--------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|_| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934
For the fiscal year ended DECEMBER 28, 2003

|_| 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                      (I.R.S. Employer
incorporation or organization)                       Identification No.)


   401 BROADHOLLOW ROAD, MELVILLE, NEW YORK                         11747
  (Address of principal executive offices)                        (Zip Code)

Registrant's telephone number, including area code:              (631) 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
                                            ----------     ----------

     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 ].

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).     Yes            No   X
                                                    -----         ------

         The registrant's common stock is not publicly-held or publicly traded.

         The number of shares of Common Stock of the  registrant  outstanding as
of March 19, 2004 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.

                           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 this
time. These statements generally contain words such as "may," "should," "seeks,"
"believes,"  "in  our  opinion,"  "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:

     o    general economic, inflation, weather and business conditions;
     o    the availability of suitable restaurant sites in appropriate  regional
          shopping malls and other locations on reasonable rental terms;
     o    changes in consumer tastes;
     o    changes in population and traffic patterns, including the effects that
          military  action  and  terrorism  or  other  events  may  have  on the
          willingness of consumers to frequent malls, airports or downtown areas
          which are the predominant areas in which our restaurants are located;
     o    our ability to continue to attract franchisees;
     o    the success of our present,  and any future,  joint ventures and other
          expansion opportunities;
     o    the availability of food (particularly cheese and tomatoes),  beverage
          and paper products at current prices;
     o    our ability to pass along cost increases to our customers;
     o    no material increase occurring in the Federal minimum wage;
     o    the continuity of services of members of our senior management team;
     o    our ability to attract and retain  competent  restaurant and executive
          managerial personnel;
     o    competition;
     o    the level of, and our ability to comply with, government regulations;
     o    our ability to generate sufficient cash flow to make interest payments
          and principal under our senior notes and new line of credit;
     o    our ability to comply with covenants  contained in the indenture under
          which  the  senior  notes  are  issued,  and  the  effects  which  the
          restrictions  imposed by those  covenants  may have on our  ability to
          operate our business; and
     o    our ability to repurchase  senior notes to the extent  required in the
          event we make certain asset sales or experience a change of control.

         You are  cautioned  not to place  undue  reliance  on  forward  looking
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



                                      -2-
<PAGE>

after  the  date  of  this  report.  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.

                                     PART I
                                     ------


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 915 company-owned and franchised  restaurants  worldwide at
December 28, 2003. In addition,  since 1995, we have created,  primarily through
joint ventures,  other restaurant  concepts for the purpose of developing growth
opportunities  in addition to the Sbarro  restaurants.  We presently  operate 29
other  concept  restaurants  through  owned  joint  ventures  in which we hold a
majority or minority position or through wholly owned subsidiaries.  (See "Other
Concepts," below.)

         GOING PRIVATE TRANSACTION
         -------------------------

         On September 28, 1999,  members of the Sbarro family (who prior thereto
owned approximately 34.4% of our common stock) became the holders of 100% of our
issued and  outstanding  common stock as a result of a merger in which a company
owned by the members of the Sbarro  family  merged with and into us. The cost of
the  merger,  including  fees  and  expenses,  was  funded  through  the  use of
substantially  all of our cash then on hand and the placement of $255.0  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.  In April 2000,  we exchanged  these senior notes for
new senior  notes  having the same terms,  except that the new senior notes were
registered  under the  Securities  Act of 1933.  Throughout  this  report we are
referring  to the new senior  notes as the "senior  notes." The old senior notes
and the new senior  notes were issued  under an indenture  dated  September  28,
1999, which, throughout this report, we are referring to as the "indenture." Our
payment   obligations   under  the   senior   notes  are   jointly,   severally,
unconditionally  and  irrevocably  guaranteed  by all of our current  restricted
subsidiaries (as defined in the indenture) and are 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 this report
and "Security Ownership of Certain Beneficial Owners and Management" included in
Item 12 of this report.




                                      -3-
<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
reasonable  operating  margin  percentages.  Sbarro  restaurants  are  primarily
located in shopping malls,  downtown  locations and other high customer  traffic
venues,  including toll roads, airports,  sports arenas,  hospitals,  convention
centers,  university  campuses  and  casinos.  We  believe  that  there  may  be
opportunities to open similar Sbarro units in these and other venues.

         As of December 28, 2003, we had 915 Sbarro quick  service  restaurants,
consisting of 528  company-owned  and 387 franchised  restaurants  located in 46
States,  the  District of Columbia,  the  Commonwealth  of Puerto Rico,  certain
United States territories and 26 countries throughout the world.

         In addition,  since 1995, we have created and operated other casual and
fine dining  concepts  for the purpose of  developing  growth  opportunities  in
addition to our Sbarro restaurants. With our joint venture partners or in wholly
owned  subsidiaries,  we currently operate 29 casual and fine dining restaurants
featuring varying cuisines under other restaurant concepts.

         RESTAURANT EXPANSION
         --------------------

         We grew from 103 Sbarro-owned or franchised  quick service  restaurants
at the time of our initial  public  offering in 1985 to 939 at the end of fiscal
2000.  However,  since  the end of  fiscal  2000,  while  we have  added 84 more
franchised  units than were closed,  we have closed or sold to  franchisees  108
more  company-owned  units than we opened,  resulting  in a net  decrease  of 24
Sbarro-owned or franchised  quick service  restaurants.  As a result,  the total
number of company-owned and franchised units at December 28, 2003 was 915.




                                      -4-
<PAGE>


         The  following  table   summarizes  the  number  of  Sbarro-owned   and
franchised quick service  restaurants in operation during each of the years from
1999 through 2003:


<TABLE>
<CAPTION>
                                                                                   FISCAL YEAR
                                                              --------------------------------------------------------
                                                                 2003       2002        2001       2000       1999
                                                                 ----       ----        ----       ----       ----
<S>                                                               <C>        <C>         <C>        <C>        <C>
Company-owned Sbarro restaurants:
 Opened during period  (1) (2)                                      4         13           9         13         24
 (Sold to) acquired from franchisees
   during period                                                  (12)        (6)          -          1         (1)
 Closed during period  (2) (3)                                    (22)       (51)        (43)       (16)        (9)
                                                                  ----       ----        ----       ----        ---
 Open at end of period (2) (4)                                    528        558         602        636        638

Franchised Sbarro restaurants:
 Opened during period (5)                                          39         42          42         36         49
 Acquired from (sold to) Sbarro
    during period                                                  12          6           -         (1)         1
 Closed or terminated during period                               (17)       (20)        (20)       (18)       (32)
                                                                  ----       ----        ----       ----       ----
 Open at end of period                                            387        353         325        303        286

All Sbarro restaurants:
 Opened during period (1)                                          43         55          51         49         73
 Closed or terminated during period  (2) (3)                      (39)       (71)        (63)       (34)       (41)
                                                                  ----       ----        ----       ----       ----
 Open at end of period  (2) (4)                                   915        911         927        939        924

Kiosks  (all franchised) open at end of year                        3          3           4          5          4

</TABLE>


(1)      Excludes 1, 2, 4, 7 and 7 other  concept  units  opened  during  fiscal
         2003, 2002, 2001, 2000 and 1999, respectively.
(2)      During  fiscal 2004 through  March 5, 2004, we have opened 1 and closed
         12 and company-owned restaurants.
(3)      See Note (5) to "Selected  Financial Data" in Item 6 of this report for
         information  with  respect  to  charges  relating  to  the  closing  of
         company-owned restaurants.
(4)      Excludes 29, 32, 37, 33 and 26 other concept units at the end of fiscal
         2003,  2002,  2001,  2000  and  1999,  respectively.  See  Note  (5) to
         "Selected Financial Data" in Item 6 of this report for information with
         respect  to  charges   relating  to  the   closing  of  other   concept
         restaurants.
(5)      During  fiscal 2004 through March 15, 2004, we have opened 5 and closed
         4 franchised restaurants.

         TRADITIONAL QUICK SERVICE CONCEPT AND MENU
         ------------------------------------------

         Sbarro quick service  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 a contemporary  motif that blends with the  characteristics  of the
surrounding area.



                                      -5-
<PAGE>

         As of December 28, 2003,  there were 239 "in-line"  Sbarro  restaurants
and 669 "food court" Sbarro quick service restaurants. In addition,  franchisees
operated 7 freestanding Sbarro  restaurants.  "In-line"  restaurants,  which are
self-contained restaurants,  usually occupy between 1,500 and 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 between 500 and 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 2003 were $0.8  million for  "in-line"  restaurants  and $0.5 million for
"food court" restaurants. Our business is subject to seasonal fluctuations,  and
the effects of weather and economic  conditions.  Sales have been highest in our
fourth fiscal quarter due primarily to increased volume in shopping malls during
the  holiday  shopping  season but  fluctuate  due to the length of the  holiday
shopping period between  Thanksgiving and New Year's Day, the number of weeks in
our fourth quarter and weather  conditions.  In recent years, our fourth quarter
sales have fluctuated significantly due to a number of other factors,  including
the adverse effect of the general economic downturn.

         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, a limited number 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 $2.79 to $7.99. 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,  beverages  and  related
restaurant  supplies used by our quick-service  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  and  distributed  by our
national independent distributor. In early fiscal 2003, we replaced our national
independent  wholesale  distributor,  with which we did not have a contract,  by
entering into a contract with another national independent wholesale distributor
due to the former distributor's bankruptcy. Our current contractual arrangement,
which  expires in January  2008,  requires us to purchase 95% of all of our food
ingredients  that are not  purchased  locally  and related  restaurant  supplies
through  the  new  distributor.  As the  majority  of the  products  used in our
restaurants are proprietary and we are involved with  negotiating  their cost to
the  wholesaler,  there has not been a  material  impact on our cost of food and
paper products from this new contractual arrangement.  Should the need arise, we
believe that there are other distributors who would be able to



                                      -6-
<PAGE>

service  our needs  and that  satisfactory  alternative  sources  of supply  are
generally available for all items regularly used in our restaurants.

         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  cash  bonuses  based  on  certain  performance-related
criteria of their location.

         We employ  approximately  40 directors of  operations,  each of whom is
typically responsible for the operations of 10 to 15 Sbarro-owned restaurants in
a given area. Before each new restaurant  opening, we assign an area or regional
director to coordinate opening  procedures.  Directors of operations recruit and
supervise the managerial staff of all Sbarro-owned restaurants and report to one
of the six vice presidents. The vice presidents coordinate the activities of the
directors of operations  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  that  have
multi-unit franchise agreements. We rely principally upon our reputation and the
strength of our existing  restaurants,  as well as on  participation in national
franchise conventions, to attract new franchisees.

         As of December  28,  2003,  we had 387  franchised  Sbarro  restaurants
operated  by 101  franchisees  in 39 states of the United  States as well as its
territories  and  in  26  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  foreign  countries) or venues  (primarily
specified non-mall locations such as for certain toll roads or airports).

         In order to obtain a  franchise,  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  had an
initial term of 15 years with the franchisee  having a renewal  option  provided
that the  agreement  had 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 in not less than ten nor
more than twenty years,  including a renewal period of the  underlying  lease if
applicable.  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 are at
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 terminate a franchisee for a variety of
reasons,  including insolvency or bankruptcy,  failure to operate its restaurant
according to standards,



                                      -7-
<PAGE>

understatement   of  gross   receipts,   failure  to  pay  fees,   or   material
misrepresentation on an application for a franchise.

         We presently  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.

         OTHER CONCEPTS
         --------------

         Since 1995, we have developed and established  new restaurant  concepts
to provide  growth  opportunities  that leverage our  restaurant  management and
financial  expertise.  These concepts are operated either by us alone or through
joint ventures with  restauranteurs  experienced in the particular food area. We
participate with our partners in overseeing the operations of each venture.  Our
joint ventures and other wholly-owned concepts presently operate 29 restaurants.
We intend to  continue  to expand the Mama  Sbarro  concept  and our  steakhouse
concept,  in the limited manner noted below,  but do not intend to expand any of
our other joint venture operations.

         The following is a summary of our internally operated and joint venture
operated concepts:

          o    Through a wholly-owned  subsidiary,  we operate eight  moderately
               priced quick casual  dining  restaurants  serving  Italian  food,
               under  the name  "Mama  Sbarro."  The  restaurants  provide  both
               quick-service and table service, with take-out service available,
               and generally  cater to families.  In February  2003, we sold two
               Mama  Sbarro  locations  to an  unaffiliated  third  party for an
               aggregate  of $0.8  million  in cash and  notes.  We  recorded  a
               provision  for  impairment  of $0.2 million  related to these two
               locations  in  fiscal  2002.  This  provision   approximated  the
               estimated  loss  from the sale.  We did not open any Mama  Sbarro
               locations  in fiscal 2003 but are planning to expand this concept
               during fiscal 2004.

          o    We operate five quick service units in mall  locations  under the
               name "Umberto of New Hyde Park" in which we own a 100%  interest.
               We closed one "Umberto of New Hyde Park"  location  during fiscal
               2002, recording a closing cost of approximately $0.1 million.

          o    We have a 40% interest in a joint venture that presently operates
               eight casual dining restaurants with a Rocky Mountain  steakhouse
               motif  under  the name  "Boulder  Creek  Steaks &  Saloon."  This
               venture also operates three fine dining steak restaurants, two of
               which are operated  under the name  "Rothmann's  Steak House" and
               the other is operated under the name "Burton & Doyle." Currently,
               there  is  Boulder  Creek  and one  mid-scale  steakhouse  in the
               planning stage, both of which are expected to be completed during
               the fourth  quarter of fiscal  2004.  We do not have any  further
               expansion plans for this venture.

          o    We have a 70% interest in a joint venture that presently operates
               one  moderately  priced,  table service  restaurant  featuring an
               Italian  Mediterranean  menu under the name  "Salute" in New York
               City.  In early 2002,  this joint  venture  closed one of its two
               remaining locations.



                                      -8-
<PAGE>

          o    At the  beginning of fiscal 2002,  we had a 50% interest with the
               same joint venture  partners in three  moderately  priced,  table
               service  restaurants that also featured an  Italian-Mediterranean
               menu.  All  three  locations  were  closed  during  fiscal  2002.
               Additional  losses of $0.3 million were recorded related to these
               locations in fiscal 2002. We recorded a loss on of the closing of
               the  third  restaurant  in  fiscal  2002  of  approximately  $4.1
               million,  for a total  restaurant  closing cost in fiscal 2002 of
               approximately  $4.4 million for this venture.  See "Item 3. Legal
               Proceedings" for information  related to lawsuits to which we are
               a party for one of the locations closed in fiscal 2002.

          o    We have a 50% interest in a joint  venture  which,  in June 1999,
               acquired two quick service Mexican style restaurants operating in
               strip centers under the names "Baja Grill" and "Waves."

          o    We had a 25%  interest  in a joint  venture  formed  in 1999 that
               operated one seafood  restaurant  under the name  "Vincent's Clam
               Bar"  which  was  sold in  August  2003.  Our  share  of the loss
               recorded  upon  the sale of the  assets  of this  restaurant  was
               approximately $0.2 million.

         All of the other  concept  locations,  except for three  Umberto of New
Hyde Park mall units, are located in the New York City metropolitan area.

         All  of  our  other  concept   locations   presently   operate  through
unrestricted  subsidiaries  which do not guarantee our senior notes. 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  under which our senior notes are issued.  Ventures in which we have a
50% or less interest are accounted for under the equity method of accounting.

         As of  December  28,  2003,  we had  an  aggregate  investment,  net of
write-downs,  impairment charges and losses on sales, in the form of advances to
and property and equipment costs of these other concepts, of approximately $10.8
million.   The  amount  of  our  investment  does  not  include   guarantees  of
indebtedness  and  reimbursement  obligations in respect of letters of credit in
the aggregate amount of approximately $7.7 million (in addition to approximately
$0.1 million of remaining  letters of credit for  locations  that have been sold
and are being used for  security  under  leases that have been sublet to the new
owners) and  guarantees  of certain real  property  lease  obligations  of these
subsidiaries  and other concepts in the approximate  amount of $2.4 million.  In
addition,  our other  concepts have  potential  obligations  of $3.0 million for
subleased real property for locations that have been sold.

         EMPLOYEES
         ---------

         As of December  28,  2003,  we employed  approximately  5,600  persons,
excluding  employees  of  other  concepts,  of  whom  approximately  3,150  were
full-time  field and restaurant  personnel,  approximately  2,250 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.   In  the  first  quarter  of  2004,  we
implemented a reduction in work force that reduced our corporate  administrative
head count by  approximately  35  persons.  We will record  severance  and other
related costs of approximately $0.7 million in the first quarter of 2004 for the
reduction  in work force.  We  estimate  that the  reduction  in work force will
reduce  our  annual  general  and  administrative  costs by  approximately  $3.1
million.



                                      -9-
<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 menu  selection,  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, military action,  terrorism, and 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  in  the
quick-service  Italian  specialty  food business  because of our leading  market
position, focus, expertise and strong national brand name recognition, increased
competition from existing or new companies and loss of market share,  could have
an adverse effect on our operations.

         TRADEMARKS
         ----------

         Our Sbarro  restaurants  operate  principally  under the  "Sbarro"  and
"Sbarro The Italian  Eatery"  trademarks.  Our other concept  locations  operate
under  separate  trademarks,  including  "Mama Sbarro" and "Boulder  Creek." The
trademarks  are  registered  with the United States Patent and Trademark  Office
with no  expiration  date but must be renewed every ten years.  Such  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 we are 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
businesses,  as are our franchisees.  Each of our restaurants and those owned by
our  franchisees  and joint  ventures 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
and joint ventures 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.

         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



                                      -10-
<PAGE>

currently  registered  to  offer  and  sell  franchises,   or  are  exempt  from
registering,  in all states in which we operate franchised restaurants that have
registration  requirements.  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.

         Although  alcoholic  beverage  sales are not  emphasized  in our Sbarro
quick service  restaurants,  our new concepts serve alcoholic beverages and some
of our  larger  restaurants  serve  beer and  wine.  Sales of beer and wine have
historically  contributed less than 1% of total revenues of Sbarro quick service
restaurants.

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

AVAILABLE INFORMATION:

         Although we are not required to file reports  with the  Securities  and
Exchange  Commission ("SEC") as a result of our going private  transactions,  we
voluntarily file with the SEC quarterly  reports on Form 10-Q, annual reports on
Form 10-K and, if  applicable,  current  reports on Form 8-K, and  amendments to
these reports.

         The public may read and copy any materials that we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW,  Washington,  DC 20549.
The public can obtain  information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site, with an address of  http://www.sec.gov  that contains  reports,  proxy and
information  statements and other information  regarding our electronic  filings
with the SEC.

         The address of our Internet site is http://www.sbarro.com. Our Internet
site does not  include  reports  we file with the SEC  because  our only  traded
security is our senior  notes which is not  actively  traded.  However,  we will
provide to the public,  as soon as reasonably  practical after we electronically
file them with the SEC,  free of charge,  a  reasonable  number of copies of our
periodic reports filed with the SEC, upon written request to our Chief Financial
Officer at our corporate headquarters,  401 Broadhollow Road, Melville, New York
11747.


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 December 28, 2003, we
leased 556  restaurants,  of which 28 were subleased to franchisees  under terms
which cover all of our obligations under the leases.  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.  Some leases



                                      -11-
<PAGE>

provide either  exclusively,  or in  combination  with base rent, for contingent
rents  generally  ranging  from 8% to 10% of net  restaurant  sales,  usually in
excess of stipulated amounts.

Leases to which we were a party at December 28, 2003 have initial terms expiring
as follows:

YEARS INITIAL LEASE                  NUMBER OF SBARRO-      NUMBER OF FRANCHISED
TERMS EXPIRE                         OWNED RESTAURANTS           RESTAURANTS
------------                         -----------------           -----------
2004...........................                62 (1)                 2
2005...........................                42                     4
2006...........................                44                     4
2007 ..........................                60                     6
2008...........................                64                     2
Thereafter.....................               256                    10

(1)      Includes  16  restaurants   under   month-to-month   tenancies  and  16
         restaurants as to which we pay only  contingent rent based on the level
         of net  restaurant  sales,  the leases for which are  generally for one
         year periods.

         We own a  four-story  office  building  in  Melville,  New York  having
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
$21.5 million.  Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties.  The remaining 27%, consisting primarily of
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.

         Until April 2004, we are also occupying a two-story  20,000 square foot
office building for  administrative  support functions  located in Commack,  New
York. We had leased the building since May 1986 from a partnership owned by some
of our shareholders at an annual base rental of $0.3 million. Our obligation for
the remainder of the lease term,  which is scheduled to expire in 2011,  will be
terminated  upon the sale of the building by the  partnership in April 2004. See
"Certain Relationships and Related Transactions" in Item 13 of this Report for a
description of the lease.

         In  addition,  our  other  concepts  own one  restaurant  and  lease 28
restaurants.


ITEM 3.  LEGAL PROCEEDINGS
-------  -----------------

         On December 20, 1999,  Antonio  Garcia and thirteen  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. Plaintiffs filed a motion to certify the lawsuit as
a class  action,  but the motion was  denied by the  court.  The court  issued a
ruling in December 2003 which was  unfavorable  to us but did not set the amount
of damages.  We are appealing the ruling due to errors that we believe were made
by the trial judge.

         On September 6, 2000, Manuel Jimenez and seven other current and former
general managers of Sbarro  restaurants in California filed a complaint  against
Sbarro in the Superior Court of California  for Orange County  alleging that the
plaintiffs were improperly  classified as exempt



                                      -12-
<PAGE>

employees under  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.  Plaintiffs are represented by the
same counsel who is  representing  the  plaintiffs  in the case in the preceding
paragraph.  We have  separately  settled with two of the managers for immaterial
amounts.  The remaining parties to this case have agreed that it will be settled
upon the same terms and conditions  that the court orders in connection with its
decision in the case discussed in the preceding paragraph.

         On March 22, 2002, five former general  managers of Sbarro  restaurants
in California  filed a complaint  against us in the Superior Court of California
for Los Angeles County.  The complaint alleges that the plaintiffs were required
to perform labor services without proper premium overtime  compensation  from at
least May 1999. The plaintiffs are seeking actual damages,  punitive damages and
attorney's fees and costs, each in unspecified amounts. In addition,  plaintiffs
have  requested  class action  status for all  managerial  employees  who worked
overtime  and/or were not  otherwise  paid regular  wages due and owing from May
1999 to present. The case is currently in the discovery phase.

         In August 2002, a subcontractor and the general contractor, pursuant to
a construction contract entered into to build the joint venture location that we
closed in fiscal 2002 and is also the subject of the  lawsuit  discussed  below,
filed a complaint  against the limited  liability joint venture company alleging
that they are owed approximately  $800,000, plus interest. We are a defendant in
the  suit by  reason  of the fact  that we  guaranteed  the  bonds  under  which
mechanics  liens for the plaintiffs  were bonded.  It is  anticipated  that this
matter will go to trial during later in fiscal 2004. We believe that our maximum
liability,  should an  unfavorable  verdict be returned  in this case,  would be
approximately $400,000.

         We believe that we have  substantial  defenses to the claims in each of
the actions and are vigorously defending these actions.

         In May 2002, the landlord of the joint venture  described above filed a
complaint  against  Sbarro in the Supreme Court of the New York for  Westchester
County alleging that we were obligated to it,  pursuant to a Guaranty  Agreement
we executed, based on an alleged breach of the lease by the tenant, a subsidiary
of the joint venture. We believed that our guarantee was limited in amount while
the landlord  alleged that the  guarantee  covered all amounts that would become
due during the remaining  lease term. The court issued a ruling in November 2003
which established our liability at $500,000. The landlord has advised us that it
intends to appeal this decision.

         In addition to the above complaints,  from time to time, we are a party
to certain claims and legal  proceedings in the ordinary course of business.  In
our  opinion,  the  results  of  the  complaints  and  other  claims  and  legal
proceedings  are  not  expected  to  have  a  material  adverse  effect  on  our
consolidated financial position or results of operations.


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

         Not applicable.




                                      -13-
<PAGE>


                                     PART II
                                     -------


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

         As a result of the going private  transaction  in September  1999,  our
common stock is not  publicly-held  nor publicly  traded.  We currently have six
shareholders of record.  (See Item 12 "Security  Ownership of Certain Beneficial
Owners and Management.")

         During  2003 and 2002,  we  declared  the  following  dividends  to our
shareholders.  Tax  distributions  are determined under a formula contained in a
tax  payment  agreement  with our  shareholders  designed  to enable them to pay
income taxes imposed upon them,  as a result of our election to be taxed,  under
the  provisions of Subchapter S of the Internal  Revenue Code, on their pro-rata
share of our taxable  income (See Item 13,  "Certain  Relationships  and Related
Transactions - Tax Payment Agreement".)

                              AMOUNT
                             PER SHARE      TOTAL                      TYPE
                             ---------      -----                      ----
     FISCAL 2003
     -----------
     January 21, 2003           $0.16        $1,100,061      Tax Distribution
     November 13, 2003          $0.10          $682,222      Tax Distribution

     FISCAL 2002
     -----------
     January 15, 2002           $0.44        $3,125,000      Tax Distribution

The tax distributions declared in 2003 related to 2002 taxable earnings.

The indenture under which our senior notes are issued contains various covenants
that may limit our ability to make "restricted payments," including, among other
things,  dividend  payments  (other  than as  distributions  pursuant to the tax
payment  agreement).  Under the terms of the  indenture,  we  currently  are not
permitted to make "restricted payments" other than distributions pursuant to the
tax payment agreement.  Our ability to make future dividend payments (other than
distributions  pursuant  to the tax  payment  agreement)  and  other  restricted
payments will depend upon our future profitability and certain other factors. At
the time of  declaration of the dividend,  we must have a consolidated  interest
ratio coverage (as defined in the  indenture),  after giving pro forma effect to
the restricted payments,  for the four most recently ended fiscal quarters of at
least 2.0 to 1. For the four  fiscal  quarters  ended  December  28,  2003,  our
consolidated  interest  coverage  ratio was 1.26 to 1. In any event,  restricted
payments  are limited in dollar  amount  pursuant to a formula  contained in the
indenture. We refer to the amount that is available for us to make dividends and
other restricted  payments as the "restricted  payment  availability." We cannot
make restricted  payments until we increase the restricted payment  availability
subsequent to December 28, 2003 by approximately $14.8 million, and then only to
the extent of any excess over that amount.





                                      -14-
<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.  Our fiscal
2003 and 2002 consolidated  financial  statements have been audited and reported
on by BDO  Seidman,  LLP,  independent  certified  public  accountants,  and our
consolidated statements for years prior to fiscal 2002 were audited and reported
on by Arthur  Andersen LLP,  independent  public  accountants.  The audit report
covering our financial  statements as of and for the fiscal year ended  December
30, 2001 and December 31, 2000 has not been  reissued by Arthur  Andersen LLP in
connection with this report.

