

Labor expense as a percentage of store sales remained constant at 27.3% in 2007 and for the same period in 2006 primarily due to a 5.7% increase in hourly wage rates which was offset by improvement in labor productivity and an increase in menu prices.

Depreciation and amortization expense related to our stores increased $6.4 million to $70.7 million in 2007 compared to $64.3 million for the same period in 2006. The increase was due to ongoing capital investment initiatives occurring at our existing stores and new store development.

Store rent expense increased $3.4 million to $63.7 million in 2007 compared to $60.3 million for the same period in 2006 due to new store development.

Other store operating expenses as a percentage of store sales increased 0.8% to 14.6% in 2007 compared to 13.8% for the same period in 2006. The increase was primarily due to negative comparable store sales and a 0.6% increase in insurance expense as percentage of store sales in 2007 attributable to the favorable impact of prior year claims reserves adjustments, resulting from improved trends of general liability and workers compensation claims recognized in 2006, which did not recur to the same extent in 2007.

Advertising expense as a percentage of total revenues decreased 0.3% to 3.9% in 2007 from 4.2% for the same period in 2006 primarily due to lower advertisement production costs in 2007 compared to 2006.

General and administrative expenses associated with our corporate office operations as a percentage of total revenues decreased 0.3% to 6.6% in 2007 from 6.9% for the same period in 2006. The decrease was primarily due to reductions in corporate office compensation and non-recurring professional service fees. During 2007, corporate compensation expense decreased $2.5 million, or 0.3% as a percent of total revenues, primarily due to reductions in bonus costs. The Company also benefited in 2007 from a decrease in professional service fees primarily associated with the conclusion of the Company’s 2006 review of its stock option granting practices. These reductions were partially offset by certain tax related charges and increases in other corporate office expenses.

Impairments related to our store assets increased to $9.6 million in 2007 compared to $3.9 million for the same period in 2006. The asset impairment charges were recorded to write down the carrying amount of the property and equipment at six and five of our stores, in 2007 and 2006, respectively.

Interest expense increased to $13.2 million in 2007 compared to $9.5 million for the same period in 2006 primarily due to a greater amount of debt outstanding under the Company’s credit facility and higher average interest rates incurred in 2007.

The Company’s effective income tax rate was 38.8% and 38.7% in 2007 and 2006, respectively.

Net Income

The Company reported net income of $55.9 million in 2007 compared to $68.3 million for the same period in 2006 due to the changes in revenues and expenses discussed above. The Company’s diluted earnings per share decreased to $1.76 per share in 2007 from $2.04 per share for the same period in 2006 due to the 18.1% decrease in net income which was partially offset by a 5.3% decrease in the number of weighted average shares outstanding.

Fiscal Year 2006 Compared to Fiscal Year 2005

Revenues

RevenuesCompany store sales increased 6.6%6.4% to $774.2$769.2 million in 2006 from $726.2compared to $722.9 million for the same period in 2005 primarily due to the net increase in the number of Company-owned stores in 2006 and a 2.7% increase in comparable store sales. TheIn 2006, the Company opened 14 new restaurantsstores and closed five restaurants in 2006. Average annual revenues per restaurant increased to approximately $1,647,000 in 2006 from approximately $1,633,000 in 2005. Fiscal years 2006 and 2005 both consisted of 52 weeks.stores. Menu prices increased approximately 0.8% between the two years.

RevenuesRevenue from franchise fees and royalties were $2.9$3.3 million in both 2006 and 2005. During 2006, one new franchise restaurantstore opened. Domestic franchise comparable store sales increased 1.8% in 2006.2006 compared to 2005.

Costs and Expenses

Costs and expenses as a percentage of revenues increased to 85.6% in 2006 from 84.4% in 2005.

Cost of sales as a percentage of revenuesstore sales decreased 0.2% to 43.3%15.8% in 2006 from 43.8%16.0% for the same period in 2005. Costs of food, beverage, and related supplies as a percentage of revenues decreased to 11.6% in 2006 from 12.0% in 2005, primarily due to a 15% reduction in average cheese prices paid during 2006 compared to 2005 and menu price increases. Costs2005. This was partially offset by additional costs of games and merchandisestore prizes which increased to 4.3% in 2006 from 4.1% in 2005 primarilyapproximately 0.2% as a percent of store sales due to the distribution of free tokens related to a marketing promotion in the first quarter of 2006. Restaurant labor expenses

Labor expense as a percentage of revenuesstore sales decreased 0.7% to 27.4%27.3% in 2006 from 27.7%28.0% for the same period in 2005 primarily due to the increase in comparable store sales and improved operational efficiencies.

Selling, generalDepreciation and administrative expenses as a percentage of revenuesamortization expense related to our stores increased $4.4 million to 13.8%$64.3 million in 2006 from 13.5%compared to $59.8 million for the same period in 2005. The increase was primarily due to $2.1new store development and capital initiatives focused on our existing stores.

Store rent expense increased $3.3 million to $60.3 million in professional service fees2006 compared to $57.0 million for the same period in 2005 primarily due to new store development and increased rents.

Other store operating expenses as a percentage of store sales increased 0.2% to 13.8% in 2006 compared to 13.6% for the same period in 2005. The increase was primarily due to increases in utilities expense and asset write-offs, which were partially offset by leverage on fixed costs associated with the Company’s review of its stock option granting practices.

