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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X|Annual Report pursuant to Section 13 or 15(d) of the Securities  Exchange Act
of 1934 For the fiscal year ended January 3, 1999

|_| 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 1-8881

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

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


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

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


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

                                                   Name of each Exchange on
             Title of each class                          which Registered
Common Stock, par value $.01 per share             New York Stock Exchange

        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 X
                   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 ].

         The aggregate  market value of Common Stock held by  non-affiliates  of
the registrant as of February 26, 1999 was approximately $339,908,000.

         The number of shares of Common Stock of the  registrant  outstanding as
of February 26, 1999 was 20,531,977.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

<PAGE>



                                  SBARRO, INC.

                                     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.  The Company has become a leading
operator  and  franchisor  of  family-style   Italian   restaurants,   with  898
restaurants  worldwide at January 3, 1999. In addition,  since 1995, the Company
has  created,  through  joint  ventures,  other  concepts  for  the  purpose  of
developing growth opportunities in addition to its Sbarro restaurants. (See "New
Ventures",  below.) As used in this  Report,  the terms  "Company"  and "Sbarro"
refers to Sbarro,  Inc. and its  consolidated  subsidiaries,  unless the context
indicates otherwise.

                  Recent Developments

                  On January 19,  1999,  the Company,  Sbarro  Merger LLC, a New
York limited liability  company  ("Mergeco"),  and 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  (collectively  the "Sbarro  Family")  entered into an Agreement and
Plan of Merger  (the  "Merger  Agreement").  The Merger  Agreement  followed  an
initial  proposal for a similar  transaction made in January 1998 and terminated
in June 1998,  and a revised  proposal made on November 25, 1998 that became the
subject of the Merger Agreement (the "Revised Proposal").

                  The Merger  Agreement  provides for the merger of Mergeco with
and  into  the  Company  (the  "Merger"),  with  each  outstanding  share of the
Company's  Common  Stock,  other  than  shares  held of record by Mergeco or the
Sbarro Family or in the Company's  treasury,  to be converted  into the right to
receive $28.85 in cash (the "Merger Consideration").  The shares to be purchased
comprise  approximately 65.6% of the Company's  presently  outstanding shares of
Common Stock. In addition,  all outstanding stock options,  including those held
by the Sbarro  Family,  will be  terminated.  For each such  option,  the holder
thereof will be paid the  difference  between the Merger  Consideration  and the
exercise  price per share,  multiplied  by the total  number of shares of Common
Stock subject to such option.

                  The Merger Agreement  contains certain  conditions to closing,
including,  among  other  things,  (i)  adoption  of the Merger  Agreement  by a
majority  of  the  votes  cast  (excluding  votes  cast  by the  Sbarro  Family,
abstentions and broker non-votes) at a meeting of the Company's  shareholders to
be  called to  consider  adoption  of the  Merger  Agreement,  (ii)  receipt  of
financing for the transactions  contemplated by the Merger Agreement,  (iii) the
continued  suspension  of  dividends by the Company and (iv) the  settlement  of
shareholder class action lawsuits that have been filed relating to the Merger. A
Memorandum of Understanding to settle those lawsuits was entered into on January
19, 1999. See "Legal Proceedings" in Item 3 of this Report.

                  This  Report  does not give  effect to changes in the  Company
that will occur if the Merger is consummated.


                                       -2-

<PAGE>



                  General

                  The  Company   develops   and   operates  or   franchises   an
international chain of family- style Italian  restaurants  principally under the
"Sbarro" and "Sbarro The Italian  Eatery" names ("Sbarro  restaurants").  Sbarro
restaurants are family-oriented  cafeteria-style restaurants featuring 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.

         As of January 3, 1999, there were 898 Sbarro and mall-based  Umberto of
New Hyde Park  restaurants (630 of which were Company owned and operated and 268
were  franchised)  located  in 48  states  throughout  the  United  States,  its
territories and 21 countries throughout the world. In addition,  since 1995, the
Company has created and operated, through joint ventures, other concepts for the
purpose  of  developing   growth   opportunities   in  addition  to  its  Sbarro
restaurants.