<TABLE>
<CAPTION>
                                                                                  FISCAL YEAR (1)
                                                                                  ---------------
                                                                              (DOLLARS IN THOUSANDS)
                                                            2003           2002          2001         2000         1999
                                                            ----           ----          ----         ----         ----

<S>                            <C>                      <C>            <C>           <C>           <C>          <C>
  SYSTEM-WIDE SALES (UNAUDITED)(2)                      $536,216       $550,279      $570,609      $569,260     $543,219
                                                        ========       ========      ========      ========     ========

  INCOME STATEMENT DATA:
  Revenues:
     Restaurant sales                                     $314,708       $345,206      $372,673      $382,365     $375,514
     Franchise related income                               10,868         10,070        10,286        11,231        8,688
     Real estate and other (3)                               6,748          5,104         5,756         5,812        5,495
                                                             -----       --------     ---------     ---------     --------
       Total revenues                                      332,324        360,380       388,715       399,408      389,697
                                                           -------        -------       -------       -------      -------

  Costs and expenses:
     Restaurant operating expenses:
       Costs of food and paper products                     67,446         67,593        74,614        74,405       75,956
        Payroll and other employee benefits                 89,614         96,288       103,828       101,553       97,336
        Other operating costs                              110,453        114,892       116,581       114,122      108,599
     Depreciation and amortization (4)                      19,712         20,683        30,375        29,039       25,712
     General and administrative costs                       25,451         23,960        29,472        30,882       28,854
     Asset impairment, restaurant
       closings and other charges (5)                        6,073          9,196        18,224            --        1,013
                                                          --------       --------      --------    ----------     --------
           Total costs and expenses                        318,749        332,612       373,094       350,001      337,470
                                                           -------        -------       -------       -------      -------

  Operating income                                          13,575         27,768        15,621        49,407       52,227
                                                            ------         ------        ------    ----------    ---------

  Other (expense) income:
      Interest expense                                     (31,039)       (30,959)      (30,950)      (30,243)      (7,899)
      Interest income (6)                                      694            528           756           949        3,828
      Equity in net income of
         unconsolidated affiliates                             425            668           310           303          423
     Insurance recovery, net (7)                                 -          7,162             -             -            -
                                                          --------       --------       -------       -------      -------

    Net other expense        e                             (29,920)       (22,601)      (29,884)      (28,991)      (3,648)
    (Loss) income before minority interest                 (16,345)         5,167       (14,263)       20,416       48,579

     Minority interest                                         (41)           (52)           (1)          (46)         266
                                                         ----------    -----------   -----------          ----  ----------

  (Loss) income before income taxes (credit)               (16,386)         5,115       (14,264)       20,370       48,845

  Income taxes (credit) (8)                                    844            334           325        (5,075)      19,322
                                                         ---------       --------        ------        -------      ------

  Net (loss) income                                       $(17,230)        $4,781      $(14,589)      $25,445     $ 29,523
                                                          =========        ======      =========      =======     ========




                                      -15-
<PAGE>

                                                                                  FISCAL YEAR (1)
                                                                                  ---------------
                                                                              (DOLLARS IN THOUSANDS)
                                                            2003           2002          2001         2000         1999
                                                            ----           ----          ----         ----         ----

  OTHER FINANCIAL AND RESTAURANT DATA:
   Net cash provided by
     operating activities (9)                              $11,034        $32,453      $34,812       $48,329      $62,282
   Net cash used in
     investing activities (9)                               (8,521)       (10,988)     (22,453)      (31,158)     (25,227)
  Net cash used in
    financing activities (9)                                (1,254)        (3,267)     (17,726)       (8,606)    (158,356)
  EBITDA (10)                                              $33,671        $56,229      $46,305       $78,703      $78,628

  Capital expenditures (11)                                 $8,521        $10,988      $22,528       $31,193      $25,282

   Number of restaurants at end of period:
    Company-owned (12)                                         528            558          602           636          638
    Franchised                                                 387            353          325           303          286
                                                               ---            ---          ---           ---          ---
       Total number of restaurants                             915            911          927           939          924
                                                               ===            ===          ===           ===          ===

  BALANCE SHEET DATA (AT END OF PERIOD):
  Total assets                                            $386,829       $404,773     $404,762      $428,555     $417,543
  Working capital (deficiency)                              27,784         27,095        4,614        10,293       (1,935)
  Total long-term obligations                              277,031        276,569      276,337       274,475      263,090
  Shareholders' equity                                      69,088         88,100       86,444       113,597      110,280
</TABLE>
____________________
(1)      Our fiscal  year ends on the  Sunday  nearest  December  31. All fiscal
         years presented contained 52 weeks.

(2)      System-wide sales are the total of sales at Sbarro-owned  quick service
         restaurants and the sales of our franchisees at their units as reported
         to us. We believe  system-wide  sales  information is an  industry-wide
         statistic  used  by  analysts  and  investors  to  compare   restaurant
         companies that operate  franchise units and/or operate multiple concept
         restaurants,  as well as  company-owned  restaurant  units. We use this
         statistic  to  assist in our  analysis  of per  location  sales and per
         location sales  information by type of location and to compare sales at
         franchise  restaurants to sales at Company-owned  restaurants to judge,
         among other things,  the relative operating success of the franchisee..
         The following table reconciles our system-wide  sales to our restaurant
         sales which we believe is the most direct comparable generally accepted
         accounting  principles in the United States ("GAAP")  financial measure
         to system-wide sales for each of the periods presented (in thousands):

<TABLE>
<CAPTION>
                                                                      Fiscal Year
                                                                      -----------
                                     2003           2002           2001             2000             1999
                                     ----           ----           ----             ----             ----
<S>                                  <C>            <C>            <C>              <C>              <C>
        Restaurant sales             $314,708       $345,206       $372,673         $382,365         $375,514
        Franchise unit sales         $221,508       $205,073       $197,936         $186,895         $167,705
        System-wide sales            $536,216       $550,279       $570,609         $569,260         $543,219
</TABLE>



                                      -16-
<PAGE>

(3)      Real estate and other revenues  include  approximately  $0.7 million of
         rebates  received  from a vendor that applied to fiscal 2002.  However,
         during  2003,  we received  new  information  regarding  those  rebates
         and recorded such amount in the fourth quarter of fiscal 2003

(4)      Includes  amortization of the excess purchase price over the book value
         of assets  acquired  as a result of our going  private  transaction  on
         September  28, 1999 of $5.4  million,  $5.0 million and $2.0 million in
         fiscal 2001, 2000 and 1999, respectively.  In fiscal 2000, we finalized
         our allocation of the purchase price from the going private transaction
         based  on an  evaluation  of our net  assets  at  September  28,  1999,
         resulting  in  lower  annual   amortization   expense  than  originally
         estimated.  In July 2001,  the  Financial  Accounting  Standards  Board
         issued Statement of Financial  Accounting  Standards  ("SFAS") No. 142,
         "Goodwill and Other Intangible Assets," which became effective as to us
         with the  beginning  of fiscal 2002.  Under SFAS No. 142,  goodwill and
         intangible assets with indefinite lives are no longer amortized but are
         reviewed  annually for  impairment  (or more  frequently  if impairment
         indicators arise). Accordingly, we incurred no amortization of goodwill
         or of intangible  assets with indefinite  lives in fiscal 2003 or 2002.
         Separable  intangible  assets  that are not  deemed to have  indefinite
         lives will  continue  to be  amortized  over their  useful  lives.  Our
         goodwill and intangible assets with indefinite lives,  which aggregated
         $205.1 million, net of accumulated amortization,  at December 28, 2003,
         are  tested  annually  for  impairment.   Our  testing  for  impairment
         concluded  that there was no  impairment  of our goodwill or intangible
         assets at the end of fiscal 2003 or 2002.

(5)      Asset impairment, restaurant closings and other charges consists of the
         following:

<TABLE>
<CAPTION>
                                       2003             2002            2001             2000          1999 (a)
                                       ----             ----            ----             ----          --------

<S>                                        <C>              <C>             <C>
 Impairment of assets                      $4.1             $0.4            $5.5              -               -
 Restaurant closings                        2.0              8.8            11.7              -               -
 Other charges                              -                -               1.0              -              $1.0
 Total                                     $6.1             $9.2           $18.2              -              $1.0
</TABLE>

(a)      Fiscal 1999 amount  represents a provision for a special  allocation of
         losses from the final  disposition  of two other  concept unit closings
         that was recorded in fiscal 1997.

(6)      We used  substantially  all of our available cash on September 28, 1999
         in order to fund the going private transaction. We will not realize the
         level of interest  income as we had prior  thereto  unless and until we
         rebuild our cash position and interest rates rise to 1999 levels.

(7)      Represents the portion,  net of related expenses,  of the settlement of
         our insurance claim  attributable to the  reimbursement  of lost income
         under our business interruption  insurance arising out of the events of
         September 11, 2001.

(8)      A credit of $5.6  million was  recorded in 2000 to  write-off  deferred
         income  taxes as a result of electing 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 laws  beginning in
         fiscal  2000.  For a  discussion  of  the  distributions  that  we  are
         permitted to make to our



                                      -17-
<PAGE>

         shareholders to pay taxes on our income, see "Certain Relationships and
         Related  Transactions  - Tax  Payment  Agreement"  in  Item  13 of this
         report.

(9)      For a more detailed presentation of our cash flow data, see our audited
         consolidated  financial statements and related notes included in Item 8
         of this report.  In 2000,  net cash  provided by  operating  activities
         before  a  change  in  deferred  taxes  caused  by  the  conversion  to
         Subchapter S status and a change in accrued  interest payable was $53.3
         million. In 1999, net cash provided by operating  activities before the
         change in accrued interest payable was $54.8 million.

(10)     EBITDA represents  earnings (losses) before cumulative effect of change
         in  accounting  method,   interest  income,  interest  expense,  taxes,
         depreciation  and  amortization.  EBITDA  includes  the  effect  of the
         charges included in note 5 above and the insurance  recovery  described
         in note 7 above.  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 GAAP or as a
         measure of a company's  profitability or liquidity.  Rather, we believe
         that EBITDA provides  relevant and useful  information for analysts and
         investors  in our senior  notes in that EBITDA is one of the factors in
         the  calculation  of our  compliance  with the ratios in the  indenture
         under which our senior notes are issued.  We also internally use EBITDA
         to determine  whether to continue  operating or close  restaurant units
         since it provides us with a measurement  of whether we our receiving an
         adequate cash return on our cash investment.  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.  The following table reconciles EBITDA to our net
         income  (loss)  which we believe  is the most  direct  comparable  GAAP
         financial  measure to EBITDA,  for each of the  periods  presented  (in
         thousands):

<TABLE>
<CAPTION>
                                                                             FISCAL YEAR
                                                                             -----------
                                                    2003          2002          2001           2000          1999
                                                    ----          ----          ----           ----          ----
<S>                                                 <C>           <C>            <C>           <C>           <C>
EBITDA                                              $33,671       $56,229        $46,305       $78,703       $78,628
Interest expense                                    (31,039)      (30,959)       (30,950)      (30,243)       (7,899)
Interest income                                         694           528            756           949         3,828
Income (taxes) credit                                  (844)         (334)          (325)        5,075       (19,322)
Depreciation and amortization                       (19,712)      (20,683)       (30,375)      (29,039)      (25,712)
                                                    --------      --------       --------      --------      --------
Net (loss) income                                  $(17,230)      $ 4,781       ($14,589)      $25,445       $29,523
                                                  ==========      =======       =========      =======       =======
</TABLE>

(11)     The following  amounts  related to the  construction of the building in
         which our  headquarters  are located,  which  opened in late 1998,  are
         included as capital expenditures:  $0.4 million in fiscal 2000 and $1.6
         million in fiscal 1999.

(12)     Excludes 29, 32, 37, 33 and 26 for other  concept  units that were open
         at the end of fiscal 2003, 2002, 2001, 2000 and 1999, respectively.





                                      -18-
<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

EXECUTIVE OVERVIEW

         We are a  leading  owner,  operator  and  franchisor  of  quick-service
restaurants,  serving  a wide  variety  of  Italian  specialty  foods  with  915
locations as of December 28, 2003. We also operate,  in certain cases with joint
venture partners,  a number of other restaurant concepts with 29 locations as of
December 28, 2003.

         During recent fiscal years, we have been faced with numerous  pressures
that  have  affected  our  revenues  and  earnings.   Comparable   quick-service
restaurant  sales  and  royalties  earned  from  sales at  comparable  franchise
locations have been significantly affected by declining mall traffic as a result
of the events of September 11, 2001, the general economic downturn in the United
States and the events that culminated in the March 2003 military action in Iraq.
In addition,  since the end of fiscal 2001, we have closed approximately 74 more
quick-service  company-owned  locations than we opened.  Our franchise group has
opened  approximately 62 more locations than were closed since the end of fiscal
2001.  These  openings have reduced the effects of the  franchisees'  comparable
sales  declines.  Earnings  have also been  affected by a decline in  comparable
sales that affects our ability to operate as efficiently as possible, changes in
the  price of cheese  over the past few  years,  and  higher  payroll  and other
operating  expenses as a percentage of restaurant  sales. Our operating  results
have also been  significantly  affected by increases in rent and other occupancy
related  expenses  resulting  principally from the renewal of existing leases at
the end of their terms.  The number of store closings and the effect on revenues
and costs from declining comparable restaurant sales has resulted in significant
provisions for asset impairment and restaurant closings.

         Our other  restaurant  concepts  have also been affected by many of the
same factors that have affected the quick-service  locations.  In addition,  the
closing  of eight  other  consolidated  concept  locations  has  resulted  in an
additional  reduction in our revenues but, as the units were either unprofitable
or marginally profitable, a positive effect on earnings.

         Since  September  2003, we have  restructured  our corporate  staff. In
September 2003, Michael O'Donnell was hired as our President and Chief Executive
Officer,  while Mario Sbarro remained as Chairman of the Board of Directors.  In
January 2004,  Peter  Beaudrault  joined us as our Corporate  Vice President and
President  of our Quick  Service  Division,  and  Anthony J.  Missano,  formerly
President  of our Quick  Service  Division,  became our  President  of  Business
Development, with responsibilities for real estate, construction, purchasing and
other business  development  matters. In February,  2004, Anthony J. Puglisi was
hired as our Chief Financial  Officer, a position that had remained vacant since
June 2002. We have also eliminated five senior level corporate employees.

         In order to become  profitable  during  fiscal 2004, we believe that we
must re-energize our quick-service  restaurant operations and, at the same time,
develop concepts that will operate outside



                                      -19-
<PAGE>

of our  traditional  mall,  hospitality  and airport venues while  continuing to
provide a quality product coupled with quality service. We believe our strategy,
when  properly  executed,  will result in future  improvement  of our  operating
results, including higher sales and earnings.

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.  As a result,  our annual  earnings can  fluctuate  due to the
length of the holiday  shopping period between  Thanksgiving  and New Year's Day
and the  number of weeks in our  fourth  quarter.  In recent  years,  our fourth
quarter  income has fluctuated  significantly  due to a number of other factors,
including the adverse effect of the general  economic  downturn and  significant
year end  adjustments  relating to asset  impairment and store closing costs. An
example  of how events  beyond  our  control  can  impact  earnings  was a heavy
snowstorm in the eastern United States on Saturday and Sunday, December 6 and 7,
2003, which severely  impacted sales during a peak weekend in the holiday season
and,  therefore  had an impact our fiscal 2003  revenues and  earnings.  Another
example is the events of September 11, 2001,  which  severely  impacted mall and
transportation  hub traffic,  our primary venues,  during the remainder of 2001,
including our peak fourth fiscal quarter, and, we believe, has continued to have
an impact on traffic in certain of these venues.  Due to the  seasonality of our
business,  until  after our  fourth  quarter  is  completed,  we are not able to
perform the annual test for  impairment  on our goodwill and  intangible  assets
with  indefinite  lives  acquired  prior to July 1, 2001 as required by SFAS No.
142,  "Goodwill and Other Intangible  Assets," and fully evaluate the impairment
of long-lived assets as required by SFAS No. 144, "Accounting for the Impairment
and Disposal of  Long-Lived  Assets." Any required  adjustments  are recorded at
that time unless  impairment  factors are present  earlier.  Our annual test for
impairment of our goodwill and intangible  assets with  indefinite  lives at the
end of fiscal  2003  concluded  that there was no  impairment  of these  assets.
However,  during fiscal 2003, we recorded an impairment of our long-lived assets
of $4.1 million as a result of our  evaluation of  impairment  indicators of the
property and equipment that is part of our long lived assets. See Note 14 of the
notes to consolidated  financial statements in Item 8 of this report for further
information regarding our quarterly financial information.

ACCOUNTING PERIOD

         Our fiscal year ends on the Sunday nearest to December 31. All reported
fiscal  years  contained 52 weeks.  Fiscal 2003 will also contain 52 weeks.  Our
2004 fiscal year will contain 53 weeks and end on January 2, 2005.  As a result,
our 2004 fiscal year will benefit from one  additional  week of operations  over
the other fiscal  years and we will report upon it in our next annual  report on
Form 10-K.

PRIMARY FACTORS CONSIDERED BY MANAGEMENT IN EVALUATING OPERATING PERFORMANCE

         Our evaluation of the cash position and operating performance of Sbarro
focuses on a number of factors, all of which play a material role:

         o     Comparable Sbarro - owned quick service location sales;
         o     Franchise  location sales and their relationship to our franchise
               revenues;
         o     Decisions  to  continue  to operate or close  Sbarro-owned  quick
               service locations;


                                      -20-
<PAGE>

         o     The  percentage  relationship  of the cost of food  and  paper
               products and payroll and other benefit costs to our restaurant
               sales;
         o     The level of other operating  expenses and their  relationship to
               restaurant sales;
         o     General  and   administrative   costs  and  its  relationship  to
               revenues;
         o     The provision for asset impairment and restaurant closings; and
         o     EBITDA.

         The following  statistical  information  highlights the primary factors
covered by our management in evaluating our operating performance:

RELEVANT FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                  Fiscal Year
                                                                                  -----------
                                                                  2003                2002                2001
                                                                  ----                ----                ----
                                                                    (in millions except numbers of locations)
<S>                                                                <C>                 <C>                 <C>
Comparable Sbarro - owned quick
service sales - (1)                                                $287.7              $297.8              $301.9
Comparable Sbarro - owned quick
service sales - annual change(1)                                     -3.4%               -1.3%               -1.0%
Number of Sbarro - owned quick
service locations closed and locations
sold to franchisees during year                                      34                  57                  43
Franchise location sales                                           $221.5              $205.1              $197.9
Franchise revenues                                                   10.5                10.1                10.1
Cost of food and paper products as a
       percentage of restaurant sales                                21.4%               19.6%               20.0%
Payroll and other benefits as a percentage
       of restaurant sales                                           28.5%               27.9%               27.9%
Other operating expenses as a percentage
       of restaurant sales                                           35.1%               33.3%               31.3%
General and administrative costs as a
       percentage of revenues                                         7.7%                6.6%                7.6%
Provision for asset impairment and
restaurant closings                                                  $5.0                $9.2               $18.2
EBITDA                                                               33.7                56.2                46.3
</TABLE>

(1)  Comparable  Sbarro-owned  quick service sales dollar and annual  percentage
changes are based on locations  that were  comparable as of December 28, 2003 in
each of the years presented.

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 this  availability  and increase the cost of
these items.  Historically,  the price of cheese has fluctuated more than any of
our other food ingredients and related restaurant supplies.




                                      -21-
<PAGE>


FISCAL 2003 COMPARED TO FISCAL 2002

         Restaurant  sales by Sbarro-owned  quick service units and consolidated
other concept units decreased 8.8% to $314.7 million for fiscal 2003 from $345.2
million for fiscal 2002.  The decrease in sales for fiscal 2003  reflects  $22.3
million  (6.9%) of lower sales of Sbarro  quick  service  units and $8.2 million
(35.6%)  of  lower  sales of  consolidated  other  concept  units.  Declines  in
comparable  location  sales of $10.1 million (3.4% to $287.3  million) in fiscal
2003 from fiscal 2002 was the  primary  reason for the decline in quick  service
restaurant  sales.  We  believe  that  these  declines  were  attributable  to a
reduction in shopping mall traffic related to the general  economic  downturn in
the United States and,  additionally with respect to the first fiscal quarter of
2003,  the effects of the threatened  and then actual  military  action in Iraq.
Comparable  restaurant  sales are made up of sales at  locations  that were open
during the entire current and prior fiscal years.

         Since the  beginning of fiscal 2002,  we closed 74  (including 30 units
closed,  net of openings during fiscal 2003) more units than we opened,  causing
the remaining  $12.3 million net reduction in Sbarro quick service unit sales in
fiscal 2003.  The units closed since the beginning of fiscal 2002 were generally
low  volume  units  that  did not  have a  material  impact  on our  results  of
operations.

         Of the decline in consolidated other concept unit sales,  approximately
$0.7 million  resulted from a 4.7%  decrease in  comparable  unit sales to $14.7
million.  We believe that these declines were  attributable  to the same factors
that affected Sbarro quick service locations.  In addition,  since the beginning
of fiscal 2002, eight (two in fiscal 2003) consolidated other concept units have
been closed, resulting in a net sales reduction of $7.5 million for fiscal 2003.
These units were either  unprofitable or marginally  profitable and were part of
ventures that we determined to discontinue.

         Franchise  related  revenues rose by $0.8  million,  or 7.9%, in fiscal
2003 over  fiscal  2002.  Excluding  approximately  $0.6  million of revenues in
fiscal 2003 related to area development  agreements for the United Arab Emirates
and Korea that expired, franchise related income increased 2.0% to $10.3 million
in fiscal  2003 from  $10.1  million  in fiscal  2002.  Initial  royalties  from
locations opened during fiscal 2003 and ongoing  royalties earned from locations
opened in fiscal 2003 and during  fiscal 2002 were  offset,  in part,  by a 2.7%
reduction in comparable unit sales in fiscal 2003 from fiscal 2002 levels.

         Approximately  $0.7  million of the  increase  in real estate and other
revenues to $6.8  million in fiscal 2003 from $5.1 million in fiscal 2002 is for
rebates received from a vendor that applied to in fiscal 2002.  However,  during
2003,  we received new  information  regarding  those  rebates and recorded such
amount in the fourth  quarter of fiscal 2003.  Increased  usage of certain other
products  that are  subject to rebate  accounts  for the  remainder  of the 2003
increase from 2002 levels.

         Cost of food and paper  products as a percentage  of  restaurant  sales
increased to 21.4% for fiscal 2003 from 19.6% for fiscal 2002. The cost of sales
percentage in fiscal 2003 was negatively  impacted by the decrease in comparable
unit  sales due to  resulting  operating  inefficiencies  In  addition,  without
changing the effect on the final product,  we modified our pizza and pasta sauce
recipes to utilize ready made sauce instead of crushed  tomatoes as the base raw
material to facilitate the  consistency in product in each  restaurant  unit and
reduce  labor  needed to  prepare  our  products.  We  estimate  that this added
approximately  3/4 of 1  percentage  point to our cost of food.  The increase in
cheese  prices  that  began  at the  end  of  the  second  quarter  resulted  in
significantly  higher  cheese  costs in the third and fourth  quarters of fiscal
2003  compared  to the  similar  periods  in  fiscal  2002



                                      -22-
<PAGE>

causing a 7/10 of 1% increase in cost of sales for fiscal 2003. Cheese prices to
date in the first  quarter  of fiscal  2004 have  increased  substantially  over
cheese  prices  during  the early part of 2003 and are  approximately  $0.90 per
pound higher than the  comparable  time period in fiscal  2003.  In early fiscal
2003, we replaced our then national independent wholesale distributor, which had
declared bankruptcy,  with another national independent  wholesale  distributor.
There has not been a  material  impact  on our cost of food and  paper  products
under this new distribution  arrangement as the majority of the products used in
our restaurants are proprietary and we are involved in negotiating their cost to
the wholesaler.  However,  the cost of sales percentage was impacted by the cost
of purchases of product from third  parties in the first  quarter of fiscal 2003
until the new distribution contract was effective.

         Payroll and other employee benefits  decreased by $6.7 million but as a
percentage of restaurant sales,  increased to 28.5% in fiscal 2003 from 27.9% of
restaurant  sales in fiscal 2002. The dollar decrease was primarily due to fewer
units  in  operation  while  the  percentage  of sales  increase  was due to the
reduction in comparable unit sales and resulting operating inefficiencies.

         Other  operating  expenses  decreased by $4.4 million but  increased to
35.1% of  restaurant  sales in fiscal 2003 from 33.3% in fiscal 2002.  The lower
dollar  level of other  operating  expenses  resulted  primarily  from the fewer
number of units in operation.  The increase as a percentage of restaurant  sales
was  primarily  due to increases in rent and other  occupancy  related  expenses
resulting  from the  renewal  of  existing  leases at the end of their  terms at
higher  rental rates,  compounded  by the reduction in comparable  unit sales In
addition,   we  are  continuing  to  experience  increases  in  our  repair  and
maintenance  costs due to the number of years that the majority of our locations
have been  operating  and the  effects  of the  long-term  utilization  on their
equipment.

         Depreciation  and  amortization  expense  decreased  by $1.0 million to
$19.7 million for fiscal 2003 from $20.7 million for fiscal 2002.  The reduction
was due to fewer  restaurants  in operation in fiscal 2003 ($1.2  million),  the
absence in 2003 of  depreciation  of $0.1 million  related to locations that had
been included in the provision for asset  impairment in fiscal 2002, as a result
of which,  no  depreciation  was taken on these  units in fiscal  2003,  and for
depreciation of $0.3 million for locations that became fully depreciated  during
fiscal 2002. These reductions were offset,  in part, by depreciation of $0.2 for
our  upgraded  computer  system  and other  capitalized  hardware  and  software
expenditures made in 2003 and 2002 that were placed in service in fiscal 2003.

         General and  administrative  expenses  were $25.5  million,  or 7.7% of
total  revenues,  for fiscal 2003,  compared to $24.0 million,  or 6.6% of total
revenues, for fiscal 2002. The principal factors contributing to the increase in
fiscal  2003 were $0.2  million  of legal fees  incurred  in  connection  with a
lawsuit, a $0.2 million allowance for doubtful accounts receivable recorded with
respect to our  franchisee  in Spain that  declared  bankruptcy,  a $0.2 million
allowance against the collectibility of amounts owed by our Israeli  franchisee,
bonuses of $0.7 million that were granted to certain  executive  officers,  $0.5
million of costs and expenses  related to the hiring and  employment  of our new
President and Chief Executive Officer and higher  quick-service field management
travel and related costs,  offset by a reversal of approximately $0.3 million of
excess  estimates  for the ultimate  cost of two lawsuits  related to one of our
former joint venture locations. In early fiscal 2004, we implemented a reduction
in work force that we estimate will reduce our annual general and administrative
costs by  approximately  $3.1 million.  In connection with the reduction in work
force, we will record  severance and other related costs of  approximately  $0.7
million in the first quarter of fiscal 2004.



                                      -23-
<PAGE>

         During fiscal 2003, we recorded a provision  for asset  impairment  and
for restaurant closing charges of $6.1 million.  Of the provision,  $2.0 million
was for costs relating to restaurant  closings,  including $0.1 million relating
to our other concept locations,  and $4.1 was for the impairment of property and
equipment,  including $0.3 million relating to our other concept locations.  The
charge  for  asset  impairment   resulted  from  our  evaluation  of  impairment
indicators which determined that the carrying amount of certain store assets may
not be recoverable from the estimated  undiscounted  future cash flows resulting
from the use of those assets.

         Under SFAS No. 142,  commencing in fiscal 2002,  we no longer  amortize
goodwill and intangible  assets with  indefinite  lives but instead review those
assets  annually for  impairment  (or more  frequently if impairment  indicators
arise). Separable intangible assets that are not deemed to have indefinite lives
continue to be amortized over their useful lives. The testing,  as of the end of
fiscal  2003,  of  goodwill  and  intangible   assets  with   indefinite   lives
(trademarks)  acquired prior to July 1, 2001 ($205.1 million, net of accumulated
amortization,  at December 28, 2003) for impairment by an independent  valuation
firm engaged to assist us in the  determination  of  impairment,  resulted in no
reduction  to  our  carrying  value  of  goodwill  and  intangible  assets  with
indefinite   lives  at  December  28,  2003.   The   valuation   firm  used  the
capitalization  of  earnings  and the  guideline  company  valuation  methods in
determining the fair value of these assets.

         Interest  expense of $31.0 million for both fiscal 2003 and fiscal 2002
relates to the 11%,  $255.0  million senior notes we issued to finance our going
private  transaction  in September  1999 ($28.1  million in both fiscal 2003 and
2002), the 8.4%,  $16.0 million  mortgage loan on our corporate  headquarters in
2001 ($1.3 million in both periods) and fees for unused borrowing capacity under
our  credit  agreement  terminated  in the fourth  quarter of fiscal  2003 ($0.1
million in both  periods).  In  addition,  $1.5  million in both fiscal 2003 and
fiscal 2002 represents  non-cash charges for the accretion of the original issue
discount on our senior notes and the amortization of deferred financing costs on
the senior notes,  the  terminated  credit  agreement  (which  included the $0.1
million balance of deferred financing costs related to this credit facility) and
the mortgage loan.

         Interest income was approximately  $0.7 million in fiscal 2003 and $0.5
million in fiscal 2002.  Higher  average cash available for investment in fiscal
2003  compared  to fiscal  2002 was  partially  offset  by the lower  prevailing
interest rates in effect.  The indenture under which our senior notes are issued
limits the types of investments which we may make.

         Equity in the net income of  unconsolidated  affiliates  represents our
proportionate  share of earnings and losses in those other  concepts in which we
have a 50% or less  ownership  interest.  Our equity in the  overall  profits of
those  concepts  declined  by $0.2  million  in  fiscal  2003 from  fiscal  2002
resulting  from our  proportionate  share ($0.5  million) of the losses from the
sale  of our  Vincent's  Clam  Bar  location  and  one of the  locations  of our
steakhouse  joint  venture.  These losses offset our equity in the operating net
income of unconsolidated affiliates of approximately $0.9 million in fiscal 2003
compared to $0.7 million for fiscal 2002.  Currently,  there are two  steakhouse
joint venture  locations that will open in the fourth quarter of fiscal 2004 but
we and our joint venture  partners do not have any further  expansion  plans for
the venture, or the Baja Grill joint venture, at this time.