Depreciationincrease in comparable store sales and amortizationa reduction in insurance costs. Utilities expense as a percentage of revenues remained consistent between years 2006 and 2005 at 8.4%.

Interest expense as a percentage of revenuesstore sales increased to 1.2%approximately 0.3% in 2006 from 0.6% in 2005 primarily due to an increase in the average debt balance and an increase in interest rates.

Other operating expenses increased as a percentage of revenues to 18.9% in 2006 from 18.1% in 2005 primarily due to a 0.3% increase in utility expense as a percentage of revenues due to an 18% increase in the average electricity expense per store. In addition2006, asset write-off charges attributable to store remodels and the Company recorded a $3.9 million asset impairment loss for 4 small market stores and one large market store, a $1.3 million loss related to the write-offwrite down of used games intended to be used in new stores and the write-offincreased by approximately $4.3 million, or 0.5% of development costs for abandoned sites where the decision was made to not develop the units. This was partially offset by an improvement in insurancestore sales. Insurance expense decreased approximately $1.5 million, or 0.2% of 0.2%store sales between the years. Insurance expense decreasedtwo years due to improved trends in workers’ compensation and general liability claims and a reduction in insurance premiums.

Advertising expense as a percentage of total revenues increased 0.2% to 4.2% in 2006 compared to 4.0% for the same period in 2005 primarily due to an increase in television advertising and newspaper insert costs.

General and administrative expenses associated with our corporate office operations as a percentage of total revenues increased 0.6% to 6.9% in 2006 compared to 6.3% for the same period in 2005. The increase was primarily due to increases in corporate office compensation and professional service fees. During 2006, corporate compensation expense increased 0.4% as a percent of total revenues primarily due to the achievement of bonus performance criteria. In 2006, the Company also incurred an increase in professional service fees of 0.3% as a percentage of total revenue primarily associated with a review of its stock option granting practices.

Impairments related to our store assets increased to $3.9 million in 2006 compared to $0.4 million for the same period in 2005. In 2006, we recorded asset impairment charges of $3.9 million to write down the carrying amount of the property and equipment at five of our stores.

Interest expense increased to $9.5 million in 2006 compared to $4.5 million for the same period in 2005 primarily due to a greater amount of debt outstanding under the Company’s credit facility and an increase in interest rates.

The Company’s effective income tax rate was 38.7% and 38.2% in 2006 and 2005, respectively.

Net Income

The Company hadreported net income of $68.3 million in 2006 compared to $69.7 million for the same period in 2005 due to the changes in revenues and expenses discussed above. The Company’s diluted earnings per share increased 5.7% to $2.04 per share in 2006 compared tofrom $1.93 per share for the same period in 2005. Weighted average diluted shares outstanding decreased 7.5% to 33.5 million in 2006 from 36.2 million in 2005 primarily due to the Company’s share repurchase program.

2005 ComparedFinancial Condition, Liquidity and Capital Resources

Cash provided by operating activities is a significant source of liquidity for the Company. Since substantially all of the Company’s sales are tendered with cash or credit cards, and accounts payable are generally due in five to 2004

Revenues

Revenues decreased 0.3%30 days, the Company is frequently able to $726.2carry current liabilities in excess of current assets. The net working capital deficit increased to $11.9 million in 2005at December 30, 2007 from $728.1$10.0 million in 2004at December 31, 2006 primarily due to an additional weekthe timing of operation in 2004payments for accounts payable and a 2.3% decreasedecline in comparable store sales. Excludinginventories. The Company’s primary requirements for cash relate to planned capital expenditures, the benefitrepurchase of the extra weekCompany’s common stock and debt service. As discussed further below, in 2007, the Company increased the maximum available borrowings obtainable under its credit facility by a total of $350.0 million and the Board of Directors authorized a $200.0 million increase in the prior year, comparable store sales would have decreasedCompany’s share repurchase program.

Net cash provided by 1.8%. Comparable store sales were negatively impactedoperating activities increased to $162.7 million in 2007 from $149.6 million in 2006. The increase was primarily attributable to a $15.8 million federal income tax refund received in 2007 in connection with the implementation of certain tax strategies partially offset by approximately 0.5% due to the losstiming of 711payments for accrued expenses and changes in operating days as a result of hurricane damage occurring in 2005. The Company opened 25 new restaurants, acquired two restaurants from franchiseesassets and closed one restaurant in 2005. Average annual revenues per restaurant decreased to approximately $1,633,000 in 2005 from approximately $1,695,000 in 2004. Fiscal year 2005 consisted of 52 weeks while fiscal year 2004 consisted of 53 weeks. Menu prices increased approximately 2.2%liabilities between the two years.

Revenues from franchise fees and royalties were $2.9

Net cash used in investing activities decreased to $108.6 million in 2005 compared to $3.22007 from $115.5 million in 2004. During 2005, one new franchise restaurant opened, one franchise restaurant closed and two franchise restaurants were acquired by the Company. Domestic franchise comparable store sales decreased 1.6% in 2005.

Costs and Expenses

Costs and expenses as a percentage of revenues increased to 84.4% in 2005 from 82.9% in 2004.

