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                        SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

|X|Annual Report pursuant to Section 13 or 15(d) of the Securities  Exchange Act
of 1934 For the fiscal year ended January 2, 2000

|_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________ to ________

Commission file number 333-90817

                                  SBARRO, INC.
             (Exact name of Registrant as specified in its charter)

      NEW YORK                                                     11-2501939
(State or other jurisdiction
of incorporation or organization)          (I.R.S. Employer Identification No.)


   401 Broad Hollow Road, Melville,  New York                          11747
       (Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:             (516) 715-4100


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


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

         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 for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirement for the past 90 days. Yes 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 [ X ].

         The registrant's common stock is not publicly-held nor publicly traded.

         The number of shares of Common Stock of the  registrant  outstanding as
of February 28, 2000 was 7,064,328.

                        DOCUMENTS INCORPORATED BY REFERENCE

                                      None







<PAGE>

                                  SBARRO, INC.

         Unless the context  otherwise  requires,  all references to "we", "us",
"our", "Sbarro" or the "Company" include Sbarro, Inc. and our subsidiaries.

                                      PART I

                              Forward-Looking Statements

         This  report  contains  certain  forward-looking  statements  about our
financial condition, results of operations, future prospects and business. These
statements  appear in a number of places in the  report and  include  statements
regarding our intent,  belief,  expectation,  strategies or  projections at that
time. These statements generally contain words such as "may", "should", "seeks",
"believes",  "expects", "intends", "plans", "estimates",  "projects", "strategy"
and similar expressions or the negative of those words.

     Forward-looking  statements  are  subject to a number of known and  unknown
risks and  uncertainties  that could cause actual  results to differ  materially
from those projected,  expressed or implied in the  forward-looking  statements.
These risks and uncertainties,  many of which are not within our control include
but are not limited to, general economic,  weather and business conditions;  the
availability of suitable restaurant sites in appropriate regional shopping malls
and other  locations on  reasonable  rental terms;  changes in consumer  tastes;
changes in population and traffic  patterns;  the ability to continue to attract
franchisees;  the  success  of the  Company's  present,  and any  future,  joint
ventures  and  other   expansion   opportunities;   the   availability  of  food
(particularly  cheese and tomatoes) and paper products at reasonable  prices; no
material increase occurring in the Federal minimum wage; the loss of services of
members  of our  senior  management  team,  the  Company's  ability  to  attract
competent restaurant and executive managerial personnel; competition; government
regulations;  our  ability to  generate  sufficient  cash flow to make  interest
payments and principal under our senior notes and credit agreement;  the effects
which  restrictions  imposed on us under our senior notes  indenture  and credit
agreement  may have on our ability to operate our  business;  and our ability to
repurchase  senior notes to the extent  required and make  repayments  under our
credit agreement to the extent required in the event we make certain asset sales
or experience a change of control.

         Because   forward-looking   statements   are   subject   to  risks  and
uncertainties,  actual  results may differ  materially  from those  expressed or
implied by any forward-looking  statements. You are cautioned not to place undue
reliance on these statements, which speak only as of the date of the report.

We do not  undertake  any  responsibility  to release  publicly any revisions to
these  forward-looking  statements to take into account events or  circumstances
that  occur  after  the date of this  report,  other  than as  required  by law.
Additionally,  we do not  undertake  any  responsibility  to  update  you on the
occurrence of any unanticipated  events which may cause actual results to differ
from those expressed or implied by the forward-looking  statements  contained in
this report, other than as required by law.

<PAGE>

ITEM 1.  BUSINESS


                  Sbarro,  Inc., a New York  corporation,  was organized in 1977
and is the  successor  to a number  of  family  food and  restaurant  businesses
developed  and operated by the Sbarro  family.  Today,  we are a leading  owner,
operator and franchisor of quick-service restaurants,  serving a wide variety of
Italian  specialty foods with 930  restaurants  worldwide at January 2, 2000. In
addition since 1995, we have created,  primarily  through joint ventures,  other
concepts for the purpose of developing  growth  opportunities in addition to the
Sbarro restaurants. (See "New Concept Development", below.)


                  Going Private Transaction

                  On September 28, 1999, members of the Sbarro family (who prior
thereto  owned  approximately  34.4% of the Sbarro's  common  stock)  became the
holders  of 100% of our  issued and  outstanding  common  stock as a result of a
merger in which (i) a company  owned by the members of the Sbarro  family merged
with and into the company,  (ii) our shareholders (other than the members of the
Sbarro  family  and the  company  owned by them)  received  the right to receive
$28.85 per share in cash in exchange for the  approximately  13.5 million shares
of our common stock not owned by the members of the Sbarro family, and (iii) all
outstanding  stock options,  including  stock options held by the members of the
Sbarro  family,  were  terminated  in exchange for a cash  payment  equal to the
number of shares  subject  thereto  multiplied by the excess,  if any, of $28.85
over the  applicable  option  exercise  price.  See "Certain  Relationships  and
Related  Transactions  included  in Item 13 of this report for a  discussion  of
amounts received by the continuing shareholders, other officers and directors of
Sbarro and their respective  immediate  family members.  The cost of the merger,
including fees and expenses,  was funded through the use of substantially all of
the our cash on hand and the  placement of $255.0  million of 11.0% Senior Notes
due September 15, 2009 (the "Senior Notes") sold at a price of 98.514% of par to
yield 11.25% per annum.  The Senior  Notes were issued under an Indenture  dated
September  28, 1999 (the  "Indenture").  We also entered  into a five year,  $30
million unsecured senior revolving bank credit facility under a Credit Agreement
dated as of September 23, 1999 (the "Credit  Agreement").  The Credit  Agreement
provides an unsecured  senior  revolving  credit  facility  which  enables us to
borrow,  on a revolving basis from time to time during its five-year term, up to
$30.0 million, including a $10.0 million sublimit for standby letters of credit.
Our payment  obligations  under the Senior  Notes and the Credit  Agreement  are
jointly,  severally,  unconditionally  and irrevocably  guaranteed by all of our
current  Restricted  Subsidiaries  (as  defined in the  Indenture)  and is to be
similarly  guaranteed  by our  future  Restricted  Subsidiaries.  See  "Selected
Financial Data" included in Item 6 of this Report,  "Management's Discussion and
Analysis of Financial condition and Results of Operations" included in Item 7 of
this Report, "Financial Statements and Supplementary Data" included in Item 8 of
the Report and "Certain Relationships and Related Transactions" included in Item
13 of this Report.






<PAGE>


                  General

                  We  are  a  leading   owner,   operator  and   franchisor   of
quick-service  restaurants,  serving a wide variety of Italian  specialty foods.
Under the "Sbarro" and "Sbarro The Italian  Eatery"  names,  we developed one of
the first  quick-service  concepts  that  extended  beyond  offering one primary
specialty item, such as pizza or hamburgers.  Our diverse menu offering includes
pizza,  pasta  and  other  hot and cold  Italian  entrees,  salads,  sandwiches,
cheesecake  and other  desserts and  beverages.  All of our entrees are prepared
fresh daily in each restaurant  using special recipes  developed by us. We focus
on serving our customers generous portions of high quality Italian-style food at
attractive   prices.  We  believe  that  the  Sbarro  concept  is  unlike  other
quick-service  Italian  restaurants  due to its diverse menu  selection  and its
fast, cafeteria-style service.

                  Since our  inception in 1959, we have focused on high customer
traffic  venues  due to the large  number of  captive  customers  who base their
eating decision  primarily on impulse and convenience.  We therefore do not have
to incur the significant  advertising and promotional  expenditures that certain
of our competitors incur to attract customers to their destination  restaurants.
These factors, combined with adherence to strict cost controls,  provide us with
high and stable operating margins. Over the past ten years, we have extended the
Sbarro concept from downtown locations and enclosed shopping malls to other high
customer  traffic  venues,  including  toll  roads,  airports,   sports  arenas,
hospitals,  convention centers,  university campuses and casinos. We believe the
opportunity to open additional Sbarro units in these and other new venues should
continue to increase as companies,  municipalities  and others seek to outsource
their non-core food  operations to companies with an established  brand name. As
of January 2, 2000, the Sbarro system  included 930  restaurants,  consisting of
644  Company-owned  and 286  franchised  restaurants  located in 48 States,  the
District of Columbia,  the  Commonwealth  of Puerto Rico,  certain United States
territories and 21 countries  throughout the world. In addition,  since 1995, we
have  created and  operated,  through  joint  ventures,  other  concepts for the
purpose  of  developing   growth   opportunities   in  addition  to  our  Sbarro
restaurants.

                  Restaurant Expansion

                  We have expanded  significantly in recent years,  growing from
103  Sbarro-owned or franchised  traditional type restaurants at the time of our
initial  public  offering in 1985 to 930 as of January 2, 2000.  During 1999, 73
new Sbarro and mall-based  Umberto of New Hyde Park restaurants were opened,  of
which 24 were  Company-owned and 49 were franchised,  while 10 Company-owned and
32 franchised units were closed.









<PAGE>


                  The following table  summarizes the number of Sbarro-owned and
franchised restaurants excluding new concepts in non-mall locations in operation
during each of the years from 1995 through 1999:

<TABLE>
<CAPTION>
                                                                  Fiscal Year

                                            1999              1998      1997      1996     1995
<S>                                         <C>                <C>        <C>      <C>       <C>
Company-owned Sbarro restaurants:
 Opened during period  (1)                  24                  26         30       29       44
 (Sold to) acquired from franchisees
   during period                            (1)                  1          4        1        -
 Closed during period  (2)                  (9)                (20)        (8)      (4)     (40)
 Open at end of period  (3)                644                 630        623      597       571

Franchised Sbarro restaurants:
 Opened during period                       49                  43         47       36       40
 Acquired from (sold to) Company
    during period                           1                   (1)        (4)      (1)      -

 Closed or terminated during period         (32)               (13)       (23)     (16)      (2)
 Open at end of period                      286                268        239      219      200

All Sbarro restaurants:
 Opened during period  (1)                   73                  69        77       65       84
 Closed or terminated during period  (2)    (42)               (33)       (31)     (20)     (42)
 Open at end of period  (3)                 930                898        862      816       771

Kiosks  (all franchised) open at
     end of year                             4                   8        7        7         8

</TABLE>


(1)      Includes, in 1999, 1998, 1997, 1996 and 1995, none, one, two, three and
         none mall locations, respectively, of a joint venture which operates as
         Umberto of New Hyde Park  which,  for the purpose of this  Report,  are
         considered Sbarro restaurants.

(2)  See Note (2) to  "Selected  Financial  Data" in Item 6 of this  Report  for
     information  with  respect  to  charges  in 1998 and 1995  relating  to the
     closing and planned closing of certain Company-owned units.

(3)  Includes,  in 1999,  1998,  1997, 1996 and 1995, six, six, five,  three and
     none joint venture mall locations which operate as Umberto of New Hyde Park
<PAGE>




                  Traditional Concept and Menu

                  Sbarro  restaurants  are  family  oriented,   offering  quick,
efficient,  cafeteria  and buffet style  service  designed to minimize  customer
waiting time and facilitate  table  turnover.  The decor of a Sbarro  restaurant
incorporates  booth  and  table  seating  (for  "in-line"  restaurants),  with a
contemporary motif that blends with the characteristics of the surrounding area.

                  As of  January  2,  2000,  there  were  259  "in-line"  Sbarro
restaurants and 664 "food court" Sbarro  restaurants.  In addition,  franchisees
operated  seven  freestanding  Sbarro  restaurants,  including two in the Middle
East,  three  in  Minnesota  and one in each of the  Bahamas  and  Puerto  Rico.
"In-line"  restaurants,  which are  self-contained  restaurants,  usually occupy
approximately  1,500 to 3,000  square feet,  contain the space and  furniture to
seat  approximately  60 to 120  people and  employ 10 to 40  persons,  including
part-time personnel.  "Food court" restaurants are primarily located in areas of
shopping  malls  designated  exclusively  for  restaurant use and share a common
dining  area  provided  by  the  mall.   These   restaurants   generally  occupy
approximately  500 to 1,000  square  feet and contain  only  kitchen and service
areas. They frequently have a more limited menu than an "in-line" restaurant and
employ 6 to 30 persons, including part-time personnel.

                  Sbarro  restaurants  are  generally  open  seven  days  a week
serving  lunch,  dinner and, in a limited number of locations,  breakfast,  with
hours  conforming  to those  of the  major  department  stores  or  other  large
retailers in the mall or trade area in which they are located.  Typically,  mall
restaurants  are open to serve customers 10 to 12 hours a day, except on Sunday,
when mall hours may be more limited.  For Sbarro - owned restaurants open a full
year,  average sales in fiscal 1999 were $0.7 million for "in-line"  restaurants
and $0.5 million for "food court" restaurants.

                  Sbarro  restaurants  feature a menu of popular  Italian  food,
including  pizza with a variety of  toppings,  a selection  of pasta  dishes and
other hot and cold Italian  entrees,  salads,  sandwiches,  cheesecake and other
desserts.  In addition to soft drinks, some of the larger restaurants serve beer
and wine.

                  All of our entrees are prepared fresh daily in each restaurant
according  to special  recipes  developed  by us. We place  emphasis  on serving
generous portions of quality  Italian-style  food at attractive  prices.  Entree
selections,  excluding  pizza,  generally range in price from $2.99 to $5.29. We
believe  that pizza,  which is sold  predominantly  by the slice,  accounts  for
approximately 50% of Sbarro restaurant sales.

                  Substantially   all  of  the  food   ingredients  and  related
restaurant  supplies  used by the  restaurants  are  purchased  from a  national
independent   wholesale  food  distributor   which  is  required  to  adhere  to
established   product   specifications   for  all  food  products  sold  to  our
restaurants.  Breads,  pastries,  produce, fresh dairy and certain meat products
are purchased  locally for each restaurant.  Soft drink mixes are purchased from
major beverage  producers  under national  contracts.  We believe that there are
other  distributors who would be able to service our needs and that satisfactory
alternative  sources of supply are generally  available for all items  regularly
used in the restaurants.
<PAGE>


                  Restaurant Management

                  Each Sbarro  restaurant is managed by one general  manager and
one or two  co-managers  or assistant  managers,  depending upon the size of the
location.  Managers are required to participate in Sbarro  training  sessions in
restaurant management and operations prior to the assumption of their duties. In
addition,  each  restaurant  manager is  required  to comply  with an  extensive
operations  manual containing  procedures for assuring  uniformity of operations
and consistent high quality of products.  We have a restaurant  management bonus
program that provides the management  teams of Sbarro-owned   restaurants
with the opportunity to receive a percentage of restaurant sales in cash bonuses
based on certain performance-related criteria of their location.


                  We  also  employ  70 to 75  area  directors,  each  of whom is
typically responsible for the operations of 6 to 14 Sbarro-owned  restaurants in
a given area. Before each new restaurant  opening, we assign an area director to
coordinate  opening  procedures.  Each area  director  reports  to one of the 12
regional directors.  The regional directors recruit and supervise the managerial
staff of all  Sbarro-owned  restaurants  and report to one of the four  regional
vice presidents.  The regional vice presidents  coordinate the activities of the
regional  directors  assigned to their areas of responsibility and report to the
President of our Quick Service Division.

                  Franchise Development

                  Growth   in   franchise    operations   occurs   through   the
establishment  of  new  Sbarro  restaurants  by  new  franchisees  and  existing
franchisees who have multi-unit franchise  agreements.  We rely principally upon
our  reputation  and the  strength of its  existing  restaurants  to attract new
franchisees as well as to participate in national franchise conventions.

                  As  of  January  2,  2000,  we  had  286   franchised   Sbarro
restaurants operated by 79 franchisees in 32 states of the United States as well
as its  territories  and in 21 countries  throughout the world. We are presently
considering  additional  franchise  opportunities in the United States and other
countries.  In certain instances,  we have established franchise locations under
territorial  agreements  in which we have granted,  for specified  time periods,
exclusive  rights to enter into franchise  agreements  for  restaurant  units in
certain  geographic  areas,  primarily in foreign  countries,  or for  specified
non-mall  locations  (such as for certain  toll roads or airports) in the United
States or foreign countries.

                  We generally  require payment of an initial fee and continuing
royalties  at rates of 3.5% to 10.0%  of gross  revenues.  Franchise  agreements
entered into prior to 1988  generally  have an initial term of 15 years with the
franchisee  having a renewal  option  provided  that the  agreement has not been
previously terminated by either party for specified reasons. Since 1988, we have
required  the  franchise  agreements  to end at the same time as the  underlying
lease,  but generally not less than ten nor more than twenty years.  Since 1990,
the renewal option has also been subject to  conditions,  including a remodel or
image enhancement  requirement.  Franchise  agreements granted under territorial
agreements and those for non-traditional  sites contain negotiated fees, royalty
rates and terms and conditions other than those contained in our basic franchise
agreement. The franchise and territorial agreements provide us with the right to

<PAGE>

terminate  a  franchisee  for a variety  of  reasons,  including  insolvency  or
bankruptcy,   failure  to  operate  its   restaurant   according  to  standards,
understatement   of  gross   receipts,   failure  to  pay  fees,   or   material
misrepresentation on an application for a franchise.

                  We employ ten management  level  individuals  responsible  for
overseeing the operations of franchise units and for developing new units. These
employees report to the President of our Franchising and Licensing Division.

                  New Concept Development

                  Since 1995,  we have entered into  several  joint  ventures to
develop new restaurant  concepts and  established one concept  independently  to
provide growth opportunities that leverage our restaurant  management expertise.
Our joint ventures and other new concept  presently  operate 28 restaurants.  We
have chosen to develop the joint ventures with restaurateurs  experienced in the
particular food area and we are actively  involved in the day-to-day  operations
of each venture. Since January 2000, the President of our Casual and Fine Dining
Division, a newly formed position,  has been overseeing these joint ventures and
other new  concepts  on our  behalf.  These  concepts  are in various  stages of
development  and  expansion  and  we are  considering  additional  concepts  for
potential development.

                  The following is a summary of our existing  joint ventures and
other new concepts:

         o        We  have a  100%  interest  in a new  concept  that  presently
                  operates  two  moderately  priced  casual  dining  restaurants
                  serving  Italian food under the name "Tony and Bruno's" in two
                  strip center  locations.  The  restaurants  primarily  provide
                  table service and cater to families.  Take-out service is also
                  available.  We are planning to open  additional  sites of this
                  concept.

         o        We have an 80%  interest  in a joint  venture  that  presently
                  operates  moderately priced casual family restaurants  serving
                  Italian food under the name  "Umberto of New Hyde Park" in six
                  mall and eight  strip  center  locations.  The  format is both
                  quick-service  and table service.  In the non-mall  locations,
                  take-out service is also available.  One non-mall location was
                  closed in 1998.  In February  1999,  we  instituted  an action
                  against the 20% partner in this  venture,  the  resolution  of
                  which is not expected to have a material adverse effect on the
                  operation of these  restaurants.  See "Legal  Proceedings" for
                  further  discussion of the action.  We do not plan to open any
                  additional restaurants under this brand name at this time.

         o        We have a 40%  interest  in a  joint  venture  that  presently
                  operates five casual dining  restaurants with a Rocky Mountain
                  steakhouse  motif  under  the  name  "Boulder  Creek  Steaks &
                  Saloon."  This  venture  also  operates  two fine dining steak
                  restaurants  under  the  names  "Rothmann's   Steakhouse"  and
                  "Burton & Doyle".  We are planning to open additional sites of
                  each type of restaurant.
<PAGE>

         o        We have a 70% interest in two moderately priced, table service
                  restaurants  featuring  an  Italian  Mediterranean  menu  that
                  operate  under the names  "Salute"  and "Cafe  Med"  which are
                  located in New York City. During 1997, this venture closed two
                  other restaurants,  resulting in a $3.3 million before tax, or
                  $2.0 million after tax, charge to our earnings.  An additional
                  $1.0  million  charge to earnings  before tax, or $0.6 million
                  after tax, was recorded in 1999 when we subsequently agreed to
                  absorb a portion  of our  joint  venture  partners'  losses on
                  these units upon their  disposition.  We are  planning to open
                  additional  restaurants  with this joint  venture  partner and
                  expect that our equity  interest in these new ventures will be
                  50% or higher.

         o        We have a 50% interest in a joint venture which, in June 1999,
                  acquired  two Mexican  style  restaurants  operating  in strip
                  centers  under  the  name  "Baja  Grill".   We  are  currently
                  evaluating whether to expand this concept.

         o        We have a 25%  interest in a joint  venture  that was recently
                  formed for the purpose of establishing seafood restaurants and
                  is operating one unit under the name "Vincent's Clam Bar".