                                      -24-
<PAGE>

         Minority  interest  represents  the  share  of  the  minority  holders'
interests in the earnings or loss of a joint venture in which we have a majority
interest. In early fiscal 2002, we closed one of the two locations owned by this
joint venture. The closed unit had a nominal operating loss in fiscal 2002.

         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 January 3, 2000. Under the provisions
of  Subchapter  S,  substantially  all  taxes  on our  income  are  paid  by our
shareholders  rather than us. Our tax expense was $0.8  million and $0.3 million
for fiscal 2003 and fiscal 2002, respectively. The expense was for taxes owed by
us (rather  than our  shareholders)  to  jurisdictions  that do not  recognize S
corporation  status or that tax entities  based on factors other than income and
for taxes withheld at the source of payment on foreign  franchise income related
payments.

FISCAL 2002 COMPARED TO FISCAL 2001:

         Restaurant sales from Sbarro-owned quick service units and consolidated
other concept units  decreased by $27.5 million,  or 7.4%, to $345.2 million for
fiscal 2002 from $372.7  million in fiscal  2001.  This was  comprised  of sales
decreases  of $22.9  million  in our quick  service  units and $4.6  million  in
consolidated  other  concept  units.  Sales at both Sbarro quick service and our
consolidated  other  concept  locations  for fiscal  2002 have  continued  to be
adversely  impacted by the  reduction in shopping  mall  traffic  related to the
general economic  downturn in the United States and the continuing impact of the
events  of  September  11,  2001.  During  fiscal  2002,  we  closed  or sold to
franchisees  44 more  company-owned  quick  service  units than we opened  which
resulted in a net sales reduction of  approximately  $5.6 million.  In addition,
quick  service  sales in fiscal  2002  compared  to  fiscal  2001  decreased  by
approximately  $3.2 million from the 34 locations  that were closed  during 2001
(including  our high volume  owned unit  destroyed  in the collapse of the World
Trade Center on September 11, 2001), net of locations  opened.  The units closed
since the beginning of fiscal 2001, with the exception of the World Trade Center
unit, were generally low volume units that did not have a material impact on our
profitability.  Comparable  Sbarro quick  service unit sales  decreased by $15.1
million,  or 4.8%, to $299.5  million in fiscal 2002. The remainder of the sales
difference  to 2001 is comprised of sales  differences  between 2002 and 2001 at
locations that were not open for a full year in either 2002 or 2001 due to their
being  remodeled  or  relocated.  In late  March  2001  and mid  June  2001,  we
implemented  price  increases  of  0.7%  and  3.3%,   respectively.   Comparable
consolidated other concept sales decreased $1.2 million, or 8%, to $14.1 million
in fiscal 2002. In addition,  during fiscal 2002, we closed 7 consolidated other
concept  units that  resulted  in a  reduction  in sales of  approximately  $3.4
million from fiscal 2001.

         Franchise  related income was relatively  unchanged for the fiscal year
ended December 29, 2002,  excluding  approximately  $0.3 million  related to the
termination of an area development  agreement in Egypt recognized  during fiscal
2001.  Continuing  royalty revenues from new locations opened in fiscal 2002 and
fiscal 2001 partially offset a reduction in royalty  revenues from  pre-existing
units  caused by a  reduction  in  comparable  unit sales at both  domestic  and
international  locations.  This increase was offset,  however, by a reduction in
income  recognized  from  existing  area  development  agreements in fiscal 2002
compared to fiscal 2001.

         Real estate and other  revenues  decreased  $0.6 million for the fiscal
year ended  December  29, 2002 from fiscal 2001  primarily  due to  decreases in
certain  vendor  rebates  resulting   principally  from



                                      -25-
<PAGE>

decreases in reported  purchasing  volumes caused by decreased  sales.

         Cost of food and paper  products as a percentage  of  restaurant  sales
decreased  to 19.6% for fiscal  2002 from  20.0% in the 2001  fiscal  year.  The
improvement was primarily due to both the benefit derived from closing locations
in fiscal  2002 and 2001 that were not able to function  as  efficiently  as our
other quick  service  locations due to their low sales volume and a $1.7 million
benefit in fiscal 2002 from lower average cheese prices that prevailed in fiscal
2001

         Payroll and other  benefits  decreased  approximately  $7.5  million in
fiscal 2002 but  remained at 27.9% of  restaurant  sales in both fiscal 2002 and
fiscal 2001. The dollar  decrease was primarily due to the effect of steps taken
to reduce  payroll  costs  beginning  in late  fiscal  2001 and the  closing  of
locations  in  fiscal  2002 and  2001.  The  decrease  in the  dollar  amount of
expenditures  for payroll and other  benefits  did not produce a change in these
costs as a percentage of sales due to the reduced level of sales in fiscal 2002.

         Other operating  expenses  decreased by approximately  $1.7 million but
increased  to 33.3% of  restaurant  sales for fiscal  2002 from 31.3% for fiscal
2001. The dollar decline was due to fewer Sbarro and consolidated  other concept
locations in operation  during fiscal 2002.  The  percentage  increase in fiscal
2002 was due to lower  sales  volume and the  effects  of higher  rent and other
occupancy related expenses  resulting from the renewal of existing leases at the
end of their terms at higher  rental  rates.  In addition,  we are  experiencing
increases in repair and maintenance  costs compared to fiscal 2001, a portion of
which  relates  to the  cost of a number  of  nationwide  maintenance  contracts
entered  into in late  fiscal  2001 or early  fiscal  2002 for the repair of our
property and equipment,  which, as discussed below in " -- Liquidity and Capital
Resources,"   has  been  a  factor  in  reducing   the  amount  of  our  capital
expenditures. In addition, as the average age of our locations increase, overall
repair and maintenance costs have been increasing. These aspects were offsetting
factors against dollar savings effected from the closing of low volume units.

         Depreciation  and  amortization  expense  decreased by $9.7 million for
fiscal  2002 from  fiscal  2001.  As a result of the  adoption  of SFAS No. 142,
"Goodwill and Other  Intangible  Assets," in fiscal 2002, we no longer amortized
goodwill and  intangible  assets with  indefinite  lives.  In fiscal  2001,  our
earnings were charged $5.4 million for  amortization  of goodwill and intangible
assets with indefinite lives. In addition, there was a reduction of $2.3 million
in depreciation and amortization related to locations that closed in fiscal 2001
and fiscal  2002.  The balance of the change in  depreciation  and  amortization
expense  in fiscal  2002  relates to  locations  that had been  included  in the
provision  for asset  impairment  in fiscal 2001 for which no  depreciation  was
taken in fiscal 2002 and to  decreases  in  depreciation  and  amortization  for
locations that became fully depreciated during either fiscal 2002 or 2001.

         General and  administrative  expenses  were $24.0  million,  or 6.6% of
total  revenues,  for fiscal 2002  compared to $29.5  million,  or 7.6% of total
revenues,  for fiscal  2001.  General and  administrative  costs for fiscal 2002
reflect  decreases in field  management costs and a reduction in corporate staff
costs due to a cost  containment  program which we implemented  beginning in the
fourth quarter of fiscal 2001.

         During  fiscal  2002,  we  recorded a provision  for asset  impairment,
restaurant  closings and other charges of $9.2 million.  Of the provision,  $8.7
million was for restaurant  closings,  including



                                      -26-
<PAGE>

$4.7 million for the closing or sale of 7 of our other concept restaurants,  and
$0.5 million was for the impairment of property and equipment.

         Interest  expense of $31.0  million in both fiscal 2002 and 2001 relate
to the 11%,  $255.0  million  senior notes  issued to finance our going  private
transaction  ($28.1  million),  the 8.4%,  $16.0  million  mortgage  loan on our
corporate headquarters ($1.3 million) and fees for the unused borrowing capacity
under our  credit  agreement  ($0.1  million).  In  addition,  interest  expense
includes  $1.5  million  in each of 2002 and  2001,  which  represents  non-cash
charges for the accretion of the original issue discount on our senior notes and
the  amortization  of deferred  financing  costs on the senior  notes,  our then
credit agreement and the mortgage loan.

         Interest income was approximately  $0.5 million in fiscal 2002 and $0.8
million in fiscal 2001. Higher cash available for investment in fiscal 2002 than
in fiscal 2001 was offset by the lower prevailing interest rates in effect.

         Equity in the net income of  unconsolidated  affiliates  represents our
proportionate  share of earnings and losses in those other  concepts in which we
have a 50% or less ownership  interest.  The increase in our share of the equity
in the net income of  unconsolidated  affiliates  of $0.4 million in fiscal 2002
over fiscal 2001 was  primarily as a result of the improved  performance  of our
steakhouse joint venture.

         Minority  interest  represents  the  share  of  the  minority  holders'
interests in the earnings or loss of a joint venture in which we have a majority
interest.  In early fiscal 2002, we closed one of the two locations  operated by
this joint venture.  We recorded an  insignificant  charge to earnings in fiscal
2001 related to this closing.

         In  September  2002,  we reached  an  agreement  to  settle,  for $9.65
million,  our claim against our insurance  company for the  reimbursement of the
depreciated cost of the assets destroyed at the Sbarro-owned  World Trade Center
location, as well as for lost income under our business  interruption  insurance
coverage, resulting from the events of September 11, 2001. In September 2002, we
received the amount of the settlement,  less an advance of $1.5 million that was
received in May 2002  against our claim for  property  damage at our World Trade
Center location.  Approximately $7.2 million, net of related expenses,  from the
settlement   relates  to   reimbursement  of  lost  income  under  our  business
interruption  insurance  coverage  and is included in our results of  operations
fiscal 2002.

         Our tax  expense  of  $0.3  million  for  both  fiscal  2002  and  2001
represents  taxes owed to  jurisdictions  that do not  recognize  S  corporation
status or that tax  entities  based on factors  other than  income and for taxes
withheld at the source of payment on foreign franchise related payments.




                                      -27-
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

CASH REQUIREMENTS

         Our   liquidity   requirements   relate   to  debt   service,   capital
expenditures,  working capital, investments in other ventures,  distributions to
shareholders  when  permitted  under the  indenture  for the senior notes and to
repay any  borrowings  we may make under our new line of  agreement  and general
corporate purposes. We incur annual cash interest expense of approximately $29.5
million  under the  senior  notes  and  mortgage  loan and may incur  additional
interest  expense  for  borrowings  under  our new  line of  credit.  We are not
required to make principal payments, absent the occurrence of certain events, on
our senior notes until they mature in September  2009. We believe that aggregate
restaurant capital expenditures and our investments in joint ventures during the
next twelve  months  will  approximate  the fiscal  2003 level of $8.5  million.
Unpaid capital expenditure commitments aggregated  approximately $0.7 million at
December 28, 2003.

         We expect our primary  sources of liquidity to meet these needs will be
cash flow from  operations.  We do not presently  expect to borrow under our new
line of credit in fiscal 2004.


CONTRACTUAL OBLIGATIONS
-----------------------

         Our  contractual  obligations  with  respect  to both our and the other
concepts  (both those in which we have a majority or minority  interest) were as
follows as of December 28, 2003:

<TABLE>
<CAPTION>
                                                                 PAYMENTS DUE BY PERIOD
                                                                 ----------------------
                                                     LESS THAN                                      MORE THAN 5
                                       TOTAL         1 YEAR        1 - 3 YEARS      4 - 5 YEARS     YEARS
                                       -----         ------        -----------      -----------     -----
                                                                          (IN MILLIONS)
<S>                                      <C>           <C>           <C>              <C>             <C>
Long-Term Debt Obligations:
     Senior notes (1)                    $255.0        $   -         $    -           $    -          $255.0
     Mortgage loan (2)                     15.5            0.2          0.3              0.3            14.7
     Credit line (3)                         -             -              -                -               -
Standby letters of credit (4)               2.7            -            0.1              0.1             2.5
Capitalized lease obligations                 -            -              -                -               -
Operating leases (5)                      315.5           51.9         96.5             76.7            90.4
Purchase obligations (6)                    1.9            1.9            -                -               -
                                         -------       -------       ------           ------          ------

Total                                    $590.6        $  54.0       $ 96.9           $ 77.1          $362.6
                                         ======        =======       ======           ======          ======
</TABLE>

(1)      There are no  principal  repayment  obligations  under the senior notes
         until  September  2009,  when  the  entire  principal  balance  becomes
         payable.
(2)      Payable in monthly  installments  of  principal  and  interest  of $0.1
         million.  Table includes only the principal  portion of the installment
         payments.
(3)      Our new line of credit enables us to borrow,  subject to bank approval,
         up to $3.0 million,  less outstanding letters of credit through May 31,
         2005. There are currently no amounts  outstanding under the new line of
         credit.  However, of the $2.7 million of letters of credit reflected in
         the table above,  $1.7 million reduces our availability  under the line
         of credit.
(4)      Represents our maximum  reimbursement  obligations to the issuer of the
         letter of credit in the event the letter of credit is drawn  upon.  The
         letters  of  credit  generally  are  issued  instead  of cash  security
         deposits under operating leases or to guarantee  construction costs for
         Sbarro or



                                      -28-
<PAGE>

         other concept locations.  Of the outstanding standby letters of credit,
         approximately  $0.1 million are for locations  that have been subleased
         to the buyers of two of our other  concept  locations.  All the standby
         letters of credit supporting leases are annually  renewable through the
         expiration of the related lease terms. If not renewed,  the beneficiary
         may draw upon the letter of credit as long as the underlying obligation
         remains outstanding.
(5)      Represents  base rent under operating  leases  including those which we
         either  sublease to, or guarantee the  obligations  of,  franchisees or
         certain of our other concepts.  Excludes real estate taxes,  utilities,
         insurance,  common area charges and other  expenses  that are not fixed
         and  contingent  rent  obligations  which  vary  with the  level of net
         restaurant  sales.  Also excludes leases that are under  month-to-month
         tenancies.
(6)      Represents  commitments  for capital  expenditures,  including  for the
         construction of restaurants and the cost to provide email  connectivity
         to our restaurants, for which we are contractually committed.  Excludes
         potential purchases under our contractual arrangement with our national
         independent  wholesale  distributor that commenced in February 2003 and
         that  requires us, for the next five years,  subject to various  causes
         for  termination,  to purchase 95% of most all our food ingredients and
         related restaurant supplies from them. The agreement does not, however,
         require us to purchase any specific fixed or minimum quantities.  Among
         the factors  that will effect the dollar  amount of  purchases  we make
         under the agreement are:

          o    Number of Sbarro locations open during the term of the contract;
          o    Level of  sales  made at  Sbarro  locations;
          o    Market price of mozzarella cheese and other commodity items;
          o    Price of diesel fuel; and
          o    Mix of products sold by Sbarro locations.

         Historically, we have not purchased or entered into interest rate swaps
of  future,  forward,  option or other  instruments  designed  to hedge  against
changes in interest rates,  the price of commodities we purchase or the value of
foreign currencies.

SOURCES AND USES OF CASH

OPERATIONS

         The  following  table  summarizes  our cash and  cash  equivalents  and
working capital as at the end of our two latest fiscal years and the sources and
uses of our cash flows during those two fiscal years:

                                                   Fiscal Year Ended
                                                   -----------------
                                        December 28, 2003      December 29, 2002
                                        -----------------      -----------------
                                                    (in millions)
                                                    ------------

Liquidity
---------
Cash and cash equivalents                       $56.4                  $55.2
Working capital                                  27.8                   27.1





                                      -29-
<PAGE>


                                                   Fiscal Year Ended
                                                   -----------------
                                        December 28, 2003      December 29, 2002
                                        -----------------      -----------------
Net cash flows
--------------
Provided by operating activities                 11.0                   32.5
Used in investing activities                     (8.5)                 (11.0)
Used in financing activities                     (1.2)                  (3.3)
Net increase in cash                              1.3                   18.2

         We have not historically  required  significant working capital to fund
our  existing  operations  and  have  financed  our  capital   expenditures  and
investments in joint ventures through cash generated from operations.

         Net cash  provided by operating  activities  was $11.0  million for the
2003 fiscal year compared to $32.5 million for the 2002 fiscal year.  This $21.5
million  reduction was primarily due to the effect of the loss from  operations,
as  adjusted  for non - cash items,  in fiscal 2003  compared to the income from
operations, as similarly adjusted, in fiscal 2002 of approximately $24.5 million
and a lower,  by $1.1  million,  reduction  in accounts  receivable  balances in
fiscal 2003 from  fiscal  2002,  offset by an  increase in accounts  payable and
accrued expenses of $3.0 million in fiscal 2003 that resulted from a significant
surge in operations toward the end of the fourth quarter.

         Net cash used in investing  activities has historically  been primarily
for  capital  expenditures,  including  those  made  by our  consolidated  other
concepts.  Net cash used in  investing  activities  declined to $8.5  million in
fiscal  2003 from  $11.0  million  in fiscal  2002.  Capital  expenditures  were
utilized for quick  service new unit  openings and  renovation  activity and for
expenditures for consolidated other concept locations. Investing activities also
include  $1.0  million and $1.9  million in fiscal 2003 and 2002,  respectively,
relating to an upgrade of our computer systems and other hardware and software.

         Net cash used in  financing  activities  was $1.3 million in the fiscal
year ended  December 28, 2003 compared to $3.3 million for the fiscal year ended
December 29,  2002.  Cash used in financing  activities  in both years  resulted
primarily from tax  distributions to shareholders.  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  are  paid  by our  shareholders.  The
indenture for the senior notes permits us to make  distributions to shareholders
under a formula  that is designed to  approximate  the income  taxes,  including
estimated taxes,  that would be payable by our shareholders if their only income
were their  pro-rata  share of our taxable  income and such income were taxed at
the highest  applicable  federal and New York State  marginal  income tax rates.
There are  differences in the book and tax treatments of the provision for asset
impairment,  tax credits and in book and tax  depreciation.  The 46% tax rate is
higher  than  our  historical  effective  tax  rate  prior  to  2000  due to (a)
differences  in tax rates between  individual and corporate  taxpayers,  (b) the
timing differences  previously  accounted for as deferred taxes in our financial
statements  (deferred taxes were eliminated upon our conversion to S corporation
status) and (c) the effect of double taxation (once on us for our taxable income
and once on our shareholders for dividends  received from us) in those state and
local   jurisdictions   that  do  not  recognize  S  corporation   status.   Tax
distributions  with respect to our taxable income for fiscal 2002, 2001 and 2000
were



                                      -30-
<PAGE>

$1.8  million,  $3.1  million  and  $7.6  million,  respectively.  There  was an
additional $0.7 million tax distribution  with respect to our taxable income for
fiscal 2002 that was  declared in  November  2003.  We do not expect to make tax
distributions in 2004 related to the 2003 results of operation.

FINANCING

         As part of the going private transaction, we sold $255.0 million of 11%
senior notes (at a price of 98.514% of par to yield  11.25% per annum),  the net
proceeds of which,  together with  substantially  all of our then existing cash,
was used to finance the  transaction,  and entered into a $30.0  million  credit
agreement  that we  terminated  in the  fourth  quarter  of  2003.  Despite  the
termination of the credit agreement, the bank agreed to temporarily continue the
standby  letters  of  credit  in  effect  at the time  that we  terminated  such
agreement.  In March 2004, we obtained a new line of credit through another bank
under which we currently have the ability,  subject to bank approval,  to borrow
up to $3 million,  less outstanding letters of credit. The bank that granted the
new line of credit has  replaced  the $1.7  million  letters of credit that were
outstanding under the prior credit agreement.

         At March 5, 2004, we had $1.3 million of undrawn availability,  subject
to bank approval,  under the new line of credit. The new line of credit contains
no financial  covenants or unused line fees.  Interest  applicable  to the loans
under  the new line of  credit is at the  bank's  prime  rate at the time of any
borrowings. The line expires in May 2005.

         Under the indenture under which our senior notes are issued,  there are
various  covenants that limit our ability to borrow funds in addition to lending
arrangements  that  existed  at the date of the going  private  transaction  and
replacements of those  arrangements,  to make "restricted  payments"  including,
among other things,  dividend payments (other than as distributions  pursuant to
the tax payment  agreement),  and to make  investments  in, among other  things,
unrestricted  subsidiaries.  Among other covenants, the indenture requires that,
in order for us to borrow  (except under  specifically  permitted  arrangements,
such as up to  $75.0  million  of  revolving  credit  loans),  our  consolidated
interest  ratio coverage (as defined in the  Indenture),  after giving pro forma
effect to the interest on the new  borrowing,  for the four most recently  ended
fiscal  quarters must be at least 2.5 to 1. As of December 28, 2003,  that ratio
was 1.26 to 1. As a result, we are not presently able to borrow funds except for
the  specifically  permitted  indebtedness,  such  as up  to  $75.0  million  of
revolving credit loans. In order to make restricted payments, that ratio must be
at least 2.0 to 1, after giving pro forma effect to the restricted  payment and,
in any event, is limited in dollar amount pursuant to a formula contained in the
indenture and credit agreement.  We refer to the amount that is available for us
to make  dividends  and other  restricted  payments as the  "restricted  payment
availability."  We cannot make  restricted  payments  (other than  distributions
pursuant to the tax payment  agreement) until we increase the restricted payment
availability by approximately $14.8 million,  and then only to the extent of any
excess over that amount.

         In March 2000,  one of our restricted  subsidiaries,  as defined in the
indenture  under which the senior  notes are issued,  obtained a $16.0  million,
8.4% loan due in 2010,  secured  by a  mortgage  on our  corporate  headquarters
building.  The loan is payable in monthly installments of principal and interest
of $0.1 million.  The outstanding  principal  balance of the loan as of December
28, 2003 was $15.5 million.  The mortgage  agreement contains various covenants,
including a requirement  that the subsidiary  maintain a minimum ratio of EBITDA
to annual debt  service of at least 1.2 to 1.0.



                                      -31-
<PAGE>

         We were in  compliance  with all  covenants  in the  indenture  for the
senior notes and our mortgage as of December 28, 2003.

OFF-BALANCE SHEET ARRANGEMENTS

         We and our unconsolidated  subsidiaries (those that are included in our
statement   of   operations   under  the  caption   "Equity  in  net  income  of
unconsolidated  affiliates)"  have  contractual  obligations  that  contingently
require  payments  under a line of  credit,  standby  letters  of  credit  and a
mortgage  loan of our  steakhouse  joint  venture  and a bank  loan of our quick
service  Mexican-style   restaurant  joint  venture.  In  addition,  we  have  a
contractual  obligation  for the remainder of the original term of the operating
lease for the Vincent's Clam Bar location which was sold.

         Our  obligations  under the guarantees for the line of credit,  standby
letter and a mortgage loan of our steakhouse  joint venture (our 40% interest in
the joint  venture's  results of operations is included in our equity in the net
income of unconsolidated  affiliates in our statement of operations) are several
and, as a result, cover only 40% of those obligations, except for a $0.6 million
letter  of  credit  that we  guarantee  in  full.  Our  guarantees  are  used to
facilitate the continuing  borrowing by the steakhouse  joint venture and are in
place  should the venture be unable to repay the amounts  owed under the line of
credit and mortgage  loan or should the standby  letters of credit be drawn upon
and the  venture  not have  funds  available  in the event of a drawing  under a
letter of credit. For fiscal 2003, we included $0.6 million of our share of this
venture's  net  income,  after  our share of a loss of $0.3  million  due to the
closing and sale of an unprofitable location, in our statement of operations and
received $0.1 million of distributions during the year. As of December 28, 2003,
the amount of our  guarantees  for this joint  venture  was  approximately  $5.6
million.  Our  guarantees,  should the line of credit be fully  utilized,  would
increase to $8.2 million.

         Our obligation  under the bank loan to our quick service  Mexican-style
restaurant  joint  venture (our 50% interest in the joint  venture's  results of
operations  is  included  in our  equity  in the net  income  of  unconsolidated
affiliates  in our  statement  of  operations)  is joint  and  several  with our
partner's  guarantee and is therefore up to 100% the  outstanding  amount of the
loan.  Our  guarantee was  established  at the inception of the borrowing by the
venture to  facilitate  its  borrowing  and is required to be in place until the
loan is repaid.  For fiscal 2003,  this venture had a minimal loss, 50% of which
was included in our statement of operations.  There were no  distributions  from
this joint  venture  during  fiscal 2003.  As of December  28, 2003,  the amount
subject to our loan guarantee for this joint venture was $1.7 million.

         In August 2003, we closed,  sold the assets and  transferred the lease,
subject  to our  remaining  $0.2  million  guarantee  for the  remainder  of the
original  lease term, of the Vincent's  Clam Bar location.  Our guarantee of the
lease would become  operable if and when the buyer  defaults under the lease for
the  location.  Our share of the loss on sales was  included in the $0.2 million
loss that  represents  our 25% share of the results of the joint  venture and is
included  in  our  equity  of  unconsolidated  affiliates  in our  statement  of
operations.





                                      -32-
<PAGE>



RELATED PARTY TRANSACTIONS
--------------------------

         We have been the sole  tenant  of an  administrative  office  building,
which is  leased  from  Sbarro  Enterprises,  L.P.  The rent paid by us for this
facility  in fiscal  2003 was $0.3  million.  We were  advised by a real  estate
broker  at the time we  renewed  the lease  for this  facility  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.  Our obligation  for the remainder of the lease term,  which is
scheduled to expire in 2011, will be terminated upon the sale of the building by
the partnership in April 2004.

         On  April  5,  2001,   we  loaned  $3.23  million  to  certain  of  our
shareholders,  including:  Mario Sbarro,  $1.08 million,  Joseph  Sbarro,  $1.24
million and Anthony  Sbarro,  $0.87 million.  The due dates of the related notes
were  extended on April 6, 2003 to April 6, 2005,  and bear interest at the rate
of 4.63%,  payable  annually.  After a loan repayment in March 2004, the current
balance of these loans is $2.95 million.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
including:  Mario  Sbarro,  $0.60  million,  Joseph  Sbarro,  $0.70 million and,
Anthony Sbarro,  $0.49 million,  and the Trust of Carmela Sbarro, $0.99 million.
The related  notes are payable on December  28, 2004,  and bear  interest at the
rate of 2.48%,  payable  annually.  After a loan  repayment  in March 2004,  the
current balance of these loans is $2.58 million.

         In March  2004,  we  extended a loan of  $40,000 to Gennaro A.  Sbarro,
Corporate  Vice  President  and  President  of  our  Franchising  and  Licensing
Division,  to March 28, 2010. The note is repayable at approximately  $5,000 per
year,  including  interest at 2.69% per annum, with a balloon payment due at the
maturity date.

         Anthony  Missano,  Corporate  Vice  President and President of Business
Development , entered into a note dated June 15, 2003 in our favor in the amount
of $89,687,  The note is repayable at approximately  $10,000 per year, including
interest at 2.96% per annum,  with a balloon  payment due on June 30, 2010.  The
note is for the  payment  of  royalties  due us for 2001 and 2000  from a former
franchisee that was owned by Mr.  Missano's wife, the daughter of Joseph Sbarro.
The current balance owed on the notes is $84,687.

         The  interest  rates  charged on all the related  party loans  included
above  approximate  the Applicable  Federal Rate (AFR) published by the Internal
Revenue Service at the time of the loan.

         Companies  owned by a son of Anthony  Sbarro paid royalties to us under
franchise  agreements  containing  terms similar to those in agreements  entered
into by us with unrelated franchisees.  Royalties paid under these agreements in
fiscal 2003 were $89,496. The related franchise agreement contains terms similar
to those in agreements entered into by us with unrelated franchisees.

         A corporation whose  shareholder is the  brother-in-law of our Chairman
of the entered into a franchise agreement with us at the time of the acquisition
from us of the assets of a Sbarro owned  restaurant in fiscal 2002 that contains
terms  similar  to  those  in  agreements  entered  into  by us  with  unrelated
franchisees.  We received  promissory  notes for each of the purchase  price and
initial franchise fee that are payable over seven years and bear interest on the
unpaid  principal  balances at



                                      -33-
<PAGE>

7% interest per annum.  The current  amount owed under the  promissory  notes of
$119,209  has been fully  reserved as of December  28,  2003.  In  addition,  we
subleased  this  location to that  franchisee.  Payments  under the sublease are
being  made  directly  to the  landlord  by the  franchisee.  Interest  Payments
received  relating to the promissory notes was $4,067 in fiscal 2003.  Royalties
paid  under  this  arrangement  in fiscal  2003 were  $3,303  but  royalties  of
approximately  $17,700 were not included in the  statement of operations as they
were not collected  during the fiscal year. The royalties and interest  Payments
noted above were collected in the beginning of fiscal 2003.