Cost of sales as a percentage of revenues decreased to 43.8% in 2005 from 44.0% in 2004. Costs of food, beverage, and related supplies as a percentage of revenues decreased to 12.0% in 2005 from 12.3% in 20042006, due to a 10% reductiondecrease in average cheese prices paidcapital expenditures during 20052007. Capital expenditures were $109.1 million in 2007 compared to 2004, a beverage credit from our supplier and menu price increases. Costs of games and merchandise decreased to 4.1%$115.8 million in 2005 from 4.2%2006. The decrease in 2004 primarily due to menu price increases. Restaurant labor expenses as a percentage of revenues increased to 27.7% in 2005 from 27.5% in 2004 primarily duecapital expenditures was attributable to the decreaseopening of four fewer stores in comparable store sales.

Selling, general and administrative expenses as a percentage of revenues increased to 13.5% in 2005 from 13.1% in 2004 primarily due to the benefit of an extra week of revenue2007 than had been opened in the prior year and the declinea lower average cost incurred per store for capital initiatives in comparable store sales.2007 compared to 2006. In 2007, capital initiatives affected 165 existing stores compared to 152 stores in 2006.

Depreciation and amortization expense as a percentage of revenuesNet cash used in financing activities increased to 8.4%$54.0 million in 20052007 from 7.7%$28.0 million in 20042006, primarily due to a $181.8 million increase in the cost of repurchases of the Company’s common stock, partially offset by a $117.4 million increase in net borrowings obtained under the Company’s recently amended credit facility, and a $37.3 million increase in proceeds obtained through the exercise of employee stock options.

Future capital investedexpenditures will primarily be for the development of new stores and reinvestment into the Company’s existing store base through various capital initiatives.

The Company’s plan for new store development is primarily focused on opening high volume stores in densely populated areas. In 2008, the Company plans to open approximately six to seven new Company-owned stores. The Company currently anticipates its cost of opening such new stores will vary depending upon many factors including the size of the unit and whether the Company acquires land or the store is an in-line or freestanding building. The average capital cost of all new stores expected to open in 2008 will approximate $2.5 million to $2.7 million per store. The average square footage of new stores in 2008 should approximate 14,000 square feet with projected average annual sales in excess of $2.0 million. The Company currently projects it will open 30 to 40 Company stores, including store relocations, during the next five years.

For its existing restaurantsstores, the Company utilizes the following capital initiatives to maintain a unique and exciting environment providing a solid foundation for long-term revenue growth: (a) major remodels, (b) expanding the decline in comparablesquare footage of the store, sales.and (c) a game enhancement initiative that includes new games and rides.

Interest expense as a percentage of revenues increasedThe major remodel initiative typically includes increasing the space allocated to 0.6% in 2005 from 0.3% in 2004 primarily due tothe game room, an increase in interest ratesthe number of games and outstanding debt.

Other operating expenses increased asrides and in most cases includes a percentage of revenues to 18.1% in 2005 from 17.8% in 2004 primarily due tonew exterior and interior identity. A new exterior identity includes a revised Chuck E. Cheese’s logo and signage, updating the benefitexterior design of the extra weekbuildings and, in some stores, colorful new awnings. The interior component includes new paint, updating décor, a new menu board, enhanced lighting, remodeled restrooms and an upgraded salad bar. The Company is currently planning to complete 20 to 24 major remodels in 2008, with an average cost of revenuesapproximately $625,000 to $675,000 per store.

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 prior yearnumber of games and the declinerides and on average range in comparablecost from $1,000,000 to $1,100,000 per store. The Company is currently planning to complete 18 to 22 store sales. This was partially offset by an improvementexpansions in insurance expense of 1.0% between the years. Insurance expense decreased due to improved trends in workers’ compensation and general liability claims and a reduction in insurance premiums.2008.

The Company’s effective income tax rate was 38.2%primary components of the game enhancement initiative are to provide new games and rides. The average cost of a game enhancement in both 2005 and 2004.

Net Income2008 will approximate $125,000 to $175,000 per store. The Company is currently planning to complete 120 to 130 game enhancement initiatives.

The Company had net income of $69.7is estimating capital expenditures in 2008 to total approximately $80.0 million to $85.0 million, including approximately $54.0 million the Company is expecting to invest in its existing stores, approximately $19.0 million related to new unit development and the remainder for general store maintenance and corporate capital expenditures. The Company plans to fund its capital expenditures through cash flow from operations and, if necessary, borrowings under the Company’s revolving credit facility.

In August 2007, the Company increased its $200.0 million revolving credit facility by $100.0 million in 2005 comparedaccordance with the terms of the agreement. In October 2007, the credit facility agreement was amended to $77.0provide for total available borrowings of up to $550 million for a term of five years. As of December 30, 2007, there were $316.8 million of borrowings and $12.1 million of letters of credit outstanding under the credit facility. The amended credit facility, which matures in October 2012, includes an accordion feature allowing the Company to request an additional $50 million in 2004 dueborrowings at any time. As amended, the credit facility bears interest at LIBOR plus an applicable margin of 0.625% to 1.25% determined based on the Company’s financial performance and debt levels, or alternatively, the higher of (a) the prime rate or (b) the Federal Funds rate plus 0.50%. As of December 30, 2007, borrowings under the credit facility incurred interest at LIBOR (5.088%) plus 0.875% or prime (7.25%). All borrowings are unsecured, but the Company has agreed not to pledge any of its existing assets to secure future indebtedness. The credit facility agreement contains certain restrictions and conditions, as defined in the agreement, that require the Company to maintain financial covenant ratios, including a minimum fixed charge coverage ratio of 1.5 to 1.0 and a maximum leverage ratio of 3.0 to 1.0. At December 30, 2007, the Company was in compliance with these covenants.