                  All joint venture restaurants, except four Umberto of New Hyde
Park mall units, are presently located in the New York City  metropolitan  area.
We are  continually  evaluating  the operating  performance of these ventures to
assess  their  feasibility  and future  growth  potential.  We intend to seek to
expand our existing  ventures,  if  appropriate,  and to develop new  restaurant
concepts either  independently or through existing or new joint ventures.  There
can be no assurance as to the  performance of the existing joint ventures or our
ability to successfully identify and develop new concepts.

                  All of our new concepts presently operate through unrestricted
subsidiaries as defined in the indenture.  As such, we have certain restrictions
as to the financing we can provide to these new concepts and these  entities are
not subject to the  restrictions  contained in the  indenture  and our revolving
credit facility.

     As of January 2, 2000, we had an aggregate  investment in our  unrestricted
subsidiaries  and related joint ventures of approximately  $14.7 million,  which
does not include  guarantees of indebtedness  and  reimbursement  obligations in
respect of  letters of credit in the  aggregate  amount of  approximately  $17.5
million and  guarantees  of certain real  property  lease  obligations  of these
unrestricted  subsidiaries and related joint ventures. In addition, we have also
sublet locations to, guaranteed all or portions of joint venture location leases
and provided other credit enhancements for these joint ventures.


                  Employees

                  As  of  January  2,  2000,  we  employed  approximately  8,800
persons, exclusive of joint ventures, of whom approximately 4,000 were full-time
field and restaurant  personnel,  4,600 were part-time  restaurant personnel and
200 were corporate administrative  personnel.  None of our employees are covered
by  collective  bargaining  agreements.  We believe our employee  relations  are
satisfactory.
<PAGE>
                  Competition

                  The  restaurant  business is highly  competitive.  Many of our
direct competitors  operate within the pizza restaurant  segment.  We believe we
compete on the basis of price, service,  location and food quality. Factors that
affect our and our franchisees'  business operations include changes in consumer
tastes, national,  regional and local economic conditions,  population,  traffic
patterns,  changes in discretionary  spending  priorities,  demographic  trends,
consumer  confidence  in  food  wholesomeness,   handling  and  safety,  weather
conditions,  the type,  number and location of competing  restaurants  and other
factors.   There  is  also  active  competition  for  management  personnel  and
attractive  commercial  shopping mall, center city and other locations  suitable
for   restaurants.   We  compete  in  each  market  in  which  we  operate  with
locally-owned  restaurants,  as well as with  national and  regional  restaurant
chains.  Factors,  such  as  inflation  and  increased  food,  beverage,  labor,
occupancy  and other  costs,  could also  adversely  affect us and others in the
restaurant industry.

                  Although we believe we are well  positioned to compete because
of our leading market position, focus and expertise in the quick-service Italian
specialty  food business and strong  national brand name  recognition,  we could
experience  increased  competition  from  existing or new  companies and loss of
market share, which could have an adverse effect on our operations.

                  Trademarks

                  Our Sbarro restaurants  operate principally under the "Sbarro"
and "Sbarro The Italian  Eatery"  service marks,  which are registered  with the
United States Patent and Trademark  Office for terms presently  expiring in 2004
and 2001, respectively.  Registered service marks may continually be renewed for
10 year  periods.  We have also  registered  or filed  applications  to register
"Sbarro" and "Sbarro The Italian Eatery" in several other countries.  We believe
that these marks continue to be materially important to our business.  The joint
ventures  to which the Company is a party have also  applied  for United  States
trademarks covering trade names used by them.

                  Governmental Regulation

                  We are  subject  to  various  federal,  state and  local  laws
affecting our business,  as are our  franchisees.  Each of our  restaurants  and
those  owned by our  franchisees  are  subject  to a variety  of  licensing  and
governmental   regulatory   provisions   relating  to   wholesomeness  of  food,
sanitation,  health,  safety and,  in certain  cases,  licensing  of the sale of
alcoholic  beverages.  Difficulties  in  obtaining,  or the  failure  to obtain,
required  licenses  or  approvals  can delay or  prevent  the  opening  of a new
restaurant in any particular  area. Our operations and those of our  franchisees
are also  subject to federal  laws,  such as minimum  wage laws,  the Fair Labor
Standards Act and the Immigration  Reform and Control Act of 1986. They are also
subject to state laws  governing  such  matters  as wages,  working  conditions,
employment of minors,  citizenship  requirements and overtime.  Some states have
set minimum wage requirements higher than the federal level.

<PAGE>

                  We are also subject to Federal  Trade  Commission  regulations
and various state laws regulating the offer and sale of franchises.  The FTC and
various state laws require us to furnish to prospective  franchisees a franchise
offering circular containing prescribed information. We are currently registered
to offer and sell  franchises in seven states and are currently  exempt from the
franchise registration requirements in five states based upon "large franchisor"
exemptions,  which are based upon our experience and meeting certain size tests,
generally  requiring a net worth of at least $5 to $15 million (depending on the
state).  The states in which we are registered,  and a number of states in which
we may franchise,  require  registration of a franchise  offering  circular or a
filing  with  state  authorities.  Substantive  state  laws  that  regulate  the
franchisor-franchisee  relationship  presently exist in a substantial  number of
states,  and bills  have been  introduced  in  Congress  from time to time which
provide for federal  regulation  of the  franchisor-franchisee  relationship  in
certain respects.  The state laws often limit,  among other things, the duration
and scope of  non-competition  provisions  and the  ability of a  franchisor  to
terminate or refuse to renew a franchise.

                  We believe that we are in compliance in all material  respects
with the laws to which we are subject.

                  Following the availability of our financial statements for the
quarter ended October 10, 1999, we amended our FTC franchise  offering  circular
and,  where   required,   filed   appropriate   amendments  to  state  franchise
registrations to reflect the going private transaction. Until the amendments are
approved in those  states,  we will not be able to sell or renew  franchises  in
those states. We currently expect, although there can be no assurance, that such
amendments will be approved and that any delay will not have a material  adverse
effect on our business.  Furthermore,  state franchise examiners have discretion
to  disapprove  franchise   registrations  based  on  a  franchisor's  financial
condition.  While we believe  that,  following  completion  of the going private
transaction,  we continue to meet these financial requirements,  there is little
specific  guidance  under  state  franchise  laws as to  acceptable  levels of a
franchisor's net worth, and whether "net worth" includes or excludes  intangible
assets, and debt, and, depending upon a franchisor's financial condition,  state
franchise  examiners in many states may require a franchisor  to escrow  initial
franchise fees for a limited period of time.

                  Although  alcoholic  beverage  sales are not emphasized in our
restaurants,  some of our larger  restaurants serve beer and wine. Sales of beer
and wine  contributed  less than 1% of our total revenues during fiscal 1999. We
have submitted documents to amend our applications with the appropriate alcohol,
beverage  and tobacco  authorities  in 14 of the 16 states in which we sell beer
and wine to  reflect  the going  private  transaction  and have filed part of an
amendment  that is required in  California.  We expect to be able to continue to
sell beer and wine in most of the locations  pending  completion of the approval
process,  except that we have  discontinued  selling  beer and wine in Colorado.
While we do not  anticipate  the  denial of any of our  remaining  applications,
there can be no assurance thereof.

<PAGE>

ITEM 2.  PROPERTIES

                  All Sbarro  restaurants  are typically  leased under  ten-year
leases  that  often do not  include  an  option  to  renew  the  lease.  We have
historically  been  able to renew or  extend  leases on  existing  sites.  As of
January  2, 2000,  we leased  657  restaurants,  of which 24 were  subleased  to
franchisees  under terms which cover all of our obligations under the lease. The
remaining  franchisees  directly  lease  their  restaurant  spaces.  Most of our
restaurant  leases provide for the payment of base rents plus real estate taxes,
utilities, insurance, common area charges and certain other expenses, as well as
contingent  rents  generally  ranging from 8% to 10% of net restaurant  sales in
excess of stipulated amounts.
Leases to which we were a party at January 2, 2000 have initial  terms  expiring
as follows:
<TABLE>
<CAPTION>


Years Initial Lease             Number of Sbarro-        Number of Franchised
Terms Expire                    owned Restaurants             Restaurants
------------                    -----------------             -----------
<S>                                       <C>                      <C>
2000......................                28                       2
2001......................                51                       4
2002......................                65                       3
2003......................                75                       3
2004......................                50                       1
Thereafter................               364                      11
</TABLE>

                  We own a four-story office building in Melville, New York with
approximately  100,000 square feet and a cafeteria style restaurant  operated by
us. This building was  purchased and renovated at a total cost of  approximately
$20.8 million.  Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties. One floor of the building is occupied by us
as our principal  executive  offices.  On March 3, 2000, we obtained a ten year,
8.4%, $16.0 million mortgage loan on this property.

                  We also occupy a two-story  20,000 square foot office building
for  administrative  support  functions  located in Commack,  New York.  We have
leased  the  building  since  May 1986 from a  partnership  owned by some of our
shareholders  at an annual base rental of $0.3 million for the  remainder of the
lease term,  which  expires in 2011.  In  addition,  we pay real  estate  taxes,
utilities,  insurance and certain other expenses for the facility.  See "Certain
Relationships  and  Related  Transactions"  in  Item  13 of  this  Report  for a
description of the lease.

                  In addition,  our new  restaurant  concepts,  including  joint
ventures, own one facility and lease 27 facilities.

<PAGE>





ITEM 3.  LEGAL PROCEEDINGS

                  In February  1999,  the Umberto of New Hyde Park joint venture
companies,  in  which  we have an 80%  interest,  began  an  action  in the U.S.
District Court for the Eastern District of New York against Umberto Corteo,  who
owns the  remaining  20% interest in the joint  venture  companies,  and against
three other  restaurants  owned by Mr. Corteo.  We alleged,  among other things,
that Mr. Corteo engaged in unfair trade practices and in trademark infringement,
thereby  breaching the joint venture  agreements.  We are seeking an accounting,
compensatory and punitive damages and injunctive relief. The answer filed by Mr.
Corteo  and his  co-defendants  denies  our  claims  and  further  alleges  that
non-competition  restrictions against Mr. Corteo in the joint venture agreements
are  unenforceable.  Mr. Corteo and his co-defendants  have also  counterclaimed
against us alleging  misappropriation of trademark rights and failure to perform
administrative  duties that amounted to a breach of the  agreements.  We believe
that our claims against Mr.
Corteo   will  be  proven  and  that  we  have   substantial   defenses  to  his
counterclaims.

                  On November 17, 1999,  an action  entitled  Shan Wanli,  Basem
Tawill, Abdul Hamid v. Sbarro, Inc. was filed in the Superior Court of the State
of Washington for King County.  The plaintiffs  allege that they served as store
managers, general managers, assistant managers or co-managers in our restaurants
in the State of Washington at various times since November 17, 1996 and that, in
connection with their employment, we violated the overtime pay provisions of the
State of  Washington's  Minimum  Wage Act by treating  them as  overtime  exempt
employees,  breached alleged employment  agreements and statutory  provisions by
failing  to  record  and pay for  hours  worked  at the  contract  rates  and/or
statutory  minimum wage rates and failed to provide  statutorily  required  meal
breaks  and rest  periods.  The  plaintiffs  also seek to  represent  all of our
restaurant managers employed for any period of time on or after November 9, 1996
in the State of  Washington.  We currently own and operate 18 restaurants in the
State of Washington.  The plaintiffs seek actual damages,  exemplary damages and
costs of the lawsuit,  including reasonable attorney's fees, each in unspecified
amounts,  and injunctive relief. We believe that we have substantial defenses to
the claims and intend to vigorously defend this action.

                  On December 20, 1999,  Antonio Garcia and eleven other current
and former  general  managers  of Sbarro  restaurants  in  California  amended a
complaint  filed in the Superior  Court of  California  for Orange  County.  The
complaint  alleges that the  plaintiffs  were  improperly  classified  as exempt
employees  under the  California  wage and hour law. The  plaintiffs are seeking
actual damages, punitive damages and costs of the lawsuit,  including reasonable
attorney's  fees, each in unspecified  amounts.  Plaintiff's  counsel has stated
that he is in contact with the plaintiff's counsel in the Wanli case and that he
may attempt to file a class  action based upon  alleged  violations  of the Fair
Labor Standards Act. We believe that we have substantial  defenses to the claims
and intend to vigorously defend this action.

                  From time to time, we are a party to certain  claims and legal
proceedings in the ordinary  course of business,  none of which, in our opinion,
would have a material  adverse  effect on our  financial  position or results of
operations.

<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

                  Not applicable.






                               PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
         AND RELATED SHAREHOLDER MATTERS

                  As a result of the going private transaction, our Common Stock
is not  publicly-held nor publicly traded.  (See Item 12 "Security  Ownership of
Certain Beneficial Owners and Management").

                  On March 13, 2000,  we declared a dividend of $18.0 million to
our shareholders.  In 1997 and 1996, we declared dividends of ($22.1 million and
$18.7 million,  respectively.  Dividends were thereafter  suspended  pending our
consideration  of the original  proposals  which  resulted in the going  private
transaction.











<PAGE>







ITEM 6.  SELECTED FINANCIAL DATA

         The following  Selected  Financial  Data should be read in  conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations"  included  in Item 7 of this Report and our  consolidated  financial
statements  and the  related  notes  included  in Item 8 of this  Report,  which
consolidated  financial  statements  have been audited and reported on by Arthur
Andersen LLP, independent public accountants.

<TABLE>
<CAPTION>

                                                                            Fiscal Year
                                                                      (Dollars in thousands)

                                             1999            1998(1)           1997             1996             1995
  <S>                                         <C>              <C>              <C>              <C>              <C>
Income Statement Data:
  Revenues:
    Restaurant sales..................     366,630         $361,534         $337,723         $319,315         $310,132
    Franchise related income..........       9.006            8,578            7,360            6,375            5,942
    Interest income...................       3,828            5,120            4,352            3,798            3,081
                                         ---------         --------         --------         --------         --------
                                           379,464          375,232          349,435          329,488          319,155
  Costs and expenses:

    Costs of food and paper products..      73,986           76,572           69,469           68,668           67,361
    Restaurant operating expenses:
      Payroll and other employee
         benefits.....................      97,174           93,367           84,910           78,258           78,342
      Occupancy and other.............     106,852          101,013           93,528           85,577           84,371
    Depreciation and amortization.....      25,363           22,429           23,922           22,910           23,630
    General and administrative........      23,456           19,708           17,762           14,940           16,089
    Provision for unit closings(2)....       1,013            2,515            3,300               --           16,400
    Terminated transaction costs(3)...          --              986               --               --               --
    Litigation settlement and
      related costs(4)................          --            3,544               --               --               --
    Loss on land to be sold(5)........          --            1,075               --               --               --
    Interest expense..................       7,948               --                                                 --
    Other income......................      (5,173)          (2,680)          (1,653)          (1,171)          (1,359)
                                          ---------        --------         ---------        --------         --------
           Total costs and expenses...     330,619          318,529          291,238          269,182          284,834
  Income before income taxes
      and cumulative effect of
      change in method of
      accounting......................      48,845           56,703           58,197           60,306           34,321
  Income taxes(6).....................      19,322           21,547           22,115           22,916           13,042
                                            ------         --------         --------         --------         --------
  Income before cumulative
    effect of change in
    method of accounting..............      29,523           35,156           36,082           37,390           21,279
                                                --             (822)              --               --               --
                                            ------        ---------          -------          -------          -------
  Net income..........................    $ 29,523         $ 34,334         $ 36,082         $ 37,390         $ 21,279
                                          ========         ========         ========         ========         ========
</TABLE>

<PAGE>
<TABLE>


<CAPTION>
                                                 1999           1998(1)          1997             1996            1995
                                                 ----           -------          ----             ----            ----
                                                                        (Dollars in thousands)

<S>                   <C>                      <C>              <C>             <C>              <C>             <C>
  Other Financial and Restaurant Data:
   Net cash provided by
     operating activities(7).............     $62,005           $58,641         $61,026           $54,009        $54,580
   Net cash provided by (used in)
     investing activities(7).............     (25,004)          (20,165)        (26,022)          (25,662)        11,139
  Net cash used in
    financing activities(7)..............    (158,356)           (3,377)        (20,012)          (17,030)       (14,580)
  EBITDA                                       78,328           $74,012         $77,767           $79,418        $54,870
  EBITDA margin(8).......................       20.9%              20.0%           22.5%             24.4%          17.4%

  Capital expenditures(9)................      25,099           $27,717         $28,556          $ 25,928        $17,513
  Ratio of earnings to fixed
    charges(10)..........................         2.4x               3.9x           4.2x              4.6x           3.1x
   Number of restaurants at end
     of period:
    Company-owned........................         644               630             623               597            571
    Franchised...........................         286               268             239               219            200
                                           ----------           -------         -------           -------        -------
       Total number of restaurants.......         930               898             862               816            771
                                           ==========           =======         =======           =======        =======

  Balance Sheet Data (at end of period):
  Total assets...........................    $417,833          $303,168        $278,649         $ 258,659      $242,730
  Working capital (deficiency)...........      (2,544)          121,380          88,006            73,619         57,645
  Total debt.............................     251,310               --               --               --             --
  Shareholders' equity...................     110,280           256,917         220,439           205,200        185,666
</TABLE>

(1)      Our fiscal year ends on the Sunday nearest December 31. Our 1998 fiscal
         year ended  January 3, 1999 and  contained  53 weeks.  All other fiscal
         years presented  contained 52 weeks. As a result,  our 1998 fiscal year
         benefited  from  one  additional  week of  operations  over  the  other
         reported fiscal years. The additional week contributed revenues, EBITDA
         and net income of  approximately  $8.5  million,  $2.7 million and $1.7
         million, respectively.

(2)      Represents   provisions  of  (a)  $16.4  million  for  the  closing  of
         approximately 40 under-performing  restaurants in fiscal 1995, (b) $3.3
         million for the closing of two joint  venture  units in fiscal 1997,
         (c) $2.5 million for the closing of 20  restaurants  in fiscal 1998 and
         (d) a special  allocation  of losses in fiscal  1999  which  arose as a
         result of the final  disposition  of two joint  venture  unit  closings
         recorded in 1997.

(3)  Represents a charge for costs  associated  with the  termination of a prior
     going private proposal by the Sbarro family.

(4)       Represents a charge in connection with the settlement of a lawsuit.
<PAGE>

(5)       Represents  a write down of the  carrying  cost on a parcel of land
          that we own.

(6)      We have elected to be taxed under the provisions of Subchapter S of the
         Internal  Revenue  Code and,  where  applicable  and  permitted,  under
         similar state and local income tax provisions beginning in fiscal 2000.
         For a discussion of the distributions  that we are permitted to make to
         our shareholders to pay taxes on our income, see "Certain Relationships
         and Related Transactions - Tax Agreement" in Item 13 of this report.

(7)      For a more detailed presentation of our cash flow data, see our audited
         consolidated  financial statements and their related notes for the year
         ended January 2, 2000 included elsewhere in Item 8 of this report.

(8)      EBITDA  represents  earnings  before  cumulative  effect  of  change in
         accounting   method,   interest  income,   interest   expense,   taxes,
         depreciation  and  amortization.  EBITDA  includes  the  effect  of the
         unusual  charges  included  in  notes  2,  3,  4 and 5.  EBITDA  margin
         represents  EBITDA divided by the sum of restaurant sales and franchise
         related  income.  EBITDA should not be considered in isolation from, or
         as a substitute  for, net income,  cash flow from  operations  or other
         cash flow statement data prepared in accordance with generally accepted
         accounting  principles or as a measure of a company's  profitability or
         liquidity.  Rather, EBITDA is presented because it is a widely accepted
         supplemental  financial  measure,  and  we  believe  that  it  provides
         relevant and useful  information.  Our calculation of EBITDA may not be
         comparable to a similarly  titled measure  reported by other companies,
         since all companies do not calculate this non-GAAP  measure in the same
         manner.  Our EBITDA  calculations  are not intended to  represent  cash
         provided by (used in)  operating  activities  since they do not include
         interest and taxes and changes in operating assets and liabilities, nor
         are they intended to represent a net increase in cash since they do not
         include cash provided by (used in) investing and financing activities.