         On March 3,  2003,  a company  in which  Gennaro  J.  Sbarro,  then our
Corporate  Vice  President and President of our Casual and Fine Dining  Division
and the son of Joseph  Sbarro,  has a 50% interest (the other 50% is owned by an
unaffiliated third party) entered into a franchise agreement and a sublease with
us for a new  location.  The lease for the  location  had been  entered  into in
September  2002  by  one  of our  subsidiaries.  Subsequent  to  that  date,  we
determined  that the  economics  of the  location  would be better  suited for a
franchise  operator and, as such,  we entered into the  franchise  agreement and
subleased the premises to this  franchisee.  Payments under the sublease will be
made directly to the landlord by the franchisee.  The franchise  agreement is on
terms and conditions  similar to those in other  franchise  arrangements we have
entered into in similar  situations with unrelated third parties.  The franchise
agreement provides for the payment of 5% of the location's sales as a continuing
royalty  but does not  provide for any initial  franchise  fee.  Future  minimum
rental  payments  under the lease for this  location over the term of the lease,
which expires in 2018, aggregate approximately $2.4 million. Mr. Sbarro issued a
note in our favor for  $54,538,  that is  repayable  in eighteen  equal  monthly
installments  of $3,030 which  commenced in November  2002 with no interest,  to
reimburse  Sbarro for costs advanced by Sbarro in connection  with the franchise
location.  The  balance on the note as of  December  28,  2003 is  $48,478.  The
location is expected to open in the first  quarter of fiscal 2004. As of October
31, 2003,  Gennaro J. Sbarro  resigned  from his  positions as Corporate  Vice -
President  and President of our Casual and Fine Dining  division.  A corporation
owned by Mr. Sbarro entered into an eighteen month  agreement with us to provide
consulting  services to our quick service and casual dining division for $22,500
per month and the  reimbursement  for customary  and usual  expenses that may be
incurred.

         In October  2003,  we sold the assets of three  Sbarro-owned  locations
separately  to  entities  owned  separately  by each of three  other of  Anthony
Sbarro's  sons. Two of the  locations,  which had no remaining book value,  were
transferred for no consideration while the third was sold for $0.3 million, that
was paid in  full,  and  resulted  in a gain to  Sbarro  of  approximately  $0.1
million.  Two of the locations were  marginally  profitable in fiscal 2002 while
the third had a small loss during that period.  In  connection  with the sale of
the locations,  the employment of the individuals with Sbarro was terminated and
we have included a charge for their total severance pay of approximately $60,000
in our results of operations  for fiscal 2003.  The franchise  agreements are on
terms and  conditions  similar to those  other  franchise  arrangements  we have
entered into in similar  situation with unrelated third parties.  The agreements
provide for the payment of 5% of the  location's  sales as a continuing  royalty
but does not provide for any initial  franchise fee.  Royalties of approximately
$16,400 have been included in the fiscal 2003 results of  operations  are unpaid
to date  and  fully  reserved  in the  financial  statements.  In  addition,  we
subleased two of the locations to two of the franchisees.  The third location is
on a month-to-month  basis and any new lease entered into by the franchisee will
not be guaranteed or subleased by Sbarro. Payments under the subleases are being
made directly to the landlord by the franchisees. Future minimum rental payments
over the  terms of the  leases  under the  leases  for the two  locations  being
subleased which expire in 2006 and 2016, aggregate approximately $2.0 million.



                                      -34-
<PAGE>

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
position as Manager of Administration - Construction. A corporation owned by her
entered into a one year  agreement  to provide  consulting  services  related to
construction matters to us for a series of monthly payments totaling $100,000.

         We,  our  subsidiaries  and our  other  concepts,  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,  $340,269
during fiscal 2003.  Based on our experience with  non-affiliated  printers that
provide  similar  services to us, we believe the services  have been provided on
terms comparable to those available from unrelated third parties.

         Bernard  Zimmerman  & 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 $315,200 for services during our
2003 fiscal year. Mr. Zimmerman is a member of Board of Directors.  We have been
advised by Mr.  Zimmerman  that these  fees were  charged on a basis  similar to
those that Bernard Zimmerman & Company, Inc. charges to unrelated clients.

         In addition to the compensation of Mario, Anthony,  Joseph,  Gennaro A.
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 2003; and

         o     Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves as
               Vice President -  Administration,  earned  $206,129 during fiscal
               2003.

         o     Other members of the immediate families of Mario, Anthony, Joseph
               and Carmela Sbarro who are our employees,  earned an aggregate of
               $621,751 during fiscal 2003.

RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------

         FIN 46,  "Consolidation of Variable  Interest  Entities," was effective
immediately  upon its  issuance  during  fiscal  2003 for all  enterprises  with
variable interests in variable interest entities created after January 31, 2003.
In December  2003,  the staff issued FIN No. 46(R) which  changes the  effective
date for interests in variable interest entities created before February 1, 2003
beginning  with the first interim  reporting  period after March 15, 2004. If an
entity is determined to be a variable  interest entity,  it must be consolidated
by the enterprise  that absorbs the majority of the entity's  expected losses if
they occur,  receives a majority of the entity's  expected  residual  returns if
they occur,  or both.  Where it is reasonably  possible that the enterprise will
consolidate  or  disclose  information  about a variable  interest  entity,  the
enterprise must disclose the nature,  purpose, size and activity of the variable
interest entity and the enterprise's maximum exposure to loss as a result of its
involvement with the variable interest entity in all financial statements issued
after January 31, 2003. The FASB has specifically exempted traditional franchise
arrangements  from the  evaluations  required  under  FIN No.  46.  We have also
reviewed our corporate relationships for possible coverage under FIN No. 46. The
application of FIN No. 46 did not have a material  effect on our disclosures and
our financial  position or results of operations.  The required  disclosures for
any variable  interest  entity have been  included in our Form 10-K for the 2003
fiscal year.


                                      -35-
<PAGE>

CRITICAL ACCOUNTING POLICIES AND JUDGMENTS
------------------------------------------

         Accounting  policies  are an integral  part of the  preparation  of our
financial statements in accordance with accounting principles generally accepted
in the United States of America.  Understanding these policies,  therefore, is a
key factor in  understanding  our reported  results of operations  and financial
position. Accounting policies often require us to make estimates and assumptions
that affect the amounts of assets,  liabilities,  revenues and expenses reported
in our financial  statements.  Due to their nature,  estimates involve judgments
based upon  available  information.  Therefore,  actual results or amounts could
differ from  estimates and the  difference  could have a material  impact on our
consolidated  financial  statements.  Accounting  policies whose application may
have the most  significant  effect on our  reported  results of  operations  and
financial  position and that require  judgments,  estimates and  assumptions  by
management  that can affect their  application and our results of operations and
financial position, are:

         o SFAS No. 5, "Accounting for  Contingencies."  Pursuant to SFAS No. 5,
in the past we have  made,  and we  intend  in the  future  to  make,  decisions
regarding the accounting for legal matters based on the status of the matter and
our best estimate of the outcome (we expense  defense  costs as incurred).  This
requires  management to make judgments  regarding the  probability and estimated
amount of possible future contingent liabilities, especially, in our case, legal
matters.  However,  especially  if a matter goes to a jury trial,  our  estimate
could be off since our estimates are based,  in large part, on our experience in
settling matters. In our judgment, we believe that the estimate of approximately
$1.6 million for outstanding legal actions is adequate.

         o SFAS No. 142, "Goodwill and Other Intangible  Assets," requires us to
test annually and  periodically  assess  whether there has been an impairment of
goodwill and intangible  asset  acquired prior to July 1, 2001 ($205.1  million,
net of accumulated amortization,  at December 28, 2003). As discussed under " --
Results of Operations"  above,  the independent  firm we engaged to assist us in
the  determination of impairment,  used the  capitalization  of earnings and the
guideline  company  valuation  methods  in  determining  the  fair  value of our
goodwill and intangible assets with indefinite lives concluded that there was no
impairment  in the  carrying  value of these  assets as of  December  28,  2003.
However, future estimates could change and cause us to take an impairment charge
with respect to those assets. Further, after taking such a charge, should future
estimates  determine that the fair value has risen,  SFAS No. 142 does not allow
us to increase the then current value.

         o  SFAS  No.  144,  "Accounting  for  the  Impairment  or  Disposal  of
Long-Lived  Assets." SFAS No. 144 requires judgments  regarding future operating
or disposition plans for marginally  performing  assets. The application of this
policy has affected  the amount and timing of charges to operating  results that
have been  significant  in recent  years ($4.1  million,  $0.4  million and $5.5
million in fiscal 2003, 2002 and 2001, respectively). We evaluate our long-lived
assets for impairment at the individual  restaurant level on an annual basis, or
whenever  events  and  circumstances  indicate  that the  carrying  amount  of a
restaurant may not be  recoverable,  including our business  judgment of when to
close underperforming  units. These impairment evaluations require an estimation
of cash flows over the remaining life of the related  restaurant lease, which is
generally  up to 10 years.  Our  estimates  are based on average cash flows from
recent  operations of the restaurants and, unless specific  circumstances  about
the  location  warrant,  do not include  unsupportable  sales  growth and margin
improvement  assumptions.  Should  the  carrying  amount  not  be  deemed  to be


                                      -36-
<PAGE>

recoverable,  we write the assets down to their fair value. After the impairment
has been  identified and the related asset written down, in accordance with SFAS
No. 144, the effect cannot be reversed. As a result, the result of evaluation is
not subject to future review and change

         o SFAS No. 146,  "Accounting for Costs Associated with Exit or Disposal
Activities,"  which addresses  accounting for  restructuring  and similar costs,
supersedes previous accounting guidance, principally EITF No. 94-3. SFAS No. 146
requires  that the  liability  for  costs  associated  with an exit or  disposal
activity be recognized  when the  liability is incurred.  Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a company's  commitment
to an exit  plan.  SFAS No.  146 also  establishes  that  the  liability  should
initially  be measured  and  recorded at fair value.  Accordingly,  SFAS No. 146
changes  the  expense  recognition  for  certain  costs we incur  while  closing
restaurants  or  undertaking  other exit or disposal  activities.  However,  the
timing  difference is not typically of significant  length. We estimate that the
liability  that will be recorded in the first  quarter of fiscal 2004 related to
the total cost of the  reduction  in work force that has  occurred  during  that
period of time is $0.7  million;  however,  the  estimate  is  subject to review
throughout the payment of the costs recorded under SFAS No. 146.

         o FIN No. 45, "Guarantor's  Accounting and Disclosure  Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," elaborates
on the  disclosures  to be  made  by a  guarantor  in its  financial  statements
concerning its obligations under certain  guarantees that it has issued. It also
clarifies  (for  guarantees  issued after January 1, 2003),  that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligations undertaken in issuing the guarantee. We have guarantees
that  would  require   recognition  upon  issuance  or  modification  under  the
provisions  of FIN No. 45. The nature of our business  will likely result in the
issuance of certain  guarantees  in the future and, as such, we will be required
to evaluate the fair value of the obligation at the inception of such guarantee.
We recognized a liability  under FIN No. 45 of  approximately  $38,000 in fiscal
2003.  The amount we may be required to  recognize in future years may be higher
than this amount depending on the number and magnitude of guarantees we issue.

         o  FIN  46,   "Consolidation  of  Variable  Interest  Entities,"  which
addresses  interests in variable  interest  entities  created before February 1,
2003 requires that, if an entity is determined to be a variable interest entity,
it must be  consolidated  by the  enterprise  that  absorbs the  majority of the
entity's  expected  losses if they occur,  receives a majority  of the  entity's
expected  residual  returns  if they  occur,  or both.  Where  it is  reasonably
possible that the enterprise will  consolidate or disclose  information  about a
variable interest entity, the enterprise must disclose the nature, purpose, size
and  activity  of the  variable  interest  entity and the  enterprise's  maximum
exposure  to loss as a result  of its  involvement  with the  variable  interest
entity in all financial statements issued after January 31, 2003. FIN No. 46(R),
which  changes  the  effective  dates for the  recording  of  variable  interest
entities created before February 1, 2003, also specifically exempted traditional
franchise locations from the evaluations  required under FIN No. 46An evaluation
of our business ventures,  other than franchise arrangements,  has been and must
continue to be  undertaken  for all new  business  ventures in order to evaluate
whether  they are variable  interest  entities.  To date,  there have no been no
changes in our  determinations  relating to potential variable interest entities
and their effect on our financial condition and results of operations.




                                      -37-
<PAGE>



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.  The  indenture  under which our senior  notes are
issued limits us to similar  investments.  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.

         Future  borrowings  under our new credit  facility  (none are currently
outstanding) will be at rates that float with the market and, therefore, will be
subject to fluctuations in interest rates.  Our $255.0 million senior notes bear
a fixed  interest  rate of 11.0%.  We are not a party to,  and do not  expect to
enter into any,  interest  rate  swaps or other  instruments  to hedge  interest
rates.

         We have not and do not expect to, purchase 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 in the changes of 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.





                                      -38-
<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------  -------------------------------------------



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------





Board of Directors
Sbarro, Inc.
Melville, New York



We have audited the accompanying consolidated balance sheets of Sbarro, Inc. and
subsidiaries  as of December 28, 2003 and  December  29,  2002,  and the related
consolidated  statements of operations,  shareholders' equity and cash flows for
each of the years then ended. 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  audit.  The  Company's  consolidated
financial  statements  for the  year  ended  December  30,  2001,  prior  to the
adjustment  discussed  in Note 1,  were  audited  by  auditors  who have  ceased
operations.  Those auditors expressed an unqualified  opinion of those financial
statements in their report dated March 21, 2002.

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  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Sbarro,  Inc. and
subsidiaries  as of December  28, 2003 and  December 29, 2002 and the results of
their  operations  and their cash flows for the years then ended,  in conformity
with accounting principles generally accepted in the United States.

As discussed in Note 1 to the  consolidated  financial  statements,  the Company
changed its method of  accounting  for goodwill and  intangible  assets upon the
adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" in 2002.

As discussed above, the consolidated  financial  statements of Sbarro,  Inc. and
subsidiaries  for the year  ended  Decmeber  30,  2001,  were  audited  by other
auditors who have ceased  operations.  As  described in Note 1, these  financial
statements have been revised to include the transitional disclosures required by
SFAS No. 142. We performed the following  audit  procedures  with respect to the
disclosures in Note 1 with respect to 2001. We agreed the net loss as previously



                                      -39-
<PAGE>

reported  and the  adjustment  to reported  net loss  representing  amortization
expense recognized in that period related to goodwill and intangible assets that
are no longer being amortized,  as a result of initially  applying SFAS No. 142,
to the Company's  underlying  records obtained from management,  and (ii) tested
the mathematical accuracy of the reconciliation of adjusted net loss to reported
net loss. In our opinion,  the disclosures  for 2001 in Note 1 are  appropriate.
However,  we were not engaged to audit,  review,  or apply any procedures to the
2001  financial  statements  of the  Company  other  than with  respect  to such
disclosures and, accordingly,  we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.

/s/ BDO Seidman, LLP

New York, New York
March 5, 2004










                                      -40-
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                    ----------------------------------------

The following report is a copy of a report  previously issued by Arthur Andersen
LLP and has not been  reissued  by Arthur  Andersen  LLP.  As  discussed  in the
Summary of Significant  Accounting  Policies note, the Company has reflected the
impact of adopting SFAS No. 142 on the 2001  consolidated  financial  statements
including the transitional  disclosures required. The Arthur Andersen LLP report
does not extend to this change to the 2001  consolidated  financial  statements.
The adjustment to the 2001 consolidated financial statements were reported on by
BDO Seidman, LLP as stated in their report appearing herein.

To Sbarro, Inc.:

We have audited the accompanying  consolidated balance sheets of Sbarro, Inc. (a
New York corporation) and subsidiaries as of December 30, 2001* and December 31,
2000*,  and the related  consolidated  statements of  operations,  shareholders'
equity and cash flows for each of the three years in the period  ended  December
30, 2001.  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 audit 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  December  30,  2001* and  December  31,  2000*,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 30, 2001, in conformity with accounting  principles  generally accepted
in the United States.

                                                   /s/ Arthur Andersen LLP

New York, New York
March 21, 2002

This is a copy of the audit report  previously  issued by Arthur Andersen LLP in
connection  with our filing on Form 10-K for the fiscal year ended  December 30,
2001.  This  audit  report  has not been  reissued  by  Arthur  Andersen  LLP in
connection with this filing on Form 10-K.

* The  2001  and  2000  consolidated  balance  sheets  and  the  2000  and  1999
consolidated  statements of operations,  shareholders' equity and cash flows are
not required to be presented in the 2003 annual report.





                                      -41-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS


<TABLE>
<CAPTION>
                                                                       DECEMBER 28, 2003         DECEMBER 29, 2002
                                                                       -----------------         -----------------
                                                                                     (IN THOUSANDS)
<S>                                                                          <C>                        <C>
Current assets:
   Cash and cash equivalents                                                 $56,409                    $55,150
   Restricted cash for untendered shares                                          21                         21
   Receivables, net of allowance for doubtful accounts of $488
     in 2003 and $491 in 2002:
         Franchise                                                             1,700                      2,059
         Other                                                                 1,171                      1,244
                                                                               -----                      -----
                                                                               2,871                      3,303

   Inventories                                                                 2,707                      3,285
   Prepaid expenses                                                            3,844                      2,362
   Current portion of loans receivable from officers                           2,810                      3,232
                                                                               -----                      -----
       Total current assets                                                   68,662                     67,353

Property and equipment, net                                                   96,604                    115,081

Intangible assets:
   Trademarks                                                                195,916                    195,916
   Goodwill                                                                    9,204                      9,204
   Deferred financing costs and other, net                                     5,482                      6,632

Loans receivable from officers, less current portion                           3,347                      2,800

Other assets                                                                   7,614                      7,787
                                                                            --------                   --------
                                                                            $386,829                   $404,773
                                                                            ========                   ========

</TABLE>
                See notes to consolidated financial statements.




                                      -42-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                       DECEMBER 28, 2003         DECEMBER 29, 2002
                                                                       -----------------         -----------------
                                                                            (IN THOUSANDS EXCEPT SHARE DATA)

<S>                                                                        <C>                          <C>
Current liabilities:
    Amounts due for untendered shares                                         $     21                  $      21
    Accounts payable                                                            13,734                     10,279
    Accrued expenses                                                            18,774                     21,623
    Accrued interest payable                                                     8,181                      8,181
    Current portion of mortgage payable                                            168                        154
                                                                              --------                   --------
         Total current liabilities                                              40,878                     40,258
                                                                              --------                   --------

Deferred rent                                                                    8,711                      8,474
                                                                              --------                   --------

Long-term debt, net of original issue discount                                 268,152                    267,941
                                                                              --------                   --------

Commitments and contingencies

Shareholders' equity:
    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 December 28,
      2003 and December 29, 2002                                                    71                         71
    Additional paid-in capital                                                      10                         10
    Retained earnings                                                           69,007                     88,019
                                                                              --------                  ---------
                                                                                69,088                     88,100
                                                                              --------                   --------

                                                                              $386,829                   $404,773
                                                                              ========                   ========


</TABLE>
                See notes to consolidated financial statements.





                                      -43-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                            FOR THE FISCAL YEARS ENDED
                                                               -------------------------------------------------------
                                                                 DEC. 28, 2003      DEC. 29, 2002      DEC. 30, 2001
                                                                 -------------      -------------      -------------
                                                                                  (IN THOUSANDS)
<S>                                                                   <C>                <C>                <C>
Revenues:
    Restaurant sales                                                  $314,708           $345,206           $372,673
    Franchise related income                                            10,868             10,070             10,286
    Real estate and other                                                6,748              5,104              5,756
                                                                      ---------         ----------           --------
       Total revenues                                                  332,324            360,380            388,715
                                                                      ---------         ----------           --------

Costs and expenses:
    Restaurant operating expenses:
       Cost of food and paper products                                  67,446             67,593             74,614
       Payroll and other employee benefits                              89,614             96,288            103,828
       Other operating costs                                           110,453            114,892            116,581
    Depreciation and amortization                                       19,712             20,683             30,375
    General and administrative                                          25,451             23,960             29,472
    Asset impairment, restaurant closings and other charges              6,073              9,196             18,224
                                                                      ---------         ----------           --------
         Total costs and expenses                                      318,749            332,612            373,094
                                                                      ---------         ----------           --------

Operating income                                                        13,575             27,768             15,621
                                                                      ---------         ----------           --------

Other (expense) income:
    Interest expense                                                   (31,039)           (30,959)           (30,950)
    Interest income                                                        694                528                756
    Equity in net income of
       unconsolidated affiliates                                           425                668                310
    Insurance recovery, net                                                  -              7,162                  -
                                                                      ---------         ----------           --------
       Net other expense                                               (29,920)           (22,601)           (29,884)
                                                                      ---------         ----------           --------

(Loss) income before minority interest                                 (16,345)             5,167            (14,263)
Minority interest                                                          (41)               (52)                (1)
                                                                      ---------         ----------           --------

(Loss) income before income taxes                                      (16,386)             5,115            (14,264)
Income taxes                                                               844                334                325
                                                                      ---------         ----------           --------

Net (loss) income                                                     $(17,230)            $4,781           $(14,589)
                                                                      =========            ======           =========


</TABLE>
                 See notes to consolidated financial statements.




                                      -44-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                    NUMBER OF SHARES                    ADDITIONAL         RETAINED
                                     OF COMMON STOCK      AMOUNT      PAID-IN CAPITAL      EARNINGS          TOTAL
                                    ----------------      ------      ---------------      --------          -----
                                                            (IN THOUSANDS, EXCEPT SHARE DATA)


<S>                                     <C>                     <C>             <C>         <C>             <C>
Balance at
   January 1, 2001                      7,064,328              $7l              $10         $113,516        $113,597

Net loss                                        -                -                -          (14,589)        (14,589)

Distributions to
   shareholders                                 -                -                -          (12,564)        (12,564)
                                        ---------        ---------        ---------         --------        --------

Balance at
   December 30, 2001                    7,064,328               71               10           86,363          86,444

Net income                                      -                -                -            4,781           4,781

Distribution to
   shareholders                                 -                -                -           (3,125)         (3,125)
                                        ---------        ---------        ---------         --------        --------


Balance at
   December 29, 2002                    7,064,328               71               10           88,019          88,100

Net loss                                        -                -                -          (17,230)        (17,230)

Distributions to
  shareholders                                  -                -                -           (1,782)         (1,782)
                                        ---------        ---------        ---------         --------        --------

Balance at
   December 28, 2003                    7,064,328              $71              $10          $69,007         $69,088
                                        =========        =========        =========          =======        ========

</TABLE>

                See notes to consolidated financial statements.




                                      -45-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                            ----------------------------------------------------------
                                                               DECEMBER 28,       DECEMBER 29,        DECEMBER 30,
                                                               ------------       ------------        ------------
                                                                   2003               2002                2001
                                                                   ----               ----                ----
                                                                                 (IN THOUSANDS)
<S>                                                                 <C>                   <C>              <C>
OPERATING ACTIVITIES:
Net (loss) income                                                   $(17,230)             $4,781           $(14,589)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
     Depreciation and amortization                                    21,249              22,137             31,830
     Allowance for doubtful accounts receivable                          435                 350                 61
     Increase in deferred rent, net                                      242                 212                969
     Loss on sale of other concept units, net                             50                   -                  -
     Asset impairment, restaurant closings and other
       charges                                                         6,073               7,922             17,352
     Minority interest                                                    41                  52                  1
     Equity in net income of unconsolidated affiliates                  (425)               (668)              (310)
     Dividends received from unconsolidated affiliates                   119                 311                244
Changes in operating assets and liabilities:
     Decrease (increase) in receivables                                  191               1,308               (614)
     Decrease (increase) in inventories                                  578                 252                (36)
     Increase in prepaid expenses                                       (253)             (1,121)              (424)
     Increase in other assets                                           (366)               (429)            (1,135)
     Increase (decrease)  in accounts payable and accrued
       expenses                                                          330              (2,654)             1,463
                                                                    --------              -------           -------
Net cash provided by operating activities                             11,034              32,453             34,812
                                                                    ========              ------             ------

</TABLE>

                                   (continued)





                                      -46-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                               DECEMBER 28,       DECEMBER 29,        DECEMBER 30,
                                                               ------------       ------------        ------------
                                                                   2003               2002                2001
                                                                   ----               ----                ----
                                                                                 (IN THOUSANDS)
INVESTING ACTIVITIES:

<S>                                                                   <C>                <C>                <C>
Purchases of property and equipment                                   (8,521)            (10,988)           (22,528)
Proceeds from disposition of property and equipment
                                                                           -                   -                 75
                                                                      -------            --------           -------
   Net cash used in investing activities                              (8,521)            (10,988)           (22,453)
                                                                      -------            --------           -------

FINANCING ACTIVITIES:

Mortgage principal repayments                                           (154)               (142)              (130)
Purchase of minority interest in subsidiary                                -                   -             (1,000)
Loans to shareholders                                                      -                   -             (6,732)
Repayment of shareholder loans                                             -                   -              2,700
Tax distributions                                                     (1,100)             (3,125)            (7,564)
Dividends                                                                  -                   -             (5,000)
                                                                      -------            --------           -------
   Net cash used in financing activities                              (1,254)             (3,267)           (17,726)
                                                                      -------             -------          ---------

Increase (decrease) in cash and cash equivalents
                                                                       1,259              18,198             (5,367)
Cash and cash equivalents at                                          55,150              36,952             42,319
                                                                      -------            --------           -------
   beginning of year
Cash and cash equivalents at end of year                             $56,409             $55,150            $36,952
                                                                     =======             =======            =======


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for:
Income taxes                                                            $388                $796             $1,197
                                                                     =======             =======            =======

Interest                                                             $29,400             $29,498            $29,491
                                                                     =======             =======            =======

</TABLE>

                See notes to consolidated financial statements.



                                      -47-
<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
         majority-owned   joint  ventures  (together,   "we,"  "our,"  "us,"  or
         "Sbarro").  All significant intercompany accounts and transactions have
         been eliminated.  Minority  interest includes the interests held by our
         partners in certain of our majority-owned joint ventures.  The minority
         interests at the end of fiscal 2003 and 2002 were not material.

         ESTIMATES:

         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.

         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:

         Property and  equipment  are stated at cost.  Depreciation  is provided
         using the  straight-line  method over the  following  estimated  useful
         lives:  leasehold  improvements - the lesser of the useful lives of the
         assets or lease  terms,  including  option  periods,  if expected to be
         utilized, and furniture, fixtures and equipment - three to ten years.

         INTANGIBLE ASSETS:

         Intangible  assets  consist of our  trademarks,  goodwill  and deferred
         financing costs. Trademark values, as well as goodwill, were determined
         based on a fair value  allocation of the purchase  price from our going
         private transaction (see Note 2).





                                      -48-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Deferred financing costs were incurred as a result of the going private
         transaction (see Note 2) and the mortgage on the corporate headquarters
         building (see Note 9) and are being  amortized as  additional  interest
         expense  over  the  respective  remaining  lives  of the  related  debt
         instruments which range from 1 1/2 years to 6 years.

         TRADEMARKS AND GOODWILL:

         Effective  July 1, 2001,  we adopted  certain  provisions  of Financial
         Accounting  Standards Board ("FASB") Statement of Financial  Accounting
         Standards  ("SFAS") No. 141,  "Business  Combinations,"  and  effective
         January 1, 2002,  we adopted  the full  provisions  of SFAS No. 141 and
         SFAS No. 142,  "Goodwill  and Other  Intangible  Assets."  SFAS No. 141
         requires  business  combinations  initiated  after June 30,  2001 to be
         accounted for using the purchase  method of accounting and broadens the
         criteria for recording  intangible assets apart from goodwill.  SFAS No
         142  requires  that  purchased  goodwill  and certain  indefinite-lived
         intangibles  no  longer  be  amortized,   but  instead  be  tested  for
         impairment at least annually.  As a result of adopting SFAS No. 142, we
         ceased the amortization of trademarks and goodwill beginning January 1,
         2002.  Prior  to the  adoption  of  SFAS  No.  142,  we  amortized  our
         trademarks  and  goodwill  on a  straight-line  basis  over  40  years.
         Supplemental  comparative  disclosure,   as  if  the  change  had  been
         retroactively applied, is as follows:

<TABLE>
<CAPTION>
                                                       Dec. 28, 2003       Dec. 29, 2002    Dec. 30, 2001
                                                       -------------       -------------    -------------
                                                                           (in thousands)
<S>                                                    <C>                 <C>              <C>
         Reported net (loss) income                    $(17,230)           $4,781           $(14,589)
         Add back:  Amortization of
              goodwill and intangible assets
              with indefinite lives                           -                 -              5,433
                                                       ---------           ------           --------

         Adjusted net (loss) income                    $(17,230)           $4,781           $(9,156)
                                                       =========           ======           ========

</TABLE>
         There were no  changes  in the  carrying  amount of the  trademarks  or
         goodwill  for the years ended  December  28, 2003 and December 29, 2002
         and December 30, 2001.  SFAS No. 142 prescribes a two-step  process for
         impairment  testing of goodwill.  The first step of this test,  used to
         identify  impairment,  compares  the fair  value of a  reporting  unit,
         including  goodwill,  with its  carrying  amount.  The second  step (if
         necessary) measures the amount of the impairment. Using the guidance in
         SFAS  No.  142,  we have  determined  that  Sbarro  as a  whole  is the
         reporting unit for purposes of evaluating goodwill for impairment.  Our
         annual  impairment  test indicated that the fair value of the reporting
         unit exceeded the reporting  unit's carrying amount.  Accordingly,  the
         second  step of the  goodwill  impairment  test was not  necessary.  We
         performed a separate  impairment  test on our  trademarks  based on the
         discounted cash flows method. The fair value of the trademarks exceeded
         the carrying value.