                  Restaurant Expansion

                  The  Company  has  expanded  significantly  in  recent  years,
growing  from  123  restaurants  at the  time of the  Company's  initial  public
offering of Common Stock in 1985 to 649 restaurants at the beginning of 1994 and
898 at the end of 1998. During 1998, 69 new Sbarro and mall-based Umberto of New
Hyde Park restaurants were opened,  of which 26 were  Company-owned  and 43 were
franchised, while 20 Company-owned and 13 franchised units were closed.

                  At the end of 1999, the Company  expects that there will be an
additional 57 units in operation,  of which  approximately  22 (net of estimated
unit closings) are expected to be Company- owned and the balance are expected to
be  franchised.  The  actual  number  of  additional  units  will  depend on the
availability of appropriate sites, as well as other factors.

                  While most Sbarro  restaurants  are located in shopping malls,
in recent years the Company has been expanding the basic Sbarro concept  outside
the shopping mall environment by adding Company-owned and franchised restaurants
in downtown areas in major United States cities,  such as Boston,  Chicago,  New
York and  Philadelphia,  as well as on toll roads,  in strip  shopping  centers,
hospitals,  convention centers,  universities,  casinos, hotels and airports. In
addition, kiosks have been introduced in certain selected markets.




                                       -3-

<PAGE>

                  The following table indicates the number of Company-owned  and
franchised  restaurants  (excluding  non-mall joint venture  restaurants) during
each of the years from 1994 through 1998.
<TABLE>
<CAPTION>

                                                                           Fiscal Year          

                                                       1998       1997     1996    1995     1994
                                                       ----       ----     ----    ----     ----

<S>                                               <C>        <C>      <C>      <C>       <C>
Company-owned Sbarro restaurants:
 Opened during period  (1)                               26         30       29       44        53
 Acquired from franchisees
   during period                                          1          4        1       -          2
 Closed during period  (2)                              [20]        [8]      [4]     [40]       [3]
 Open at end of period  (3)                             630        623      597      571       567

Franchised Sbarro restaurants:
 Opened during period                                    43         47       36       40        38
 Sold to Company during period                           [1]        [4]      [1]       -        [2]
 Closed or terminated during period                     [13]       [23]     [16]      [2]       [8]
Open at end of period                                   268        239      219      200       162


All Sbarro restaurants:
 Opened during period  (1)                               69         77       65       84        91
 Closed or terminated during period  (2)                [33]       [31]     [20]     [42]      [11]
 Open at end of period  (3)                             898        862      816      771       729

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

</TABLE>


(1)      Includes,  in 1998,  1997 and 1996,  one, two and three mall locations,
         respectively,  of a joint venture which operates as Umberto of New Hyde
         Park  which,  for the purpose of this  Report,  are  considered  Sbarro
         restaurants.

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

(3)      Includes,  in 1998,  1997 and 1996,  six,  five and three joint venture
         mall locations which operate as Umberto of New Hyde Park


                  Concept and Menu

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

                  As of  January  3,  1999,  there  were  258  "in-line"  Sbarro
restaurants and 633 "food court" Sbarro  restaurants.  In addition,  franchisees
operated  seven  freestanding  Sbarro  restaurants,  including two in the Middle
East,  three  in  Minnesota  and one in each of the  Bahamas  and  Puerto  Rico.
"In-line"  restaurants,  which are  self-contained  restaurants,  usually occupy

                                       4
<PAGE>

approximately  1,500- 3,000 square feet, contain the space and furniture to seat
approximately  60-120  people  and employ  10-40  persons,  including  part-time
personnel.  "Food court"  restaurants are primarily located in areas of shopping
malls  designated  exclusively for restaurant use and share a common dining area
provided by the mall. These restaurants generally occupy approximately 500-1,000
square feet and contain only kitchen and service areas.  They  frequently have a
more  limited  menu  than an  "in-line"  restaurant  and  employ  6-30  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.  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 Company-owned  restaurants open a full year, average sales in
1998 (first 52 weeks) and 1997 were  $705,000 and  $693,000,  respectively,  for
"in-line" restaurants and $506,000 and $493,000,  respectively, for "food court"
restaurants.  A principal factor in the increase in average sales per restaurant
was the 1.4% and .7%  selective  menu  price  increases  in  September  1998 and
February 1998, respectively.