(9)  The following  amounts related to the  construction of our headquarters are
     included as capital expenditures: $0.4 million in fiscal 1995, $4.2 million
     in fiscal 1996,  $5.0 million in fiscal 1997,  $4.8 million in fiscal 1998,
     and $1.6 million in fiscal 1999.

(10)     The ratio of earnings to fixed charges has been  determined by dividing
         the total fixed charges into the sum of earnings before taxes on income
         and fixed  charges.  Fixed  charges  consist of  interest  expense  and
         one-third  of  rental  expense,  which  we  deem  to  be  a  reasonable
         approximation of the interest factor of this expense.

<PAGE>



ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS

         The following  discussion  and analysis of our financial  condition and
results  of  operations  should  be read in  conjunction  with the  consolidated
financial statements, the notes thereto and other data and information appearing
elsewhere in this report.

Results of Operations

         Our fiscal year ends on the Sunday  nearest to December  31. The fiscal
year which ended on January 3, 1999 contained 53 weeks, while all other reported
fiscal years  contained 52 weeks.  As a result,  our 1998 fiscal year  benefited
from one additional  week of operations  over the other  reported  fiscal years,
with its year ending on January 3, 1999 as opposed to  December  28,  1997.  The
additional week in fiscal 1998 produced revenues of $8.5 million, and net income
of $1.7 million.

         Fiscal 1999 Compared to Fiscal 1998

         Restaurant sales from Sbarro-owned units and consolidated joint venture
units  increased  1.4% to $366.6  million from $361.5 million in the 1998 fiscal
year. The increase resulted primarily from a higher number of units in operation
in the current fiscal year than the comparable period in 1998 and selective menu
price increases of approximately  2.8%, 1.4% and .7% at Sbarro-owned units which
became   effective  in  September  1999,   September  1998  and  February  1998,
respectively. Sales for 1998 included $8.5 million generated in the 53rd week of
the 1998 fiscal year.  Comparable  unit sales  increased 0.8% in the fiscal 1999
year from the first 52 weeks of the 1998  fiscal year  primarily  as a result of
the menu price  increases.  Comparable  restaurant sales are made up of sales at
locations that were open during the entire current and prior fiscal year.

         Franchise  related income increased 4.7% to $9.0 million in fiscal 1999
from $8.6 million in fiscal 1998. The increases  resulted primarily from greater
continuing  royalties due to a higher number of franchise  units in operation in
the current  year than in the 1998 fiscal  year  partially  offset by lower area
development and initial franchise fees in fiscal 1999.

         Interest income was approximately $3.8 million for fiscal 1999 compared
to $5.1 million in fiscal 1998. As discussed  elsewhere in this report,  we used
substantially  all of our  available  cash in order to fund  the  going  private
transaction. Therefore, we generated a minimal amount of interest income for the
period from  September 28, 1999, the date of the going private  transaction,  to
the end of the fiscal year. We will not realize the level of interest  income as
it had in the past unless and until it rebuilds its cash position.

         Cost of food and paper  products as a percentage  of  restaurant  sales
improved  to 20.2% for fiscal 1999  compared to 21.2% for the 1998 fiscal  year.
Cost of food and paper  products as a percentage  of restaurant  sales  declined
from the prior year  primarily due to lower average  cheese prices during fiscal
1999 and the impact of the menu price increases described above.
<PAGE>

         Restaurant operating expenses - payroll and other benefits increased to
26.5% of  restaurant  sales in fiscal  1999 from  25.8% of  restaurant  sales in
fiscal  1998.  This  increase  was  primarily  due to the  tight  labor  market,
resulting in pressures on wages and salaries and associated increases in amounts
paid for payroll taxes.  Congress has recently been  considering  increasing the
minimum  wage by $1.00 per hour over a two to three  year  period  beginning  as
early as April 2000. Any such increases would increase our labor costs.

         Restaurant  operating expenses - occupancy and other expenses increased
to 29.1% of  restaurant  sales in fiscal  1999 from  27.9% in fiscal  1998.  The
increase was  attributable  principally to increases in rent and other occupancy
related costs.

         Depreciation  and  amortization  expense  increased  by $2.9 million in
fiscal  1999  over  fiscal  1998  primarily  as  a  result  of  an  increase  in
depreciation  and  amortization  of  our  new  headquarters  building  that  was
completed in the fourth quarter of fiscal 1998 and amortization of the excess of
the purchase price over the cost of net assets  acquired in connection  with the
going private transaction.

         General and  administrative  expenses  were $23.5  million,  or 6.2% of
total revenues,  for the 1999 fiscal year, compared to $19.7 million, or 5.3% of
total  revenues,  for the 1998 fiscal year.  The increase was  primarily  due to
higher payroll costs and costs associated with the  administration of additional
Sbarro-owned restaurants,  expanding joint venture operations, higher litigation
costs,  increases in various  field  training and human  resource  functions and
costs associated with our headquarters building,  which was completed during the
fourth quarter of fiscal 1998.

         Interest  expense of $7.9 million in fiscal 1999 relates to the accrual
of  interest,  accretion of original  issue  discount  and the  amortization  of
deferred  financing  charges  with  respect to the  senior  notes for the period
subsequent  to their  issuance  on  September  28, 1999 in  financing  the going
private  transaction  and  the  cost  of the  unused  line  of  credit  and  the
amortization  of  deferred  financing  charges  with  respect to the bank credit
agreement entered into at that time. These charges and costs will continue while
the notes are outstanding.

         The provision  for unit closings is the result of a special  allocation
of  losses  in  fiscal  1999  of $1.0  million  in  connection  with  the  final
disposition of two joint venture unit closings recorded in 1997 and $2.5 million
for the closing of 20 Sbarro restaurants in 1998.

         Other  income  increased  by $2.5  million to $5.2 million for the 1999
fiscal year compared to the 1998 fiscal year  primarily as a result of increased
incentives from suppliers,  income, net of expenses,  generated from the leasing
of  substantially  all of our  corporate  headquarters  building not occupied by
Sbarro to third  parties and an increase  in equity  earnings of joint  ventures
accounted for under the equity method of accounting.
<PAGE>

         The  effective  income tax rate was 39.6% and 38.0% for fiscal 1999 and
fiscal  1998,  respectively.  The increase in the  effective  income tax rate is
primarily as a result of the non-deductible  amortization expenses in connection
with the going private transaction.

         The  cumulative  effect of the change in method of accounting in fiscal
1998 resulted from Sbarro's  implementation of Statement of Position 98-5 of the
Accounting  Standards Executive Committee of the American Institute of Certified
Public Accountants which required companies that had capitalized pre-opening and
similar costs to write off all those existing  costs as a "cumulative  effect of
accounting  change" and to expense all those costs as incurred in the future. In
accordance with the early application provisions,  we implemented SOP 98-5 as of
the  beginning  of our 1998 fiscal year and  incurred a one-time  charge of $0.8
million, net of an income tax benefit of $0.5 million, to write off all start-up
costs existing as of the beginning of that year.

         Fiscal 1998 Compared to Fiscal 1997

         Our 1998 fiscal year benefited  from one additional  week of operations
over the prior fiscal year. The additional week in fiscal 1998 produced revenues
of $8.5 million, and net income of $1.7 million.

         Restaurant sales from Sbarro-owned units and consolidated joint venture
units  increased  7.1% to  $361.5  million  from  $337.7  million  in 1997.  The
increases  resulted  primarily from a higher number of units in operation during
the 1998 fiscal year,  selective menu price increases of approximately  1.4% and
0.7% which became  effective in September 1998 and February 1998,  respectively,
and sales  generated in week 53 of the 1998 fiscal year.  Comparable  unit sales
increased  1.6% to $322.4 million for the first 52 weeks of the 1998 fiscal year
from $317.2  million in our 1997 fiscal year.  Comparable  restaurant  sales are
made up of sales at locations that were open during the entire current and prior
fiscal years.

         Franchise  related income  increased 16.5% to $8.6 million in 1998 from
$7.4 million in 1997. The increases resulted from greater  continuing  royalties
due to a larger  number of franchise  units in operation in 1998, an increase in
initial  franchise  and  development  fees  due to  opening  more  international
franchise  units in 1998 than in 1997 and royalties  generated in week 53 of the
1998 fiscal year. During the year ended January 3, 1999, 13 units were closed by
franchisees.  These  units  did  not  produce  material  levels  of  sales  and,
consequently,  did not  generate  material  amounts of royalty  income to us. In
addition, we purchased one franchise unit.

         Interest income  increased to $5.1 million in 1998 from $4.4 million in
1997.  This  increase was due to larger  amounts of cash being  invested in 1998
than in 1997 and the  length  of the  1998  fiscal  year.  Interest  rates  were
comparable in both years.

         Cost of food and paper products,  as a percentage of restaurant  sales,
increased to 21.2% in 1998 from 20.6% in 1997.  Higher cheese prices during 1998
increased food costs by approximately  $2.6 million or 0.7% of sales and was the
primary  cause of the  increase.  The  increase  occurred  during the last three
quarters of the fiscal year.
<PAGE>

         Restaurant  operating  expenses -- payroll and other employee  benefits
increased to 25.8% of restaurant sales in 1998 from 25.1% of restaurant sales in
1997. This increase was  attributable to the $1.2 million (or 0.3% of restaurant
sales) payroll and other employee  benefit  component of start-up costs expensed
as incurred during 1998 under SOP 98-5 implemented by us in the first quarter of
fiscal  1998,  which  expenses  in prior years were  capitalized  and charged to
amortization  expense  over a two year period.  In addition,  the effects of the
federal minimum wage,  which became  effective in September 1997, a strong labor
market and an increase in  unemployment  and other payroll taxes  contributed to
the increase.

         Restaurant operating expenses -- occupancy and other expenses increased
to 27.9% in 1998 from 27.7% in 1997. The increase is attributable principally to
such costs  increasing at a rate faster than the increase in restaurant sales in
1998 from 1997.

         Depreciation and amortization  expenses decreased to $22.4 million from
$23.9  million  principally  as a  result  of the  absence  of  amortization  of
previously  capitalized  start-up costs which,  as discussed  below,  were fully
written off as of the beginning of the year with the implementation of SOP 98-5.
Had we not implemented SOP 98-5, we would have incurred amortization expenses of
$1.2 million in 1998 for prior and current years' costs previously  capitalized.
The  balance  of  the  decrease  relates  to the  absence  of  depreciation  and
amortization  in 1998 on certain  older units and also to the closing of certain
Sbarro-owned units, as discussed below.

         General and administrative  expenses increased to $19.7 million or 5.3%
of total  revenues in 1998 from $17.8  million or 5.1% of revenues in 1997.  The
increases  were  due to  higher  costs  associated  with the  administration  of
Sbarro-owned  restaurants and additional supervisory,  administrative and travel
expenses related to increased international franchising activities. In addition,
$0.8  million,  or 0.2% of revenues,  of the increase  was  attributable  to the
general and  administrative  expense  component of start-up  costs  incurred and
expensed  during  1998 under SOP 98-5.  These  start-up  expenses in prior years
would have been capitalized and charged to amortization  expense over a two year
period.

         Results for fiscal 1998 include one-time charges to operating income of
$2.5  million  before  tax,  or $1.6  million  after tax,  for the closing of 20
Sbarro-owned restaurants and $1.0 million before tax, or $0.6 million after tax,
for costs  associated  with the  terminated  negotiations  of the initial  going
private  proposal by the Sbarro  family.  The fiscal year results also include a
provision  of $3.5  million  before tax, or $2.2  million  after tax,  for costs
associated  with the  settlement  approved and  finalized in December  1998 of a
lawsuit under the Fair Labor  Standards Act and a charge of $1.1 million  before
tax, or $0.7 million after tax, for the difference between the carrying cost and
proposed selling price of a parcel of land sold by us.

         Other income  increased to $2.7 million in 1998 from $1.7 million in
1997 primarily as a result of increased  incentives  from suppliers.
<PAGE>

         The effective income tax rate was 38.0% for fiscal 1998 and 1997.

         The  cumulative  effect of the change in method of accounting  resulted
from  our  implementation  of  SOP  98-5  which  requires  companies  that  have
capitalized  pre-opening and similar costs to write off all such existing costs,
net of tax benefit, as a "cumulative effect of accounting change" and to expense
all such costs as incurred in the future.  As permitted by its early application
provisions, we implemented SOP 98-5 as of the beginning of our 1998 fiscal year.
In addition to on-going  start up costs  incurred and expensed  during 1998 with
respect to restaurant  operating expenses -- payroll and other employee benefits
and  general  and  administrative  expenses as  discussed  above,  we incurred a
one-time  charge  during 1998 of $0.8  million,  net of an income tax benefit of
$0.5 million,  to write off all start-up  costs  existing as of the beginning of
the year.

Impact of Inflation and Other Factors

         Food, labor, rent,  construction and equipment costs are the items most
affected by inflation in the restaurant business.  Although for the past several
years  inflation  has not been a significant  factor,  there can be no assurance
that this trend will continue. In addition,  food and paper product costs may be
temporarily  or  permanently  affected by weather,  economic  and other  factors
beyond our control  that may reduce the  availability  and  increase the cost of
these  items.  Historically,  the price of cheese has  fluctuated  more than our
other food ingredients and related restaurant supplies.

Seasonality

         Our  business is subject to seasonal  fluctuations,  and the effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased  volume in shopping  malls during the holiday
shopping  season.   While  the  fourth  fiscal  quarter  normally  accounts  for
approximately 40% of net income for the year, the length of the holiday shopping
period  between  Thanksgiving  and New Year's Day and the number of weeks in our
fourth quarter result in fluctuations in fourth quarter  financial  results from
year to year. In addition,  the effects of the going private transaction reduced
the net income for the fourth  quarter of 1999 as a percentage of total 1999 net
income.  The fourth quarter of 1999 accounted for 31% of net income for the 1999
fiscal year. Excluding the impact of the going private  transaction,  net income
for the fourth quarter of 1999 would have been  approximately  39% of net income
for the 1999 fiscal year. The 1998 fiscal year,  which contained 53 weeks, had a
13 week fourth quarter.  Excluding the impact of the thirteenth week, the fourth
quarter of fiscal 1998 would have accounted for 38% of our net income,  which is
consistent with the comparable prior year period.

Accounting Period

         Our fiscal  year ends on the Sunday  nearest to  December  31. The
fiscal  year which  ended on January 3, 1999  contained  53 weeks. All other
reported fiscal years contained 52 weeks.
<PAGE>

Liquidity and Capital Resources

         We have historically not required  significant  working capital to fund
our  existing  operations  and  have  financed  its  capital   expenditures  and
investments  in its joint  ventures  through  cash  generated  from  operations.
Substantially   all  of  our  cash  was  used  to  complete  the  going  private
transaction.  As a result,  at January 2, 2000 we had unrestricted cash and cash
equivalents of $33.5 million and a working capital deficit of $2.5 million.

         As part of the going private transaction,  we issued the original notes
and entered into a $30.0 million bank credit facility.  We have $27.5 million of
undrawn availability under the bank credit facility,  net of outstanding letters
of credit and  guarantees of  reimbursement  obligations  currently  aggregating
approximately  $2.5  million.  In March 2000 we  obtained a $16.0  million  8.4%
mortgage loan on our corporate  headquarters  building and  distributed an $18.0
million dividend to our shareholders, as discussed below.

         Net cash provided by operating  activities  was $62.0 million and $58.6
million  for the  fiscal  years  ended  January  2, 2000 and  January  3,  1999,
respectively.  Although  net income  decreased by $4.8  million,  cash flow from
operations  increased by $3.4 million as a result of increased  depreciation and
amortization  of $3.3 million and a $5.0 million net change in operating  assets
and liabilities principally resulting from accrued interest of $7.5 million.

         Net cash used in  investing  activities  primarily  relates  to capital
expenditures, including investments made by our joint ventures. Net cash used in
investing  activities  was $25.0  million and $20.2  million for the years ended
January 2, 2000 and January 3, 1999, respectively. The increase in net cash used
in investing  activities  for the year ended January 2, 2000 from the year ended
January 3, 1999 was due mainly to a decrease in proceeds from the  maturities of
marketable  securities of $7.5 million,  offset by a modest  decrease in capital
expenditures  from $27.7  million in fiscal 1998 to $25.1 million in fiscal 1999
principally  related to the  completion  of our corporate  headquarters  in late
1998.

         Net cash used in financing activities was $158.4 million for the fiscal
year ended  January 2, 2000  compared to $3.4  million for the fiscal year ended
January 3, 1999.  This increase  primarily  resulted from $410.0 million of cash
used, net of accrued or previously paid costs of the going private  transaction,
to pay the public  shareholders  in the going  private  transaction  and related
transaction costs,  including  financing costs,  offset by approximately  $251.2
million of net  proceeds  raised  through  the private  placement  of the senior
notes.  Net cash used in financing  activities  for fiscal 1998 was comprised of
$5.5 million of cash  dividends paid in fiscal 1998 that were declared in fiscal
1997  partially  offset by $2.1  million of proceeds  from the exercise of stock
options.

         As a result of the going private transaction, we used substantially all
of our cash on hand and incurred approximately $255.0 million of debt. We expect
<PAGE>


our other liquidity needs will relate to capital expenditures,  working capital,
investments in joint ventures,  distributions to shareholders as permitted under
the Indenture and general corporate  purposes.  We expect our primary sources of
liquidity to meet these needs will be cash flow from operations and availability
under our credit facility.

         Since we used  substantially  all of our cash on hand to consummate the
going private  transaction,  we will not realize the level of interest income as
in the past  unless and until we rebuild  our cash  position.  Further,  we will
incur annual cash  interest  expense of  approximately  $29.7  million under the
senior notes and mortgage  loan and may incur  additional  interest  expense for
borrowings under our credit facility.

         We believe  that  aggregate  restaurant  capital  expenditures  and our
investments in joint  ventures  during the next twelve months will be moderately
higher  than  levels  in  recent  fiscal  years.   Unpaid  capital   expenditure
commitments aggregated approximately $3.5 million at January 2, 2000.

         Our effective tax rate after the going private  transaction  was higher
than our  historical  effective  tax rate  primarily  due to the  non-deductible
amortization  of the  excess of the  purchase  price  over the fair value of net
assets acquired arising as a result of the going private  transaction.  In March
2000,  we  elected  to be taxed  under the  provisions  of  Subchapter  S of the
Internal Revenue Code and, where  applicable and permitted,  under similar state
and local income tax provisions  beginning January 3, 2000. Under the provisions
of  Subchapter  S,  substantially  all taxes on our  income  will be paid by our
shareholders.  On a pro  forma  basis  to  give  effect  to  the  going  private
transaction,  if we were taxed as an S corporation as of the beginning of fiscal
1999,  we and our  shareholders  would have had a tax liability on our income of
approximately  $25.4 million or 50% of our income  before taxes.  This amount is
higher than our  historical  effective  tax rate due to (i)  differences  in tax
rates between  individual and corporate  taxpayers,  (ii) the timing differences
currently  accounted for as deferred  taxes in our financial  statements  (which
deferred taxes may be eliminated or reduced upon conversion to an S corporation,
in fiscal 2000) and (iii) the effect of double taxation in those state and local
jurisdictions  that do not  recognize S  corporation  status.  The indenture and
credit facility permit  distributions to shareholders for taxes on our earnings,
as  discussed  under " Certain  Relationships  and  Related  Transactions  - Tax
Agreement" in Item 13 of this report.

         Historically  we  have  paid  dividends  on  our  common  stock  to our
shareholders.  Quarterly dividends aggregated $22.1 million for fiscal 1997, the
last  full  fiscal  year in which we paid a  dividend.  Our  Board of  Directors
suspended  the payment of dividends  commencing  in the first quarter of 1998 in
connection  with a prior going  private  proposal  by the Sbarro  family and the
consideration  of other strategic  alternatives.  On March 13, 2000 our Board of
Directors  declared  a  dividend  of $18  million.  We expect  that our Board of
Directors will from time to time elect to pay dividends to our  shareholders  in
amounts  that will be based  upon a number of  factors,  including  our  working
capital  needs,  operating  performance,  debt service  obligations  and capital
expenditure requirements. Distributions are subject to the provisions of the
Indenture.