                                      -49-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         LONG-LIVED ASSETS:

         In August  2001,  the FASB  issued SFAS No.  144,  "Accounting  for the
         Impairment or Disposal of Long-lived Assets." This statement supersedes
         SFAS No. 121,  "Accounting for the Impairment of Long-lived  Assets and
         for  Long-lived  Assets to be Disposed Of," and  Accounting  Principles
         Board Opinion No. 30, "Reporting  Results of  Operations-Reporting  the
         Effects  of  Disposal  of a Segment of a  Business  and  Extraordinary,
         Unusual and Infrequently  Occurring Events and Transactions."  SFAS No.
         144 retains the fundamental  provisions of SFAS No. 121 for recognition
         and measurement of impairment,  but amends the accounting and reporting
         standards  for  segments of a business to be disposed  of. SFAS No. 144
         became  effective  with respect to us with the beginning of fiscal 2002
         and  has  not  had a  material  impact  on our  financial  position  or
         operating results.  Long-lived assets are evaluated for impairment when
         events or changes in circumstances indicate that the carrying amount of
         the assets may not be  recoverable  through the estimated  undiscounted
         future cash flows resulting from the use of these assets. When any such
         impairment  exists,  the related  assets will be written  down to their
         fair value.

         EXIT OR DISPOSAL ACTIVITIES:

         In June 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
         Associated with Exit or Disposal Activities" which addresses accounting
         for restructuring  and similar costs. SFAS No. 146 supersedes  previous
         accounting  guidance,  principally  Emerging Issues Task Force ("EITF")
         Issue  No.  94-3,  "Liability  for  Recognition  for  Certain  Employee
         Termination  Benefits  and Other Costs to Exit an  Activity  (including
         Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that
         the liability for costs associated with an exit or disposal activity be
         recognized  when the  liability  is  incurred.  Under EITF No.  94-3, a
         liability  for an exit cost was  recognized  at the date of a company's
         commitment  for an exit plan.  SFAS No. 146 also  establishes  that the
         liability should initially be measured and recorded at fair value. SFAS
         No. 146 changes the timing of expense  recognition for certain costs we
         incur while closing  restaurants or undertaking  other exit or disposal
         activities.   However,  the  timing  difference  is  not  typically  of
         significant  length.  The  adoption  of the



                                      -50-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         provisions of SFAS No. 146 for restructuring activities initiated after
         December  29,  2002 did not have a  material  impact  on our  financial
         position or operating results for fiscal 2003.

         GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES:

         In November 2002, the FASB issued FASB  Interpretation  ("FIN") FIN No.
         45, "Guarantor's  Accounting and Disclosure Requirements for Guarantees
         including   Indirect   Guarantees  of  Indebtedness  of  Others"  which
         addresses the  accounting  for and  disclosure by guarantors  regarding
         obligations relating to the issuance of certain guarantees.  FIN No. 45
         requires  that,  at the  inception  of a guarantee  for all  guarantees
         issued or modified  after  December 31, 2002, a liability  for the fair
         value of the  obligation  undertaken  be  recorded.  No revision of, or
         restatement of accounting  for  guarantees  issued or modified prior to
         December 31, 2002 is allowed. The disclosure requirements of FIN No. 45
         are effective with our 2002 financial statements.  As described in Note
         10, we provide certain  guarantees that would require  recognition upon
         modification  under the  provisions  of FIN No. 45.  There are  certain
         arangements  that  were  entered  into  during  2003  with  respect  to
         guarantees for franchised locations. In accordance with FIN No. 45, the
         fair value of these  guarantees  of $38,000  has been  recorded  during
         fiscal 2003 While the nature of our business  will likely result in the
         issuance of certain guarantees in the future, we do not anticipate that
         FIN No. 45 will have a material  impact on our  financial  position  or
         operating results.

         VARIABLE INTEREST ENTITIES:

         FIN  No.  46,   "Consolidation  of  Variable  Interest  Entities,"  was
         effective  immediately  upon its  issuance  during  fiscal 2003 for all
         enterprises with interests in variable  interest entities created after
         January 31, 2003.  In December  2003,  FASB issued FIN No. 46 (R) which
         changes the effective  dates for the recording of interests in variable
         interest  entities  created before  February 1, 2003 beginning with the
         first  interim  reporting  period  ending after March 15,  2004.  If an
         entity is  determined  to be a  variable  interest  entity,  it must be
         consolidated  by  the  enterprise  that  absorbs  the  majority  of the
         entity's  expected  losses if they occur, or receives a majority of the
         entity's  expected residual returns if they occur, or both. Where it is
         reasonably  possible that the enterprise  will  consolidate or disclose
         information  about a variable  interest  entity,  the  enterprise  must
         disclose  the  nature,  purpose,  size  and  activity  of the  variable
         interest  entity and the  enterprise's  maximum  exposure  to loss as a
         result of its  involvement  with the  variable  interest  entity in all
         financial  statements  issued  after  January  31,  2003.  The FASB has
         specifically  exempted  traditional  franchise  arrangements  from  the
         evaluations  required  under  FIN No.  46. We have  also  reviewed  our
         corporate  relationships  for possible  coverage  under FIN No. 46. The
         application  of FIN  No.  46 did  not  have a  material  effect  on our
         disclosures and our financial  position or operating  results.  We have
         several variable entities,  which require certain disclosure.  However,
         we are  not  the  primary  beneficiary  and  therefore  do not  need to
         consolidate these entities.



                                      -51-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         ACCOUNTING FOR VENDOR REBATES:

         In  November  2002,  the EITF  reached a consensus  on Issue No.  02-16
         "Accounting   by  a  Customer   (Including  a  Reseller)   for  Certain
         Consideration  Received from a Vendor,"  addressing  the accounting for
         cash  consideration  received  by a  customer  from a vendor  including
         vendor  rebates  and  refunds.   The  consensus   reached  states  that
         consideration  received  should be presumed  to be a  reduction  of the
         prices of the  vendor's  products or services  and should  therefore be
         shown as a reduction of cost of sales in the statement of operations of
         the customer.  The presumption could be overcome if the vendor receives
         an  identifiable  benefit  in  exchange  for the  consideration  or the
         consideration  represents  a  reimbursement  of a specific  incremental
         identifiable  cost  incurred by the  customer  in selling the  vendor's
         product  or  service.  If one of  those  conditions  is met,  the  cash
         consideration  should be  characterized  as revenues or a reduction  of
         such  costs  as  applicable,  in the  statement  of  operations  of the
         customer.  The consensus reached also concludes that rebates or refunds
         based on the customer  achieving a specified level of purchases  should
         be recognized as a reduction of cost of sales based on a systematic and
         rational allocation of the consideration to be received relative to the
         transactions  that mark the progress of the customer toward earning the
         rebate or refund  provided  the amounts  are  probable  and  reasonably
         estimable.  This  standard is effective for  arrangements  entered into
         after December 31, 2002.

         Our current accounting policy, which conforms to the provisions of EITF
         No. 02-16, is to account for vendor rebates related to the usage of the
         products  for  which  rebates  are  received  in  company-owned  Sbarro
         locations  as a reduction of the cost of food and paper  products.  The
         rebates  are  recognized  as earned  based on our usage of the  related
         products.  We also receive  consideration  from  manufacturers  for the
         usage  of the same  raw  materials  by our  franchisees.  Those  rebate
         amounts are  included in "real estate and other" in our  statements  of
         operations.

         EQUITY INVESTMENTS:

         We account  for our  investments  in 50% or less owned  joint  ventures
         under the  equity  method of  accounting.  The equity in the net income
         (loss) of these  unconsolidated  affiliates  are included in "equity in
         net  income  of   unconsolidated   affiliates"  in  our  statements  of
         operations and the related assets are included in "other assets" in the
         accompanying balance sheets.




                                      -52-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         FRANCHISE RELATED INCOME AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:

         Initial franchise fees are recorded as income as restaurants are opened
         by the  franchisee  and we have  performed  substantially  all required
         services. Development fees are recognized over the number of restaurant
         openings covered under each development  agreement,  with any remaining
         balance recognized at the end of the term of the agreement. Royalty and
         other fees from franchisees are accrued as earned.

         We  monitor  the  financial  condition  of our  franchisees  and record
         provisions for estimated losses on receivables when we believe that our
         franchisees  are unable to make their required  payments.  While we use
         the  best  information  available  in  making  our  determination,  the
         ultimate recovery of recorded receivables is also dependent upon future
         economic  events and other  conditions  that may be beyond our control.
         Included in general and  administrative  expenses  are  provisions  for
         uncollectible  franchise  receivables of $0.4 million, $0.3 million and
         $0.1 million in 2003, 2002 and 2001, respectively.

         DEFERRED RENT:

         The  majority  of our  lease  agreements  provide  for  scheduled  rent
         increases during the lease term. Provision has been made for the excess
         of operating lease rental expense over cash rentals paid, computed on a
         straight-line basis over the lease terms.

         INCOME TAXES:

         We are 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. Therefore, we do not pay
         federal or, with  certain  limited  exceptions,  state and local income
         taxes for periods for which we are treated as an S corporation. Rather,
         our shareholders  include their pro-rata share of our taxable income on
         their individual  income tax returns and thus are required to pay taxes
         on their respective  share of our taxable income,  whether or not it is
         distributed to them. We file a  consolidated  federal income tax return
         for informational purposes.

         Minority  interest  includes no provision or liability for income taxes
         as any tax liability related to their interest is the responsibility of
         the minority partners.

         ACCOUNTING PERIOD:

         Our fiscal year ends on the Sunday nearest to December 31. All reported
         fiscal years contained 52 weeks.




                                      -53-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         FAIR VALUE OF FINANCIAL INSTRUMENTS:

         The carrying amounts of cash, receivables, accounts payable and accrued
         liabilities  approximate fair value because of the short-term nature of
         these items.  The estimated  fair value of our senior notes at December
         28, 2003 was approximately  $202.7 million.  The carrying amount of the
         mortgage  loan  approximates  fair value because the interest rate this
         instrument bears is reasonably  equivalent to the current rates offered
         for debt of a similar nature and maturity.

         DEFINED CONTRIBUTION PLAN:

         We have a 401(k) Plan  ("Plan") for all qualified  employees.  The Plan
         provides for a 25% matching  employer  contribution  of up to 4% of the
         employees'   deferred  savings  (maximum   contribution  of  1%  of  an
         employee's deferred savings). The employer contributions vest over five
         years.  The  employee's  deferred  savings  cannot  exceed  15%  of  an
         individual  participant's   compensation  in  any  calendar  year.  Our
         contribution  to the Plan was $105,000,  $36,000 and $137,000 in fiscal
         2003, 2002 and 2001, respectively. The contribution was lower in fiscal
         2002 as our matching  contribution  was suspended for the first half of
         the year.

         RECLASSIFICATIONS:

         Certain  items  in  the  financial   statements   presented  have  been
         reclassified to conform to the fiscal 2003 presentation.

2.       GOING PRIVATE TRANSACTION:

         On September 28, 1999,  members of the Sbarro family (who prior thereto
         owned  approximately  34.4% of our common  stock) became the holders of
         100% of our issued and outstanding common stock as a result of a "going
         private" merger. (Note 9)

         During  the second  quarter of fiscal  2001,  the funds  remaining  for
         untendered shares that had been held by a third party paying agent were
         returned to us. We will hold such funds  until the  related  shares are
         tendered or escheated to the appropriate jurisdiction.  At December 28,
         2003,  there was $21,000  being held by us for such  untendered  shares
         that is shown as restricted cash and amounts due for untendered  shares
         in the consolidated balance sheet.

         In  accordance  with EITF Issue No. 88-16,  "Basis in Leveraged  Buyout
         Transactions,"  the acquisition of all the outstanding shares of common
         stock not owned by the Sbarro family and all outstanding  stock options
         was 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  shareholders'  equity  at  their  original  basis in the
         accompanying consolidated balance sheet.



                                      -54-
<PAGE>

         During fiscal 2000,  we finalized an  allocation of the purchase  price
         from the going private  transaction based on an evaluation of Sbarro at
         September  29,  1999  which   increased   property  and  equipment  and
         intangible assets by $7.0 million and $216.0 million,  respectively. In
         accordance with SFAS No. 142, we have not, since fiscal 2001, amortized
         any of the intangible assets with indefinite lives.

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.

         Since 1995, we have developed and established other restaurant concepts
         in seeking to provide growth opportunities that leverage our restaurant
         management and financial expertise.

         We operate all of these restaurants as one segment.

         The following sets forth the number of Sbarro  restaurants in operation
         as of:

<TABLE>
<CAPTION>
                                     DECEMBER 28,      DECEMBER 29,      DECEMBER 30,
                                         2003              2002              2001
                                         ----              ----              ----

<S>                                       <C>               <C>               <C>
         Sbarro-owned (a)                 528               558               602
         Franchised                       387               353               325
                                          ---               ---               ---
                                          915               911               927
                                          ===               ===               ===
</TABLE>

         (a)      Excludes  29, 32 and 37 other  concept  units as of the end of
                  the respective fiscal years.

4.       EFFECT OF EVENTS OF SEPTEMBER 11, 2001:

         As a result  of the  events  of  September  11,  2001,  a  Sbarro-owned
         location,  as well as a franchise  location,  that had  operated in the
         World  Trade  Center  in New York  City were  destroyed.  Although  the
         Sbarro-owned   location   generated   substantial  sales  revenues  and
         operating  income,  the effect on our  consolidated  results for fiscal
         2001 was not  material  to our  consolidated  results  as a whole.  The
         franchise location did not generate  significant  royalty revenues.  In
         addition,  a number of  airports  were  temporarily  closed  due to the
         events of September 11 causing airport Sbarro-owned and franchise units
         to close  for  periods  of time.  Due to the  continuing  effect of the
         events  of  September  11  compounded  by the  effect  of the  economic
         slowdown in the United States,  those airport locations and a number of
         downtown  locations  continued to  experience a period of reduced sales
         throughout fiscal 2003.



                                      -55-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In  September  2002,  we reached  an  agreement  to  settle,  for $9.65
         million,  our claim with our insurance company for the reimbursement of
         the  depreciated  cost  of the  assets  destroyed  at the  Sbarro-owned
         location,  as well as for lost income under our  business  interruption
         insurance  coverage.  The proceeds of the  settlement  were received in
         September 2002. Approximately $7.2 million, net of related expenses, of
         the  settlement  relates  to  reimbursement  of lost  income  under our
         business interruption insurance coverage and is included in our results
         of operations for fiscal 2002.

5.       PROPERTY AND EQUIPMENT, NET:

<TABLE>
<CAPTION>
                                                              DECEMBER 28,          DECEMBER 29,
                                                                 2003 (a)             2002 (b)
                                                                 --------             --------
                                                                      (IN THOUSANDS)
<S>                                                                <C>                  <C>
                  Land                                             $3,781               $ 3,781
                  Leasehold improvements                          141,538               155,359
                  Furniture, fixtures and equipment                65,594                71,757
                                                                  -------               -------
                                                                  210,913               230,897
                  Less accumulated depreciation and               114,309               115,816
                                                                  -------               -------
                     amortization (c)
                                                                  $96,604              $115,081
                                                                  =======              ========
</TABLE>

         (a)      During 2003,  we recorded a charge of $4.1  million,  of which
                  $0.4  million  was  for  our  other   concepts,   relating  to
                  impairment losses on property and equipment.  In addition,  we
                  recorded a provision for restaurant  closings of approximately
                  $2.0  million  in  connection  with the  closing  of 35 Sbarro
                  locations  ($1.9 million) and 2 other concept  locations ($0.1
                  million) during fiscal 2003.
         (b)      During 2002, we recorded a charge of $0.5 million  relating to
                  impairment  losses on property  and  equipment,  of which $0.2
                  million  was for other  concept  locations.  In  addition,  we
                  recorded a provision for restaurant  closings of approximately
                  $8.7  million  in  connection  with the  closing  of 57 Sbarro
                  locations  ($4.0 million) and 7 other concept  locations ($4.7
                  million) during fiscal 2002.
         (c)      Depreciation  and  amortization  of property and equipment was
                  $19.7 million, $20.7 million and $24.9 million in fiscal 2003,
                  2002 and 2001, respectively.






                                      -56-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.       ACQUIRED INTANGIBLE ASSETS AND GOODWILL:

<TABLE>
<CAPTION>
                                                              DECEMBER 28,          DECEMBER 29,
                                                                  2003                  2002
                                                                  ----                  ----
                                                                      (IN THOUSANDS)
<S>                                                                <C>                  <C>
                  Trademarks                                     $195,916              $195,916
                                                                 ========              ========
                  Goodwill                                          9,204                 9,204
                                                                 ========              ========
                  Deferred financing costs                          9,573                10,129
                  Less accumulated amortization                     4,091                 3,497
                                                                  -------               -------
                                                                 $  5,482              $  6,632
                                                                 ========              ========

</TABLE>
         Amortization  expense of the acquired intangible assets for each of the
         2003, 2002 and 2001 fiscal years was as follows:

<TABLE>
<CAPTION>
                                                                        FOR THE FISCAL YEARS ENDED
                                                      --------------------------------------------------------------
                                                          DECEMBER 28,          DECEMBER 29,         DECEMBER 30,
                                                              2003                  2002                 2001
                                                              ----                  ----                 ----
                                                                              (IN THOUSANDS)

<S>                                                             <C>                  <C>                  <C>
Trademarks (a)                                                   $  -                 $  -               $5,189
Goodwill (a)                                                        -                    -                  244
Deferred financing costs (b)                                    1,148                1,074                1,074
                                                                -----                -----                -----
                                                               $1,148               $1,074               $6,507
                                                               ======               ======               ======
</TABLE>

(a)      Under SFAS No. 142, as of December  31, 2001,  trademarks  and goodwill
         are no longer amortized.
(b)      Amortization of deferred  financing costs includes $0.1 million for the
         write-off of the remaining  unamortized deferred financing costs of the
         related to our former bank credit agreement upon the termination of the
         credit agreement.
(c)      Amortization  of deferred  financing costs for the next five years will
         be as follows:

        FISCAL YEARS ENDING (IN THOUSANDS):
        -----------------------------------
        January 2, 2005                                              $962
        January 1, 2006                                               962
        December 31, 2006                                             962
        December 30, 2007                                             962
        December 28, 2008                                             962
        Later year                                                    672
                                                                   ------
                                                                   $5,482
                                                                   ======




                                      -57-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.       ACCRUED EXPENSES:

<TABLE>
<CAPTION>
                                                           DECEMBER 28,              DECEMBER 29,
                                                               2003                      2002
                                                               ----                      ----
                                                                       (IN THOUSANDS)

<S>                                                               <C>                        <C>
                  Compensation                                    $5,112                     $5,502
                  Payroll and sales taxes                          2,695                      3,047
                  Rent and related cost                            1,725                      1,896
                  Provision for restaurant closings
                      (Notes 5 and 12)                               987                      1,452
                  Other                                            8,255                      9,726
                                                                   -----                      -----
                                                                 $18,774                    $21,623
                                                                 =======                    =======
</TABLE>

8.       INCOME TAXES:

         We are 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.  Therefore,  we do not pay federal or,
         with  certain  limited  exceptions,  state and local  income  taxes for
         periods  for which we are  treated  as an S  corporation.  Rather,  our
         shareholders  include  their  pro-rata  share of our taxable  income on
         their individual  income tax returns and thus are required to pay taxes
         on their respective  share of our taxable income,  whether or not it is
         distributed to them.

         In  connection  with the  going  private  transaction  and the  related
         financing,   we  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 determined under a formula
         designed to approximate the income taxes,  including  estimated  taxes,
         that would be payable by our  shareholders  if their only  income  were
         their pro-rata share 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 for income tax purposes. We
         made  distributions  to our  shareholders,  in accordance  with the tax
         payment agreement,  of $1.8 million with respect to our fiscal 2002 and
         $3.1 million with respect to our fiscal 2001 earnings. Our shareholders
         are  expected to have a tax loss that is  significantly  lower than our
         book loss in fiscal 2003 and had taxable income that was  significantly
         higher than our book income in fiscal 2002 resulting  from  differences
         in the book and tax  treatments of the  provision for asset  impairment
         and significant  differences in book and tax depreciation.  We estimate
         that no  distributions  will be made in 2004 related to our fiscal 2003
         results of operations.




                                      -58-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The provision  for income taxes is comprised of taxes payable  directly
         by us to  jurisdictions  that do not recognize S corporation  status or
         that tax  entities  based on factors  other  than  income and for taxes
         withheld at the source of payment on foreign  franchise  income related
         payments as follows:

<TABLE>
<CAPTION>
                                                             FOR THE FISCAL YEARS ENDED
                                           DECEMBER 28,              DECEMBER 29,             DECEMBER 30,
                                               2003                      2002                     2001
                                               ----                      ----                     ----
                                                                   (IN THOUSANDS)
<S>                                               <C>                     <C>                    <C>
                  Federal:
                      Current                    $   -                     $ -                    $  -
                      Deferred                       -                       -                       -
                                                     -                       -                       -
                                                  ----                    ----                   ----
                                                     -                       -                       -
                                                  ----                    ----                   ----
                  State and local:
                      Current                      500                      17                     90
                      Deferred                       -                       -                      -
                                                  ----                    ----                   ----
                                                   500                      17                     90
                  Foreign                          344                     317                    235
                                                  ----                    ----                   ----
                                                  $844                    $334                   $325
                                                  ====                    ====                   ====
</TABLE>

9.       LONG-TERM DEBT:

         INDENTURE:

         The going  private  transaction  (Note 2) was  partially  funded by the
         placement of $255.0  million of 11.0% senior  notes due  September  15,
         2009.

         Interest on the senior notes is payable  semi-annually  on March 15 and
         September  15 of each year.  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 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  line of credit
         agreement  discussed  below.  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 covenants,  including,  but not limited to,
         restrictions on the 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 by us and the guaranteeing  subsidiaries.  We were in
         compliance with the various covenants  contained in the indenture as of
         December 28, 2003.



                                      -59-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         The  discount at which the senior  notes were  issued,  an aggregate of
         approximately $3.8 million,  is being accreted to the senior notes on a
         straight-line  basis  over the  original  ten year  life of the  senior
         notes.  Accretion  of the  discount  was $0.3 million in each of fiscal
         2003, 2002 and 2001.

         CREDIT AGREEMENT:

         During  March 2004,  we entered  into a new line of credit  arrangement
         that  enables us to  borrow,  subject to bank  approval,  $3.0  million
         through May 2005,  subject to reduction  for standby  letters of credit
         issued by the bank ($1.7 million at March 5, 2004). Interest applicable
         to loans  under the new line of credit  are to be at the  bank's  prime
         rate at the time of any borrowings. There are no unused line fees to be
         paid or covenants  to be met under the new line of credit.  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 new line of credit on a joint and
         several basis.

         During  2003 we  terminated  our bank  credit  agreement  (the  "credit
         agreement") which provided us with an unsecured senior revolving credit
         facility that enabled 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.  No amounts had been
         borrowed under the credit facility  although there were $1.7 million of
         letters of credit outstanding under the credit agreement as of December
         28,  2003.  The bank  continued  the letters of credit  until they were
         replaced by the bank with which we have our new line of credit.

         MORTGAGE:

         In March  2000,  one of our  Restricted  Subsidiaries  obtained a $16.0
         million,  8.4% loan due in 2010, secured by a mortgage on our corporate
         headquarters  building.  The loan is payable in monthly installments of
         principal  and  interest of $0.1  million.  The  outstanding  principal
         balance  as of  December  28,  2003 was  $15.5  million.  The  mortgage
         agreement contains various covenants,  including a requirement that the
         subsidiary  maintain a minimum  ratio of EBITDA to annual and quarterly
         debt service of at least 1.2 to 1.0. The  subsidiary  was in compliance
         with the various  covenants  contained in the mortgage  agreement as of
         December 28, 2003.





                                      -60-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MATURITIES OF LONG-TERM DEBT:

         Scheduled maturities of long-term debt are as follows (in thousands):

        FISCAL YEAR ENDING:
        -------------------
        January 2, 2005                                          $168
        January 1, 2006                                           182
        December 31, 2006                                         197
        December 30, 2007                                         215
        December 28, 2008                                         235
        Later years                                           269,495
                                                              -------
                                                              270,492
        Less:
           Current maturities                                    (168)
           Unaccreted original issue discount                  (2,172)
                                                              -------
                                                             $268,152

10.      COMMITMENTS AND CONTINGENCIES:

         EMPLOYMENT AGREEMENT:

         On September  8, 2003,  we entered into an  employment  agreement  with
         Michael  O'Donnell,  our current President and Chief Executive Officer,
         for a term ending on December 31, 2006, subject to earlier  termination
         by us or  Mr.  O'Donnell  following  specified  notice.  The  agreement
         provides, among other things, for an annual salary of $450,000; subject
         to  increase at the  discretion  of our board of  directors,  an annual
         performance bonus beginning in 2004 to be based upon the achievement of
         increases in EBITDA as defined and other  objectives to be set forth in
         business  plans and  budgets  approved  from time to time by our board,
         which bonus,  for the year ending  December 31, 2004,  will not be less
         than $112,500;  $1,000,000 of life insurance;  the reimbursement of Mr.
         O'Donnell for certain relocation, travel and housing expenses incurred;
         and a special  incentive award. The special incentive award is designed
         to reward Mr. O'Donnell for  improvements in our adjusted EBITDA,  cash
         position and long term debt  position  over the term of the  agreement,
         vests upon termination of Mr. O'Donnell's employment, is reduced in the
         event of early  termination of employment and, when earned, is payable,
         with interest, in twelve equal quarterly  installments.  Alternatively,
         in the event of a public  offering  of our  common  stock,  a change in
         control  of  Sbarro,  including  by  merger,  sale of  stock or sale of
         assets,  or  a  liquidation  or  dissolution  of  Sbarro,  the  special
         incentive award will be based on the per share proceeds received by our
         shareholders  in excess  of a  threshold  amount.  The  agreement  also
         provides  for  severance  pay in the event of early  termination  by us
         without "cause" (as defined) or by Mr.  O'Donnell for "good reason" (as
         defined).  Since the ultimate amount of the special  incentive award is
         not known until  termination  of the agreement,  the special  incentive
         award is subject to variable plan  accounting.  There will be no charge
         to our earnings until our EBITDA, cash position and/or



                                      -61-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         long-term  debt  position  improves  or  a  special  event  occurs.  No
         compensation  expense  relating  to the  special  incentive  award  was
         recorded in fiscal 2003.

         LEASES:

         All of our restaurants are 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.