                  Sbarro  restaurants  feature a menu of popular  Italian  food,
including  pizza with a variety of  toppings,  a selection  of pasta  dishes and
other hot and cold Italian  entrees,  salads,  sandwiches,  cheesecake and other
desserts.  In addition to soft drinks, some of the larger restaurants serve beer
and wine, although alcoholic beverage sales are not emphasized.

                  All food products are prepared fresh daily in each  restaurant
according to special  recipes  developed  by the Company.  Emphasis is placed on
serving generous portions of quality  Italian-style food at value prices. Entree
selections,  excluding pizza,  generally range in price from $2.99 to $5.29. The
Company believes that pizza, which is sold predominantly by the slice,  accounts
for approximately one-half of Sbarro restaurant sales.

                  Substantially   all  of  the  food   ingredients  and  related
restaurant  supplies  used by the  restaurants  are  purchased  from a  national
independent   wholesale  food  distributor   which  is  required  to  adhere  to
established  product  specifications for all food products sold to the Company's
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.  The Company  believes that
there are other  distributors  who would be able to service the Company's  needs
and that satisfactory  alternative sources of supply are generally available for
all items regularly used in the restaurants.


                  Restaurant Management

                  Each Sbarro  restaurant is managed by one General  Manager and
one or two  Co-  Managers  or  Assistant  Managers.  Managers  are  required  to
participate in Company 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.

                  The Company has a Restaurant  Management  Bonus  Program which
provides the  management  teams of  Company-owned  Sbarro  restaurants  with the
opportunity to receive a percentage of restaurant sales in cash bonuses based on
certain performance-related criteria.

                  The Company also employs 70 - 75 Area Directors,  each of whom
is typically  responsible  for the  operations  of 6 - 14  Company-owned  Sbarro
restaurants  in a given area.  Before each new restaurant  opening,  the Company
assigns an Area Director to coordinate opening

                                       -5-

<PAGE>



procedures.  Each Area Director reports to one of the 13 Regional Directors. The
Regional   Directors   recruit  and  supervise  the  managerial   staff  of  all
Company-owned  Sbarro  restaurants  and report to one of the five  Regional Vice
Presidents.  The Regional  Vice  Presidents  coordinate  the  activities  of the
Regional  Directors  assigned to their areas of responsibility and report to one
of two Corporate  Vice  Presidents.  The Corporate  Vice  Presidents  have total
responsibility for their geographic areas.

                  Franchise Development

                  Growth   in   franchise    operations   occurs   through   the
establishment  of new Sbarro  restaurants  by new  franchisees  and by  existing
franchisees  capable of multi-unit  operations.  The Company relies  principally
upon its reputation and the strength of its existing  restaurants to attract new
franchisees.

                  As of January 3, 1999, the Company had 268  franchised  Sbarro
restaurants operated by 73 franchisees in 30 states of the United States as well
as its  territories  and in 21 countries  throughout  the world.  The Company is
presently  considering  additional franchise  opportunities in the United States
and other countries.

                  In   certain   instances,   franchise   locations   have  been
established through territorial  agreements under which the Company has granted,
for specified time periods,  exclusive rights to enter into franchise agreements
for  restaurant  units  in  certain  geographic  areas,   primarily  in  foreign
countries,  or for specified  non-mall locations (such as for certain toll roads
or airports) in the United States or foreign countries.