         We do not have any principal  repayment  obligations under the notes or
our credit agreement for ten and five years, respectively.  We believe that cash
flow from  operations  and funds  available  under our credit  facility  will be
sufficient to meet our liquidity needs.
<PAGE>

Market Risks

         We have  historically  invested  our cash on hand in short term,  fixed
rate, highly rated and highly liquid instruments which mature and are reinvested
throughout  the year.  Although our existing  investments  are not considered at
risk with respect to changes in interest rates or markets for these instruments,
our rate of return on  short-term  investments  could be affected at the time of
reinvestment as a result of intervening events.

         Our   borrowings   under  our  credit   facility  will  be  subject  to
fluctuations  in  interest  rates.  However,  we do not expect to enter into any
interest  rate  swaps or other  instruments  to hedge our  borrowings  under our
credit facility.

         We have not purchased future,  forward,  option or other instruments to
hedge against  fluctuations in the prices of the  commodities we purchase.  As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.

         All of our transactions with foreign  franchisees have been denominated
in, and all payments  have been made in,  United  States  dollars,  reducing the
risks attendant in changes in the values of foreign currencies.  As a result, we
have not  purchased  future  contracts,  options or other  instruments  to hedge
against changes in values of foreign currencies.

Recent Accounting Pronouncements

Pursuant to  Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective  Date of FASB  Statement No. 133 -- An Amendment of FASB Statement No.
133," issued in June 1999,  SFAS No. 133 is effective for fiscal years beginning
after  June  15,  2000.  Presently,  we do not use  derivative  instruments  and
therefore SFAS No. 133 is not currently applicable.
<PAGE>


Year 2000

         In 1999, we  implemented a program with the objective of avoiding "year
2000"  issues,  which  could  arise in  situations  where  computer  software or
databases  recognize  the two digit year "00" as the year 1900  rather  than the
year 2000.  Our IT systems,  which we use primarily for  financial,  accounting,
human resources,  payroll,  operations support and point-of-sales processing and
reporting, and our non-information  technology systems, which we use principally
in  communications  systems,  both use computer  hardware,  software and related
technology  that could have been  affected by year 2000 issues.  This could have
resulted  in  system  failures  or   miscalculations   that  could  have  caused
disruptions  in  business  operations  and  increased  costs in  processing  and
analyzing  data.  As part of program to avoid year 2000 issues,  we reviewed our
in-house software developed by our IT department and packaged software purchased
from third parties, and remediated these where needed.

         All software  modification and testing was performed by our internal IT
department  without the need to employ additional staff and without  significant
interruption of the other functions  performed by the department.  We spent less
than $150,000 for testing,  purchasing hardware and for other modification costs
to finish the project.  We did not  separately  track  internal costs which were
principally  payroll and related costs of our IT systems department  incurred as
part of our year 2000 project. We do not anticipate  additional  expenditures as
part of our year 2000 program.

         To date, we have  experienced  no  significant  year 2000 problems with
either the hardware or software used in our IT or non-IT systems, in interfacing
with  our food and  beverage  suppliers  or with  the  systems  employed  by the
landlords of the facilities in which we conduct  business.  We do not anticipate
any year 2000  problems  in the  future.  Should any occur,  we believe we could
quickly implement the contingency plans we developed in preparing for year 2000.


ITEM 7-A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES OF MARKET RISK

         We have  historically  invested  our cash on hand in short term,  fixed
rate, highly rated and highly liquid  instruments which are reinvested when they
mature throughout the year. Although our existing investments are not considered
at risk  with  respect  to  changes  in  interest  rates or  markets  for  these
instruments,  our rate of return on short-term  investments could be affected at
the time of reinvestment as a result of intervening events.

         Our   borrowings   under  our  credit   facility  will  be  subject  to
fluctuations  in  interest  rates.  However,  we do not expect to enter into any
interest  rate  swaps or other  instruments  to hedge our  borrowings  under our
credit facility.

         We have not purchased future,  forward,  option or other instruments to
hedge against  fluctuations in the prices of the  commodities we purchase.  As a
result, our future commodities purchases are subject to changes in the prices of
such commodities.
<PAGE>

         All of our transactions with foreign  franchisees have been denominated
in, and all payments  have been made in,  United  States  dollars,  reducing the
risks attendant in changes in the values of foreign currencies.  As a result, we
have not  purchased  future  contracts,  options or other  instruments  to hedge
against changes in values of foreign currencies.


ITEM     8. FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA Annexed hereto starting
         on Page F-1.


ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
         None


<PAGE>

                              PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The directors  and executive officers of the Company and their ages at
February 29, 2000 are:

 Name                    Age                           Position
 Mario Sbarro             58    Chairman of the Board, President, Chief
                                Executive Officer and Director
 Anthony Sbarro           53    Vice Chairman of the Board, Treasurer and
                                    Director
 Joseph Sbarro            59    Senior Executive Vice President, Secretary
                                    and Director
 Carmela Sbarro           78    Vice President and Director
 Anthony J. Missano       41     President--Quick Service Division and Corporate
                                    Vice President
 Gennaro A. Sbarro        33    President -- Franchising and Licensing
                                    Division and Corporate Vice President
 Gennaro J. Sbarro        37    President --  Casual  and  Fine  Dining
                                 Division and Corporate Vice President
 Robert G. Rooney         42    Senior Vice President and Chief Financial
                                    Officer
 Carmela N. Merendino     35    Vice President-- Administration
 Joseph A. Fallarino      47    Vice President-- Human Resources
 Henry G. Ciocca          53    Vice President and General Counsel
 John Bernabeo            43    Vice President-- Architecture and
                                    Engineering
 Donald A. Dziomba        51    Vice President-- Management Information Services
 Steven B. Graham         46    Vice President and Controller
 Harold L. Kestenbaum     50    Director
 Richard A. Mandell       57    Director
 Terry Vince              71    Director
 Bernard Zimmerman        67    Director



         MARIO  SBARRO  has  been  an  officer,   a  director  and  a  principal
shareholder of Sbarro since its organization in 1977, serving as Chairman of our
board of  directors  and  Chief  Executive  Officer  for more than the past five
years.  Mr.  Sbarro  re-assumed  the  position as our  President  in May 1996 (a
position he held for more than five years prior to December 1993).
<PAGE>

         ANTHONY  SBARRO  has  been  an  officer,  a  director  and a  principal
shareholder of Sbarro since its  organization in 1977,  serving as Vice Chairman
of our board of directors  since May 1996 and as President  and Chief  Operating
Officer from December  1993 through May 1996.  For more than five years prior to
December 1993, Mr. Sbarro was an Executive Vice President. He has also served as
our Treasurer for more than the past five years.

         JOSEPH  SBARRO  has  been  an  officer,  a  director  and  a  principal
shareholder  of  Sbarro  since  its  organization  in 1977,  serving  as  Senior
Executive  Vice  President  since  December 1993. For more than five years prior
thereto,  Mr. Sbarro was an Executive Vice President.  He has also served as our
Secretary for more than the past five years.

     CARMELA SBARRO has been one of our Vice  Presidents  since March 1985. Mrs.
Sbarro was a founder of Sbarro, together with her late husband,  Gennaro Sbarro.
Mrs.  Sbarro  devotes a  substantial  portion of her time to recipe and  product
development. Our board of directors elected Mrs. Sbarro as a director in January
1998. Mrs. Sbarro previously served as a director from March 1985 until December
1988, when she was elected director emeritus.

         ANTHONY J.  MISSANO has been a Corporate  Vice  President  since August
1996 and was elected  President of our Quick  Service  Division in January 2000.
From February 1995 until August 1996, he served as Vice  President -- Operations
(West),  and from  June  1992  until  February  1995 he  served  as a Zone  Vice
President.

         GENNARO A. SBARRO has been a Corporate Vice President since August 1996
and was elected  President of our Franchising and Licensing  Division in January
2000.  From  February  1995 until  August  1996 he served as Vice  President  --
Franchising,  and for more than five years prior  thereto Mr.  Sbarro  served in
various capacities for us.

         GENNARO J. SBARRO has been a Corporate Vice President since August 1996
and was  elected  President  of our Casual and Fine  Dining  Division in January
2000.  From  February  1995 until  August 1996,  he served as Vice  President --
Operations  (East),  and from June 1992 until  February 1995 he served as a Zone
Vice President.

         ROBERT G. ROONEY was elected Senior Vice President and Chief  Financial
Officer in January 2000.  From June 1999, when he joined us, until January 2000,
Mr. Rooney served as Vice President -- Finance and Chief Financial Officer. From
December  1996 until he joined us, Mr.  Rooney was employed by  Discovery  Zone,
Inc. (a national  family  entertainment  center  chain),  serving as Senior Vice
President,  Chief Financial and Administrative Officer since February 1997. From
March 1994 until  September 1996, Mr. Rooney served as Senior Vice President and
Chief Financial Officer of Victory Capital LLC (formerly Forschner  Enterprises,
Inc.), a venture capital firm, and, from September 1992 to February 1994, served
as a director and consultant on behalf of various investors and investment funds
affiliated with Forschner  Enterprises,  Inc.  Discovery Zone,  Inc.,  which had

<PAGE>
filed  under  Chapter  11 of the  United  States  Bankruptcy  Code  prior to Mr.
Rooney's joining that company, again filed under that law on April 20, 1999. Mr.
Rooney has been a certified public accountant in New York for over 20 years.

     CARMELA N.  MERENDINO  was elected  Vice  President  --  Administration  in
October 1988. Ms.  Merendino  joined us in March 1985 and performed a variety of
corporate  administrative  functions  for us  prior  to  her  election  as  Vice
President -- Administration.

         JOSEPH A.  FALLARINO  joined  Sbarro in September  1998 and was elected
Vice President -- Human  Resources in November  1998.  Prior to joining us, from
April 1998 until  September  1998,  Mr.  Fallarino  served as  Director of Human
Resources  of  Ogden   Corporation,   an   international   diversified   service
corporation;  from  March  1996  until  March  1998,  he served  as Senior  Vice
President -- Human  Resources of Arbor  Management  LLC, a provider of financial
services and healthcare services;  and from January 1994 until February 1996, he
served as Vice  President  -- Human  Resources  of AMS  Corporation,  a national
outsourcing company.

         HENRY G.  CIOCCA  joined  Sbarro  in  January  2000 and  serves as Vice
President and General Counsel. From August 1997 to April 1999, Mr. Ciocca was an
advisor to the President of The Thomson Corporation, a worldwide information and
publishing company.  From September 1995 to June 1997, Mr. Ciocca was President,
Chief  Executive  Officer  and a Director of  Markborough  Properties,  Inc.,  a
publicly-traded  commercial real estate company  headquartered in Toronto;  from
June 1993 to August 1995, Mr. Ciocca was President and Chief  Executive  Officer
of Markborough Development, a division of The Thomson Corporation that developed
master  planned  communities  in the United  States;  and from June 1987 to June
1993, Mr. Ciocca held various positions with The Thomson Corporation,  including
Executive Vice President and General Counsel. Mr. Ciocca is admitted to practice
law in Connecticut, Florida and New York.

         JOHN  BERNABEO  joined  Sbarro in  August  1992 and  served in  various
capacities  prior  to  his  election  as  Vice  President  --  Architecture  and
Engineering in May 1997.

     DONALD A.  DZIOMBA was elected  Vice  President  -  Management  Information
Services in January 2000.  Mr.  Dziomba had served as our Director of Management
Information Systems since joining Sbarro in November 1993.

     STEVEN B. GRAHAM was elected Vice President and Controller in January 2000.
Mr. Graham has served as our Controller  since joining Sbarro in April 1994. Mr.
Graham has been a certified public accountant in New York for over 20 years.

     HAROLD L. KESTENBAUM has been a practicing attorney in New York since 1976.
He became a director of Sbarro in March 1985.
<PAGE>

     RICHARD  A.  MANDELL,  a  private  investor,  was a  Managing  Director  of
BlueStone  Capital  Partners,  L.P., an investment  banking firm,  from February
until April 1998 and Vice  President -- Private  Investments  of Clariden  Asset
Management  (NY) Inc., a subsidiary of Clariden Bank, a private Swiss bank, from
January 1996 until February 1998.  From 1982 until June 1995, Mr. Mandell served
as a Managing  Director of  Prudential  Securities  Incorporated,  an investment
banking firm. He became a director of Sbarro in March 1986.  Mr. Mandell is also
a director of  Trend-Lines,  Inc.,  U.S.A.  Detergents,  Inc. and Shells Seafood
Restaurants, Inc.

         TERRY VINCE has been  Chairman of the Board and  President of Sovereign
Hotels, a company that operates  hotels,  since October 1991 and Chairman of the
Board of Fame Corp., a food service management company,  since January 1994. Mr.
Vince became a director of Sbarro in December 1988.

     BERNARD  ZIMMERMAN  has been  President of Bernard  Zimmerman and Co., Inc.
since October 1972 and was Senior Vice  President of The Zimmerman  Group,  Inc.
from January 1991 to November 1996,  financial and management  consulting firms.
Mr.  Zimmerman  also  served as  President  and a director of Beacon Hill Mutual
Fund,  Inc. from December 1994 until  October 1996.  From  September  1986 until
September  1993,  Mr.  Zimmerman  also served as Chairman  and  President of St.
Lawrence  Seaway Corp.,  an owner and manager of  agricultural  properties.  Mr.
Zimmerman has been a certified  public  accountant in New York for more than the
past thirty-five years. He became a director of Sbarro in March 1985.

         Under our  certificate  of  incorporation,  our board of  directors  is
divided into three classes as nearly equal in number as the then total number of
directors  constituting  the  entire  board  permits.  Our  board  of  directors
presently consists of eight members, with each class being elected for a term of
three years. Anthony Sbarro and Harold L. Kestenbaum serve as Class 1 directors,
Joseph Sbarro, Richard A. Mandell and Terry Vince serve as Class 2 directors and
Mario Sbarro,  Carmela Sbarro and Bernard  Zimmerman serve as Class 3 directors.
The  terms of our  Class 1 and our  Class 2  directors  will  expire at our next
annual meeting of shareholders and the term of our Class 3 directors will expire
at our annual meeting of shareholders in 2001. At each annual meeting, directors
are  elected to succeed  those in the class  whose term  expires at that  annual
meeting, such newly-elected  directors to hold office until the third succeeding
annual  meeting  and  the  election  and   qualification   of  their  respective
successors.

         Paul Vatter, who had, prior to the going private transaction, indicated
an intention to retire,  resigned from the board effective on December 31, 1999.
As a result, our board of directors  consists of eight members.  To permit this,
our  shareholders  amended our by-laws so that the minimum  number of  directors
that can  constitute  our board is now six. The maximum number of directors that
could  constitute  our board remains  twelve.  There is no present  intention to
replace Mr. Vatter as a director.

         Our  officers  are elected  annually by the board of  directors  at its
meeting held immediately after the annual meeting of our shareholders,  and hold
their respective  offices until their successors are duly elected and qualified.
Officers may be removed at any time by the board.
<PAGE>

     Mario, Anthony and Joseph Sbarro are the sons of Carmela Sbarro. Carmela N.
Merendino is the  daughter,  and Gennaro A. Sbarro is the son, of Mario  Sbarro.
Gennaro J.  Sbarro is the son,  and  Anthony J.  Missano is the  son-in-law,  of
Joseph Sbarro.


ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

         The following  table sets forth  information  concerning the annual and
long-term compensation of our chief executive officer and other five most highly
compensated  persons who were  serving as  executive  officers at the end of our
1999  fiscal  year for  services in all  capacities  to us and our  subsidiaries
during our 1999, 1998 and 1997 fiscal years. All of the options set forth on the
table under the caption "Long Term  Compensation"  were  terminated in the going
private transaction in exchange for a cash payment equal to the number of shares
to the options  thereto  multiplied  by the  excess,  if any, of $28.85 over the
applicable  option exercise price.  See  "--Aggregated  Option Exercises is Last
Fiscal Year" for information on amounts executive  officers named in the Summary
Compensation  Table received in connection  with the termination of options that
they held.
<TABLE>
<CAPTION>
<S>                                              <C>        <C>              <C>                    <C>
                                                                     Annual                  Long Term
Name and                                                          Compensation              Compensation
Principal Position                               Year        Salary          Bonus           Options(#)

Mario Sbarro.................................    1999     $ 700,000      $  300,000                --

Chairman of the Board, President and             1998       713,462          300,000               --
      Chief Executive Officer                    1997        700,000         160,000          250,000

Anthony Sbarro...............................    1999        300,000        200,000                --
Vice Chairman of the Board and Treasurer         1998        305,769         200,000               --
                                                 1997        300,000         150,000          100,000

Joseph Sbarro................................    1999        300,000        200,000                --
Senior Executive Vice President and              1998        305,769         200,000               --
     Secretary                                   1997        300,000         150,000          100,000

Anthony J. Missano...........................    1999        200,000        150,000                --
President-- Quick Service Division               1998        203,846         100,000               --
                                                 1997        200,000          75,000           80,000
Gennaro A. Sbarro............................    1999        200,000        150,000                --
President-- and Licensing Division               1998        203,846         100,000               --
                                                 1997        200,000          75,000           80,000
Gennaro J. Sbarro............................    1999       200,000         150,000                --
President-- Casual and Fine Dining Division      1998        203,846         100,000               --
                                                 1997        200,000          75,000           80,000
</TABLE>

<PAGE>

Aggregated Option Exercises in Last Fiscal Year and Year End Values

         All of the options held by each executive  officer named in the Summary
Compensation Table were terminated in the going private  transaction in exchange
for a cash  payment  equal  to the  number  of  shares  subject  to the  options
multiplied by the excess of $28.85 over the applicable  option  exercise  price.
The  following  table sets forth the number and value of shares of common  stock
subject to those options and the amount received by the named executive officers
in exchange for the  termination of their  options.  The executives did not have
any  unexercised  options  at the end of our  1999  fiscal  year.  See  "Certain
Relationships and Related Transactions"  included in Item 13 of this Report, for
more information about amounts received in exchange for termination of options.



                                         Shares
                                      Acquired on               Value
Name                                     Exercise             Realized(1)
----                                     --------             --------
Mario Sbarro.....................         620,000(2)         $2,221,987
Anthony Sbarro...................         265,000             1,145,242
Joseph Sbarro....................         300,000             1,323,743
Anthony J. Missano...............          93,500               348,000
Gennaro A. Sbarro................          98,251               389,168
Gennaro J. Sbarro................          93,500               348,000

(1)  Represents  the number of shares  subject to the options  multiplied by the
excess of $28.85 over the applicable option exercise price.

(2) No value was  realized  upon the  termination  of options  covering  100,000
shares whose exercise price was in excess of $28.85 per share.

Compensation of Directors

         Our non-employee  directors currently receive a retainer at the rate of
$16,000 per annum,  $1,000 for each  meeting of the Board  attended and $500 for
each  meeting  attended of a  committee  of the board on which they serve if the
meeting  is not held on the same day as a  meeting  of the  board,  except  that
members of the special committee that considered the merger and a prior proposal
for a similar transaction  received additional  compensation as described below.
Members of the board also are reimbursed for reasonable travel expenses incurred
in attending  board and  committee  meetings.  The regular  compensation  of our
employee  directors  covers  compensation  for  services  as  a  director.   Our
non-employee  directors  earned the following  cash  compensation,  exclusive of
travel reimbursements, from us during fiscal 1999

<PAGE>

 for services as members of the board, other than for service on the special
     committee:

  ---------------------------------------------- ------------------
  Harold L. Kestenbaum.......................            $20,000
  ---------------------------------------------- ------------------
  ---------------------------------------------- ------------------
  Richard A. Mandell.........................            $20,000
  ---------------------------------------------- ------------------
  ---------------------------------------------- ------------------
  Paul A. Vatter.............................            $20,000
  ---------------------------------------------- ------------------
  ---------------------------------------------- ------------------
  Terry Vince................................            $20,000
  ---------------------------------------------- ------------------
  ---------------------------------------------- ------------------
  Bernard Zimmerman..........................            $20,000
  ---------------------------------------------- ------------------

         Each   non-employee   director   held  stock  options  under  our  1993
non-employee  director  stock  option plan to purchase  an  aggregate  of 22,500
shares of common  stock at exercise  prices  ranging  from $21.50 to $28.875 per
share. The options and this plan were terminated upon  consummation of the going
private  transaction and our non-employee  directors  received cash in an amount
equal to the excess of $28.85 over the  applicable  exercise  price per share of
the options held by them under this plan. For information regarding amounts that
our  non-employee  directors  received in  connection  with the  termination  of
options  granted  under  this  plan,  see  "Certain  Relationships  and  Related
Transactions."