         Rental expense under operating  leases,  including common area charges,
         other expenses and additional amounts based on sales, were as follows:

<TABLE>
<CAPTION>
                                                                        FOR THE FISCAL YEARS ENDED
                                                          -------------------------------------------------------
                                                          DECEMBER 28,          DECEMBER 29,         DECEMBER 30,
                                                              2003                  2002                 2001
                                                              ----                  ----                 ----
                                                                              (IN THOUSANDS)

<S>                                                           <C>                  <C>                  <C>
         Minimum rentals                                      $51,089              $51,975              $52,856
         Common area charges                                   14,702               15,246               15,827
         Contingent rentals                                     4,112                3,760                4,511
                                                              -------              -------              -------
                                                              $69,903              $70,981              $73,194
                                                              =======              =======              =======
</TABLE>

         Future minimum rental and other payments required under  non-cancelable
         operating  leases  for our  Sbarro  restaurants  and our other  concept
         locations and our existing leased  administrative  and support function
         office (Note 11) are as follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               January 2, 2005                                $71,374
               January 1, 2006                                 69,209
               December 31, 2006                               66,910
               December 30, 2007                               61,920
               December 28, 2008                               56,001
               Later years                                    149,718
                                                             --------
                                                             $475,132
                                                             ========

         We are the  principal  lessee under certain  operating  leases for four
         other concept  locations that have been sold and sublet to unaffiliated
         third  parties.  Future minimum  rental  payments  required under these
         non-cancelable  operating leases as of December 28, 2003 are as follows
         (in thousands):



                                      -62-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                FISCAL YEARS ENDING:
                --------------------
                January 2, 2005                                   $308
                January 1, 2006                                    320
                December 31, 2006                                  329
                December 30, 2007                                  330
                December 28, 2008                                  278
                Later years                                      3,075
                                                                ------
                                                                $4,640
                                                                ======

         We  are  the  principal  lessee  under  operating  leases  for  certain
         franchised restaurants which are subleased to franchisees.  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 December 28, 2003 are
         as follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               January 2, 2005                                  $2,061
               January 1, 2006                                   1,781
               December 31, 2006                                 1,719
               December 30, 2007                                 1,281
               December 28, 2008                                   785
               Later years                                       1,385
                                                                ------
                                                                $9,012
                                                                ======

         We are the principal lessee under operating leases for three franchised
         restaurants  that were sold and franchised to related parties (see Note
         11) and are subleased by us to the  franchisees.  The  franchisees  pay
         rent and related  expenses  directly to the  landlord.  Future  minimum
         rental payments  required under these  non-cancelable  operating leases
         are as follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               January 2, 2005                                    $305
               January 1, 2006                                     288
               December 31, 2006                                   168
               December 30, 2007                                   156
               December 28, 2008                                   156
               Later years                                         645
                                                                   ---
                                                                $1,718
                                                                ======

         Future minimum rental payments required under non-cancelable  operating
         leases for  restaurants  that had not as yet opened as of December  28,
         2003 are as follows (in thousands):




                                      -63-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


               FISCAL YEARS ENDING:
               --------------------
               January 2, 2005                                    $163
               January 1, 2006                                     207
               December 31, 2006                                   211
               December 30, 2007                                   228
               December 28, 2008                                   230
               Later years                                       1,206
                                                                 -----
                                                                $2,245
                                                                ======

         Future  minimum  rental  payments   required  under  a   non-cancelable
         operating  lease for a restaurant that has been franchised to a related
         party (see Note 11) and which had not as yet opened as of December  28,
         2003,  under which lease we are the principal  lessee is as follows (in
         thousands):


               FISCAL YEARS ENDING:
               --------------------
               January 2, 2005                                    $159
               January 1, 2006                                     160
               December 31, 2006                                   160
               December 30, 2007                                   160
               December 28, 2008                                   166
               Later years                                       1,631
                                                                 -----
                                                                $2,436
                                                                ======

         In  accordance  with  FIN No.  45,  we have  recorded  a  liability  of
         approximately $38,000 which represents the fair value of the guarantees
         related to the leasing of franchised locations during fiscal 2003.

         CONSTRUCTION CONTRACTS AND OTHER:

         We are a party to  contracts  aggregating  $1.8 million with respect to
         the construction of restaurants. Payments of approximately $0.4 million
         have been made on those contracts as of December 28, 2003. We have also
         entered into a contract for $0.5 million to provide email  connectivity
         to our restaurants.

         PRODUCT PURCHASE DISTRIBUTION ARRANGEMENT:

         We have a contractual arrangement with a national independent wholesale
         distributor that commenced in February 2003 and that requires us, until
         February  2008,  subject to early  termination  for  certain  specified
         causes to  purchase  95% of most of our food  ingredients  and  related
         restaurant supplies from them. The agreement does not, however, require
         us to purchase any specific  fixed  quantities.  Among the factors that
         will effect the dollar  amount of  purchases we make under the contract
         are:



                                      -64-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         o        Number  of  Sbarro  locations  open  during  the  term  of the
                  contract;
         o        Level of sales made at Sbarro locations;
         o        Market price of mozzarella cheese and other commodity items;
         o        Price of diesel  fuel;  and o Mix of  products  sold by Sbarro
                  locations.

         LETTERS OF CREDIT:

         There are $1.7 million of bank letters of credit  issued under our line
         of credit to support  potential  obligations  we, and, in one case, for
         the benefit of one of our consolidated  other concepts.  The letters of
         credit  have  been  issued  instead  of cash  security  deposits  under
         operating  leases.  Of  the  outstanding  standby  letters  of  credit,
         approximately  $0.1 million are for locations  that have been subleased
         to the buyers of two of our other concept  locations  (one of which was
         sold in 2003).

         GUARANTEE ARRANGEMENTS PERTAINING TO THE OTHER CONCEPTS:

         We are a party to various financial guarantees to a bank for two of our
         other concepts.  We are jointly liable,  along with our partner,  for a
         loan owed by one of the other concepts.  Our liabilities under the line
         of credit,  mortgage  loan and $0.1 million of letters of credit to the
         second concept are limited to our minority  ownership  percentage.  The
         remaining  letter of credit for the second  concept of $0.6  million is
         jointly  and  severally  guaranteed  by  each  of the  partners  in the
         concept.  To varying  degrees,  these  guarantees  involve  elements of
         performance and credit risk. The possibility of our having to honor our
         contingencies is largely  dependent upon future operations of the other
         concepts.  We would  record a liability  if events  occurred  that make
         payment  under  the  guarantees  probable.  Under  FIN No.  45,  we are
         required  to record a  liability  for the fair value of any  obligation
         undertaken or modified after December 31, 2002. No such  obligation was
         undertaken or modified in fiscal 2003.

         The details of our  guarantees  as of December 28, 2003 and their terms
         are as follows:


         TYPE OF GUARANTEED OBLIGATION   AMOUNT (1)     TERM
         -----------------------------   ----------     ----

         Loan                            $1.7 million   November 1, 2007
         Mortgage loan                    0.3 million   June 30, 2008
         Letters of credit                1.0 million   Varying through May 2021
         Line of credit                   4.6 million   December 31, 2010

         (1) Represents our current maximum  exposure under existing  borrowings
         and  letters of credit.  Our  exposure  under the line of credit  could
         increase  to $7.1  million if the full  amount of the line of credit is
         utilized. During 2003, the exposure from borrowings available under



                                      -65-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         the line of credit  increased by  approximately  $2.0 million due to an
         increase in the joint venture's total line of credit. In addition,  the
         loan  expiration date for all new term loans was extended from December
         31,  2008 to  December  31,  2010.  The form of the  guarantee  was not
         modified during fiscal 2003.

         LITIGATION:

         On December 20, 1999,  fourteen  current and former general managers of
         Sbarro  restaurants in California  amended a complaint against us 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  attorneys'  fees,  each in unspecified  amounts.
         Plaintiffs filed a motion to certify the lawsuit as a class action, but
         the  motion  was  denied by the  court.  The  court  issued a ruling in
         December 2003 which was unfavorable to us but did not set the amount of
         damages. We are appealing the ruling due to errors that we believe were
         made by the trial judge.

         On September 6, 2000,  eight other current and former general  managers
         of Sbarro restaurants in California filed a complaint against us in the
         Superior  Court of  California  for  Orange  County  alleging  that the
         plaintiffs  were  improperly   classified  as  exempt  employees  under
         California  wage  and hour  law.  The  plaintiffs  are  seeking  actual
         damages,   punitive  damages  and  costs  of  the  lawsuit,   including
         reasonable attorneys' fees, each in unspecified amounts. Plaintiffs are
         represented by the same counsel who is  representing  the plaintiffs in
         the case  discussed  in the  preceding  paragraph.  We have  separately
         settled with two of the managers for immaterial amounts. The parties to
         this case have agreed  that it will be settled  upon the same terms and
         conditions that the court orders in connection with its decision in the
         case discussed in the preceding paragraph.

         On March 22, 2002, five former general  managers of Sbarro  restaurants
         in  California  filed a complaint  against us in the Superior  Court of
         California  for Los Angeles  County.  The  complaint  alleges  that the
         plaintiffs  were  required to perform  labor  services  without  proper
         premium  overtime  compensation  from at least May 1999. The plaintiffs
         are seeking actual  damages,  punitive  damages and attorneys' fees and
         costs,  each in  unspecified  amounts.  In  addition,  plaintiffs  have
         requested  class action status for all managerial  employees who worked
         overtime  and/or were not  otherwise  paid regular  wages due and owing
         from May 1999 to March 2002.  The case is  currently  in the  discovery
         phase.

         In August 2002, a subcontractor and the general contractor, pursuant to
         a  construction  contract  entered  into to  build  the  joint  venture
         location  that was closed during fiscal 2002 and is also the subject of
         the lawsuit  discussed  below,  filed a  complaint  against the limited
         liability   joint   venture   company   alleging  that  they  are  owed
         approximately  $800,000,  plus interest. We are a defendant in the suit
         by  reason  of the  fact  that we  guaranteed  the  bonds  under  which
         mechanics liens for the plaintiffs were bonded.  It is anticipated that
         this matter



                                      -66-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         will go to trial  during  later in fiscal  2004.  We  believe  that our
         maximum  liability,  should an unfavorable  verdict be returned in this
         case, would be approximately $400,000.

         We believe that we have substantial defenses in each of the actions and
         are vigorously defending these actions.

         In May 2002, the landlord of the joint venture  described above filed a
         complaint  against  Sbarro  in the  Supreme  Court  of the New York for
         Westchester County alleging that we were obligated to it, pursuant to a
         Guaranty Agreement we executed,  based on a alleged breach of the lease
         by the tenant, a subsidiary of the joint venture.  We believed that our
         guarantee  was limited in amount  while the  landlord  alleged that the
         guarantee  covered  all  amounts  that  would  become  due  during  the
         remaining  lease term. The court issued a ruling in November 2003 which
         established our liability at $500,000. The landlord has advised us that
         it intends to appeal this decision but we have accrued this amount.

         In addition to the above complaints,  from time to time, we are a party
         to claims and legal proceedings in the ordinary course of business.  In
         our opinion,  the results of such claims and legal  proceedings are not
         expected  to  have  a  material  adverse  effect  on  our  consolidated
         financial position or results of operations.

11.      TRANSACTIONS WITH RELATED PARTIES:

         We have been the sole tenant of an  administrative  office  building in
         Commack,  New York which was leased from a partnership owned by certain
         of our shareholders.  For each of the 2003, 2002 and 2001 fiscal years,
         the annual rent paid pursuant to the sublease was $0.3 million. We were
         advised by a real estate  broker that, at the time we renewed the lease
         for the  facility,  our rent is  comparable  to the rent that  would be
         charged  by  an  unaffiliated  third  party.  Our  obligation  for  the
         remainder of the lease term,  which would have expired in 2011, will be
         terminated  upon the sale of the building by the  partnership  in April
         2004.

         On  April  5,  2001,   we  loaned  $3.23  million  to  certain  of  our
         shareholders,  including:  Mario Sbarro, $1.08 million,  Joseph Sbarro,
         $1.24 million and Anthony Sbarro,  $0.87 million.  The due dates of the
         related notes were extended on April 6, 2003 to April 6, 2005, and bear
         interest at the rate of 4.63%, payable annually.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
         including:  Mario Sbarro, $0.60 million,  Joseph Sbarro, $0.70 million,
         Anthony Sbarro,  $0.49 million,  and the Trust of Carmela Sbarro, $0.99
         million.  The related notes are payable on December 28, 2004,  and bear
         interest at the rate of 2.48%, payable annually.



                                      -67-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In March 2004,  we extended a loan of $40,000 to Gennaro A. Sbarro,
         Corporate Vice President and President of our Franchising and Licensing
         Division,  to March 28, 2010.  The note is  repayable at  approximately
         $5,000 per year,  including interest at 2.69% per annum, with a balloon
         payment due at the maturity date.

         Anthony  Missano,  Corporate  Vice  President and President of Business
         Development  , entered  into a note dated June 15, 2003 in our favor in
         the amount of $89,687,  The note is repayable at approximately  $10,000
         per year, including interest at 2.96% per annum, with a balloon payment
         due on June 30, 2010.  The note is for the payment of royalties  due us
         for 2001  and  2000  from a  former  franchisee  that was  owned by Mr.
         Missano's wife, the daughter of Joseph Sbarro. The current balance owed
         on the notes is $84,687.

         The  interest  rates  charged on all the related  party loans  included
         above  approximate  the Applicable  Federal Rate (AFR) published by the
         Internal Revenue Service at the time of the loan.  Interest income from
         related  parties was $222,577,  $220,666 and $270,382 in the 2003, 2002
         and 2001 fiscal years, respectively.

         A member of our Board of Directors acts as a consultant to us for which
         he received  $0.3  million in each of the 2003,  2002,  and 2001 fiscal
         years.

         A member of our Board of Directors  assisted one of our other  concepts
         in the preparation of its initial Uniform  Franchise  Offering Circular
         in fiscal 2002 for which the fee was $20,000.

         We and our other  concepts  have  purchased  printing  services  from a
         corporation  owned by a son-in-law of Mario Sbarro for which we and our
         other concepts paid, in the aggregate,  $340,000, $422,000 and $487,000
         in fiscal 2003, 2002 and 2001, respectively.

         Companies  owned by a son of Anthony  Sbarro are  parties to  franchise
         agreements  with us  containing  terms  similar to those in  agreements
         entered into by us with  unrelated  franchises.  Royalties  under these
         agreements  in fiscal  2003,  2002 and 2001 were  $89,946,  $91,551 and
         $88,008, respectively.

         As of July 14, 2002, we sold the assets of a Sbarro-owned location that
         we  intended  to  close  to a  corporation  whose  shareholder  is  the
         brother-in-law  of our Chairman of the Board and President for $88,900.
         The sales price  resulted in a loss of  approximately  $64,000  that is
         included in the provision for  restaurant  closings in the statement of
         operations. At the same time, that corporation entered into a franchise
         agreement  containing terms similar to those in agreements entered into
         by us with unrelated franchisees. We received promissory notes for each
         of the purchase  price and initial  franchise fee that are payable over
         seven years and bear  interest on the unpaid  principal  balances at 7%
         per  annum.  The  current  amount  owed under the  promissory  notes of
         $119,209 has been fully  reserved as of December 28, 2003. In addition,
         in 2002 we subleased  the lease for this  location to that  franchisee.
         Payments  under the sublease are being made directly to the landlord by
         the franchisee.  Interest  payments received relating to the promissory
         notes was $4,067 in fiscal 2003 and $-0- in fiscal 2002. Royalties



                                      -68-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         paid under this  arrangement  in fiscal  2003 were $3,303 and $6,723 in
         fiscal 2002 but royalties of approximately $17,700 were not included in
         the fiscal 2003  statement  of  operations  as they were not  collected
         during the fiscal year. The royalties and interest payments noted above
         were collected in the beginning of fiscal 2003.

         On March 3,  2003,  a company  in which  Gennaro  J.  Sbarro,  then our
         Corporate  Vice  President  and President of our Casual and Fine Dining
         Division and the son of Joseph  Sbarro,  has a 50% interest  (the other
         50% is owned by an  unaffiliated  third party) entered into a franchise
         agreement and a sublease with us for a new location.  The lease for the
         location  had  been  entered  into  in  September  2002  by  one of our
         subsidiaries. Subsequent to that date, we determined that the economics
         of the location would be better suited for a franchise operator and, as
         such,  we  entered  into the  franchise  agreement  and  subleased  the
         premises to this  franchisee.  Payments under the sublease will be made
         directly to the landlord by the franchisee.  The franchise agreement is
         on  terms  and   conditions   similar  to  those  in  other   franchise
         arrangements we have entered into in similar  situations with unrelated
         third parties.  The franchise  agreement provides for the payment of 5%
         of the  location's  sales as a continuing  royalty but does not provide
         for any initial franchise fee. Future minimum rental payments under the
         lease for this  location  over the term of the lease,  which expires in
         2018, aggregate approximately $2.4 million. Mr. Sbarro issued a note in
         our favor for  $54,538,  that is repayable  in eighteen  equal  monthly
         installments  of  $3,030  which  commenced  in  November  2002  with no
         interest,   to  reimburse  Sbarro  for  costs  advanced  by  Sbarro  in
         connection with the franchise  location.  The balance on the note as of
         December  28, 2003 is $48,478.  The location is expected to open in the
         first quarter of fiscal 2004. As of October 31, 2003, Gennaro J. Sbarro
         resigned from his positions as Corporate Vice - President and President
         of our Casual and Fine  Dining  division.  A  corporation  owned by Mr.
         Sbarro  entered  into an eighteen  month  agreement  with us to provide
         consulting services to our quick service and casual dining division for
         $22,500  per  month  and the  reimbursement  for  customary  and  usual
         expenses that may be incurred.

         In October  2003,  we sold the assets of three  Sbarro-owned  locations
         separately  to  entities  owned  separately  by each of three  other of
         Anthony  Sbarro's sons.  Two of the  locations,  which had no remaining
         book value,  were transferred for no consideration  while the third was
         sold for $0.3 million, that was paid in full, and resulted in a gain to
         Sbarro  of  approximately  $0.1  million.  Two  of the  locations  were
         marginally  profitable  in fiscal 2002 while the third had a small loss
         during that period.  In connection with the sale of the locations,  the
         employment of these  individuals with Sbarro was terminated and we have
         included  a charge  for  their  total  severance  pay of  approximately
         $60,000 in our results of  operations  for fiscal 2003.  The  franchise
         agreements are on terms and conditions similar to those other franchise
         arrangements  we have entered into in similar  situation with unrelated
         third  parties.  The  agreements  provide  for the payment of 5% of the
         location's  sales as a continuing  royalty but does not provide for any
         initial  franchise fee.  Royalties of  approximately  $16,400 have been
         included in the fiscal  2003  results of  operations  but are



                                      -69-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         unpaid to date.  In addition,  we subleased two of the locations to two
         of the franchisees. The third location is on a month-to-month basis and
         any new lease entered into by the franchisee  will not be guaranteed or
         subleased  by  Sbarro.  Payments  under the  subleases  are being  made
         directly to the  landlord by the  franchisees.  Future  minimum  rental
         payments  over the terms of the  leases  under the  leases  for the two
         locations  being  subleased,  which expire in 2006 and 2016,  aggregate
         approximately $2.0 million.

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
         position as Manager of  Administration  -  Construction.  A corporation
         owned by her entered into a one year  agreement  to provide  consulting
         services related to construction  matters to us for a series of monthly
         payments totaling $100,000.

         In addition to the compensation of Mario, Anthony,  Joseph,  Gennaro A.
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 2003; and

         o     Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves as
               Vice President -  Administration,  earned  $206,129 during fiscal
               2003.

         o     Other members of the immediate families of Mario, Anthony, Joseph
               and Carmela Sbarro who are our employees,  earned an aggregate of
               $621,751 during fiscal 2003.


12.      PROVISION FOR ASSET IMPAIRMENT, RESTAURANT CLOSINGS AND OTHER CHARGES:


         The  provisions  for asset  impairment,  restaurant  closings and other
         charges consists of the following:

<TABLE>
<CAPTION>
                                       2003             2002            2001
                                       ----             ----            ----

<S>                                        <C>              <C>             <C>
 Impairment of assets (see Note 5)         $4.1             $0.4            $5.5
 Restaurant closings                        2.0              8.8            11.7
 Other charges                              -                -               1.0
                                           ----             ----           -----
 Total                                     $6.1             $9.2           $18.2
                                           ====             ====           =====
</TABLE>


         The year-end accrual for the provison for restaurant closings and other
         charges wre $1.0 million,  $1.5 million and $1.5 million as of December
         28, 2003, December 29, 2002 and December 30, 2001, respectively.

13.      DIVIDENDS:

         We  declared  distributions  to our  shareholders  pursuant  to the tax
         payment agreement described in Note 8 as follows:

         o        $1.8  million  with  respect to our taxable  income for fiscal
                  2002,  of which $1.1 million was paid in 2003 and $0.7 million
                  was paid in February 2004;

         o        $3.1  million  with  respect to our taxable  income for fiscal
                  2001 that was paid in 2002; and

         o        $7.6  million  with  respect to our taxable  income for fiscal
                  2000 that was paid in 2001.

         In addition, there was a $5.0 million dividend paid to our shareholders
         in fiscal 2001.




                                      -70-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                         FIRST           SECOND            THIRD           FOURTH
                                         QUARTER         QUARTER           QUARTER          QUARTER
                                         -------         -------           -------          -------
                                                               (IN THOUSANDS)

<S>                                       <C>              <C>               <C>             <C>
         FISCAL YEAR 2003
         ----------------
         Revenues (a)                     $93,115          $72,043           $75,778         $91,388(a)
         Gross profit (b)                  69,205           54,002            56,408          67,647
         Net (loss) income (a)(c)         (10,490)          (5,212)           (7,954)          6,426

         FISCAL YEAR 2002
         ----------------
         Revenues                        $105,206          $79,332           $81,886         $93,956
         Gross profit (b)                  80,761           60,833            62,996          73,023
         Net (loss) income (c)             (2,421)          (3,337)            8,646           1,893

</TABLE>
         (a)      Revenues and net income for the fourth quarter of 2003 include
                  approximately  $0.7 million and $0.4 million of vendor rebates
                  that should have been  recorded  during fiscal 2002 and in the
                  first two  quarters  of fiscal  2003,  respectively.  However,
                  during  2003 we  received  new  infomrlaiton  regarding  those
                  rebates and, as a result,  were able to apply better  judgment
                  in their recording.

         (b)      Gross profit  represents  the  difference  between  restaurant
                  sales and the cost of food and paper products.

         (c)      See Note 12 for information  regarding the provision for asset
                  impairment of property and equipment,  restaurant closings and
                  other  charges in 2003 and 2002.  We recorded  impairments  of
                  approximately  $3.0  million and $1.1 million in the third and
                  fourth  quarter of fiscal 2003,  respectively.  See Note 4 for
                  information  regarding  an  insurance  recovery  in the  third
                  quarter of fiscal 2002.

16.      GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:

         Certain  subsidiaries  have guaranteed  amounts  outstanding  under our
         senior  notes  and  new  line  of  credit.  Each  of  the  guaranteeing
         subsidiaries is our direct or indirect wholly owned subsidiary and each
         has fully and  unconditionally  guaranteed  the senior notes on a joint
         and several basis.

         The following condensed consolidating financial information presents:

         (1)      Condensed consolidating balance sheets as of December 28, 2003
                  and December 29, 2002 and related statements of operations and
                  cash flows for the  fiscal  years  ended  December  28,  2003,
                  December 29, 2002 and  December 30, 2001 of (a) Sbarro,  Inc.,
                  the parent, (b) the guarantor subsidiaries as a group, (c) the
                  nonguarantor  subsidiaries  as a  group  and (d)  Sbarro  on a
                  consolidated basis.



                                      -71-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         (2)      Elimination entries necessary to consolidate Sbarro, Inc., the
                  parent, with the guarantor and nonguarantor subsidiaries.

         The principal  elimination entries eliminate  intercompany balances and
         transactions.  Investments  in  subsidiaries  are  accounted for by the
         parent on the cost method.





                                      -72-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 28, 2003

                                 (IN THOUSANDS)

                                     ASSETS



<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
                                             PARENT      SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
                                             ------      ------------     ------------    ------------       -----

<S>                                             <C>           <C>              <C>                            <C>
Current assets:
   Cash and cash equivalents                    $49,515       $5,595           $1,299                         $56,409
   Restricted cash for untendered shares             21            -                -                              21
   Receivables less allowance for
     doubtful accounts of $488:
     Franchise                                    1,700            -                -                           1,700
     Other                                        (191)          966              396                           1,171
                                                  -----          ---              ---                           -----
                                                  1,509          966              396                           2,871

   Inventories                                    1,177        1,387              143                           2,707
   Prepaid expenses                               4,018         (227)              53                           3,844
   Current portion of loans receivable
       from officers                              2,810            -                -                           2,810
                                                  -----     --------         --------                           -----
     Total current assets                        59,050        7,721            1,891                          68,662

Intercompany receivables                          6,697      317,237                -       $(323,934)              -

Investment in subsidiaries                       65,469            -                -         (65,469)              -

Property and equipment, net                      36,189       55,706            4,709                          96,604

Intercompany receivables - long term

Intangible assets:
   Trademarks, net                              195,916            -                -               -         195,916
   Goodwill, net                                  9,204            -                -               -           9,204
   Deferred financing costs and other,            5,369          233                -            (120)          5,482
     net

   Loans receivable from officers less
     current portion                              3,347            -                -               -           3,347

   Other assets                                   7,034        1,822             (212)         (1,030)          7,614
                                                  -----        -----             -----         -------          -----
                                               $388,275     $382,719           $6,388       $(390,553)       $386,829
                                               ========     ========           ======       ==========       ========
</TABLE>




                                      -73-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 28, 2003

                                 (IN THOUSANDS)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                           GUARANTOR     NONGUARANTOR                    CONSOLIDATED
                                             PARENT      SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS        TOTAL
                                             ------      ------------    ------------    ------------        -----

<S>                                            <C>                <C>            <C>           <C>            <C>
Current liabilities:
   Amounts due for untendered shares              $21                                                            $21
   Accounts payable                            11,859             129            419           1,327          13,734
   Accrued expenses                            15,521           1,447          1,806                          18,774
   Accrued interest payable                     8,181               -              -              -            8,181
   Current portion of mortgage payable              -             168              -              -              168
                                              -------          ------        -------       ---------         -------
     Total current liabilities                 35,582           1,744          2,225           1,327          40,878
                                               ------           -----          -----           -----          ------

Intercompany payables                         317,236           2,958          3,740        (323,934)              -
                                              -------          ------        -------       ---------         -------

Deferred rent                                   8,009               -            702               -           8,711
                                              -------          ------        -------       ---------         -------

Long-term debt, net of
   original issue discount                    252,827          15,325              -               -         268,152
                                              -------          ------        -------       ---------         -------

Intercompany payables - long term

Shareholders' equity (deficit):
   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                                        71               -              -               -              71
   Additional paid-in capital                      10          65,469          2,477        (67,946)              10
   Retained earnings (deficit)               (225,460)        297,223         (2,756)              -          69,007
                                             ---------        -------         -------       --------          ------

                                             (225,379)        362,692           (279)       (67,946)          69,088
                                             ---------        -------         -------       --------          ------

                                             $388,275        $382,719         $6,388      $(390,553)        $386,829
                                             ========        ========         ======      ==========        ========

</TABLE>


                                      -74-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 29, 2002

                                 (IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                           GUARANTOR     NONGUARANTOR                     CONSOLIDATED
                                             PARENT      SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS       TOTAL
                                             ------      ------------    ------------     ------------       -----

<S>                                             <C>             <C>             <C>            <C>              <C>
Current assets:
   Cash and cash equivalents                  $47,636          $6,539           $975                          $55,150
   Restricted cash for untendered
      shares                                       21               -              -                               21
   Receivables less allowance for
      doubtful accounts of $491:
      Franchise                                 2,059                              -                            2,059
      Other                                        69           1,088             87                            1,244
                                              -------         -------         ------                         --------
                                                2,128           1,088             87                            3,303

   Inventories                                  1,417           1,725            143                            3,285
   Prepaid expenses                             2,677            (342)            27                            2,362
   Current portion of loans receivable
      from officers                             3,232               -              -                            3,232
                                              -------         -------        -------                        ---------
     Total current assets                      57,111           9,010          1,232                           67,353

Intercompany receivables                        5,197         313,877              -        $(319,074)              -

Investment in subsidiaries                     65,469               -              -          (65,469)              -

Property and equipment, net                    42,762          65,726          6,593                -         115,081

Intercompany receivables - long term            3,308               -              -           (3,308)              -

Intangible assets:
   Trademarks, net                            195,916               -              -                -         195,916
   Goodwill, net                                9,324               -              -             (120)          9,204
   Deferred financing costs and other,
      net                                       6,361             271              -                -           6,632

   Loans receivable from officers,
      less current portion                      2,800               -              -                -           2,800

   Other assets                                 8,742           1,705           (303)          (2,357)          7,787
                                             --------        --------         -------          -------       --------
                                             $396,990        $390,589         $7,522        $(390,328)       $404,773
                                             ========        ========         ======        ==========       ========
</TABLE>


                                      -75-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 29, 2002

                                 (IN THOUSANDS)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                           GUARANTOR     NONGUARANTOR                     CONSOLIDATED
                                             PARENT      SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS       TOTAL
                                             ------      ------------    ------------     ------------       -----