                  The Company's basic  franchise  agreement  generally  requires
payment of an initial fee and continuing  royalties at rates of 5% - 7% of gross
revenues.  Franchise  agreements  entered into prior to 1988  generally  have an
initial term of 15 years with the franchisee  having a renewal  option  provided
that the  agreement  has not been  previously  terminated  by  either  party for
specified reasons. Since 1988, the Company has required the franchise agreements
to be coterminous with the underlying lease, but generally not less than ten nor
more than twenty years.  Since 1990, the renewal option has also been subject to
certain  conditions,  including  a  remodel  or image  enhancement  requirement.
Franchise  agreements  granted  under  territorial   agreements  and  those  for
non-traditional  sites  contain  negotiated  fees,  royalty  rates and terms and
conditions   other  than  those  contained  in  the  Company's  basic  franchise
agreement. The franchise and territorial agreements provide the Company with the
right to terminate a franchisee for a variety of reasons,  including  insolvency
or  bankruptcy,  failure to  operate  its  restaurant  according  to  standards,
understatement   of  gross   receipts,   failure  to  pay  fees,   or   material
misrepresentation on an application for a franchise.

                  The  Company   employs  ten   management   level   individuals
responsible  for overseeing the operations of franchise units and for developing
new units. These employees report to a Corporate Vice President.

                  New Ventures

                  Since  1995,  the  Company  has  entered  into  joint  venture
arrangements  for the purpose of developing new restaurant  concepts.  The first
venture, in which the Company has a 40% interest, presently operates five casual
dining  restaurants,  with a Rocky  Mountain  steakhouse  motif,  under the name
Boulder  Creek  Steaks  &  Saloon.  In  addition,  it  operates  one  Rothmann's
Steakhouse,  a fine dining restaurant.  A second fine dining steakhouse is under
construction.  Another  venture,  in which the Company has a 70% interest,  is a
moderately   priced,   table  service  restaurant  chain  featuring  an  Italian
Mediterranean  menu,  currently operating two restaurants under the names Salute
and Cafe Med.  During  1997,  the joint  venture  determined  to close two other
restaurants  resulting in a $3,300,000  before tax ($2,046,000 or $.10 basic and
diluted earnings per share after tax) charge to

                                       -6-

<PAGE>



the Company's earnings. A third venture in which the Company has an 80% interest
is a family  restaurant  concept in mall and non-mall  locations  under the name
Umberto of New Hyde Park. In non-mall  locations,  this concept  features  table
service and take-out pizza and other Italian-style foods. This venture currently
operates six  restaurants in strip shopping  centers and six in shopping  malls.
One  non-mall  restaurant  was closed in 1998.  In  February  1999,  the Company
instituted an action against its partner in this joint venture  alleging,  among
other things,  breach of contract and unfair  competition,  seeking  damages and
injunctive  relief.  The matter is in its initial  stages and no answer has been
submitted to this complaint. To date, all joint-venture restaurants, except four
Umberto  of New  Hyde  Park  mall  units,  are  located  in the  New  York  City
metropolitan  area. The Company  continues to monitor the results of these three
concepts for the purpose of evaluating their potential  future growth.  In March
1999,  another joint  venture,  in which the Company has a 50% interest  entered
into  an  agreement  to  acquire  a  business  which   currently   operates  two
Mexican-style  restaurants.  The Company is also currently  considering entering
into a joint venture for the purpose of establishing a seafood restaurant.

                  Employees

                  As of  January  3,  1999,  the  Company  (exclusive  of  joint
ventures to which the Company is a party) employed  approximately 7,500 persons,
of whom approximately 3,300 were full-time field and restaurant personnel, 4,000
were  part-time  restaurant  personnel  and 200  were  corporate  administrative
personnel.  None of the Company's employees are covered by collective bargaining
agreements. The Company believes its employee relations are satisfactory.

                  Competition

                  The restaurant  business is highly competitive with respect to
price,  service,  location and food quality, and is often affected by changes in
consumer tastes, economic conditions,  population and traffic patterns. There is
active competition for management  personnel and attractive  commercial shopping
mall,  center city and other  locations  suitable for  restaurants.  The Company
competes in each market in which it operates with  locally-owned  restaurants as
well as with national and regional restaurant operations.