         As compensation for serving on the special committee,  we agreed to pay
to each member of the special  committee a fee equal to (1) $2,500 for  services
rendered  in any  day on  which  the  member  expended  four  hours  or  more in
performing services as a member of the special committee and (2) $1,250 for each
day in which the member expended a reasonable amount of time, but less than four
hours, in performing services as a member of the special committee.  In addition
to the foregoing fees, Richard A. Mandell, as chairman of the special committee,
$10,000  with  respect to the  special  committee's  consideration  of the prior
proposal and $10,000 with respect to the special  committee's  consideration  of
the  merger.  Each  member  of the  special  committee  was  reimbursed  for all
out-of-pocket  expenses incurred in performing his services.  The members of the
special  committee earned the following cash  compensation,  exclusive of travel
reimbursements, from us in connection with the merger and the prior proposal:


  Harold L. Kestenbaum........................  $14,750
  --------------------------------------------- ---------------------
  --------------------------------------------- ---------------------
  Richard A. Mandell..........................     48,500
  --------------------------------------------- ---------------------
  --------------------------------------------- ---------------------
  Paul A. Vatter..............................      9,750
  --------------------------------------------- ---------------------
  --------------------------------------------- ---------------------
  Terry Vince.................................      9,750
  --------------------------------------------- ---------------------

         Bernard  Zimmerman and Company,  Inc.,  of which  Bernard  Zimmerman is
President  and  a  majority   shareholder,   renders  financial  and  consulting
assistance to us, for which it received fees of $474,000  during our 1999 fiscal
year.  Harold L.  Kestenbaum,  P.C., of which Harold  Kestenbaum is a principal,
received fees of $2,767 for legal services during our 1999 fiscal year.

<PAGE>





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT

         The  following  table  sets forth  certain  information  regarding  the
ownership  of shares of our common stock as of February 28, 2000 with respect to
(1)  holders  known to us to  beneficially  own more  than five  percent  of our
outstanding  common stock,  (2) each of our directors,  (3) our Chief  Executive
Officer and our five next most highly compensated executive officers and (4) all
of our directors and executive  officers as a group. We understand that,  except
as noted below,  each beneficial owner has sole voting and investment power with
respect to all shares attributable to such owner.


                                            Shares Beneficially Owned
Beneficial Owner                            Number               Percent
----------------                            ------               -------
Mario Sbarro(1).....................         1,524,730(2)          21.6%
Anthony Sbarro(1)...................         1,233,800             17.5%
Joseph Sbarro(1)....................         1,756,022(3)          25.6%
Trust of Carmela Sbarro(1)..........         2,497,884(4)          35.3%
Harold L. Kestenbaum................                --              --
Richard A. Mandell..................                --              --
Terry Vince.........................                --              --
Bernard Zimmerman...................                --              --
Anthony J. Missano..................            25,946(5)           0.4%
Gennaro A. Sbarro...................                --              --
Gennaro J. Sbarro...................            25,946              0.4%
All directors and executive
officers as a group
    (18 persons)....................         7,064,328            100.0%

(1)  The business address of each of Mario Sbarro, Joseph Sbarro, Anthony Sbarro
     and the Trust of Carmela Sbarro is 401 Broadhollow Road, Melville, New York
     11747.

(2)      Excludes the 2,497,884  shares held by the Trust of Carmela Sbarro,  of
         which trust Mario Sbarro serves as a co-trustee  and as to which shares
         Mr.  Sbarro may be deemed a  beneficial  owner with  shared  voting and
         dispositive power.

(3)      Excludes 25,946 shares  beneficially owned by each of Mr. Sbarro's son,
         Gennaro J. Sbarro, reflected below, and daughter. Mr. Sbarro's daughter
         is the wife of Anthony J. Missano.

(4)      The trust was  created by Carmela  Sbarro for her  benefit  and for the
         benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
         The  trustees  of the trust are  Franklin  Montgomery,  whose  business
         address is 488 Madison  Avenue,  New York,  New York  10022,  and Mario

<PAGE>

         Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed
         to be the  beneficial  owners of these  shares with  shared  voting and
         dispositive power.

(5)  Represents  shares  owned by Mr.  Missano's  wife.  Mr.  Missano  disclaims
     beneficial ownership of these shares.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         We are the sole tenant of an administrative  office building,  which is
leased from Sbarro  Enterprises,  L.P. The annual rent  payable  pursuant to the
sublease is $0.3  million each year for the  remainder of the lease term,  which
expires  in 2011.  In  addition,  we are  obligated  to pay real  estate  taxes,
utilities,  insurance  and certain other  expenses for the facility.  We believe
that our rent is comparable to the rent that would be charged by an unaffiliated
third party. The limited partners of Sbarro Enterprises, L.P. are Mario, Joseph,
Anthony and Carmela Sbarro.

     In addition to the compensation of Mario, Anthony,  Joseph,  Gennaro A. and
Gennaro J. Sbarro and Anthony J. Missano:

         o        Carmela  Sbarro,  the  mother of  Mario,  Anthony  and  Joseph
                  Sbarro,  who was a  co-founder  of Sbarro  and  serves as Vice
                  President  and a  director,  received  $100,000  from  us  for
                  services rendered during fiscal 1999; and

         o        Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves
                  as Vice President -- Administration, received $155,000 from us
                  for services rendered during fiscal 1999.

         In addition, other members of the immediate families of Mario, Anthony,
Joseph  and  Carmela  Sbarro,  who are our  employees,  earned an  aggregate  of
$729,534 during fiscal 1999.

         We,  our  subsidiaries  and the  joint  ventures  in  which  we have an
interest  have  purchased  printing  services  from  a  corporation  owned  by a
son-in-law  of Mario  Sbarro  for which they paid,  in the  aggregate,  $396,947
during  fiscal  1999.  We believe  that these  services  were  provided on terms
comparable to those that would have been available from unrelated third parties.

         On March 13, 2000,  our board of directors  authorized us to lend Mario
Sbarro, our Chairman,  President and Chief Executive Officer, $2.0 million under
a note that will be payable two years after we make the loan. The note will bear
interest at the rate of 6.45%,  which will be payable annually.  We believe that
the loan is on terms  that are no less  favorable  to us than  would  have  been
obtained in a comparable transaction by us with an unrelated person.
<PAGE>

         Companies  owned by a son of Anthony  Sbarro and a company owned by the
daughter  of Joseph  Sbarro  paid  royalties  to us under  franchise  agreements
containing  terms  similar  to  those  in  agreements  entered  into  by us with
unrelated  franchisees.  Royalties  paid to us aggregated  $111,166 and $38,860,
respectively, during fiscal 1999.

         Tax Agreement

         We have elected to be taxed under the provisions of Subchapter S of the
Internal  Revenue Code of 1986,  and,  where  applicable  and  permitted,  under
similar state and local income tax  provisions,  beginning in fiscal 2000.  With
certain limited  exceptions,  we will not pay federal and state and local income
taxes for  periods  for which we are treated as an S  corporation.  Rather,  our
shareholders  will include their  pro-rata  share of our taxable income on their
individual  income  tax  returns  and thus will be  required  to pay taxes  with
respect to their respective  shares of our taxable income,  whether or not it is
distributed to them.

         We have entered into a tax payment agreement with our shareholders. The
tax payment  agreement  permits us to make  periodic  tax  distributions  to our
shareholders  in amounts  that are  intended to  approximate  the income  taxes,
including  estimated  taxes,  that would be payable by our shareholders if their
only income were their pro-rata shares of our taxable income and that income was
taxed at the highest  applicable  federal and New York State marginal income tax
rates. We may only make the tax  distributions  with respect to periods in which
we are treated as an S corporation.

         The tax payment agreement provides for adjustments of the amount of tax
distributions  previously  paid in  respect  of a year  upon the  filing  of our
federal income tax return for that year,  upon the filing of an amended  federal
income tax return or as a result of an audit. In these  circumstances,  if it is
determined that the amount of tax distributions previously made for the year was
less than the amount  computed  based upon our federal  income tax  return,  our
amended  federal return or as adjusted based on the results of the audit, we may
make  additional  tax  distributions  which might  include  amounts to cover any
interest or penalties.  Conversely,  if it is determined in these  circumstances
that the amount of tax  distributions  previously  made for a year  exceeded the
amount  computed  based on our federal  income tax return,  our amended  federal
return or the results of an audit, as the case may be, our shareholders  will be
required to repay the  excess,  with,  in certain  circumstances,  interest.  In
addition,  our shareholders will be required to return,  with interest,  any tax
distributions  previously distributed with respect to any taxable year for which
it is subsequently determined that we were not an S corporation.

         Going Private Transaction

         When we completed  the going  private  transaction,  we paid our public
shareholders  merger  consideration  of $28.85 per share in cash. Other than the
members of the Sbarro family who are our continuing  shareholders  (who received

<PAGE>

no merger consideration), our directors, executive officers, owners of more than
5% of our common stock and members of the  immediate  families of the  foregoing
persons  received  the same $28.85  merger  consideration  for each share of our
common stock owned by them as the other public  shareholders  received.  We also
terminated all  outstanding  stock options and paid in cash to each stock option
holder  (including  the  members  of the Sbarro  family  who are our  continuing
shareholders), whether or not the option holder's stock options were then vested
or  exercisable,  an amount  in cash  equal to the  excess  of  $28.85  over the
applicable  exercise price per share subject to the stock option.  The following
table sets forth the amount  received by our directors,  our executive  officers
and owners of more than 5% of our common stock, including entities controlled by
them, upon termination of their stock options:
<TABLE>

<CAPTION>

<S>                                     <C>                                                         <C>
  Name                                 Relationship to Company                                     Amount

  Mario Sbarro                        Chairman of the Board, President,                        $     2,221,987
                                      Chief Executive Officer and Director
  Anthony Sbarro                      Vice Chairman of the Board,                                    1,145,242
                                      Treasurer and Director
  Joseph Sbarro                       Senior Executive Vice President,                               1,323,743
                                      Secretary and Director
  John Bernabeo                       Vice President --                                                  9,312
                                      Architecture and Engineering
  Joseph A. Fallarino                 Vice President-- Human Resources                                  20,188
  Carmela N. Merendino                Vice President-- Administration                                   54,212
  Anthony J. Missano                  President-- Quick Service Division                               348,000
  Gennaro A. Sbarro                   President-- Franchising and Licensing Division                   389,168
  Gennaro J. Sbarro                   President-- Casual and Fine Dining Division                      348,000
  Steven B. Graham                    Vice President and Controller                                     13,567
  Donald A. Dziomba                   Vice President - Management Information Systems                   11,917
  Harold L. Kestenbaum                Director                                                          93,965
  Richard A. Mandell                  Director                                                          93,965
  Paul A. Vatter                      Director                                                          93,965
  Terry Vince                         Director                                                          93,965
  Bernard Zimmerman                   Director                                                         160,213
</TABLE>

     Other members of the immediate  family of Mario Sbarro,  Anthony Sbarro and
Joseph  Sbarro  received  $495,162,  $7,350  and  $696,000,   respectively,   in
connection with the termination of their stock options.
<PAGE>

                                   PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                  ON FORM  8-K

(a)(1) and (a)(2) and (d) Financial Statements and Financial Statement Schedule

         Financial Statements                                            Page
         Report of Independent Public Accountants                         F-1

         Consolidated Balance Sheets at January 2, 2000 and
         January 3, 1999                                                  F-2

         Consolidated Statements of Income for each of the
         fiscal years in the three-year period ended January 2, 2000      F-4

         Consolidated Statements of Shareholders' Equity for each of
         the fiscal years in the three-year period ended January 2, 2000  F-5

         Consolidated Statements of Cash Flows for each of the
         fiscal years in the three-year period ended January 2, 2000      F-6

         Notes to Consolidated Financial Statements                       F-8

         Financial Statement Schedule

         Report of Independent Public Accountants on Schedule              S-1

         II - Valuation and Qualifying Accounts                            S-2

         Information required by other schedules called for under Regulation S-X
         is either not applicable or is included in the consolidated  financial
         statements or notes thereto.

(b)      Reports on Form 8-K

         No Reports  on Form 8-K were  filed by us during the fourth  quarter of
         our fiscal year ended January 2, 2000.




<PAGE>

(c)  Exhibits:

         *2.01             Agreement  and Plan of Merger dated as of January 19,
                           1999 among the Company, Sbarro Merger LLC, a New York
                           limited  liability  company,   Mario  Sbarro,  Joseph
                           Sbarro,   Joseph   Sbarro   (1994)   Family   Limited
                           Partnership,  Anthony  Sbarro,  and Mario  Sbarro and
                           Franklin Montgomery, not individually but as trustees
                           under that certain  Trust  Agreement  dated April 28,
                           1984  for  the  benefit  of  Carmela  Sbarro  and her
                           descendants. (Exhibit 2 to the Company Current Report
                           on Form 8-K dated (date of earliest  event  reported)
                           January 19, 1999, File No. 1-8881)

         *3.01(a)          Restated  Certificate of Incorporation of the
                           Company as filed with the  Department of State of the
                           State of New York on March 29, 1985. (Exhibit 3.01 to
                           the  Company's  Registration  Statement  on Form S-1,
                           File No.
                           2-96807)

         *3.01(b)          Certificate  of Amendment  to the  Company's
                           Restated  Certificate of  Incorporation as filed with
                           the  Department  of State of the State of New York on
                           April 3,  1989.  (Exhibit  3.01(b)  to the  Company's
                           Annual Report on Form 10-K for the year ended January
                           1, 1989, File No. 1-8881)

         *3.01(c)          Certificate  of Amendment  to the  Company's
                           Restated  Certificate of  Incorporation as filed with
                           the  Department  of State of the State of New York on
                           May  31,  1989.   (Exhibit   4.01  to  the  Company's
                           Quarterly  Report on Form 10-Q for the quarter  ended
                           April 23, 1989, File No. 1-8881)

         *3.01(d)          Certificate  of Amendment  to the  Company's
                           Restated  Certificate of  Incorporation as filed with
                           the  Department  of State of the State of New York on
                           June  1,  1990.   (Exhibit   4.01  to  the  Company's
                           Quarterly  Report on Form 10-Q for the quarter  ended
                           April 22, 1990, File No. 1-8881)

          * 3.02           By-Laws  of the  Company,  as  amended.  (Exhibit 3.1
                           to the  Company's Registration Statement on Form S-4,
                           File No. 333-90817)

         *4.01             Indenture  dated as of September,  28, 1999 among the
                           Company,  the Restricted  Subsidiaries of the Company
                           named therein, as guarantors, and Firstar Bank, N.A.,
                           including the form of 11% Senior Notes of the Company
                           to be issued upon  consummation of the Exchange Offer
                           and the form of Senior  Guarantees of the Guarantors.
                           (Exhibit 4.1 to the Company's  Current Report on Form
                           8-K dated (date of earliest event reported) September
                           23, 1999, File No. 1-8881)

<PAGE>


         4.02            Credit Agreement dated as of September 23, 1999 among
                         the Company, European American Bank, as agent,  and the
                         Lenders party thereto (Exhibit 4.2 to the
                         Company's  Current  Report  on Form  8-K  dated  (date
                         of earliest  event reported) September 23, 1999, File
                         No. 1-8881)

         *10.01            Commack, New York Corporate  Headquarters  Sublease.
                          (Exhibit 10.04 to the Company's Registration Statement
                           on Form S-1, File No. 2-96807)

     +   *10.02            The Company's  Performance  Incentive  Plan. (Exhibit
                          A to the Company's  Proxy  Statement  dated April 29,
                           1997, File No. 1-8881)

     +  *10.03             Consulting  Agreement (including option) dated
                           June  3,  1985   between   the  Company  and  Bernard
                           Zimmerman  &  Company,  Inc.  (Exhibit  10.04  to the
                           Company's  Annual  Report  on Form  10-K for the year
                           ended January 1, 1989, File No. 1-8881)

     + *10.04            Form of  Indemnification  Agreement between the Company
                          and each of its directors and officers.  (Exhibit
                         10.04 to the Company's  Annual Report on Form 10-K
                         for the year ended December 31, 1989, File No. 1-8881)

     *10.05              Registration  Rights  Agreement dated as of September
                         28, 1999 among the Company, the Guarantors named
                         therein and Bear, Stearns & Co. Inc. (Exhibit 10.1
                         to the  Company's  Current  Report on Form 8-K  dated
                         (date of  earliest  event reported) September 23, 1999,
                          File No. 1-8881)
<PAGE>

         *10.06            Tax Payment  Agreement dated as of September 28, 1999
                           among  the  Company,  Mario  Sbarro,  Joseph  Sbarro,
                           Joseph  Sbarro  (1994)  Family  Limited  Partnership,
                           Anthony   Sbarro,   and  Mario  Sbarro  and  Franklin
                           Montgomery,  not  individually  but as Trustees under
                           that certain Trust Agreement dated April 28, 1984 for
                           the  benefit  of Carmela  Sbarro and her  descendants
                           (Exhibit 10.6 to the Company's Registration Statement
                           on Form S-4, File No. 333-90817

         *12.01            Statement of computation of earnings to fixed charges
                          (Exhibit 12.1 to amendment No. 2 to the Company's
                         Registration Statement on Form S-4, File No. 333-90817)


         21.01             List of subsidiaries.

27.01    Financial Data Schedule

-----------------------------
 * Incorporated by reference to the document indicated.
 + Management contract or compensatory plan.


<PAGE>




                            UNDERTAKING

         We  hereby   undertake  to  furnish  to  the  Securities  and  Exchange
Commission,  upon request,  all constituent  instruments  defining the rights of
holders of long-term debt of our us and our consolidated  subsidiaries not filed
with this Report.  Those instruments have not been filed since none are, nor are
being,  registered  under Section 12 of the Securities  Exchange Act of 1934 and
the total amount of securities  authorized  under any of those  instruments does
not exceed 10% of the total assets of us and our  subsidiaries on a consolidated
basis.




<PAGE>


                          SIGNATURES

                  Pursuant  to the  requirements  of  Section 13 or 15(d) of the
Securities  Exchange Act of 1934,  the registrant has duly caused this report to
be signed on its behalf by the  undersigned,  thereunto duly authorized on March
30, 2000.

                               SBARRO, INC.


                       By:      /s/ MARIO SBARRO
                                Mario Sbarro, Chairman of the Board

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

         Signature                  Title                           Date


 /s/ MARIO SBARRO                   Chairman of the Board      March 30, 2000
Mario Sbarro                        (Principal Executive Officer)
                                     and Director


 /s/ ROBERT G. ROONEY               Senior Vice President and  March 30, 2000
Robert G. Rooney                    Chief Financial Officer
                                    (Principal Financial Officer)


/s/ JOSEPH SBARRO                   Director                March 30, 2000
Joseph Sbarro



/s/ ANTHONY SBARRO                  Director                March 30, 2000
Anthony Sbarro


<PAGE>




         Signature                 Title                           Date



 /s/ STEVEN B. GRAHAM               Vice President and          March 30, 2000
Steven B. Graham                     Controller (Principal
                                      Accounting Officer)


/s/ HAROLD KESTENBAUM                      Director          March 30, 2000
Harold Kestenbaum



/s/  RICHARD A. MANDELL                    Director          March 30, 2000
Richard A. Mandell



/s/ CARMELA SBARRO                       Director          March 30, 2000
Carmela Sbarro



/s/ TERRY VINCE                          Director
Terry Vince


/s/ BERNARD ZIMMERMAN                   Director          March 30, 2000
Bernard Zimmerman

<PAGE>

                REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




     To Sbarro, Inc.:


     We have audited the  accompanying  consolidated  balance  sheets of Sbarro,
     Inc. (a New York  corporation)  and  subsidiaries as of January 2, 2000 and
     January  3,  1999,  and the  related  consolidated  statements  of  income,
     shareholders'  equity and cash flows for each of the three  fiscal years in
     the period  ended  January  2, 2000.  These  financial  statements  are the
     responsibility  of  the  Company's  management.  Our  responsibility  is to
     express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
     accepted in the 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 includes
     examining, on a test basis, evidence supporting the amounts and disclosures
     in  the  financial  statements.   An  audit  also  includes  assessing  the
     accounting principles used and significant estimates made by management, as
     well as evaluating the overall financial statement presentation. We believe
     that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
     in all  material  respects,  the  financial  position of Sbarro,  Inc.  and
     subsidiaries  as of January 2, 2000 and January 3, 1999, and the results of
     their operations and their cash flows for each of the three fiscal years in
     the period ended January 2, 2000, in conformity with accounting  principles
     generally accepted in the United States.