<S>                                          <C>              <C>             <C>             <C>              <C>
Current liabilities:
   Amounts due for untendered shares              $21                                                             $21
   Accounts payable                             9,503            $212           $564                           10,279
   Accrued expenses                            17,887           1,560          2,176                           21,623
   Accrued interest payable                     8,181               -              -                            8,181
   Current portion of
      mortgage payable                              -             154              -                              154
                                              -------       ---------          -----        ----------       --------
     Total current liabilities                 35,592           1,926          2,740                           40,258
                                               ------           -----          -----                           ------

Intercompany payables                         313,877               -          5,197        $(319,074)              -
                                              -------       ---------          -----        ----------       --------

Deferred rent                                   7,793               -            681                -           8,474
                                              -------       ---------          -----        ----------       --------

Long-term debt, net of original issue
   discount                                   252,449          15,492              -                  -       267,941
                                              -------       ---------          -----        ----------       --------

Intercompany payables - long term                   -           3,308              -           (3,308)              -
                                              -------       ---------          -----        ----------       --------

Shareholders' equity (deficit):
   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                                        71               -              -                -              71
   Additional paid-in capital                      10          65,469          2,477          (67,946)             10
   Retained earnings (deficit)               (212,802)        304,394         (3,573)               -          88,019
                                           -----------      ---------      ----------    ------------       ---------

                                             (212,721)        369,863         (1,096)         (67,946)         88,100
                                           -----------      ---------    ------------        ---------       --------

                                             $396,990        $390,589         $7,522        $(390,328)       $404,773
                                             ========        ========         ======        ==========       ========

</TABLE>



                                      -76-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
                                            PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
                                            ------       ------------     ------------    ------------       -----
<S>                                           <C>            <C>               <C>            <C>             <C>
Revenues:

   Restaurant sales                          $135,295       $164,535          $14,878                        $314,708
   Franchise related income                    10,868              -                -                          10,868
   Real estate and other                        4,077          2,586               85                           6,748
   Intercompany charges                        10,728              -                -         (10,728)              -
                                               ------    -----------      -----------         --------    -----------
       Total revenues                         160,968        167,121           14,963         (10,728)        332,324
                                              -------        -------           ------         --------        -------

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           27,402         36,116            3,928               -          67,446
     Payroll and other employee
       benefits                                36,474         48,155            4,985               -          89,614
     Other operating costs                     49,196         57,282            3,975               -         110,453
     Depreciation and amortization              8,801          9,899            1,012               -          19,712
     General and administrative                15,212         10,418             (179)              -          25,451
     Asset impairment, restaurant
       closings and other charges               5,647              -              426               -           6,073
     Intercompany charges                           -         10,728                -         (10,728)              -
                                              -------        -------           ------         --------        -------
       Total costs and expenses               142,732        172,598           14,147         (10,728)        318,749
                                              -------        -------           ------         --------        -------

Operating income (loss)                        18,236         (5,477)             816               -          13,575
                                               ------         -------             ---               -          ------

Other (expense) income:
   Interest expense                           (29,693)        (1,346)               -               -         (31,039)
   Interest income                                694              -                -               -             694
   Equity in net income of
     unconsolidated affiliates                    425              -                -               -             425
                                              -------        -------           ------         --------        -------

Net other expense                             (28,574)        (1,346)               -               -         (29,920)
                                              -------        -------           ------         --------        -------

(Loss) income before minority interest        (10,338)        (6,823)             816               -         (16,345)
Minority interest                                   -              -              (41)              -             (41)
                                              -------        -------           ------         --------        -------
(Loss) income before income taxes
   (credit)                                   (10,338)        (6,823)             775               -         (16,386)
Income taxes (credit)                             536            348              (40)              -             844
                                              -------        -------           ------         --------        -------

Net (loss) income                            $(10,874)       $(7,171)            $815         $     -        $(17,230)
                                             =========       ========            ====         =======        =========
</TABLE>



                                      -77-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR     NONGUARANTOR                     CONSOLIDATED
                                             PARENT      SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS       TOTAL
                                             ------      ------------    ------------     ------------       -----
<S>                                           <C>             <C>             <C>             <C>             <C>
Revenues:

   Restaurant sales                          $144,394        $177,728        $23,084                         $345,206
   Franchise related income                    10,070               -              -                           10,070
   Real estate and other                        1,605           3,499              -                            5,104
   Intercompany charges                             -          15,275              -         $(15,275)              -
                                             --------        --------       --------        ----------        -------
       Total revenues                         156,069         196,502         23,084          (15,275)        360,380
                                             --------        --------       --------        ----------        -------

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           26,596          34,592          6,405                -          67,593
     Payroll and other employee
       benefits                                37,996          50,005          8,287                -          96,288
     Other operating costs                     48,242          59,207          7,443                -         114,892
     Depreciation and amortization              9,133          10,290          1,260                -          20,683
     General and administrative                11,203          12,286            471                -          23,960
     Provision for asset impairment,
       restaurant closings and other
       charges (1)                             12,850               -         (3,654)               -           9,196
     Intercompany charges                      15,275               -              -          (15,275)              -
                                             --------        --------       --------        ---------         -------
       Total costs and expenses               161,295         166,380         20,212          (15,275)        332,612
                                             --------        --------       --------        ---------         -------


Operating (loss) income                        (5,226)         30,122          2,872                -          27,768
                                             --------        --------       --------        ---------         -------

Other (expense) income:
   Interest expense                           (29,600)         (1,359)             -                -         (30,959)
   Interest income                                528               -              -                -             528
   Equity in net income of
     unconsolidated affiliates                    668               -              -                -             668
   Insurance recovery, net                      7,162               -              -                -           7,162
                                             --------        --------       --------        ---------         -------
   Net other expense                          (21,242)         (1,359)             -                -         (22,601)
                                             ---------       --------       --------        ---------         -------
(Loss) income before minority interest        (26,468)         28,763          2,872                -           5,167
Minority interest                                   -               -            (52)               -             (52)
                                             --------        --------       --------        ---------         -------
(Loss) income before income taxes
(credit)                                      (26,468)         28,763          2,820                            5,115
Income taxes (credit)                          (1,629)          1,773            190                -             334
                                             ---------       --------       --------        ---------         -------

Net (loss)  income                           $(24,839)        $26,990         $2,630        $       -         $4,781
                                             =========        =======         ======        =========         ======
</TABLE>


(1) Income  included in  Nonguarantor  Subsidiaries  for the provision for asset
impairment, restaurant closings and other charges represents uncollectibility of
amounts due to the Parent of $8.2 million, which is eliminated in consolidation.



                                      -78-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS
                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR     NONGUARANTOR                     CONSOLIDATED
                                             PARENT      SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS       TOTAL
                                             ------      ------------    ------------     ------------       -----

<S>                                           <C>             <C>             <C>             <C>             <C>
Revenues:
   Restaurant sales                          $155,310        $189,731        $27,632                         $372,673
   Franchise related income                    10,286               -              -                           10,286
   Real estate and other                        3,078           3,548              -       $     (870)          5,756
   Intercompany charges                             -          13,020              -          (13,020)               -
                                             --------          ------       ---------       ---------        ---------
       Total revenues                         168,674         206,299         27,632          (13,890)        388,715
                                             --------         -------       ---------       ---------        ---------

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           27,900          39,173          7,541                -          74,614
     Payroll and other employee
       benefits                                41,287          53,185          9,356                -         103,828
     Other operating costs                     46,619          60,197          9,765                -         116,581
     Depreciation and amortization             16,025          12,844          1,506                -          30,375
     General and administrative                14,161          15,618            563             (870)         29,472
     Provision for asset impairment,
       restaurant closings and other
       charges (1)                             21,310                         (3,086)               -          18,224
     Intercompany charges                      13,020                -             -          (13,020)                -
                                             --------          ------       ---------       ---------        ---------
       Total costs and expenses               180,322         181,017         25,645          (13,890)        373,094
                                             --------          ------       ---------       ---------        ---------

   Operating (loss) income                    (11,648)         25,282          1,987                -          15,621
                                             --------          ------       ---------       ---------        ---------

   Other (expense) income:
     Interest expense                         (29,581)         (1,369)        (1,903)           1,903         (30,950)
     Interest income                            2,659               -              -           (1,903)            756
     Equity in net income of
       unconsolidated affiliates                  310               -              -                -             310
                                             --------          ------       ---------       ---------        ---------

   Net other expense                          (26,612)         (1,369)        (1,903)               -         (29,884)
                                             --------          ------       ---------       ---------        ---------
   (Loss) income before minority
     interest                                 (38,260)         23,913             84                -         (14,263)
   Minority interest                                -               -             (1)               -              (1)
                                             --------          ------       ---------       ---------        ---------
   (Loss) income before income taxes
     (credit)                                 (38,260)         23,913             83                          (14,264)
                                             ---------         ------       --------                          --------

   Income taxes (credit)                         (288)            586             27                -            (325)
                                             ---------         ------       --------        ---------            -----

   Net (loss) income                         $(37,972)        $23,327            $56        $       -      $  (14,589)
                                             =========        =======            ===        =========      ===========

</TABLE>

(1) Income  included in  Nonguarantor  Subsidiaries  for the provision for asset
impairment, restaurant closings and other charges represents uncollectibility of
amounts  due  to  the  Parent  of  $13.7   million,   which  is   eliminated  in
consolidation.




                                      -79-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
Operating activities:                       PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
---------------------                       ------       ------------     ------------    ------------       -----

<S>                                               <C>         <C>                <C>            <C>               <C>
Net (loss) income                            $(10,874)       $(7,171)            $815                        $(17,230)
Adjustments to reconcile net (loss)
   income to net cash (used in) provided
   by operating activities:
     Depreciation and amortization             10,211         10,029            1,009                          21,249
     Allowance for doubtful accounts
       receivable                                 435              -                -                             435
     Asset impairment, restaurant
       closings and other charges               4,199          1,452              422                           6,073
     Increase in deferred rent, net               200              -               42                             242
     Loss on sale of other concept, net
       asset impairment costs                       -              -               50                              50
     Minority interest                              -              -               41                              41
     Equity in net income of
       unconsolidated affiliates                 (425)             -                -                            (425)
     Dividends received from
       unconsolidated affiliates                  119              -                -                             119
     Changes in operating assets and
       liabilities:
     Decrease in receivables                       15            121               55                             191
     Decrease in inventories                      239            339                -                             578
     Increase in prepaid expenses                (185)           (41)             (27)                           (253)
     Decrease (increase) in other
       assets                                     816            (49)             194         $(1,327)           (366)
     Increase (decrease) in accounts
       payable and accrued expenses               764         (1,108)            (653)          1,327             330
                                                  ---         -------            -----          -----             ---
Net cash provided by operating
   activities                                   5,514          3,572            1,948               -          11,034
                                                -----          -----            -----               -          ------

Investing activities:
---------------------

Purchases of property and equipment            (5,849)        (2,485)            (187)              -          (8,521)
                                               -------        -------            -----          -----          -------

Net cash used in investing activities          (5,849)        (2,485)            (187)              -          (8,521)
                                               -------        -------            -----          -----          -------
</TABLE>







                                      -80-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
                                            PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
                                            ------       ------------     ------------    ------------       -----

<S>                                           <C>             <C>               <C>             <C>           <C>
Financing activities:
---------------------
Mortgage principal repayments                       -           (154)               -               -            (154)
Tax distributions                              (1,100)             -                -               -          (1,100)
Intercompany balances                           3,314         (1,876)          (1,438)              -               -
                                                -----         -------          -------    -----------     -----------

Net cash (used in) provided by
   financing activities                         2,214         (2,030)          (1,438)              -          (1,254)
                                                -----         -------          -------              -          -------

Increase (decrease) in cash and cash
   equivalents                                  1,879           (943)             323               -           1,259
Cash and cash equivalents at beginning
   of year                                     47,636          6,539              975               -          55,150
                                               ------          -----              ---     -----------          ------

Cash and cash equivalents at end of
   year                                       $49,515         $5,596           $1,298               -         $56,409
                                              =======         ======           ======     ===========         =======

Supplemental disclosure of cash flow
   information:
Cash paid during the period for income
   taxes                                         $290            $85              $13           $   -            $388
                                                 ====            ===              ===           =====            ====

Cash paid during the period for
   interest                                   $28,192         $1,308            $   -           $   -         $29,400
                                              =======         ======            =====           =====         =======

</TABLE>



                                      -81-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
Operating activities:                       PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
---------------------                       ------       ------------     ------------    ------------       -----

<S>                                            <C>             <C>             <C>              <C>            <C>
Net (loss) income                            $(24,839)       $26,990           $2,630                          $4,781
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization             12,551          8,325            1,261                          22,137
     Allowance for doubtful accounts
       receivable                                 350              -                -               -             350
     Increase (decrease) in deferred
       rent, net                                  421           (135)             (74)                            212
     Asset impairment, restaurant
       closings and other charges               3,453              -            4,469                           7,922
     Minority  interest                             -              -               52                              52
     Equity in net income of
       unconsolidated affiliates                 (668)             -                -                            (668)
     Dividends received from
       unconsolidated affiliates                  311              -                -                             311
     Changes in operating assets and
       liabilities:
     Decrease (increase) in receivables         1,755           (475)              28                           1,308
     (Increase) decrease  in
       inventories                                 (4)            46              210                             252
     (Increase) decrease in prepaid
       expenses                                  (763)          (187)            (171)                         (1,121)
     (Increase) decrease in other
       assets                                    (438)           282             (273)                           (429)
     (Decrease) increase in accounts
       payable and accrued expenses            (2,475)         1,827           (1,886)          $(120)         (2,654)
                                               -------         -----           -------          ------         -------

Net cash (used in) provided by
   operating activities                       (10,346)        36,673            6,246            (120)         32,453
                                              --------        ------            -----         --------         ------

Investing activities:
---------------------
Purchases of property and equipment            (8,357)        (2,398)            (233)                        (10,988)
                                               -------        -------            -----                        --------

Net cash used in investing activities          (8,357)        (2,398)            (233)              -         (10,988)
                                              --------        ------            -----         --------        --------
</TABLE>



                                      -82-
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
                                            PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
                                            ------       ------------     ------------    ------------       -----

<S>                                           <C>             <C>                 <C>             <C>         <C>
Financing activities:
---------------------
Mortgage principal repayments                       -           (142)               -               -            (142)
Tax distribution                               (3,125)             -                -               -          (3,125)
Intercompany balances                          39,791        (33,031)          (6,880)            120               -
                                             --------       ---------        ---------       --------      ----------
Net cash provided by (used in)
    financing activities                       36,666        (33,173)          (6,880)            120          (3,267)
                                             --------       ---------        ---------       --------          -------

(Decrease) increase in cash and cash
    equivalents                                17,963          1,102             (867)              -          18,198
Cash and cash equivalents at beginning
    of year                                    29,673          5,437            1,842               -          36,952
                                             --------        -------          -------      ----------         -------
Cash and cash equivalents at end of
    period                                    $47,636         $6,539             $975       $       -         $55,150
                                              =======        =======             ====       =========         =======


Supplemental disclosure of cash flow
    information:
Cash paid during the period for income
    taxes                                        $533           $262               $1             $ -            $796
                                                 ====           ====               ==             ===            ====
Cash paid during the period for
    interest                                  $28,171         $1,327              $ -             $ -         $29,498
                                              =======         ======              ===             ===         =======
</TABLE>





                                      -83-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
                                            PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
                                            ------       ------------     ------------    ------------       -----
Operating activities:
---------------------

<S>                                            <C>            <C>              <C>                            <C>
Net (loss) income                          $  (37,972)       $23,327          $    56           $   -      $  (14,589)
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities
     Depreciation and amortization             12,492         17,827            1,511               -          31,830
     Allowance for doubtful accounts
       receivable                                  61              -                -               -              61
     Increase in deferred rent, net               720           (258)             507               -             969
     Asset impairment, restaurant
       closings and other charges              20,914              -           (3,562)              -          17,352
     Minority interest                              -              -                1               -               1
     Equity in net income of
       unconsolidated affiliates                 (310)             -                -               -            (310)
     Dividends received from
       unconsolidated affiliates                  244              -                -               -             244
     Changes in operating assets and
       liabilities:
       Increase in receivables                   (359)          (243)             (12)              -            (614)
       Decrease (increase) in
         inventories                               16             (7)             (45)              -             (36)
       (Increase) decrease in
         prepaid expenses                      (1,202)           666              112               -            (424)
       (Increase) decrease in
         other assets                             340         (1,518)              43               -          (1,135)
       (Decrease) increase in accounts
         payable and accrued expenses          (2,438)         3,438              463               -           1,463
                                               ------         -------          -------        --------        --------
Net cash (used in) provided by
   operating activities                        (7,494)        43,232             (926)              -          34,812
                                               ------         -------          -------        --------        --------


Investing activities:
---------------------
Purchases of property and equipment            (9,651)        (7,947)          (4,930)              -         (22,528)
Proceeds from disposition of
Property and equipment                             75               -                -               -             75
                                               ------         -------          -------        --------        --------
Net cash used in investing activities          (9,576)        (7,947)          (4,930)               -        (22,453)
                                               -------        -------          -------        --------        --------
</TABLE>



                                      -84-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                          GUARANTOR      NONGUARANTOR                     CONSOLIDATED
                                            PARENT       SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS       TOTAL
                                            ------       ------------    ------------     ------------       -----

<S>                                             <C>          <C>               <C>        <C>                 <C>
Financing activities:
---------------------
Mortgage principal repayments                       -           (130)              -               -             (130)
Purchase of minority interest                  (1,000)             -               -               -           (1,000)
Loans to shareholders                          (6,732)             -               -               -           (6,732)
Repayment of shareholder loans                  2,700              -               -               -            2,700
Tax distributions                              (7,564)             -               -               -           (7,564)
Dividends                                      (5,000)             -               -               -           (5,000)
Intercompany balances                          27,377        (33,951)          6,574               -                -
                                             --------        --------        -------      -----------       ----------
Net cash provided by (used in)
   financing activities                         9,781        (34,081)          6,574               -          (17,726)
                                             --------        --------        -------      -----------         --------


(Decrease) increase in cash and cash
   equivalents                                 (7,289)         1,204             718               -           (5,367)
Cash and cash equivalents at beginning
   of period                                   36,963          4,232           1,124               -           42,319
                                             --------         -------         ------       ----------        --------

Cash and cash equivalents at end of
   period                                     $29,674         $5,436          $1,842       $       -          $36,952
                                              =======         ========        ======       ==========         =======


Supplemental disclosure of cash flow
   information:

Cash paid during the period for income
   taxes                                       $  562           $628        $      7        $       -          $1,197
                                               ======           ====        ========        =========          ======

Cash paid during the period for
   interest                                   $28,159         $1,332       $      -         $       -         $29,491
                                              =======         ======       =========        =========         =======

</TABLE>



                                      -85-
<PAGE>



ITEM 9.  CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
-------  ----------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

None


ITEM 9A. CONTROLS AND PROCEDURES
-------  -----------------------

         Disclosure Controls and Procedures. The Company's management,  with the
participation  of the  Company's  Chief  Executive  Officer and Chief  Financial
Officer,  has evaluated the effectiveness of the Company's  disclosure  controls
and procedures (as such term is defined in Rules  13a-15(e) and 15d-15(e)  under
the Securities  Exchange Act of l934, as amended (the "Exchange Act")) as of the
end of the  period  covered  by  this  report.  Based  on such  evaluation,  the
Company's  Chief Executive  Officer and Chief  Financial  Officer have concluded
that,  as of the  end of the  period,  the  Company's  disclosure  controls  and
procedures are effective.  Notwithstanding  the foregoing,  a control system, no
matter  how well  designed  and  operated,  can  provide  only  reasonable,  not
absolute,  assurance that it will detect or uncover  failures within the Company
to  disclose  material  information  otherwise  required  to be set forth in the
Company's periodic reports.

         Internal  Control  Over  Financial  Reporting.  There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules  13a-15(f) and 15d-15(f)  under the Exchange Act) during the
fourth quarter of 2003 that have materially  affected,  or are reasonable likely
to materially affect, the Company's internal control over financial reporting.







                                      -86-
<PAGE>

                                    PART III
                                    --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------

         Our directors  and  executive  officers and their ages at March 5, 2004
         are:

         NAME                     AGE                  POSITION
         ----                     ---                  --------
         Mario Sbarro              62      Chairman of the Board and Director
         Anthony Sbarro            57      Vice Chairman of the Board, Treasurer
                                               and Director
         Joseph Sbarro             63      Senior Executive Vice President,
                                               Secretary and Director
         Carmela Sbarro            82      Vice President and Director
         Michael O'Donnell         47      President, Chief Executive Officer
                                               and Director
         Peter  Beaudrault         49      President - Quick Service Division
                                               and Corporate Vice President
         Anthony J. Missano        45      President - Business Development and
                                               Corporate Vice President
         Gennaro A. Sbarro         37      President - Franchising and Licensing
                                               Division and Corporate Vice
                                               President
         Carmela N. Merendino      39      Vice President - Administration
         Anthony J. Puglisi        54      Vice President and Chief Financial
                                               Officer
         Steven B. Graham          50      Vice President and Controller
         Ashraf Kilada             40      Vice President - Risk Management and
                                               Benefits
         Harold L. Kestenbaum      54      Director
         Richard A. Mandell        61      Director
         Terry Vince               75      Director
         Bernard Zimmerman         71      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  until  September  2003,  as our  President  and Chief
Executive Officer, for more than the past five years.

         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 and 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 and Secretary for more than the past five years.

         CARMELA  SBARRO has been a Vice  President  for more than the past five
years.  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.  Mrs.  Sbarro has been a director  since January 1998.
Mrs.  Sbarro  also  served as a director  from March 1985 until  December  1988,
following  which she was elected  director  emeritus until her reelection to our
board of directors.



                                      -87-
<PAGE>

         MICHAEL  O'DONNELL joined us as President,  Chief Executive Officer and
was elected to our Board of Directors in September,  2003.  Prior to his joining
Sbarro, Mr. O'Donnell was an industry  consultant from January 2003 and for more
than five years prior to that was the President and Chief  Executive  Officer of
New Concepts at Outback  Steakhouse Inc., a restaurant chain. Mr. O'Donnell is a
director of Champps Entertainment and Boston Inner City Schools

         PETER BEAUDRAULT was elected  Corporate Vice President and President of
our  Quick  Service  Division  in March  2004.  Prior  to  joining  Sbarro,  Mr.
Beaudrault was an industry  consultant  from January 2003 and for more than five
years prior to that was the  President and Chief  Executive  Officer of the Hard
Rock Cafe International, a restaurant chain.

         ANTHONY J.  MISSANO was elected  President of Business  Development  in
March 2004. He has been a Corporate  Vice  President for more than the past five
years and served as President of our Quick  Service  Division  from January 2000
until March 2004..

         GENNARO A. SBARRO has been a Corporate Vice President for more than the
past five years and was  elected  President  of our  Franchising  and  Licensing
Division in January 2000.

         CARMELA N. MERENDINO has been Vice President - Administration  for more
than the past five years.

         ANTHONY J. PUGLISI joined us as Vice President-Chief  Financial Officer
in February 2004.  Prior to joining  Sbarro,  Mr. Puglisi was the Vice President
and Chief  Financial  Officer of Langer,  Inc.,  a provider of products  used to
treat muscle - skeletal disorders, from April 2002 to February 2004. Mr. Puglisi
was Senior Vice  President and Chief  Financial  Officer of Netrex  Corporation,
from  September  2000 to October 2001 and  Executive  Vice  President  and Chief
Financial Officer of Olsten Corporation,  a provider of staffing and home health
care services,  from 1993 to March 2000. Mr. Puglisi has been a certified public
accountant in New York for over twenty-five years.

         ASHRAF KILADA was elected Vice President - Risk Management and Benefits
in January  2002.  Mr.  Kilada  served as our  director of Risk  Management  and
Benefits for more than the past five years.

         STEVEN B. GRAHAM was elected  Vice  President  in January  2000 and has
served as our Controller for more than the past five years.  Mr. Graham has been
a certified public accountant in New York for over twenty-five years.

         HAROLD L.  KESTENBAUM  has been a  practicing  attorney in New York for
more than the past five years. He became a director of Sbarro in March 1985. Mr.
Kestenbaum is also a director of Rezconnect Technologies, Inc. and UFSI, Inc.

         RICHARD A. MANDELL has been a private investor and financial consultant
since  April  1998.  Prior  to  that  date,  he was  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 Encore  Capital Group,
Inc.  and Smith &  Wollensky  Restaurant



                                      -88-
<PAGE>

Group,  Inc. Mr. Mandell has been a certified public  accountant in New York for
more than the past thirty years.

         TERRY VINCE has been  Chairman of the Board and  President of Sovereign
Hotels,  Inc., a company that owns and manages hotels, and Chairman of the Board
of Fame Corp., a food service  management  company,  for more than the past five
years. Mr. Vince became a director of Sbarro in December 1988.

         BERNARD ZIMMERMAN has been President of Bernard Zimmerman & Co., Inc. a
financial and management  consulting firm, for more than the past five years. In
addition,  since July  2003,  Mr.  Zimmerman  has been the  President  and Chief
Executive  Officer and a director of FCCC,  Inc.,  a company  engaged in seeking
business  combinations,  mergers and/or  acquisitions.  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.

         Our by-laws  provide  that the  minimum  number of  directors  that can
constitute  our  board  is six and the  maximum  number  of  directors  that can
constitute our board is twelve.

         Our  officers are elected  annually by the board of directors  and hold
their respective  offices until their successors are duly elected and qualified.
Officers may be removed at any time by the board.

         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. Anthony J. Missano is the son-in-law of Joseph Sbarro.

         Our board of directors has determined that Richard A. Mandell, Chairman
of  our  Audit  Committee,  is  the  audit  committee  financial  expert  and is
independent.

         During fiscal 2003, our officers,  directors and shareholders  were not
required to file reports under Section 16(a) of the  Securities  Exchange Act of
1934.

         We have  adopted a Code of Ethics that applies to,  among  others,  our
principal executive officer,  principal financial officer,  principal accounting
officer,  controller and other persons performing  similar functions.  A copy of
our Code of Ethics is filed as exhibit 14 to this report.

         We undertake to provide to any person,  without charge, upon request, a
copy of our Code of  Ethics.  If you wish a copy of our Code of  Ethics,  please
write to our chief  financial  officer,  Sbarro,  Inc.,  401  Broadhollow  Road,
Melville, New York 11747.







                                      -89-
<PAGE>



ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------

SUMMARY COMPENSATION TABLE

         The following table sets forth information  concerning the compensation
of our chief executive  officer and other five most highly  compensated  persons
who were  serving as  executive  officers at the end of our 2003 fiscal year for
services in all capacities to us and our subsidiaries  during our 2003, 2002 and
2001 fiscal years:

<TABLE>
<CAPTION>
                                                                         ANNUAL
                                                                      COMPENSATION
NAME AND                                                              ------------
PRINCIPAL POSITION                                   YEAR        SALARY          BONUS
------------------                                   ----        ------          -----

<S>                                                  <C>       <C>               <C>
Michael O'Donnell..............................      2003      $133,816            --
President, Chief Executive Officer (1)

Mario Sbarro...................................      2003      $700,000         $220,000
Chairman of the Board, President and                 2002       700,000            --
      Chief Executive Officer                        2001       700,000            --

Anthony Sbarro.................................      2003       400,000          220,000
Vice Chairman of the Board and Treasurer             2002       325,000            --
                                                     2001       300,000            --

Joseph Sbarro..................................      2003       400,000          250,000
Senior Executive Vice President and                  2002       325,000            --
     Secretary                                       2001       300,000            --

Anthony J. Missano.............................      2003       220,000            --
Corporate Vice President and President - Quick       2002       220,000          150,000
     Service Division                                2001       200,000          150,000

</TABLE>
(1) Mr.  O'Donnell  joined us on September 8, 2003. See "Employment  Agreements"
below.

There  was  no  other  annual  compensation,  long-term  compensation  or  other
compensation  awarded  to,  earned  by or paid to any of the  foregoing  persons
during any of the reported periods.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR.

         We did not grant any options to purchase  our  securities  or any stock
appreciation rights during fiscal 2003.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END VALUES

         No options  were  exercised  during  fiscal  2003 and no  options  were
outstanding at the end of fiscal 2003.



                                      -90-
<PAGE>

COMPENSATION OF DIRECTORS

         Each of 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 the member
serves if the  meeting  is not held on the same day as a meeting  of the  board.
Members of the board also are reimbursed for reasonable travel expenses incurred
in attending board and committee meetings.