From time to time, the Company repurchases shares of its common stock under a plan authorized by its Board of Directors (the “Board”). The plan authorizes repurchases in the open market or in private transactions. In July 2005, the Board approved a $400 million share repurchase authorization. On October 22, 2007, the Board authorized a $200 million increase to the changes in revenuesshare repurchase authorization, bringing the total outstanding share repurchase authorization available at that time to approximately $347.0 million. During 2007, the Company repurchased 7,887,337 shares at an aggregate purchase price of approximately $248.1 million. At the end of 2007, approximately $232.2 million remained available for share repurchases under the $600 million repurchase authorization approved by the Board.

The Company continually assesses the most optimal means by which to repurchase its common stock, including but not limited to open market repurchases, private transactions or other structured transactions such as an accelerated share repurchase entered into with a banking partner. The Company currently anticipates, subject to market conditions, that it will increase its borrowings under the amended credit facility to reflect a debt to Adjusted EBITDA ratio of 2 to 1 and expenses discussed above. use cash provided by operations to complete the $232.2 million share repurchase authorization by the end of fiscal year 2010.

Contractual Obligations

The Company’s diluted earnings per share decreased 3.5% to $1.93 per share in 2005 compared to $2.00 per share in 2004 duefollowing are contractual cash obligations of the Company as of December 30, 2007 (in thousands):

In addition to the 9.5% decrease in net income over the prior year and a 5.9% decrease in the Company’s number of weighted average shares outstanding. In addition,above, the Company estimates that the additional weekaccrued liabilities for group medical, general liability and workers’ compensation claims of approximately $16.2 million as of December 30, 2007 will be paid as follows: approximately $7.8 million to be paid in 2008 and the remainder paid over the six year period from 2009 to 2014.

As of December 30, 2007, capital expenditures totaling $10.3 million were outstanding and included in accounts payable. These amounts are expected to be paid in less than one year.

Inflation

The Company’s cost of operations, including but not limited to labor, food products, supplies, utilities, financing and rental costs, are significantly affected by inflationary factors. The Company pays most of its part-time employees rates that are related to federal, state and municipal mandated minimum wage requirements. Management anticipates that any increases in 2004 increased diluted earnings per share by approximately $.11. Weighted average diluted shares outstanding decreased to 36.2 millionfederal or state mandated minimum wage would result in 2005 from 38.5 million in 2004 primarily duehigher costs to the Company’s share repurchase program.Company, which the Company expects may be partially offset by menu price increases.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The application of GAAP requires the Company to make estimates and assumptions that affect the reported values of assets and liabilities at the date of the financial statements, the reported amount of revenues and expenses during the reporting period, and the related disclosures of contingent assets and liabilities. The use of estimates is pervasive throughout the Company’s financial statements and is affected by management judgment and uncertainties. The Company’s estimates, assumptions and judgments are based on historical experience, current market trends and other factors that it believes to be relevant and reasonable at the time the consolidated financial statements are prepared. The Company continually evaluates the information used to make these estimates as the business and the economic environment change. Actual results may differ materially from these estimates under different assumptions or conditions.

The significant accounting policies used in the preparation of the Company’s consolidated financial statements are discloseddescribed in Note 1 “Summary of significant accounting policies” under Item 8. “Financial Statements and Supplementary Data.” The Company considers an accounting policy or estimate to be critical if it requires difficult, subjective or complex judgments, and is material to the portrayal of financial condition, changes in financial condition or results of operations. The accounting policies and estimates that management considers most critical are: estimation of reserves and valuation allowances specifically related to insurance, tax and legal contingencies; valuation of long-lived assets; stock-based compensation; and lease accounting. The selection, application and disclosure of the critical accounting policies and estimates have been reviewed by the Audit Committee of the Board of Directors.

Estimation of Reserves and Valuation Allowances

The amount of liability the Company records for claims related to insurance, tax and legal contingencies requires the Company to make judgments about the amount of expenses that will ultimately be incurred. The Company uses history and experience, as well as other specific circumstances surrounding these contingencies, in evaluating the amount of liability that should be recorded. As additional information becomes available, the Company assesses the potential liability related to its various claims and revises its estimates as appropriate. These revisions could materially impact the Company’s results of operations and financial position or liquidity.

The Company is insured for certain losses related to workers’ compensation, general liability, property and other liability claims, with deductibles up to approximately $0.2 million to $0.4 million per occurrence. This insurance coverage limits the Company’s exposure for any catastrophic claims that may arise above the deductible. The Company also has a self-insured health program administered by a third party covering the majority of the employees that participate in the Company’s health insurance programs. The Company estimates the amount of reserves for all insurance programs discussed above at the end of each reporting period. This estimate is based on information provided by either an independent actuarial firm or third party. The information includes historical claims experience, demographic factors, severity factors, and other factors the Company deems relevant. A 10% change in the insurance reserves at December 30, 2007, would have affected net income by approximately $0.9 million for the fiscal year ended December 30, 2007. As of December 30, 2007, actual losses had not exceeded the Company’s expectations. Additionally, for claims that exceed the deductible amount, the Company records a gross liability and a corresponding receivable representing expected recoveries, since the Company is not legally relieved of its obligation to the claimant.