                                                        /s/ Arthur Andersen LLP



     New York, New York
     March 13, 2000



                                       F-1





<PAGE>


                           SBARRO, INC. AND SUBSIDIARIES

                            CONSOLIDATED BALANCE SHEETS

                                      ASSETS

<TABLE>
<CAPTION>
                                                              January 2, 2000           January 3, 1999
                                                               ---------------           ---------------
                                                                   (In thousands except share date)

Current assets:

<S>                                                                <C>                             <C>
     Cash and cash equivalents                                     $33,514                         $154,909
     Restricted cash for untendered
        shares (Note 2)                                                298                                -
     Receivables, net of allowance for
       doubtful accounts of $419 in 1999
       Franchise                                                     1,429                            1,342
       Other                                                         2,938                           2,185
                                                              ---------------                  ------------
                                                                     4,367                            3,527

     Inventories                                                     3,686                            3,122

     Prepaid expenses                                                1,905                           1,291
                                                              ---------------                  ------------

       Total current assets                                         43,770                          162,849

Property and equipment, net (Note 4)                               137,232                          138,126

Other assets:

     Excess of purchase price over the cost
       of net assets acquired, net of
       accumulated amortization of
       $2,000 (Note 2)                                               220,681                             -
     Deferred financing costs, net of accumulated
       amortization of $277 (Note 7)                                   9,553                             -
     Other assets, net                                                 6,597                         6,630
                                                                -------------                -------------

                                                                    $417,833                      $307,605
                                                                  ===========                   ===========
</TABLE>


                                                                  F-2


<PAGE>


                                      SBARRO, INC. AND SUBSIDIARIES

                                 CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                  LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                               January 2, 2000               January 3, 1999
                                                               ---------------               ---------------
                                                                      (In thousands except share data)
Current liabilities:
<S>                                                              <C>                              <C>
     Accounts payable                                            $   9,673                        $  11,559
     Amounts due for untendered shares
       (Note 2)                                                        298                               -
     Accrued expenses (Note 5)                                      35,589                           25,764
     Income taxes payable (Note 6)                                     754                            4,146
                                                                 ----------                     -----------
       Total current liabilities                                    46,314                           41,469


Deferred income taxes  (Note 6)                                      9,929                            9,219

Long-term debt, net of original
  issue discount  (Note 7)                                         251,310                               -

Commitments and contingencies (Note 8)

Shareholders' equity (Notes 2 and 10):
     Preferred stock, $1 par value;
       authorized 1,000,000 shares; none issued                             -                             -
     Common stock, $.01 par value; authorized
       40,000,000 shares; issued and outstanding
       7,064,328 shares at January 2, 2000 and
       20,531,643 shares at January 3, 1999                              71                             205
     Additional paid-in capital                                          10                          34,587
     Retained earnings                                              110,199                         222,125
                                                                  ----------                  -------------
                                                                    110,280                         256,917
                                                                 -----------                  -------------

                                                                   $417,833                        $307,605
                                                                ============                   ============

</TABLE>

                               See notes to consolidated financial statements


                                                                  F-3

<PAGE>





                                      SBARRO, INC. AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
 <S>                                                     <C>                      <C>                   <C>
                                                                            For the Fiscal Years Ended
                                                       January 2,             January 3,          December 28,
                                                           2000                     1999                  1997
                                                           ----                     ----                  ----
                                                        (52 weeks)                (53 weeks)            (52 weeks)
                                                                                 (In thousands)
Revenues:

    Restaurant sales                                    $366,630                 $361,534              $337,723
    Franchise related income                               9,006                    8,578                 7,360
    Interest income                                       3,828                     5,120                 4,352
                                                     -----------               ----------            ----------
      Total revenues                                    379,464                   375,232               349,435
                                                       ---------                 --------              --------

Costs and expenses:
    Cost of food and paper products                      73,986                    76,572                69,469
    Restaurant operating expenses:
      Payroll and other employee benefits                97,174                    93,367                84,910
      Occupancy and other expenses                      106,852                   101,013                93,528
    Depreciation and amortization                        25,363                    22,429                23,922
    General and administrative                           23,456                    19,708                17,762
    Provision for unit closings  (Note 11)                1,013                     2,515                 3,300
    Terminated transaction costs (Note 2)                    -                        986                     -
    Litigation settlement and  related
      costs  (Note 8)                                        -                      3,544                     -
    Loss on land to be sold (Note 4)                         -                      1,075                     -
    Interest expense  (Note 7)                            7,948                         -                     -
    Other income                                         (5,173)                   (2,680)               (1,653)
                                                       ---------                ---------             ---------
      Total costs and expenses                          330,619                   318,529               291,238
                                                        --------                 --------              --------

Income before income taxes and
    cumulative effect of change in method
    of accounting for start-up costs                     48,845                    56,703                58,197
Income taxes  (Note 6)                                   19,322                    21,547                22,115
                                                        --------                   ------                ------
Income before cumulative effect
    of accounting change                                 29,523                    35,156                36,082

Cumulative effect of change in method
    of accounting for start-up costs, net of
    income taxes of $504 (Note 1)                               -                    (822)                    -
                                                       ----------         ----------------         ------------

Net income                                                $29,523                 $34,334               $36,082
                                                          =======                 =======               =======
</TABLE>

                             See notes to consolidated financial statements

                                                                  F-4


<PAGE>





                                     SBARRO, INC. AND SUBSIDIARIES

                            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>


<CAPTION>
                                Number of                        Additional
                                   shares of                         paid-in         Retained
                                common stock    Amount               capital          earnings              Total
                        (In thousands, except share data)
<S>                                      <C>               <C>             <C>                <C>             <C>
Balance at
    December 29, 1996                20,392,909          $204            $31,219         $173,777           $205,200

Exercise of stock options                53,745            0               1,225              0               1,225

Net income                                                                                 36,082             36,082

Dividends declared                                                                        (22,068)           (22,068)
                                ---------------      --------         -----------        ---------          ---------

Balance at
    December 28, 1997            20,446,654               204             32,444          187,791            220,439

Exercise of stock options            84,989                1              2,143                                2,144

Net income                                                                                 34,334             34,334
                                -----------          ---------           -------         ----------           -------
Balance at
    January 3, 1999              20,531,643               205             34,587          222,125            256,917

Exercise of stock options            17,337                                  426                                 426

Net income                                                                                 29,523             29,523

Shares repurchased and
    retired in going private
    transaction (Note 2)        (13,484,652)             (134)           (35,003)                            (35,137)

Adjustment to original
    cost basis of continuing
    shareholders (Note 2)                                                               (141,449)         (141,449)
                                ---------------      --------          ---------       -----------       -----------

Balance at
    January 2, 2000                  7,064,328           $71                 $10         $110,199           $110,280
                                     =========           ====                ===         ========           ========

</TABLE>


                               See notes to consolidated financial statements


                                                                  F-5


<PAGE>


                                          SBARRO, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                        For the Fiscal Years Ended
                                                          January 2,          January 3,         December 28,
                                                              2000                   1999               1997
                                                              ----                   ----               ----
                                                         (52 weeks)             (53 weeks)           (52 weeks)
                                                                             (In thousands)
Operating activities:

<S>                                                         <C>                    <C>               <C>
Net income                                                  $29,523                $34,334           $36,082
Adjustments to reconcile net
   income to net cash provided
    by operating activities:
     Cumulative effect of change in method
      of accounting for start-up costs                           -                     822                   -
      Depreciation and amortization                         25,740                  22,429             23,922
     Increase (decrease) in deferred
       income taxes                                            710                  (2,078)            (1,844)
     Provision for unit closings                              1,013                  2,515              3,300
     Loss on land to be sold                                     -                   1,075                  -

Changes in operating assets and liabilities:
    Increase in receivables                                    (839)                (1,152)             (510)
    Increase in inventories                                    (564)                  (160)             (121)
    (Increase) decrease in prepaid
     expenses                                                  (615)                   477               (359)
    Increase in other assets                                 (1,814)                  (817)            (2,468)
    Increase in accounts payable
     and accrued expenses                                    10,243                  1,827             3,534
    Decrease in income taxes
     payable                                                 (1,392)                  (631)             (510)
                                                          -----------               --------         ----------

Net cash provided by
   operating activities                                      62,005                 58,641             61,026
                                                           --------               --------            ----------

</TABLE>

                                                              (continued)


                                                                  F-6


<PAGE>



                                     SBARRO, INC. AND SUBSIDIARIES

                              CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>

                                      For the Fiscal Years Ended
                                                       January 2,              January 3,         December 28,
                                                          2000                   1999               1997
                                                          ----                   ----               ----
<S>                                                          <C>                    <C>                   <C>
                                                        (52 weeks)            (53 weeks)            (52 weeks)
                                                                                (In thousands)
Investing activities:

Proceeds from maturities of marketable
   securities                                                    -                    7,500                 2,500
Purchases of property and equipment                          (25,099)               (27,717)              (28,556)
Proceeds from disposition of property
   and equipment                                                 55                      52                    34
                                                         ----------             ----------              --------

Net cash used in investing activities                        (25,044)               (20,165)              (26,022)
                                                           - -------                 ------              ------

Financing activities:

Proceeds from exercise of stock
   options                                                      426                  2,144                 1,225
Proceeds from long-term debt                                251,211                      -                     -
Cost of merger and related financing                       (411,000)                     -                     -
Accrued and previously paid merger costs                      1,007                      -                     -

Cash dividends paid                                              -                   (5,521)              (21,237)
                                                     --------------                  ------             ---------

Net cash used in
   financing activities                                     (158,356)                (3,377)              (20,012)
                                                        -------------              --------              --------

(Decrease) increase in cash and cash
   equivalents                                             (121,395)                 35,099                14,992
Cash and cash equivalents at
   beginning of year                                        154,909                 119,810               104,818
                                                         ----------              ---------            ----------

Cash and cash equivalents at end
   of year                                                  $33,514               $154,909              $119,810
                                                            =======               ========              ========
</TABLE>

                            See notes to consolidated financial statements

                                                                  F-7

<PAGE>


                                   SBARRO, INC. AND SUBSIDIARIES

                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Summary of significant accounting policies:

         Basis of financial statement presentation:

         The consolidated  financial  statements include the accounts of Sbarro,
         Inc.,  its  wholly-owned  subsidiaries  and the  accounts  of its joint
         ventures (together,  "we", "our", "us", or "Sbarro").  All intercompany
         accounts and transactions have been eliminated.

The  preparation  of our  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires us to make estimates and  assumptions
that  may  affect  the  amounts   reported  in  the  financial   statements  and
accompanying notes. Our actual results could differ from those estimates.

         Cash equivalents:

         All highly liquid debt  instruments  with a maturity of three months or
         less at the time of purchase are considered to be cash equivalents.

         Marketable securities:

         We classified  our  investments  in  marketable  securities as "held to
         maturity".  These  investments  were stated at  amortized  cost,  which
         approximated market, and were comprised primarily of direct obligations
         of the U.S.  Government and its agencies.  All previous  investments in
         marketable securities matured during fiscal 1998.

         Inventories:

         Inventories,   consisting   primarily  of  food,  beverages  and  paper
         supplies,  are stated at cost,  which is  determined  by the  first-in,
         first-out method.

         Property and equipment and depreciation:

         Property and equipment are stated at cost. Depreciation is provided for
         by the  straight-line  method over the  estimated  useful  lives of the
         assets.  Amortization of leasehold  improvements is provided for by the
         straight-line  method over the estimated  useful lives of the assets or
         the lease term, whichever is shorter. One-half year of depreciation and
         amortization is recorded in the year in which the restaurant  commences
         operations.


                                       F-8



<PAGE>


                            SBARRO, INC. AND SUBSIDIARIES

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.       Summary of significant accounting policies (continued):

         Deferred charges:

         We  account  for  pre-opening  and  similar  costs in  accordance  with
         Statement  of  Position  ("SOP")  98-5  of  the  Accounting   Standards
         Executive  Committee  of the American  Institute  of  Certified  Public
         Accountants,  which required companies to write off all such costs, net
         of tax benefit,  as a  "cumulative  effect of  accounting  change" upon
         adoption  and to expense  all of those costs as incurred in the future.
         In accordance with its early application provisions, we implemented the
         SOP as of the  beginning  of our 1998 fiscal  year which  resulted in a
         charge of $1.2 million before tax, or $0.8 million after tax.

         Comprehensive income:

         In the  first  quarter  of 1998,  we  adopted  Statement  of  Financial
         Accounting  Standards ("SFAS") 130, "Reporting  Comprehensive  Income",
         which  establishes new rules for the reporting of comprehensive  income
         and its components. The adoption of this statement had no impact on our
         net income or shareholders'  equity. For the 1999, 1998 and 1997 fiscal
         years,  our  operations  did not  give  rise  to  items  includible  in
         comprehensive  income  which were not  already  included in net income.
         Therefore,  our comprehensive  income is the same as our net income for
         all periods presented.

         Franchise related income:

         Initial franchise fees are recorded as income as restaurants are opened
         by the  franchisee and we have  performed  substantially  all services.
         Development fees are recognized over the number of restaurant  openings
         covered under each development  agreement.  Royalty and other fees from
         franchisees  are accrued as earned.  Revenues and  expenses  related to
         construction of franchised  restaurants are recognized when contractual
         obligations are completed and the restaurants are opened.

         Stock based compensation plans:

         In accordance with Accounting  Principles Board Opinion ("APB") No. 25,
         "Accounting    for   Stock   Issued   to   Employees,"    and   related
         interpretations,  compensation  cost for stock options were measured as
         the excess,  if any, of the quoted market price of the Company's  stock
         at the date of grant over the amount an  employee  paid to acquire  the
         stock (Note 10). All option plans were  terminated  upon the completion
         of the going private transaction (Note 2).



                                       F-9
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.       Summary of significant accounting policies (continued):

         Income taxes:

         We file a consolidated federal income tax return. Deferred income taxes
         result primarily from differences  between  financial and tax reporting
         of depreciation and amortization.

         Accounting period:

          Our fiscal year ends on the Sunday  nearest to December 31. Our 1998
          fiscal year ended January 3, 1999 and contained 53 weeks.  All other
          reported  fiscal years contained 52 weeks.

         Per share data:

     The provisions of SFAS No. 128,  "Earnings Per Share" became  effective for
Sbarro's  quarter and year ended  December 28,  1997.  SFAS No. 128 requires the
presentation  of both basic and  diluted  earnings  per share on the face of the
income  statement.  After the  going  private  transaction  (Note 2), we are not
subject to the provisions of SFAS No. 128.

         Long-lived Assets:

         Impairment  losses are recorded on long-lived assets on a restaurant by
         restaurant  basis  whenever  impairment  factors are  determined  to be
         present, the undiscounted cash flows estimated to be generated by those
         assets are less than the  carrying  value of such  assets and events or
         changes in  circumstances  indicate that the carrying amount may not be
         recoverable.

         Derivative instruments and hedging activities:

     SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the  Effective  Date of SFAS  Statement  No. 133 - an Amendment of
SFAS  Statement  No.  133," issued in June 1999,  SFAS No. 133 is effective  for
fiscal years beginning after June 15, 2000. Presently,  we do not use derivative
instruments and therefore we do not expect SFAS No. 133 to be applicable when it
is adopted in fiscal 2000.

         Reclassifications:

         Certain  items in the fiscal 1998 and 1997  financial  statements  have
         been reclassified to conform to the fiscal 1999 presentation.
                                      F-10

<PAGE>

                             SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.       Summary of significant accounting policies (continued):

         Supplemental disclosures of cash flow information:

                                         For The Fiscal Years Ended
                                January 2,     January 3,     December 28,
                                  2000             1999         1997
                                               (In thousands)
          Cash paid for:
            Income taxes        $20,054         $24,235         $24,297
                               ========        =======         =======

            Interest            $30             $    -          $    -
                                 ===        ==========           =======

2.       Going private transaction:

         On September 28, 1999,  members of the Sbarro family (who prior thereto
         owned  approximately  34.4% of the  Company's  common stock) became the
         holders of 100% of our issued and  outstanding  common  stock  under an
         Amended and Restated  Agreement  and Plan of Merger dated as of January
         19, 1999.  Under the terms of the merger  agreement (i) a company owned
         by the members of the Sbarro family  merged with and into Sbarro,  (ii)
         our  shareholders  (other than the members of the Sbarro family and the
         company owned by them)  received the right to receive  $28.85 per share
         in cash in exchange for the  approximately  13.5 million  shares of our
         common stock not owned by the members of the Sbarro  family,  and (iii)
         all  outstanding  stock  options,  including  stock options held by the
         members of the Sbarro  family,  were  terminated in exchange for a cash
         payment equal to the number of shares subject to the options multiplied
         by the excess,  if any, of $28.85 over the applicable  option  exercise
         price.  The cost of the merger,  including  amounts to pay related fees
         and expenses of the transaction,  was approximately  $411.0 million and
         was funded using  substantially all of our cash on hand and the sale of
         $255 million of 11% Senior Notes (Note 7).

         As of January 2, 2000, there was $0.3 million remaining on deposit with
         a third party paying agent for untendered shares to be redeemed as part
         of the merger  consideration.  That amount is shown as restricted  cash
         and  amounts  due for  untendered  shares in the  consolidated  balance
         sheet.  Should  any  shares  remain  untendered  after  one  year  from
         September 28, 1999, the related funds will be returned to us to be held
         until claimed or escheated to the appropriate jurisdictions.



                                      F-11

<PAGE>

                         SBARRO, INC. AND SUBSIDIARIES

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.       Going private transaction (continued):

         The acquisition of all the outstanding shares of common stock not owned
         by the  Sbarro  family  and all  outstanding  stock  options  have been
         accounted for under the purchase method of accounting. As a result, the
         remaining  shares  of  common  stock  owned by the  Sbarro  family  are
         presented  in  shareholder's  equity  at  their  original  basis in the
         accompanying  consolidated  balance  sheet.  The final  purchase  price
         allocations have not been completed and are subject to adjustment based
         on fair market  appraisals and other fair market value  estimates as of
         the date of the merger.  The excess of purchase  price over the cost of
         assets  acquired is being  amortized  on a straight  line basis over an
         estimated weighted average useful life of 30 years.

         Summarized  below are our unaudited pro forma results of operations for
         the year ended January 2, 2000 and January 3, 1999 as if the merger had
         taken place as of the  beginning  of each year.  Adjustments  have been
         made for the  amortization of the excess of the purchase price over the
         cost basis of net assets acquired, interest expense, including interest
         on the $16 million mortgage issued subsequent to year end to one of the
         guaranteeing  subsidiaries  (Note 15) and related changes in income tax
         expense.

                                                 For the Fiscal Years Ended

                                           January 2, 2000      January 3, 1999
                                           ---------------      ---------------
                                                         (In thousands)
         Pro Forma:
                  Revenues                     $375,636           $370,112
                                               =========          ==========
                  Income before cumulative
                    effect of accounting
                    change                    $   6,662          $    5,143
                                             ===========        ============
                  Net income                  $   6,662          $    4,348
                                              ===========        =============

         These pro forma results of operations are not necessarily indicative of
         the actual  results of  operations  that  would have  occurred  had the
         merger  taken place at the  beginning  of the periods  presented  or of
         results which may occur in the future.

         In connection  with the  termination  of  negotiations  for the initial
         proposal of our  acquisition of all shares of common stock not owned by
         such members of the Sbarro  family we recorded a charge of $1.0 million
         before  tax,  or  $0.6  million  after  tax,  in  our  1998   financial
         statements.



                                      F-12
<PAGE>


                              SBARRO, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.       Description of business:

         We and our franchisees  develop and operate family  oriented  cafeteria
         style Italian  restaurants  principally  under the "Sbarro" and "Sbarro
         The Italian Eatery" names.  The restaurants are located  throughout the
         world, principally in shopping malls and other high traffic locations.