EMPLOYMENT AGREEMENT

         On September  8, 2003,  we entered into an  employment  agreement  with
Michael O'Donnell, our current President and Chief Executive Officer, for a term
ending on  December  31,  2006,  subject  to  earlier  termination  by us or Mr.
O'Donnell  following  specified  notice.  The  agreement  provides,  among other
things, for an annual salary of $450,000;  subject to increase at the discretion
of our board of directors,  an annual  performance bonus beginning in 2004 to be
based upon the  achievement  of  increases  in  EBITDA,  as  defined,  and other
objectives to be set forth in business  plans and budgets  approved from time to
time by our board,  which bonus, for the year ending December 31, 2004, will not
be less than $112,500;  $1,000,000 of life insurance;  the  reimbursement of Mr.
O'Donnell for certain  relocation,  travel and housing expenses incurred;  and a
special  incentive award. The special  incentive award is designed to reward Mr.
O'Donnell for improvements in our adjusted  EBITDA,  cash position and long term
debt  position over the term of the  agreement,  vests upon  termination  of Mr.
O'Donnell's  employment,  is  reduced  in the  event  of  early  termination  of
employment  and,  when  earned,  is  payable,  with  interest,  in twelve  equal
quarterly installments.  Alternatively, in the event of a public offering of our
common stock, a change in control of Sbarro,  including by merger, sale of stock
or sale of assets,  or a  liquidation  or  dissolution  of Sbarro,  the  special
incentive  award  will  be  based  on the per  share  proceeds  received  by our
shareholders  in excess of a threshold  amount.  The agreement also provides for
severance  pay in the  event of early  termination  by us  without  "cause"  (as
defined) or by Mr. O'Donnell for "good reason" (as defined).

COMPENSATION  COMMITTEE  INTERLOCKS AND INSIDER  PARTICIPATION  IN  COMPENSATION
DECISIONS

         Our  board  of  directors   does  not  presently  have  a  Compensation
Committee.  Decisions regarding the compensation of executive officers are being
made by the Board of Directors.  Accordingly,  Mario Sbarro,  Anthony Sbarro and
Joseph Sbarro,  executive officers,  directors and employees, may participate in
deliberations of our board concerning executive officer compensation.

         Bernard  Zimmerman  & Company,  Inc.,  of which  Bernard  Zimmerman,  a
director of Sbarro, is President and a majority  shareholder,  renders financial
and  consulting  assistance  to us, for which it received  fees of $315,200  for
services rendered during our 2003 fiscal year.

         See Item 13, "Certain  Relationships and Related  Transactions" in this
report, for information concerning related party transactions.





                                      -91-
<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 March 5, 2004 by (1) holders known
to us to  beneficially  own more than five  percent  of our  outstanding  common
stock,  (2)  each  of our  directors,  (3)  the  persons  named  in the  summary
compensation  tables in Item 11 of the report 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.

<TABLE>
<CAPTION>
                                                                                  SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER                                                                  NUMBER            PERCENT
----------------                                                                  ------            -------
<S>                                                                               <C>       <C>      <C>
Mario Sbarro (1).......................................................           1,524,730 (2)      21.5%
Anthony Sbarro (1).....................................................           1,233,800          17.5%
Joseph Sbarro (1)......................................................           1,756,022 (3)      24.8%
Trust of Carmela Sbarro (1)............................................           2,497,884 (4)      35.4%
Harold L. Kestenbaum...................................................                  --           --
Richard A. Mandell.....................................................                  --           --
Michael O'Donnell......................................................                  --           --
Terry Vince............................................................                  --           --
Bernard Zimmerman......................................................                  --           --
Anthony J. Missano.....................................................              25,946(5)        0.4%
All directors and executive officers as a group
    (16 persons) (6) ..................................................           7,038,382          99.6%
</TABLE>
_____________________
(1)      The business  address of these  stockholders 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, and daughter who 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 1270 Avenue of the Americas,  New York, New York 10020,  and
         Mario,  Anthony and Joseph Sbarro. Each trustee may be deemed to be the
         beneficial owner of all these shares with shared voting and dispositive
         power.

(5)      Includes  25,946  shares  owned  by Mr.  Missano's  wife.  Mr.  Missano
         disclaims beneficial ownership of these shares.

         We do not have any equity compensation plans, contracts or arrangements
for employees or non-employees.




                                      -92-
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------  ----------------------------------------------

         We have been the sole  tenant  of an  administrative  office  building,
which is  leased  from  Sbarro  Enterprises,  L.P.  The rent paid by us for this
facility  in fiscal  2003 was $0.3  million.  We were  advised by a real  estate
broker  at the time we  renewed  the lease  for this  facility  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.  Our obligation  for the remainder of the lease term,  which is
scheduled to expire in 2011, will be terminated upon the sale of the building by
the partnership in April 2004.

         On  April  5,  2001,   we  loaned  $3.23  million  to  certain  of  our
shareholders,  including:  Mario Sbarro,  $1.08 million,  Joseph  Sbarro,  $1.24
million and Anthony  Sbarro,  $0.87  million.  The due date of the related notes
were  extended on April 6, 2003 to April 6, 2005,  and bear interest at the rate
of 4.63%,  payable  annually.  After a loan repayment in March 2004, the current
balance of these loans is $2.95 million.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
including:  Mario Sbarro, $0.60 million,  Joseph Sbarro, $0.70 million,  Anthony
Sbarro,  $0.49 million,  and the Trust of Carmela  Sbarro,  $0.99  million.  The
related notes are payable on December 28, 2004, and bear interest at the rate of
2.48%,  payable  annually.  After a loan  repayment  in March 2004,  the current
balance of these loans is $2.58 million.

         In March  2004,  we  extended a loan of  $40,000 to Gennaro A.  Sbarro,
Corporate  Vice  President  and  President  of  our  Franchising  and  Licensing
Division,  to March 28, 2010. The note is repayable at approximately  $5,000 per
year,  including  interest at 2.69% per annum, with a balloon payment due at the
maturity date.

         Anthony  Missano,  Corporate  Vice  President and President of Business
Development , entered into a note dated June 15, 2003 in our favor in the amount
of $89,687,  The note is repayable at approximately  $10,000 per year, including
interest at 2.96% per annum,  with a balloon  payment due on June 30, 2010.  The
note is for the  payment  of  royalties  due us for 2001 and 2000  from a former
franchisee that was owned by Mr.  Missano's wife, the daughter of Joseph Sbarro.
The current balance owed on the notes is $84,687.

         The  interest  rates  charged on all the related  party loans  included
above  approximate  the Applicable  Federal Rate (AFR) published by the Internal
Revenue  Service at the time of the loan.  Interest  income from related parties
was  $222,577,  $220,666 and $270,382 in the 2003,  2002 and 2001 fiscal  years,
respectively.

         Companies  owned by a son of Anthony  Sbarro paid royalties to us under
franchise  agreements  containing  terms similar to those in agreements  entered
into by us with unrelated franchisees.  Royalties paid under these agreements in
fiscal 2003 were $89,496. The related franchise agreement contains terms similar
to those in agreements entered into by us with unrelated franchisees.

         A corporation whose  shareholder is the  brother-in-law of our Chairman
of the entered into a franchise agreement with us at the time of the acquisition
from us of the assets of a Sbarro owned  restaurant in fiscal 2002 that contains
terms  similar  to  those  in  agreements  entered  into  by us  with  unrelated
franchisees.  We received  promissory  notes for each of the purchase  price and
initial franchise fee that are payable over seven years and bear interest on the
unpaid  principal  balances at



                                      -93-
<PAGE>

7% interest per annum.  The current  amount owed under the  promissory  notes of
$119,209  has been fully  reserved as of December  28,  2003.  In  addition,  we
subleased  this  location to that  franchisee.  Payments  under the sublease are
being  made  directly  to the  landlord  by the  franchisee.  Interest  payments
received  relating to the promissory notes was $4,067 in fiscal 2003.  Royalties
paid  under  this  arrangement  in fiscal  2003 were  $3,303  but  royalties  of
approximately  $17,700 were not included in the  statement of operations as they
were not collected  during the fiscal year. The royalties and interest  payments
noted above were collected in the beginning of fiscal 2003.

         On March 3,  2003,  a company  in which  Gennaro  J.  Sbarro,  then our
Corporate  Vice  President and President of our Casual and Fine Dining  Division
and the son of Joseph  Sbarro,  has a 50% interest (the other 50% is owned by an
unaffiliated third party) entered into a franchise agreement and a sublease with
us for a new  location.  The lease for the  location  had been  entered  into in
September  2002  by  one  of our  subsidiaries.  Subsequent  to  that  date,  we
determined  that the  economics  of the  location  would be better  suited for a
franchise  operator and, as such,  we entered into the  franchise  agreement and
subleased the premises to this  franchisee.  Payments under the sublease will be
made directly to the landlord by the franchisee.  The franchise  agreement is on
terms and conditions  similar to those in other  franchise  arrangements we have
entered into in similar  situations with unrelated third parties.  The franchise
agreement provides for the payment of 5% of the location's sales as a continuing
royalty  but does not  provide for any initial  franchise  fee.  Future  minimum
rental  payments  under the lease for this  location over the term of the lease,
which expires in 2018, aggregate approximately $2.4 million. Mr. Sbarro issued a
note in our favor for  $54,538,  that is  repayable  in eighteen  equal  monthly
installments  of $3,030 which  commenced in November  2002 with no interest,  to
reimburse  Sbarro for costs advanced by Sbarro in connection  with the franchise
location.  The  balance on the note as of  December  28,  2003 is  $48,478.  The
location is expected to open in the first  quarter of fiscal 2004. As of October
31, 2003,  Gennaro J. Sbarro  resigned  from his  positions as Corporate  Vice -
President  and President of our Casual and Fine Dining  division.  A corporation
owned by Mr. Sbarro entered into an eighteen month  agreement with us to provide
consulting  services to our quick service and casual dining division for $22,500
per month and the  reimbursement  for customary  and usual  expenses that may be
incurred.

         In October  2003,  we sold the assets of three  Sbarro-owned  locations
separately  to  entities  owned  separately  by each of three  other of  Anthony
Sbarro's  sons. Two of the  locations,  which had no remaining book value,  were
transferred for no consideration while the third was sold for $0.3 million, that
was paid in  full,  and  resulted  in a gain to  Sbarro  of  approximately  $0.1
million.  Two of the locations were  marginally  profitable in fiscal 2002 while
the third had a small loss during that period.  In  connection  with the sale of
the locations,  the employment of the individuals with Sbarro was terminated and
we have included a charge for their total severance pay of approximately $60,000
in our results of operations  for fiscal 2003.  The franchise  agreements are on
terms and  conditions  similar to those  other  franchise  arrangements  we have
entered into in similar  situation with unrelated third parties.  The agreements
provide for the payment of 5% of the  location's  sales as a continuing  royalty
but does not provide for any initial  franchise fee.  Royalties of approximately
$16,400 have been included in the fiscal 2003 results of  operations  are unpaid
to date  and  fully  reserved  in the  financial  statements.  In  addition,  we
subleased two of the locations to two of the franchisees.  The third location is
on a month-to-month  basis and any new lease entered into by the franchisee will
not be guaranteed or subleased by Sbarro. Payments under the subleases are being
made directly to the landlord by the franchisees. Future minimum rental payments
over the  terms of the  leases  under the



                                      -94-
<PAGE>

leases for the two  locations  being  subleased  which  expire in 2006 and 2016,
aggregate approximately $2.0 million.

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
position as Manager of Administration - Construction. A corporation owned by her
entered into a one year  agreement  to provide  consulting  services  related to
construction matters to us for a series of monthly payments totaling $100,000.

         We,  our  subsidiaries  and our  other  concepts,  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,  $340,269
during fiscal 2003.  Based on our experience with  non-affiliated  printers that
provide  similar  services to us, we believe the services  have been provided on
terms comparable to those available from unrelated third parties.

         Bernard  Zimmerman  & 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 $315,200 for services during our
2003 fiscal year. Mr. Zimmerman is a member of Board of Directors.  We have been
advised by Mr.  Zimmerman  that these  fees were  charged on a basis  similar to
those that Bernard Zimmerman & Company, Inc. charges to unrelated clients.

         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 2003; and

         o        Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves
                  as Vice President -  Administration,  earned  $206,129  during
                  fiscal 2003.

         o        Other  members of the  immediate  families of Mario,  Anthony,
                  Joseph and  Carmela  Sbarro who are our  employees,  earned an
                  aggregate of $621,751 during fiscal 2003.

         TAX PAYMENT AGREEMENT

         We are 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.  Therefore,  we do not pay
federal and state and local income taxes for periods for which we are treated as
an S corporation.  Rather, our shareholders  include their pro-rata share of our
taxable income on their  individual  income tax returns and thus are 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  determined  under a formula designed in amounts to approximate the
income  taxes,   including  estimated  taxes,  that  would  be  payable  by  our
shareholders if their only income was their pro-rata share 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



                                      -95-
<PAGE>

treated as an S corporation.  We declared distributions to our shareholders,  in
accordance  with the tax payment  agreement of $1.8 million in 2003 with respect
to fiscal 2002 earnings.

         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.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------  --------------------------------------

Our principal  accountants  for each of the past two years has been BDO Seidman,
LLP

AUDIT FEES:

The  aggregate  audit  fees  billed  for each of the last two  fiscal  years for
professional services rendered by our principal accountants for the audit of our
annual  financial  statements  included in our report on Form 10-K and review of
our  quarterly  financial  statements  included in our Reports on Form 10-Q were
$116,000 and $93,000 in fiscal 2003 and 2002, respectively.

AUDIT - RELATED FEES:

The aggregate fees billed in each of our last two fiscal years for assurance and
related services by our principal accountants that are reasonably related to the
performance  of the audit or review of our financial  statements not included in
Audit Fees were $19,400 in fiscal 2003. The services  included  consultation  on
various new  accounting  pronouncements  and their  impact on us. We incurred no
audit-related fees in fiscal 2002.

TAX FEES:

The aggregate fees billed in each of the last two fiscal years for  professional
services  rendered by our principal  accountants for tax compliance,  tax advice
and tax planning were $64,550 and $54,300 in fiscal 2003 and 2002, respectively.
These services included, in each fiscal year reported, a review of our corporate
income and franchise tax returns, tax planning advice related to our tax returns
and tax advice relating to contemplated corporate transactions.

ALL OTHER FEES:

Other  than the fees  described  above,  we have not  incurred  any fees for any
services rendered by our principal accounting firm.



                                      -96-
<PAGE>

PRE - APPROVAL POLICIES AND PROCEDURES:

It is our policy that, before we engage our principal  accountants for any audit
or non - audit services, the engagement is approved by our audit committee.  Our
audit  committee  has  delegated  to Richard A.  Mandell,  its  Chairman  and an
independent  director,  the authority to grant such pre-approvals during periods
when the audit  committee  is not in  session  and a meeting  cannot be  readily
convened. A decision by Mr. Mandell to pre-approve an audit or non-audit service
must be presented to the full audit committee at its next scheduled meeting. All
fees  paid to and or  billed  by our  principal  accountants  were  approved  in
accordance with the policy described above beginning May 6, 2003.















                                      -97-
<PAGE>


                                     PART IV
                                     -------


ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
--------  ----------------------------------------------------
          ON FORM 8-K
          -----------

(a) (1)   Consolidated Financial Statements

         The following consolidated financial statements of Sbarro, Inc. and the
Report of Independent Auditors thereon are included in Item 8 above:

<TABLE>
<CAPTION>
                                                                               Page
                                                                               ----

<S>                                                                           <C>
          Report of Independent Certified Public Accountants                  38 - 40

          Copy of Report of Independent Public Accountants (Arthur
          Andersen LLP)                                                          41

          Consolidated Balance Sheets at December 28, 2003 and December
          29, 2002                                                            42 - 43

          Consolidated  Statements of Operations for each of the fiscal
          years in the three-year period ended December 28, 2003                 44

          Consolidated Statements of Shareholders' Equity for each
          of the fiscal years in the three-year period ended
          December 28, 2003                                                      45

          Consolidated  Statements of Cash Flows for each of the
          fiscal years in the three-year period ended December 28, 2003       46 - 47

          Notes to Consolidated Financial Statements                          48 - 85

(a) (2)   Financial Statement Schedules
</TABLE>

         The following  financial  statement schedule is filed as a part of this
Report on Page S-3:  Schedule II - Valuation  and  Qualifying  Accounts  for the
three fiscal years ended  December 28, 2003 is filed on page S-3 of this report.
All  other  schedules  called  for by Form  10-K are  omitted  because  they are
inapplicable or the required  information is shown in the financial  statements,
or notes thereto, included herein.

(a) (3)   Exhibits

Exhibits:
---------

        *2.01       Agreement  and Plan of Merger  dated as of January  19, 1999
                    among  Sbarro,  Inc.,  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



                                      -98-
<PAGE>

                    28,  1984  for  the  benefit  of  Carmela   Sbarro  and  her
                    descendants.  (Exhibit 2 to our  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 Sbarro,  Inc. as
                    filed with the  Department of State of the State of New York
                    on  March  29,  1985.  (Exhibit  3.01  to  our  Registration
                    Statement on Form S-1, File No. 2-96807)

        *3.01(b)    Certificate  of  Amendment to our  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 our
                    Annual  Report on Form 10-K for the year  ended  January  1,
                    1989, File No. 1-8881)

        *3.01(c)    Certificate  of  Amendment to our  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 our
                    Quarterly  Report on Form 10-Q for the  quarter  ended April
                    23, 1989, File No. 1-8881)

        *3.01(d)    Certificate  of  Amendment to our  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 our
                    Quarterly  Report on Form 10-Q for the  quarter  ended April
                    22, 1990, File No. 1-8881)

        *3.02       By-Laws of Sbarro,  Inc.,  as amended.  (Exhibit  3.1 to our
                    Registration Statement on Form S-4, File No. 333-90817)

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

        *10.01(a)   Building Lease between Sbarro Enterprises,  L.P. and Sbarro,
                    Inc.  (Exhibit 10.04 to our  Registration  Statement on Form
                    S-1, File No. 2-96807)

        *10.01(b)   Amendment dated May 4, 2000 to Building Lease between Sbarro
                    Enterprises, L.P. and Sbarro, Inc., (Exhibit 10.01(b) to our
                    Annual  Report on Form 10-K for the year ended  December 30,
                    2001, File No. 333-90817)

        *+10.02     Form of Indemnification  Agreement between Sbarro,  Inc. and
                    each of its directors and  officers.  (Exhibit  10.04 to our
                    Annual  Report on Form 10-K for the year ended  December 31,
                    1989, File No. 1-8881)

        *10.04      Tax Payment  Agreement  dated as of September 28, 1999 among
                    Sbarro,  Inc.,  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



                                      -99-
<PAGE>

                    (Exhibit  10.6 to our  Registration  Statement  on Form S-4,
                    File No. 333-90817)

        *10.05(a)   Distribution Agreement dated January 1, 2003 between Sbarro,
                    Inc. and Vistar Corporation (confidential treatment has been
                    granted   with   respect   to  certain   portions   of  this
                    agreement).(Exhibit  10.05 of our Annual Report on Form 10-K
                    for the years ended December 29, 2002 File No. 333-90817).

        10.05(b)    Letter Agreement dated January 1, 2003 between Sbarro,  Inc.
                    and  Vistar  Corporation  (confidential  treatment  has been
                    requested  with  respect to certain  portions of this letter
                    agreement).

        *+10.06     Employment agreement,  dated as of September 8, 2003 between
                    Sbarro,  Inc. and Michael  O'Donnell.  (Exhibit 99.01 to our
                    Current  Report on Form 8-K dated  (date of  earliest  event
                    reported) September 8, 2003, File No. 333-90817)

        12.01       Statement of computation of earnings to fixed charges

        14.01       Code of Ethics - For  Executive  Officers  and  Directors of
                    Sbarro, Inc.

        *21.01      List of subsidiaries. (Exhibit 21.01 to our Annual Report on
                    Form  10-K for the year  ended  January  2,  2000,  File No.
                    333-90817)

        31.01       Certification of Principal Executive pursuant to Section 302
                    of the Sarbanes-Oxley Act of 2002.

        31.02       Certification of Vice President, Chief Financial Officer and
                    Principal  Accounting Officer pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.

        32.01       Certification  of Principal  Executive  Officer  pursuant to
                    Section 906 of the Sarbanes-Oxley Act of 2002.

        32.02       Certification of Vice President, Chief Financial Officer and
                    Principal  Accounting Officer pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002.

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

(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 December 28, 2003.




                                     -100-
<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.









                                     -101-
<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
29, 2004.

                                         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/ MICHAEL O'DONNELL            President and Chief
---------------------            Executive Officer                March 29, 2004
Michael O'Donnell


/s/ ANTHONY J. PUGLISI           Vice President,                  March 29, 2004
----------------------           Chief Financial Officer
Anthony Puglisi                  And Principal Accounting
                                 Officer


/s/ MARIO SBARRO                 Director                         March 29, 2004
----------------
Mario Sbarro


/s/ JOSEPH SBARRO                Director                         March 29, 2004
-----------------
Joseph Sbarro


/s/ ANTHONY SBARRO               Director                         March 29, 2004
------------------
Anthony Sbarro


/s/ HAROLD L. KESTENBAUM         Director                         March 29, 2004
------------------------
Harold L. Kestenbaum


/s/  RICHARD A. MANDELL          Director                         March 29, 2004
-----------------------
Richard A. Mandell


/s/ CARMELA SBARRO               Director                         March 29, 2004
------------------
Carmela Sbarro





<PAGE>

/s/ TERRY VINCE                  Director                         March 29, 2004
---------------
Terry Vince


/s/ BERNARD ZIMMERMAN            Director                         March 29, 2004
---------------------
Bernard Zimmerman





<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
               --------------------------------------------------


Board of Directors
Sbarro, Inc.
Melville, New York



The  audits  referred  to in our  report  dated  March 5, 2004  relating  to the
consolidated  financial  statements of Sbarro,  Inc. and subsidiaries,  which is
contained in Item 8 of this Form 10-K  included  the audits of the  accompanying
financial  statement schedule for the years ended December 28, 2003 and December
29,  2002.  This  financial  statement  schedule  is the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion on this
financial statement schedule based upon our audits.

In our opinion,  such  financial  statement  schedule  presents  fairly,  in all
material respects, the information set forth thereinfor the years ended Decmeber
28, 2003 and December 29, 2002.



/s/ BDO Seidman, LLP

New York, New York
March 5, 2004











                                      S-1
<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 21,  2002.  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 21, 2002


This is a copy of the report on the accompanying  schedule  previously issued by
Arthur  Andersen LLP in connection  with the schedule  included in our filing on
Form 10-K for the fiscal year ended December 30, 2001. This audit report has not
been  reissued by Arthur  Andersen  LLP in  connection  with this filing on Form
10-K.







                                      S-2
<PAGE>



SCHEDULE II
                          SBARRO, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

                            FOR THE THREE YEARS ENDED

<TABLE>
<CAPTION>
COLUMN A                               COLUMN B                 COLUMN C                 COLUMN D         COLUMN E
--------                               --------                 --------                 --------         --------
                                                               ADDITIONS
                                                               ---------
                                        Balance         Charged
                                          at               to          Charged to                        Balance at
                                       Beginning       Costs and         Other                             End of
Description                            of Period        Expenses        Accounts        Deductions         Period
-----------                            ---------        --------        --------        ----------         ------
December 28, 2003
-----------------

<S>                                        <C>              <C>                              <C>           <C>
Allowance for doubtful
 accounts receivable                       $491             $435                           $(438) (1)        $488
                                           ====             ====                           ======            ====
Provision for store closings             $1,452           $2,030                            $787  (2)      $  987
                                         ======           ======                            ====           ======
                                                                                          $2,474  (3)
                                                                                           $(177) (4)
                                                                                            ====
                                                                                           $(877) (5)
                                                                                           ======
                                                                                           $(288)
                                                                                           ======

December 29, 2002
-----------------

Allowance for doubtful
  accounts receivable                      $175             $350                             $34  (1)       $ 491
                                           ====             ====                             ===            =====

Provision for store closings             $1,467           $8,689                          $1,333  (2)      $1,452
                                         ======           ======                          ======           ======

                                                                                          $7,413  (3)
                                                                                            $(42) (4)

December 30, 2001
-----------------

Allowance for doubtful
 accounts receivable                       $211          $    61                             $97  (1)        $175
                                           ====          =======                             ===             ====

Provision for store closings                $50           $1,881                            $464  (2)      $1,467
                                            ===           ======                            ====           ======
</TABLE>


(1) Write off of  uncollectible  accounts.
(2) Payments to landlords and others for closed locations.
(3) Write off of property and equipment.
(4) Transfer of miscellaneous balances.
(5) Proceeds upon sale.
(6) Reversal of excess accrual.



                                      S-3
<PAGE>


                                  EXHIBIT INDEX
                                  -------------


EXHIBIT NUMBER                              DESCRIPTION
--------------                              -----------

*2.01       Agreement  and Plan of Merger  dated as of  January  19,  1999 among
            Sbarro,  Inc.,  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 our 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 Sbarro, Inc. as filed with
            the  Department of State of the State of New York on March 29, 1985.
            (Exhibit  3.01 to our  Registration  Statement on Form S-1, File No.
            2-96807)

*3.01(b)    Certificate   of   Amendment   to  our   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 our Annual Report on
            Form 10-K for the year ended January 1, 1989, File No. 1-8881)

*3.01(c)    Certificate   of   Amendment   to  our   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 our Quarterly  Report on
            Form 10-Q for the quarter ended April 23, 1989, File No. 1-8881)

*3.01(d)    Certificate   of   Amendment   to  our   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 our Quarterly  Report on
            Form 10-Q for the quarter ended April 22, 1990, File No. 1-8881)

*3.02       By-Laws  of  Sbarro,   Inc.,   as  amended.   (Exhibit  3.1  to  our
            Registration Statement on Form S-4, File No. 333-90817)

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

*10.01(a)   Building Lease between  Sbarro  Enterprises,  L.P. and Sbarro,  Inc.
            (Exhibit 10.04 to our  Registration  Statement on Form S-1, File No.
            2-96807)

*10.01(b)   Amendment  dated  May 4,  2000  to  Building  Lease  between  Sbarro
            Enterprises,  L.P. and Sbarro, Inc., (Exhibit 10.01(b) to our Annual
            Report on Form 10-K for the year ended  December 30, 2001,  File No.
            333-90817)



<PAGE>

*+10.02     Form of Indemnification  Agreement between Sbarro,  Inc. and each of
            its directors and officers.  (Exhibit  10.04 to our Annual Report on
            Form 10-K for the year ended December 31, 1989, File No. 1-8881)

*10.04      Tax Payment  Agreement  dated as of September 28, 1999 among Sbarro,
            Inc.,  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  our  Registration
            Statement on Form S-4, File No. 333-90817)

*10.05(a)   Distribution  Agreement dated January 1, 2003 between  Sbarro,  Inc.
            and Vistar Corporation (confidential treatment has been granted with
            respect to certain portions of this agreement).(Exhibit 10.05 of our
            Annual  Report on Form 10-K for the years  ended  December  29, 2002
            File No. 333-90817).

10.05(b)    Letter  Agreement  dated  January 1, 2003 between  Sbarro,  Inc. and
            Vistar Corporation  (confidential  treatment has been requested with
            respect to certain portions of this letter agreement).

*+10.06     Employment agreement,  dated as of September 8, 2003 between Sbarro,
            Inc. and Michael O'Donnell.  (Exhibit 99.01 to our Current Report on
            Form 8-K dated (date of earliest event reported)  September 8, 2003,
            File No. 333-90817)

12.02       Statement of computation of earnings to fixed charges

14.01       Code of Ethics - For  Executive  Officers  and  Directors of Sbarro,
            Inc.

*21.01      List of  subsidiaries.  (Exhibit  21.01 to our Annual Report on Form
            10-K for the year ended January 2, 2000, File No. 333-90817)

31.01       Certification of Principal  Executive pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002.

31.02       Certification  of  Vice  President,   Chief  Financial  Officer  and
            Principal   Accounting  Officer  pursuant  to  Section  302  of  the
            Sarbanes-Oxley Act of 2002.

32.01       Certification of Principal Executive Officer pursuant to Section 906
            of the Sarbanes-Oxley Act of 2002.

32.02       Certification  of  Vice  President,   Chief  Financial  Officer  and
            Principal   Accounting  Officer  pursuant  to  Section  906  of  the
            Sarbanes-Oxley Act of 2002.

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