The Company is subject to periodic audits from multiple domestic and foreign tax authorities related to income tax, sales and use tax, personal property tax, and other forms of taxation. These audits examine the Company’s tax positions, timing of income and deductions, and allocation procedures across multiple jurisdictions. As part of the Company’s evaluation of these tax issues, the Company establishes reserves in the consolidated financial statements. The following discussion addressesstatements based on the estimate of current probable tax exposures. Effective January 1, 2007, the Company began recognizing uncertain income tax positions based on the assessment of whether the tax position was more likely than not to be sustained on audit, using the guidance provided in Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” Depending on the nature of the tax issue, the Company could be subject to audit over several years; therefore, the estimated reserve balances might exist for multiple years before an issue is resolved by the taxing authority.

Additionally, the Company is from time to time involved in legal proceedings and governmental inquiries associated with employment and other matters. Reserves are established based on the Company’s most critical accounting policies,best estimates of the potential liability in these matters. These estimates are developed in consultation with in-house and outside legal counsel and are based upon a combination of litigation and settlement strategies.

Although the Company believes that its assessments of tax and legal reserves are based on reasonable judgments and estimates, actual results could differ, which may expose the Company to material gains or losses in future periods. These actual results could materially affect the Company’s effective tax rate, earnings, deferred tax balances and cash flows in the period of resolution.

Valuation of Long-Lived Assets

Long-lived assets, such as property and equipment, are thosereviewed for impairment when events or changes in circumstances indicate that require significant judgment.the carrying amount may not be recoverable, such as historical negative cash flows or plans to dispose of or sell long-lived assets before the end of their previously estimated useful lives. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount is not recoverable, the Company recognizes an impairment loss equal to the amount by which the carrying amount exceeds fair value. Fair value is determined by discounting expected future cash flows using a risk-free rate of interest or other market information.

Impairment losses, if any, are recorded in the period in which the Company determines that an impairment occurred. The carrying value of the asset is adjusted to the new carrying value, and any subsequent increases in fair value are not recorded. Additionally, if it is determined that the estimated remaining useful life of the asset should be decreased, the periodic depreciation expense is adjusted based on the new carrying value of the asset unless written down to salvage value, at which time depreciation ceases.

The impairment calculation requires the Company to apply judgment and estimates concerning future cash flows, strategic plans, useful lives and discount rates. If actual results are not consistent with the Company’s estimates and assumptions, the Company may be exposed to additional impairment charges, which could be material to the Company’s results of operations.

Stock-Based Compensation Expense

Prior to 2006, theThe Company accounted forhas historically granted certain stock-based compensation underawards to employees and directors in the intrinsic value methodform of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,”stock options and related interpretations (“APB 25”), and had adopted the disclosure-only provisionsrestricted stock. In accordance with Statement of Financial Accounting Standards Board Statement No. 123 “Accounting for Stock-Based Compensation,” (“SFAS 123”). In December 2004, the Financial Accounting Standards Board issued a revised and renamed standard regarding stock-based compensation,(revised 2004), “Share-Based Payment,” (“SFAS 123R’). The revised standard, which was adopted byat the date that an award is granted, the Company in the first quarter of 2006, eliminates the disclosure–only election under SFAS 123 and requires the recognition of compensation expense of stock options and all other forms of equity compensation generally based ondetermines the fair value of the instruments onaward and recognizes the date of grant. In ordercompensation expense over the period that services are required to enhance comparability among all years presented and to providebe provided (“requisite service period”) in exchange for the fullest understanding ofaward, which typically is the impact that expensing stock-based compensation has onperiod over which the Company, the Company has retrospectively applied the new standard to prior period results.award vests.

The Company determines the fair value of all stock-based compensation is recognized in expense over the vesting period, and is determined onawards as of the measurement date. The measurement date (i.e. grant date), which is determined the first date on which both are known with finality (1) the number of shares an individual employee is entitled to receive and (2) the option or purchase price, if any.award price. The Company uses all available evidence to determine the most likely measurement date.

The Company considers For awards granted after 2005, this is the date of a meeting to bethat the accounting measurement date if minutes of the meeting were recorded and provided sufficient specificity to determine the award price and the number of awards to be allocated to individuals.

For the instances when approval is obtained through unanimous written consent, the Company considers the measurement date to be the date when the last required approval was received by the Company from theCompany’s Board of Directors or a special committeethe Compensation Committee of the Company’s Board of Directors meets and approves the granting of a stock-based award.

Restricted stock is valued at the closing market price of the Company’s common stock on the UWC. However in instances indate of grant. The fair value of stock options were estimated using the Black-Scholes option-pricing model, which requires management to apply judgment and use highly subjective assumptions of factors required to be input into the model, including estimating the length of individuals will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term (“volatility”), a dividend yield and risk-free interest rate. The Company

was unable used historical data and judgment to locate definitiveestimate the expected term and complete documentation evidencing the date on whichstock price volatility. Effective during the last required approval of a UWC was received by2006 fiscal year, the Company the Company formed a conclusion asdiscontinued granting stock options; however it continues to the most likely date that approval was receivedrecognize compensation expense for option awards previously granted to employees and non-employee directors based on the timingfair values used for the pro forma disclosures previously required by Statement of letters notifying employees of the stock award (if available) and the approval pattern of past stock awards approved through a UWC with evidence of the date on which the last required approval was received by the Company. More specifically,Financial Accounting Standards No. 123, “Accounting for these instances, the Company estimates the accounting measurement date to be the earlier of the date of the letter notifying the employee of the stock award (if available) or the average number of days lapsing from the stated “as of” date of a UWC to the date on which the last required approval of a UWC was received by the Company for other stock awards. For annual stock awards (in which the largest number of awards were granted to employees) and mid-year grants, the average number of days lapsing from the ‘as of’ date of the UWC to the date on which the last required approval of a UWC was received by the Company averaged 29 and 48 business days, respectively.