         The following sets forth the number of units in operation as of:

                              January 2,    January 3,       December 28,
                                 2000          1999              1997
                                 ----          ----              ----
            Sbarro-owned          644           630               623
            Franchised            286           268               239
                                  ---           ---               ---
                                  930           898               862
                                  ===           ===               ===

4.       Property and equipment, net:
                                               January 2,          January 3,
                                                  2000               1999
                                                  ----               ----
                                                      (In thousands)

                  Land and improvements (a)            $ 3,364       $ 3,364
                  Leasehold improvements               203,296       187,828
                  Furniture, fixtures and equipment    111,235       107,891
                  Construction-in-progress               3,031         2,662
                                                          ----         -----
                                                       320,926       301,745

                  Less accumulated depreciation        183,694       163,619
                  and amortization
                                                      $137,232      $138,126
                                                    ==========      ========

(a)               During 1998, we recorded a charge of $1.1 million  before tax,
                  $0.7  million  after  tax,  for  the  difference  between  the
                  carrying  cost and proposed  selling price of a parcel of land
                  which is being offered for sale.

                                               F-13

<PAGE>


                                  SBARRO, INC. AND SUBSIDIARIES

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.       Accrued expenses:

                                              January 2,    January 3,
                                                 2000          1999
                                                 ----          ----
                                           (In thousands)

       Interest                                  $7,487         $  -
       Compensation                               6,169        4,109
       Payroll and sales taxes                    5,219        3,193
       Rent                                       7,514        6,786
       Provision for unit closings
         (Note 11)                                  863        2,867
       Other                                      8,337        8,809
                                                  -----       -----
                                                $35,589      $25,764
                                                =======      =======

6.       Income taxes:

                                              For the Fiscal Years Ended

                                          January 2, January 3,    December 28,
                                              2000     1999             1997
                                              ----     ----             ----
                                                   (In thousands)

                  Federal:
                    Current              $14,758      $19,421         $19,868
                    Deferred                 557       (2,209)         (1,557)
                                             ---       ------          ------
                                          15,315       17,212          18,311
                                          ------       ------          ------
                  State and local:
                    Current                3,854        4,708           4,091
                    Deferred                 153         (373)           (287)
                                          ------         ----            ----
                                           4,007        4,335           3,804
                                           -----         -----          -----
                                         $19,322      $21,547         $22,115
                                       =========      =======         =======



                                             F-14


<PAGE>





                           SBARRO, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.       Income taxes (continued):

         Deferred income taxes are comprised of the following:


                                                 January 2,     January 3,
                                                  2000             1999
                                                  ----             ----
                                                      (In thousands)
            Depreciation and amortization      $15,397          $15,805
            Deferred charges                        11                -
            Other                                  495              101
                                                  ---            ------
            Gross deferred tax liabilities      15,903           15,906
                                                ------           ------
            Accrued expenses                    (2,070)          (4,776)
            Deferred income                     (3,496)          (1,483)
            Other                                 (408)            (428)
                                                  ----             ----
            Gross deferred tax assets           (5,974)          (6,687)
                                                -------          ------
                                                $9,929            $9,219
                                               =======           ======


         Actual tax expense  differs from  "expected"  tax expense  (computed by
         applying the Federal  corporate  rate of 35% for the fiscal years ended
         January 2, 2000, January 3, 1999, and December 28, 1997) as follows:

                                               For the Fiscal Years Ended
                                              January 2, January 3, December 28,
                                                   2000       1999        1997
                                                   ----       ----        ----
                                                       (In thousands)

            Computed "expected" tax
              expense                           $17,096     $19,382     $20,369
            Increase (reduction) in income
              taxes resulting from:
              State and local income taxes,
              net of Federal income tax
              benefit                             2,605       2,725       2,429
              Tax exempt interest income
                and dividends received
                deduction                        (1,002)     (1,198)       (978)
              Amortization of excess
                purchase price over the cost
                of net assets acquired              700             -         -
              Other, net                            (77)       638          295
                                                    ----       ---         ---
                                                 $19,322   $21,547      $22,115
                                                ========   =======      =======

                                          F-15
<PAGE>

                             SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.       Income taxes (continued):

         Deferred  income taxes are provided for temporary  differences  between
         financial and tax reporting.  These  differences  and the amount of the
         related deferred tax benefit are as follows:


                                        For the Fiscal Years Ended

                                     January 2,    January 3,  December 28,
                                       2000          1999         1997
                                       ----          ----         ----
                          (In thousands)


             Depreciation and
              amortization           $ (408)      $(1,891)      $(1,824)
             Accrued expenses         2,706          (261)         (624)
             Other                   (1,588)         (430)          604
                                        ----           -----       ----


                                        $710       $(2,582)      $(1,844)
                                        ====       =======       =======


         In March,  2000,  we filed  elections to change our tax status from a C
         Corporation to Subchapter "S" corporation  effective  fiscal 2000. As a
         result,  in lieu of federal and certain state  corporate  income taxes,
         the shareholders will be taxed on their proportionate shares of income,
         or receive the benefit of any losses  individually.  In the future, our
         income tax provision will be  significantly  reduced and  substantially
         all  taxes on our  income  will be paid by  shareholders.  We will make
         distributions  to  shareholders  for taxes owed by them on our earnings
         pursuant to a tax agreement with  shareholders.  During fiscal 2000, we
         may reduce or eliminate a portion of our  deferred  tax  liability as a
         consequence of this change in status.

7.       Long-term debt:

         (a) The cost of the merger,  including  fees and  expenses,  was funded
         through  the use of  substantially  all of our  cash  on  hand  and the
         placement of $255 million of 11.0% Senior Notes due  September 15, 2009
         sold at a price of 98.514% of par to yield 11.25% per annum. The Senior
         Notes were issued  under an  Indenture  dated  September  28, 1999 (the
         "Indenture").  We also entered into a five year, $30 million  unsecured
         senior  revolving bank credit  facility  under a bank credit  agreement
         dated as of September 23, 1999.

         Interest on the Senior Notes is payable  semi-annually  on March 15 and
         September 15 of each year  commencing  on March 15,  2000.  Our payment
         obligations   under   the   Senior   Notes  are   jointly,   severally,
         unconditionally  and irrevocably  guaranteed by all of Sbarro's current
         Restricted  Subsidiaries  (as  defined in the  Indenture)  and is to be
         similarly guaranteed by our future Restricted Subsidiaries.  The Senior
         Notes and the subsidiary guarantees are senior unsecured obligations of
         Sbarro and the guaranteeing

                                      F-16


<PAGE>

                            SBARRO, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  7.     Long-term debt (continued):

         subsidiaries,  respectively,  ranking pari passu in right of payment to
         all of our  and  their  respective  present  and  future  senior  debt,
         including  amounts  outstanding  under the bank credit  agreement.  The
         Indenture  permits  redemption  of the  Senior  Notes at our  option at
         varying  redemption  prices and requires us to offer to purchase Senior
         Notes in the  event of a  Change  of  Control  and in  connection  with
         certain Asset Sales (each as defined).  The Indenture  contains various
         convenants on our part and the guarantor subsidiaries,  including,  but
         not  limited  to,  restrictions  on our  payment  of  dividends,  stock
         repurchases,  certain  investments and other restricted  payments,  the
         incurrence  of  indebtedness   and  liens  on  our  assets,   affiliate
         transactions, asset sales and mergers.

         In  connection  with the issuance of the Senior  Notes,  Sbarro and the
         guaranteeing  subsidiaries  have  agreed  to offer the  holders  of the
         Senior  Notes the right to exchange  those  Senior Notes for 11% Senior
         Notes due 2009 with the same  terms as the  existing  Senior  Notes but
         which  are to be  registered  under  the  Securities  Act of  1933,  as
         amended.  If we do not timely comply with our obligations to effectuate
         such registration,  we will be required to pay liquidated damages until
         cured to each holder of the Senior  Notes  beginning at $.05 per $1,000
         of notes per week for the first 90 days increasing every ninety days up
         to a maximum of $.50 per $1,000 of notes per week. The initial deadline
         under the registration rights agreement is March 27, 2000.

         The  discount at which the Senior  Notes were  issued,  an aggregate of
         approximately $3.8 million,  is being accreted to the Senior Notes over
         the original ten year life of the Senior Notes.

(b)      The  bank  credit  agreement  provides  us  with  an  unsecured  senior
         revolving  credit  facility  that enables us to borrow,  on a revolving
         basis from time to time during its  five-year  term, up to $30 million,
         including a $10 million  sublimit  for  standby  letters of credit.  No
         amounts  were  outstanding  under the credit  facility as of January 2,
         2000.

         Each of our current guaranteeing subsidiaries (the same entities as the
         Restricted  Subsidiaries  under the Indenture)  have agreed to, and the
         future   guaranteeing   subsidiaries   are  to,   unconditionally   and
         irrevocably  guarantee our obligations  under the bank credit agreement
         on a joint and  several  basis.  All  borrowings  under the bank credit
         agreement are repayable on September 28, 2004. In addition,  we will be
         required to repay our loans and reduce the lenders'  commitments  under
         the bank credit agreement using the proceeds of certain asset sales and
         issuances of certain equity interests of, and sales of equity interests
         in, the guaranteeing subsidiaries.

         At our option,  the interest  rates  applicable to loans under the bank
         credit  agreement will be at either (a) the bank's prime rate (8.75% at
         February 28,  2000) plus a margin  ranging from zero to 0.75% (there is
         no margin at February 28, 2000) or (b) reserve adjusted LIBOR (5.88% at
         February 28, 2000) plus a margin  ranging from 1.5% to 2.5% (the margin
         at February 28, 2000 is 1.75%). In each case, the

                                      F-17
<PAGE>

                           SBARRO, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  7.     Long-term debt (continued):

         margin  depends  upon the ratio of our senior debt (as  defined) to its
         earnings  before  interest,  taxes and  depreciation  and  amortization
         ("EBITDA").  We have agreed to pay certain fees in connection  with the
         bank credit agreement, including an unused commitment fee at a rate per
         year that will vary from 0.25% of the undrawn amount of the facility to
         0.45% of the undrawn  amount of the facility per year,  depending  upon
         the ratio of our senior debt to EBITDA.  The unused  commitment  fee is
         0.30% per year.

         The bank credit agreement contains various covenants on our part and
         on the part of the guaranteeing
         subsidiaries,  including,  but  not  limited  to,  restrictions  on the
         payment of dividends and making stock repurchases,  certain investments
         and  other  restricted   payments,   the  incurrence  of  indebtedness,
         guarantees,   other  contingent  obligations,   and  liens  on  assets,
         affiliate  transactions,  asset sales and mergers,  consolidations  and
         acquisitions   of  stock  or   assets   by  us  and  our   guaranteeing
         subsidiaries. The bank credit agreement also contains provisions which,
         under certain circumstances, prohibit redemptions or repurchases of the
         Senior Notes,  including  repurchases  that might otherwise be required
         pursuant to the terms of the Indenture,  and imposes certain conditions
         on our amending or  supplementing  the Indenture.  In addition,  we are
         required  to  maintain  a  minimum  ratio  of  consolidated  EBITDA  to
         consolidated  interest  expense  (in each  case  with the  guaranteeing
         subsidiaries) of at least 2.0 to 1.0 and a ratio of consolidated senior
         debt to  consolidated  EBITDA  (in  each  case  with  the  guaranteeing
         subsidiaries)  ranging from 4.5 to 1.0 in 1999 to 3.9 to 1.0  beginning
         December  29, 2002.  We are in  compliance  with the various  covenants
         contained in the agreement as of January 2, 2000.

         (c) The costs of issuing  the Senior  Notes and  establishing  the bank
         credit agreement,  an aggregate of approximately  $9.3 million and $0.6
         million, respectively, were capitalized as deferred financing costs and
         are being amortized over the ten and five year lives, respectively,  of
         the Senior Notes and the credit agreement,  respectively. The accretion
         and  amortization  will  result in an  increase  in  reported  interest
         expense above amounts payable in cash.

8.       Commitments and contingencies:

         Commitments:

         We conduct  all of our  operations  in leased  facilities.  Most of our
         restaurant  leases  provide  for the  payment  of base  rents plus real
         estate  taxes,  utilities,  insurance,  common area charges and certain
         other expenses,  as well as contingent rents generally  ranging from 8%
         to 10% of net restaurant sales in excess of stipulated amounts.


                                             F-18
<PAGE>

                                 SBARRO, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.       Commitments and contingencies:

         Commitments (continued):

         Rental expense under operating  leases,  including common area charges,
         other expenses and additional amounts based on sales, are as follows:
                                              For the Fiscal Years Ended
                               January 2,      January 3,      December 28,
                                    2000           1999              1997
                                    ----           ----              ----
                                              (In thousands)

         Minimum rentals           $46,682        $43,387            $40,365
         Common area charges       13,763         13,314              12,541
         Contingent rentals         3,134           3,011              2,910
                               -----------      ---------          ---------
                                 $63,579          $59,712            $55,816
                                 ========         =======            =======

         Future minimum rental and other payments required under  non-cancelable
         operating  leases  for  Sbarro-operated  restaurants  that were open on
         January 2, 2000 and the  existing  leased  administrative  and  support
         function office (Note 9) are as follows (in thousands):

                  Fiscal Years Ending:
                  December 31, 2000                             $68,989
                  December 30, 2001                              67,505
                  December 29, 2002                              64,222
                  December 28, 2003                              60,316
                  January 2, 2005                                56,392
                  Later years                                   155,858

         We  are  the  principal  lessee  under  operating  leases  for  certain
         franchised   restaurants   which  are  subleased  to  the   franchisee.
         Franchisees  pay rent and related  expenses  directly to the  landlord.
         Future minimum  rental  payments  required  under these  non-cancelable
         operating  leases  for  franchised  restaurants  that  were  open as of
         January 2, 2000 are as follows (in thousands):

                           Fiscal Years Ending:
                           December 31, 2000                     $1,631
                           December 30, 2001                      1,567
                           December 29, 2002                      1,291
                           December 28, 2003                      1,165
                           January 3, 2005                        1,067
                           Later years                            3,250

                                              F-19
<PAGE>

                           SBARRO, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.       Commitments and contingencies:

         Commitments (continued):

         As of February 28, 2000,  future minimum rental payments required under
         non-cancelable  operating  leases for restaurants  which had not as yet
         opened as of January 2, 2000 are as follows (in thousands):

                  Fiscal Years Ending:
                           December 31, 2000                     $1,522
                           December 30, 2001                      2,180
                           December 29, 2002                      2,516
                           December 28, 2003                      2,656
                           January 3, 2005                        2,737
                           Later years                           25,825

         We are a party to  contracts  aggregating  $3.9 million with respect to
         the construction of restaurants. Payments of approximately $0.4 million
         have been made on those contracts as of January 2, 2000.

         We are the  guarantor  of $2.3 million of letters of credit and for our
         pro rata  interests of up to $8.9  million for loans,  a mortgage and a
         line of credit for certain of our joint ventures.

         Contingencies:

         In February 1999, the Umberto of New Hyde Park joint venture companies,
         in which we have an 80% interest,  began an action in the U.S. district
         Court for the Eastern District of New York against Umberto Corteo,  who
         owns the  remaining 20% interest in the joint  venture  companies,  and
         against three other restaurants owned by Mr. Corteo. We alleged,  among
         other things,  that Mr. Corteo engaged in unfair trade practices and in
         trademark infringement, thereby breaching the joint venture agreements.
         We are seeking an  accounting,  compensatory  and punitive  damages and
         injunctive relief. The answer filed by Mr. Corteo and his co-defendants
         denies our claims and further alleges that non-competition restrictions
         against Mr. Corteo in the joint venture  agreements are  unenforceable.
         Mr. Corteo and his co-defendants  have also  counterclaimed  against us
         alleging  misappropriation  of trademark  rights and failure to perform
         administrative  duties that amounted to a breach of the agreements.  We
         believe that our claims  against Mr.  Corteo will be proven and that we
         have substantial defenses to his counterclaims.

         On November 17, 1999,  certain former  managers of restaurant  units in
         the State of Washington  instituted a lawsuit  against Sbarro  alleging
         that  they  served  as  store  managers,  general  managers,  assistant
         managers or co-managers  in our  restaurants in the State of Washington
         at various times since  November 17, 1996 and that, in connection  with
         their employment,  we violated the overtime pay provisions of the State
         of  Washington's  Minimum Wage Act by treating them as overtime  exempt
         employees,   breached  alleged  employment   agreements  and  statutory
         provisions by failing to record and

                                  F-20
<PAGE>

                      SBARRO, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.       Commitments and contingencies:

         Contingencies (continued):

         pay for hours worked at the contract  rates  and/or  statutory  minimum
         wage rates and failed to provide  statutorily  required meal breaks and
         rest  periods.  The  plaintiffs  also  seek  to  represent  all  of our
         restaurant  managers  employed  for any  period  of  time  on or  after
         November  9,  1996 in the State of  Washington.  We  currently  own and
         operate 18 restaurants in the State of Washington.  The plaintiffs seek
         actual damages,  exemplary damages and costs of the lawsuit,  including
         reasonable attorney's fees, each in unspecified amounts, and injunctive
         relief. We believe that we have substantial  defenses to the claims and
         intend to vigorously defend this action.

         On December 20, 1999,  twelve  current and former  general  managers of
         Sbarro  restaurants  in  California  amended a  complaint  filed in the
         Superior Court of California for Orange County.  The amended  complaint
         alleges  that the  plaintiffs  were  improperly  classified  as  exempt
         employees  under the  California  wage and hour law. The plaintiffs are
         seeking  actual  damages,  punitive  damages and costs of the  lawsuit,
         including  reasonable  attorney  fees,  each  in  unspecified  amounts.
         Plaintiffs'  counsel  has  stated  that  they are in  contact  with the
         plaintiffs' counsel in the case discussed above and that he may attempt
         to file a class action based upon alleged  violations of the Fair Labor
         Standards  Act.  We believe  that we have  substantial  defenses to the
         claims and intend to vigorously defend this action.

         In December 1998, the Court approved, and we completed,  the settlement
         of an action that was pending in the United States  District  Court for
         the  Southern  District  of New York  whereby  the  plaintiffs,  former
         restaurant level management employees, alleged that we required general
         managers and  co-managers  to  reimburse us for cash and certain  other
         shortages  sustained by us and thereby lost their status as  managerial
         employees exempt from the overtime compensation  provisions of the Fair
         Labor  Standards Act. The settlement  resulted in a one-time  charge of
         $3.5 million before tax, or $2.2 million after tax, in fiscal 1998.

         From  time to time we are  also a party to  certain  claims  and  legal
         proceedings in the ordinary  course of business,  none of which, in our
         opinion, would have a material adverse effect on our financial position
         or results of operations.



                                  F-21

<PAGE>


                               SBARRO, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.       Transactions with related parties:

         We are the sole tenant of an  administrative  office  building which is
         leased from a partnership owned by certain of Sbarro's shareholders.

         For each of the 1999, 1998 and 1997 fiscal years,  the annual rent paid
         pursuant to the  sublease  was $0.3  million.  The annual rent  payable
         pursuant to the sublease is $0.3 million each year for the remainder of
         the lease term which expires in 2011. In addition,  we are obligated to
         pay real estate taxes, utilities,  insurance and certain other expenses
         for the  facility.  We believe that our rent is  comparable to the rent
         that would be charged by an unaffiliated third party.

         A member of our Board of  Directors  acts as a  consultant  to us for
           which he received  $0.5  million,  $0.1 million and $0.1
         million in the 1999, 1998 and 1997 fiscal years, respectively.

10.      Stock options:

         Our Board of Directors  adopted,  and our shareholders had approved,  a
         1991  Stock  Incentive  Plan (the  "1991  Plan"),  which  replaced  the
         Company's  1985 Incentive  Stock Option Plan,  and a 1993  Non-Employee
         Director  Stock  Option  Plan (the "1993  Plan").  As part of the going
         private  transaction,  all  outstanding  options and option  plans were
         terminated in exchange for a cash payment equal to the number of shares
         subject to the stock option multiplied by the excess, if any, of $28.85
         over the option's exercise price (Note 2).