Self-InsuranceStock-Based Compensation.”

The Company estimates its liabilityrecognizes stock-based compensation only to the extent that an award vests and applies an estimated forfeiture rate assumption to adjust compensation cost for incurred but unsettled general liabilitythe effect of those individuals that are not expected to complete the requisite service period and workers’ compensation related claims under its self-insured retention programs, including reported losses in the process of settlement and losses incurred but not reported.will forfeit non-vested awards. The estimateforfeiture rate assumption is based on loss development factors determined through actuarial methods using the actual claim lossCompany’s historical experience of award forfeitures, and as necessary, is adjusted for certain events that are not expected to recur during the Company subject to adjustment for current trends. In addition,expected term of the Company uses a third-party actuary report obtained semi-annually to determine its required insurance reserves. Revisions toaward.

While the estimated liability resulting from ongoing periodic reviewsassumptions that have been developed are recognizedbased on the Company’s best expectations, they involve inherent uncertainties based on market conditions and employee behavior that are outside of the Company’s control. If actual results are not consistent with the assumptions used, the stock-based compensation expense reported in the period in which a material difference is identified. Significant increases in general liability and workers’ compensation claim losses could have a material adverse impact on future operating results.Company’s consolidated financial

The Company also estimates its liability for claims related to a medical benefits program it provides to its employees. The estimated liability is based upon historical claims data.

Impairment of Long-Lived Assets

The Company periodically reviews the estimated useful lives and recoverability of its depreciable assets based on factors including historical experience, the expected beneficial service period of the asset, the quality and durability of the asset and the Company’s maintenance policy including periodic upgrades. Changes in useful lives are made on a prospective basis, unless factors indicate the carrying amounts of the assetsstatements may not be recoverablerepresentative of the actual economic cost of the stock-based compensation. Additionally, if actual employee forfeitures significantly differ from the Company’s estimated forfeitures, the Company may have an adjustment to the financial statements in future cash flows and an impairment write-down is necessary.periods.

Lease Accounting

The Company usesestimates the expected term of a consistent lease period (generally,by assuming the exercise of renewal options, in addition to the initial non-cancelable lease term, plusif the renewal option periods provided foris in the lease thatsole discretion of the Company and can be reasonably assured) when calculating depreciationassured due to the existence of leasehold improvementsan economic penalty that would preclude the abandonment of the lease at the end of the initial non-cancelable lease term. The expected term is used in the determination of whether a lease is a capital or operating lease and in determiningthe calculation of straight-line rent expense and classification of its leases as either an operating lease or a capital lease. The lease term and straight-line rent expense commences onexpense. Additionally, the date when the Company takes possession and has the right to control use of the leased premises. Funds received from the lessor intended to reimburse the Company for the costsuseful life of leasehold improvements is recorded as a deferred credit resulting fromlimited by the expected lease term or the economic life of the asset, whichever is shorter. If significant expenditures are made for leasehold improvements late in the expected term of a lease incentive and amortized overrenewal is reasonably assured, the lease term as a reduction to rent expense.

New Accounting Standards

In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), a Replacement of Accounting Principles Board Opinion No. 20, and Financial Accounting Standards Board Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principles, unless it is not impracticable to determine either the period-specific effects or the cumulative effectuseful life of the change. SFAS 154 also requires that retrospective application of a change in accounting principle beleasehold improvement is limited to the direct effectsend of the change. Indirect effectsrenewal period or economic life of the asset.

The determination of the expected term of a change in accounting principle, such aslease requires the Company to apply judgment and estimates concerning the number of renewal periods that are reasonably assured. If a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognizedlease is terminated prior to reaching the end of the expected term, this may result in the periodacceleration of the accounting change. SFAS 154 also requires that a change in depreciation amortization, or deletion method forimpairment of long-lived non-financial assets, be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 did not have a material impact on the Company’s consolidated financial statements. The Company’s consolidated financial statements for the year ended December 31, 2006 comply with the provisions of FAS 154.

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presentedit may result in the Income Statement.” A consensus was reachedreversal of deferred rent balances that entities may adopt a policy of presenting sales taxesassumed higher rent payments in renewal periods that were never ultimately exercised by the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. The Company presents sales net of sales taxes. This issue will not impact the method for recording sales taxes in the Company’s consolidated financial statements.Company.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN48), “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48.Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements,”Measurements” (“SFAS 157”). This statementSFAS 157 defines fair value, and provides guidanceestablishes a framework for measuring fair value, and the necessary disclosures.expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 will beis effective for fiscal years beginning after November 15, 2007.2007, which is the Company’s 2008 fiscal year. On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2 (“FSP 157-2”) which defers the effective date of SFAS 157 until fiscal years and interim periods beginning after November 15, 2008, for nonfinancial assets and liabilities that are measured at fair value on a non-recurring basis. For the Company, the deferral provided by FSP 157-2 will apply to property and equipment measured at fair value in connection with its periodic assessments for impairment. Additionally, on February 14, 2008, the FASB issued FSP No. 157-1 which amends SFAS 157 to exclude from its scope fair value measurements for purposes of lease classification or measurement under Statement of Financial Accounting Standards No. 13, “Accounting for Leases.” In 2008, the Company will apply the provisions of SFAS 157 to its financial assets and liabilities. The Company has not determined the impact, if any, fromCompany’s partial adoption of this new accounting pronouncement on the financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, (“SAB 108”), which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatementsstatement in the current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The adoption of SAB 108 did2008 has not havehad a material impact on the Company’sits consolidated financial statements.