         Under  the 1991  Plan,  we were  able to grant,  until  February  2001,
         incentive stock options and  non-qualified  stock options,  alone or in
         tandem with stock  appreciation  rights ("SARS"),  to our employees and
         consultants.  Options  and SARs were not able to be granted at exercise
         prices of less than 100% of the fair market  value of our common  stock
         on the date of grant. The Board of Directors and the Board's  Committee
         were  empowered to determine,  within the limits of the 1991 Plan,  the
         number of shares  subject to each option and SAR, the  exercise  price,
         and the time  period  (which may not exceed ten years) and terms  under
         which each may be exercised.

         The 1993 Plan  provided for the  automatic  grant to each  non-employee
         director  of an  option  to  purchase  3,750  shares  of  common  stock
         following each annual shareholders' meeting. Each option had a ten year
         term and was  exercisable  in full  commencing  one year after grant at
         100% of the fair market value of our common stock on the date of grant.
         In each of fiscal 1998,  1997 and 1996,  each of the five  non-employee
         directors  were  granted  options to purchase  3,750 shares at $ 24.06,
         $28.88 and $26.88 per share,  respectively.  In fiscal 1997, options to
         purchase an aggregate of 11,250 shares  granted to a deceased  director
         were exercised at prices ranging from $21.50 to $23.71.


                                      F-22

<PAGE>

                            SBARRO, INC. AND SUBSIDIARIES

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  10.    Stock options (continued):

         A summary of the status of our option  plans is  presented in the table
below:
<TABLE>
<CAPTION>

                                                   1999                 1998                         1997
                                                   ----                 ----                         ----
                                                Weighted-               Weighted-                   Weighted-
                                                 Average                 Average                   Average
                                                Exercise                Exercise                    Exercise
<S>                                     <C>           <C>          <C>           <C>         <C>           <C>
                                            Shares     Price         Shares      Price         Shares      Price
         Options outstanding,
             beginning of period        1,560,432     $25.87       1,638,339     $25.85      934,836       $25.57
         Granted                                -0-      N/A          23,750     $24.22      777,750       $25.96
         Exercised                         (17,337)   $24.58         (84,989)    $25.23      (53,745)      $22.78
         Terminated for cash
             (Note 2)                   (1,391,095)      N/A                                     -               -
         Canceled or expired              (152,000)    $28.83        (16,668)    $25.15     (20,502)       $24.66
                                     ----------------------------------------  ----------------------------------
         Options outstanding,
             end of period                      -0-        N/A     1,560,432     $25.87    1,638,339       $25.85
         Options exercisable,
             end of period                      N/A        N/A       617,515     $25.99      573,880       $26.05
</TABLE>

         The foregoing  table includes  options granted in fiscal 1997 under the
         1991  Plan to our  Chairman  of the  Board and  President  to  purchase
         100,000   and   150,000   shares  at  $25.13   and  $28.88  per  share,
         respectively,  and  to  our  Vice  Chairman  of the  Board  and  Senior
         Executive  Vice  President  to purchase  100,000  and  100,000  shares,
         respectively,  at $25.13 per share;  options  granted in fiscal 1996 to
         our  Chairman  of the Board and  President  and Senior  Executive  Vice
         President  to purchase  100,000  and 50,000  shares,  respectively,  at
         $24.75 per share;  and  options  granted in fiscal  1993 under the 1991
         Plan to our Chairman of the Board and  President,  Vice Chairman of the
         Board and Senior Executive Vice President and one non-employee director
         to purchase 120,000, 90,000, 75,000 and 37,500 shares, respectively, at
         $27.09 per share.  Each such option was  granted at an  exercise  price
         equal to the fair market value of our common stock on the date of grant
         and was exercisable for 10 years from the date of grant. As part of the
         going private  transaction,  those options were  terminated in exchange
         for a cash payment  equal to the number of shares  subject to the stock
         option  multiplied  by the excess,  if any, of $28.85 over the option's
         exercise price (Note 2).

         In addition to the  foregoing,  in fiscal 1990,  shareholders  approved
         options were granted to our Chairman of the Board and  President,  Vice
         Chairman of the Board and Senior  Executive  Vice President to purchase
         150,000, 75,000 and 75,000 shares,  respectively,  at $20.67 per share,
         the fair market value of our common  stock on the date of grant,  for a
         period of 10 years from the date of grant. As part of


                                      F-23
<PAGE>

                SBARRO, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  10.    Stock options (continued):

         the going private  transaction,  these options were also  terminated in
         exchange  for a cash payment  equal to the number of shares  subject to
         the stock option  multiplied by the excess,  if any, of $28.85 over the
         option's exercise price (Note 2).

         Sbarro  adopted the pro forma  disclosure  provisions  of SFAS No. 123,
         "Accounting for Stock-Based Compensation". Accordingly, no compensation
         cost has been recognized in the accompanying  financial  statements for
         the stock option plans.  No calculation is presented for fiscal 1999 as
         a result of the  termination of all  outstanding  options in connection
         with the going private  transaction (Note 2). Had compensation cost for
         our stock option plans been determined under SFAS No. 123 for the years
         ended January 3, 1999 and December 28, 1997,  our net income would have
         approximated the pro forma amounts below:

                                               For the Fiscal Years Ended
                                       January 3,          December 28,
                                           1999                    1997
                                           ----                    ----
                                                  (In thousands)
         Net income:
         As Reported                        34,334                36,082
                                            ======                ======
         Pro Forma                          33,770                35,089
                                            ======                ======

         The fair value of each option grant was  estimated on the date of grant
         using  the  Black-Scholes  option  pricing  model  with  the  following
         assumptions:

                                            1998                      1997
                                            ----                      ----

         Expected life (years)               .5                       1.5
         Interest rate                      5.15%                      5.82%
         Volatility                           31%                        21%
         Dividend yield                     0.00%                      4.00%
         Weighted average fair value
             of options granted           $2.38                     $2.79
                                          =====                     =====

11.      Provision for unit closings:

         In  connection  with the final  disposition  of two joint venture units
         closings recorded in fiscal 1997, we agreed to a special  allocation of
         losses which resulted in an additional  $1.0 million charge before tax,
         or $0.6 million after tax, to earnings in fiscal 1999.


                                      F-24
<PAGE>

                       SBARRO, INC. AND SUBSIDIARIES

          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.      Provision for unit closings (continued):

         A provision for  restaurant  closings of $2.5 million  before tax, or
          $1.6 million after tax, was  established  in fiscal 1998
         relating to the closing of 20 restaurant locations.

         A  provision  for  restaurant  closings  in the amount of $3.3  million
         before tax, or $2.0 million  after tax,  relating to our  investment in
         one of our  joint  ventures  was  established  in  fiscal  1997 for the
         closing of certain of the joint venture's units.

12.      Dividends:

         In fiscal  1997,  we  declared  quarterly  dividends  of $.27 per share
         aggregating $22.1 million or $1.08 per share. Dividends were thereafter
         suspended pending  consideration by the Company of various proposals by
         certain members of the Sbarro family for the going private  transaction
         (Note 2).

         On March 13,  2000,  the Board of  Directors  declared  an $18  million
          dividend to shareholders (Note 15).

13.      Quarterly financial information (unaudited):
<TABLE>
<CAPTION>
<S>                                            <C>                 <C>                 <C>            <C>
                                                  First             Second             Third         Fourth
                                                 Quarter            Quarter           Quarter         Quarter
                                                                          (In thousands)

         Fiscal year 1999
         Revenues                              $104,451            $81,556             $89,444        $104,013
         Gross profit (a)                        79,390             62,680              68,026          82,548
         Net income (b)                           6,912              6,234               7,563           8,814
                                              ==========         ==========           =========       ==========

         Fiscal year 1998
         Revenues                               $101,883            $78,844            $85,907       $108,598
         Gross profit (a)                         77,463             60,142             65,035         82,322
         Net income (b)                            7,138              5,107              7,081         15,008
                                                   =====              =====              =====         ======
</TABLE>

         (a) Gross profit represents the difference between restaurant sales and
         the  cost of  food  and  paper  products.
          (b)  See  Notes 8 and 11 for information regarding unusual charges.

                                       F-25

<PAGE>

                             SBARRO, INC. AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.      Summarized condensed financial information:

         The following tables present condensed  summary  financial  information
         for  Sbarro's   subsidiaries   that  guarantee  the  parent   company's
         obligations  under the  Senior  Notes  and bank  credit  agreement  and
         exclude  the  parent  company  and  non-guarantor   subsidiaries.   The
         non-guaranteeing  subsidiaries  represent less than 3% of  consolidated
         pre-tax income and assets on an individual and combined basis.  Each of
         the  guaranteeing  subsidiaries  is our direct or indirect wholly owned
         subsidiary and each has fully and unconditionally guaranteed the Senior
         Notes and the bank credit  agreement on a joint and several  basis.  We
         have determined that presenting separate financial statements and other
         disclosures concerning each guaranteeing  subsidiary is not material to
         investors. As described in Note 2, we have not completed final purchase
         price  allocations.   Accordingly,   the  condensed  summary  guarantor
         subsidiary financial  information  presented below does not give effect
         to any final purchase price allocations.

              Condensed Summary Guarantor Subsidiaries Financial Information
                                      Balance Sheet Data

                                    January 2, 2000             January 3, 1999
                                    ---------------             ---------------
                                                (In thousands)
Current assets............... $           6,805                $       7,623
Intercompany receivables.....           172,744                      147,903
                                  ----------------     ---------------------
    Total current assets.....           179,549                      155,526
Property and equipment, net..            82,214                       80,787
Other assets, net............               707                          573
                             ---------------------     ---------------------
                                  $     262,470                $     236,886
                                  ================             =============
Current liabilities..........     $         579                $         453
Intercompany payables-
   - long term...............            19,897                       19,909
Shareholders' equity.........           241,994                      216,524
                             ---------------------     ---------------------
                                  $     262,470                $     236,886
                                  =============                =============









                                       F-26

<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.      Summarized condensed financial information (continued):


                                    Income Statement Data

                              For the Fiscal Years Ended
                            January 2, 2000  January 3, 1999  December 28, 1997
                             -------------    -------------    -----------------
                                              (In thousands)
Revenues....................  $     189,321    $     187,690   $        178,758
                              =============    =============   ================
Gross profit(a).............  $     149,428    $     146,376   $        140,554
                              =============    =============   ================
Income before cumulative
  effect of change in
  method of accounting(b)...  $      25,470    $      26,935   $         25,663
                              =============    =============   ================
Net income(b)...............  $      25,470    $      26,935   $         25,663
                              =============    =============   ================

(a) Gross profit represents the difference between restaurant sales and the cost
of food and paper  products.  (b) No  portion  of the  cumulative  effect of the
change in accounting principles pertained to the guaranteeing subsidiaries (Note
         1).

15.      Subsequent events:

         On March 3, 2000, a 100% wholly owned  subsidiary of Sbarro  obtained a
         8.4%, ten year,  $16,000,000  mortgage loan that is collateralized by a
         building which is owned by one of the guaranteeing  subsidiaries of our
         Senior Notes issued in connection  with the going private  transaction.
         The loan is being paid based on a thirty year amortization schedule.

         On March 13,  2000,  the Board of  Directors  declared  an $18  million
         dividend to  shareholders  and  granted  our  Chairman of the Board and
         President a $2.0 million, 6.45%, two year loan.






                                              F-27


<PAGE>




              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE




         To Sbarro, Inc.:


We have audited, in accordance with auditing standards generally accepted in the
United  States,  the  consolidated  financial  statements  of Sbarro,  Inc.  and
subsidiaries,  included in this filing and have issued our report  thereon dated
March 13,  2000.  Our audits  were made for the purpose of forming an opinion on
the basic financial  statements taken as a whole.  The accompanying  schedule is
the responsibility of the Company's  management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.




                                               /s/ Arthur Andersen LLP



         New York, New York
         March 13, 2000





                                       S-1

<PAGE>


                                                  SCHEDULE II
                                         SBARRO, INC. AND SUBSIDIARIES
                                       VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                                            (In thousands)

                                                       FOR THE THREE YEARS ENDED
<S>                                      <C>              <C>               <C>                 <C>       <C>
COLUMN A                             COLUMN B               COLUMN C                    COLUMN D           COLUMN E
------ -                             --------               --------------              --------           --------
                                                            ADDITIONS
                                     Balance           Charged         Charged to
                                        at                to              Other                        Balance at
                                     Beginning         Costs and        Accounts       Deductions         End of
Description                          of Period         Expenses         Describe         Describe         Period

January 2, 2000:

Allowance for doubtful
  accounts receivable (1)                $38              $381                                             $419

Accumulated amortization of
 Canadian development rights (5)         493                 13                                             506

Accumulated amortization of
 purchased leasehold rights (5)          181                86                                              267
                                         ----              ----                                           -----
                                        $712            $  480                                           $1,192
                                        =====           =======                                         =======
January 3, 1999:

Allowance for doubtful
 accounts receivable (1)                  $38                                                              $38

Accumulated amortization
 of deferred charges (3)                1,269                                               (1,269) (3)

Accumulated amortization of
 Canadian development rights (5)          481                12                                            493

Accumulated amortization of
 purchased leasehold rights (5)           96                85                                             181
                                          ---             -----                        -----------       ------
                                       $1,884              $97                           $  (1,269)       $712
                                       ======              ====                          ==========       ====
December 28, 1997

Allowance for doubtful
 accounts receivable (1)                  $43                                               ($5) (2)        $38

Accumulated amortization
 of deferred charges (3)                1,436            $1,495                           (1,662) (4)     1,269

Accumulated amortization of
 Canadian development rights (5)          424                57                                             481

Accumulated amortization of
 purchased leasehold rights (5)           943               213                            (1,060) (4)           96
                                          ---           -------                          ---------         --------
                                       $2,846            $1,765                           $(2,727)       $1,884
                                       ======            ======                           ========       ======
</TABLE>

(1) Included in accounts receivable
(2) Write off of uncollectible accounts
(3) Amount included in cumulative effect of accounting change for start-up costs
(4) Write-off of fully amortized deferred charges (5) Included in other assets

                                                                  S-2


<PAGE>



                                            EXHIBIT INDEX

Exhibit Number                              Description

*2.01             Agreement  and Plan of Merger  dated as of  January  19,  1999
                  among the  Company,  Sbarro  Merger  LLC,  a New York  limited
                  liability company,  Mario Sbarro, Joseph Sbarro, Joseph Sbarro
                  (1994) Family Limited  Partnership,  Anthony Sbarro, and Mario
                  Sbarro  and  Franklin  Montgomery,  not  individually  but  as
                  trustees  under that certain Trust  Agreement  dated April 28,
                  1984 for the  benefit of Carmela  Sbarro and her  descendants.
                  (Exhibit  2 to the  Company  Current  Report on Form 8-K dated
                  (date of earliest event  reported)  January 19, 1999, File No.
                  1-8881)

 *3.01(a)         Restated  Certificate of  Incorporation  of the Company as
                  filed with the Department of State of the State of New
                  York on March 29, 1985.   (Exhibit 3.01 to the Company's
                  Registration Statement on Form S-1, File No. 2-96807)

* 3.01(b)         Certificate  of Amendment to the  Company's  Restated
                  Certificate of  Incorporation  as filed with the Department of
                  State of the  State of New  York on  April 3,  1989.  (Exhibit
                  3.01(b) to the  Company's  Annual  Report on Form 10-K for the
                  year ended January 1, 1989, File No. 1-8881)

* 3.01(c)         Certificate  of Amendment to the  Company's  Restated
                  Certificate of  Incorporation  as filed with the Department of
                  State of the State of New York on May 31, 1989.  (Exhibit 4.01
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended April 23, 1989, File No. 1-8881)

* 3.01(d)         Certificate  of Amendment to the  Company's  Restated
                  Certificate of  Incorporation  as filed with the Department of
                  State of the State of New York on June 1, 1990.  (Exhibit 4.01
                  to the Company's Quarterly Report on Form 10-Q for the quarter
                  ended April 22, 1990, File No. 1-8881)

* 3.02            By-Laws of the Company, as amended.  (Exhibit 3.1 to the
                  Company's  Registration  Statement on Form S-4, File No.
                  333-90817)

*4.01             Indenture  dated as of September,  28, 1999 among the Company,
                  the Restricted  Subsidiaries of the Company named therein,  as
                  guarantors,  and Firstar Bank, N.A., including the form of 11%
                  Senior Notes of the Company to be issued upon  consummation of
                  the Exchange  Offer and the form of Senior  Guarantees  of the
                  Guarantors.  (Exhibit 4.1 to the Company's  Current  Report on
                  Form 8-K dated (date of earliest event reported) September 23,
                  1999, File No. 1-8881)

*4.02             Credit Agreement dated as of September 23, 1999 among
                  the Company,  European  American Bank, as agent,  and
                  the  Lenders  party  thereto   (Exhibit  4.2  to  the
                  Company's  Current  Report on Form 8-K dated (date of
                  earliest event reported) September 23, 1999, File No.
                  1-8881)

*10.01            Commack,  New  York  Corporate  Headquarters  Sublease.
                  (Exhibit  10.04 to the  Company's  Registration
                   Statement on Form S-1, File No. 2-9680

+   *10.02        The Company's  Performance  Incentive  Plan.  (Exhibit A to
                  the Company's  Proxy  Statement  dated April 29, 1997,
                  1997, File No. 1-8881)

+  *10.03         Consulting  Agreement (including option) dated
                  June  3,  1985   between   the  Company  and  Bernard
                  Zimmerman  &  Company,  Inc.  (Exhibit  10.04  to the
                  Company's  Annual  Report  on Form  10-K for the year
                  ended January 1, 1989, File No. 1-8881)

+   *10.04        Form of  Indemnification  Agreement  between the Company and
                  each of its directors  and  officers.  (Exhibit
                  10.04 to the Company's Annual Report on Form 10-K for the year
                  ended December 31, 1989, File No. 1-8881)

*10.05            Registration  Rights  Agreement  dated as of September  28,
                  1999 among the  Company,  the  Guarantors  named
                  therein and Bear,  Stearns & Co. Inc.  (Exhibit 10.1 to the
                  Company's Current Report on Form 8-K dated (date of
                  earliest event reported) September 23, 1999, File No. 1-8881)

 *10.06           Tax Payment  Agreement dated as of September 28, 1999
                  among  the  Company,  Mario  Sbarro,  Joseph  Sbarro,
                  Joseph  Sbarro  (1994)  Family  Limited  Partnership,
                  Anthony   Sbarro,   and  Mario  Sbarro  and  Franklin
                  Montgomery,  not  individually  but as Trustees under
                  that certain Trust Agreement dated April 28, 1984 for
                  the  benefit  of Carmela  Sbarro and her  descendants
                  (Exhibit   10.6  to  t  he   Company's   Registration
                  Statement on Form S-4, File No. 333-90817.

*12.01            Statement of  computation  of earnings to fixed  charges
                  (Exhibit  12.1 to Amendment No. 2 to the Company's
                  Registration Statement on Form S-4, file No. 333-90817).

21.01             List of subsidiaries.

27.01             Financial Data Schedule.


-----------------------------
 * Incorporated by reference to the document indicated.
 + Management contract or compensatory plan.


<PAGE>


                            EXHIBIT 21.01



NAME OF SUBSIDIARY                      STATE OF                PERCENTAGE
           (1)(2)                     INCORPORATION              OWNERSHIP


Sbarro of Virginia, Inc.                   Virginia                 100

Sbarro America, Inc.                       New York                 100

      Sbarro's of Texas, Inc.              Texas                     49 (3)

Italian Food Franchising,
    Inc.                                   New York                  100

Corest Management, Inc.                    New York                  100

Franrest Management, Inc.                  New York                  100

Larkfield Equipment Corp.                  New York                  100

Sbarro of Roosevelt Field
    Inc.                                   New York                  100

Melville Advertising
   Agency, Inc.                            New York                  100

401 Broadhollow Realty Corp.               New York                  100


(1)      Excludes subsidiaries which, if considered in the aggregate as a single
         subsidiary,  would not constitute a significant  subsidiary (within the
         meaning of Rule 1-02(v) of Regulation  S-X) as of the end of the fiscal
         year covered by this report.

(2) Indentation indicates the direct parent of an indirect subsidiary.

(3) Sbarro America, Inc. beneficially owns 100% of the outstanding shares of the
      indicated subsidiary.


<PAGE>