In February 2007, the FASB issued SFASStatement of Financial of Accounting Standards No. 159, (“FAS 159”), “The Fair Value Option for Financial Assets and Liabilities.” This statementLiabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date. FASSFAS 159 is effective for fiscal years beginning after November 15, 2007. We2007, which is the Company’s 2008 fiscal year. The Company’s adoption of this statement in 2008 has not had a material impact on its consolidated financial statements; however any further impact of SFAS 159 will depend on the extent to which the Company elects to measure eligible items at fair value in the future.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”) and Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 141(R) establishes new guidance for how business combinations are accounted for in the acquirer’s financial statements. SFAS 160 establishes accounting and reporting standards for minority ownership interests in subsidiaries, which will be characterized as noncontrolling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008, which will be the Company’s fiscal year beginning December 29, 2008. The Company is currently evaluating the impact the adoption of this adoptionthese statements will have on ourits consolidated financial statements.

InflationForward-Looking Statements

The Company’s cost of operations, including but not limited to labor, food products, supplies, utilities, financing and rental costs, are significantly affected by inflationary factors. The Company pays most of its part-time employees’ rates that are related to federal and state mandated minimum wage requirements. Management anticipates that any increases in federally mandated minimum wage would result in higher costs to the Company, which the Company expects may be partially offset by menu price increases and increased efficiencies in operations.

Financial Condition, Liquidity and Capital Resources

Cash provided by operating activities increased to $149.6 million in 2006 from $135.0 million in 2005. Cash outflows from investing activities for 2006 were $115.5 million, primarily related to capital expenditures. Net cash outflows from financing activities for 2006 were $28.0 million, primarily related to the repurchase of the Company’s common stock. The Company’s primary requirements for cash relate to planned capital expenditures, the repurchase of the Company’s common stock and debt service. The Company expects that it will satisfy such requirements from cash provided by operations and, if necessary, funds available under its line of credit.

Cash provided by operating activities is a significant source of liquidity for the Company. Since substantially all of the Company’s sales are for cash and credit cards, and accounts payable are generally due in five to 30 days, the Company is able to carry current liabilities in excess of current assets. The net working capital deficit decreased from $12.2 million at January 1, 2006 to $9.6 million at December 31, 2006 due primarily to the timing of payments for various accrued expenses.

The Company has initiated several strategies to increase revenues and earnings over the long-term that require capital expenditures. These strategies include: (a) new restaurant development, (b) major remodels, (c) expansions of the square footage of existing restaurants, (d) a game enhancement initiative that includes new games and rides and (d) small market remodels.

In 2007, the Company plans to add approximately 10 restaurants, including relocating three restaurants. The Company currently anticipates its cost of opening such new restaurants will vary depending upon many factors including the size of the restaurants and whether the Company acquires land or the restaurant is an in-line or freestanding building. The average square footage of new stores in 2007 should approximate 12,500 square feet with projected average annual sales in excess of $2 million. The average capital cost of all new restaurants expected to open in 2007 will approximate $2.1 to $2.2 million per restaurant.

The major remodel initiative typically includes expansion of the space allocated to the game room, an increase in the number of games and rides and in most cases may include a new exterior and interior identity. A new exterior identity includes a revised Chuck E. Cheese logo and signage, updating the exterior design of the buildings and, in some restaurants, colorful new awnings. The interior component includes painting, updating décor, a new menu board, enhanced lighting, remodeled restrooms and an upgraded salad bar. The average cost of major remodels in 2007 will approximate $550,000 to $650,000. In addition to expanding the square footage of existing restaurants, expansions typically include all components of a major remodel including an increase in the number of games and rides and range in cost from $800,000 to $900,000 per restaurant. The primary components of the game enhancement initiative are to provide new games and rides and the average capital cost is currently approximately $100,000 to $150,000 per restaurant. Small market remodels primarily include new games and rides and typically the removal of seating. Small market remodels are expected to range in cost from $100,000 to $150,000.

The Company expects the aggregate capital costs in 2007 of completing game enhancements, major remodels and expanding the square footage of existing restaurants to total approximately $56 million and impact approximately 155 restaurants. This plan includes 65 game enhancements, 55 major remodels, 20 small market remodels and 15 store expansions.

During 2006, the Company opened 14 new restaurants and impacted a total of 152 existing restaurants with capital expenditures. The Company currently estimates that total capital expenditures in 2007 will be approximately $90 to $92 million, including the $56 million the Company is expecting to invest in existing restaurants. The Company plans to fund its capital expenditures through cash flow from operations and, if necessary, borrowings under the Company’s line of credit.

From time to time, the Company repurchases shares of its common stock under a plan authorized by its Board of Directors. The plan authorizes repurchases in the open market or in private transactions. Beginning in 1993 , the Company has repurchased approximately 23.6 million shares of the Company’s common stock, retroactively adjusted for all stock splits, at an aggregate purchase price of approximately $505 million. During 2006, the Company repurchased 1,959,635 shares at an aggregate purchase price of approximately $66.8 million. At the end of 2006, approximately $280 million remained available for share repurchases under a $400 million share repurchase authorization approved by the Company’s Board of Directors in July 2005.

In July 2005, the Company amended its line of credit agreement to provide for borrowings of up to $200 million for a term of five years. The credit facility replaces the Company’s previous $132.5 million credit facility that was scheduled to mature in December 2005. Interest under the line of credit is dependent on earnings and debt levels of the Company and ranges from prime or, at the Company’s option, LIBOR plus 0.50% to 1.25%. Currently, any borrowings under this line of credit would be at the prime rate or LIBOR plus 0.75%. As of December 31, 2006, there were $168.2 million in borrowings under this line of credit and outstanding letters of credit of $11.2 million. The line of credit agreement contains certain restrictions and conditions as defined in the agreement that require the Company to maintain a fixed charge coverage ratio at a minimum of 1.5 to 1.0 and a maximum total debt to earnings before interest, taxes, depreciation, and amortization ratio of 3.0 to 1.0. Borrowings under the line of credit agreement are unsecured but the Company has agreed to not pledge any of its existing assets to secure future indebtedness. At December 31, 2006, the Company was in compliance with all of the above debt covenants. The Lenders under the line of credit agreement have agreed to waive any default or event of default resulting from the Company’s failure to deliver certain documents, including its consolidated financial statements, as required by the line of credit agreement during the period beginning August 16, 2006 and ending May 15, 2007.

The following are contractual cash obligations of the Company as of December 31, 2006 (thousands):

In addition to the above, the Company estimates that the accrued liabilities for group medical, general liability and workers compensation claims of approximately $12.7 million as of December 31, 2006 will be paid as follows: approximately $4.2 million to be paid in 2007 and the remainder paid over the six year period from 2008 to 2013.

Under the terms of the respective employment agreements of the Company’s Chief Executive Officer (“CEO) and president, if employment with the Company is terminated by the Company, other than as a result of death or permanent disability, as defined in the agreements, the CEO will be entitled to receive a severance amount of $3 million and the president will be entitled to receive a severance amount equal to two times his then current base salary. Under the terms of the respective employment agreements, the CEO and president will receive their respective severance amount in the event there is a change of control, as defined in the agreements, and the CEO or president voluntarily terminates their employment within one year after such a change in control. If the severance payments had been due as of December 31, 2006, the Company would have been required to make aggregate payments totaling approximately $4.2 million.

As of December 31, 2006, capital expenditures totaling $7.3 million were outstanding and included in accounts payable. These amounts are expected to be paid in less than one year.

Certain statements in this report, other than historical information, may be considered forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and are subject to various risks, uncertainties and assumptions. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “project,” “estimate” and similar expressions (or the negative of such expressions). Forward-looking statements are made based on management’s current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Item 1A. “Risk Factors” of this Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on the Company’s operating results, performance or financial condition are its ability to implement its growth strategies, national, regional and local economic conditions affecting the restaurant /entertainment industry, competition within each of the restaurant and entertainment industries, store sales cannibalization, success of its franchise operations, negative publicity, health epidemics or pandemics, acts of God, terrorist acts, litigation, demographic trends, fluctuations in quarterly results of operations, including seasonality, government regulations, weather, school holidays, increased commodity, utility, insurance, advertising and labor costs.

The Company is subject to interest rate, commodity price and foreign currency market risks.

The Company’s exposure to market risk results primarily from changes in interest rates on its revolving line of credit which was $316.8 million at December 30, 2007. The Company currently has not entered into any derivative instruments to manage the form ofexposure to this risk. The exposure to interest rate risk results from changes in LIBOR and foreign currency risk. Boththe prime rate. The annualized effect of a 100 basis point increase in LIBOR at December 30, 2007, would result in an increase of interest rate riskexpense by approximately $3.2 million.

Additionally, commodity prices of foods such as cheese can vary throughout the year due to changes in demand and foreignsupply. The Company currently has not entered into any hedging arrangements to reduce the volatility of the commodity prices from period to period. The estimated increase in the Company’s cheese costs from a hypothetical $0.10 adverse change in the average cheese block price per pound would have been approximately $0.9 million for the 2007 fiscal year.

Foreign currency risk arewith respect to changes in the value of the Canadian dollar is immaterial to the Company.

Item 8.

Financial Statements and Supplementary Data

CEC ENTERTAINMENT, INC.

YEARS ENDED DECEMBER 31, 2006, JANUARY 1, 2006

AND JANUARY 2, 2005

CONTENTSINDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

CEC Entertainment, Inc.

Irving, Texas

We have audited the accompanying consolidated balance sheets of CEC Entertainment, Inc. and subsidiaries (the “Company”) as of December 31, 200630, 2007 and January 1,December 31, 2006, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These30, 2007. We also have audited the Company’s internal control over financial reporting as of December 30, 2007, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, suchthe consolidated financial statements referred to above present fairly, in all material respects, the financial position of CEC Entertainment, Inc.Inc and subsidiaries as of December 31, 200630, 2007 and January 1,December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006,30, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, Also, in accordance withour opinion, the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’smaintained, in all material respects, effective internal control over financial reporting as of December 31, 2006,30, 2007, based on the criteria established inInternal Control—Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 20, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.Commission.

/s/ Deloitte & Touche LLP

Dallas, Texas

April 20, 2007February 28, 2008

CEC ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

(Thousands,in thousands, except share data)