                  Trademarks

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

                  Governmental Regulation

                  The  Company is subject  to various  Federal,  state and local
laws affecting its business.  The restaurants of the Company and its franchisees
are subject to a variety of regulatory  provisions  relating to wholesomeness of
food, sanitation, health, safety and, in certain cases, licensing of the sale of
alcoholic  beverages.  The Company is also  subject to a  substantial  number of
state laws and regulations governing the offer and sale of franchises. Such laws
impose registration and disclosure  requirements on franchisors in the offer and
sale of franchises and may also apply substantive  standards to the relationship
between franchisor and franchisee. The Company is also subject to

                                       -7-

<PAGE>



Federal Trade Commission  regulations  governing disclosure  requirements in the
sale of franchises.  In addition,  the Fair Labor Standards Act,  governing such
matters as minimum wage requirements,  overtime,  employment of minors and other
working conditions,  is applicable to the Company. The Company believes it is in
compliance with such laws in all material aspects.  (See "Legal  Proceedings" in
Item 3 of this Report.)


ITEM 2.  PROPERTIES

                  All Sbarro restaurants are operated in leased premises.  As of
January 3, 1999, the Company leased 655 restaurants,  of which 25 were subleased
to franchisees  under terms which cover all obligations of the Company under the
lease. The remaining franchisees directly lease their restaurant spaces. Most of
the Company's  restaurant leases provide for the payment of base rents plus real
estate  taxes,  utilities,  insurance,  common area  charges  and certain  other
expenses,  as well as contingent  rents generally  ranging from 8% to 10% of net
restaurant  sales in excess of stipulated  amounts.  Leases to which the Company
were a party at January 3, 1999 have initial terms expiring as follows:

   Years Initial Lease          Number of Company-         Number of Franchised
      Terms Expire               owned Restaurants                Restaurants
   -------------------          ------------------         --------------------

         1999                              35                            4
         2000 - 2004                      319                           17
         2005 - 2009                      266                            4
         2010 - 2013                       10                            0


                  In March 1994,  the Company  purchased a 100,000  square foot,
four-story  office building in Melville,  New York, for $5,350,000.  The Company
has renovated the building at an additional  cost of  approximately  $15 million
and,  since  November  1998,  has occupied 25% of the building as its  principal
executive offices. The balance of the facility, other than one half of one story
and common areas and a cafeteria style restaurant  operated by the Company,  are
currently under lease to unaffiliated third parties.

                  The  Company  also  occupies a  two-story  20,000  square foot
office building for  administrative  support functions  located in Commack,  New
York.  The building has been  subleased  for a period of fifteen years since May
1986 from a  partnership  owned by  certain  shareholders  of the  Company  at a
current  annual base rental of  $337,000.  In  addition,  the Company  pays real
estate taxes, utilities, insurance and certain other expenses for the facility.

ITEM 3.  LEGAL PROCEEDINGS


                  Following the Company's  announcement of the Revised Proposal,
(see  "Business  Recent  Developments"  in Item 1 of this  Report),  seven class
action  lawsuits were  instituted  by  shareholders  against the Company,  those
members of the Sbarro Family who are directors of the Company and all or some of
the other directors of the Company.  The lawsuits were instituted in the Supreme
Court of the State of New York, New York County and Suffolk County. The lawsuits
in Suffolk County were discontinued and subsequently  refilled as one lawsuit in
New York County (with one additional plaintiff) in anticipation of consolidating
all lawsuits into one lawsuit. While the

                                       -8-

<PAGE>



complaints  in each of the  lawsuits  vary,  in  general,  they  allege that the
directors breached  fiduciary duties,  that the then proposed price of $27.50 to
be paid to  shareholders  other than the Sbarro Family was  inadequate  and that
there were inadequate  procedural  protections for those shareholders.  Although
varying,  the complaints  seek,  generally,  a declaration of a breach of, or an
order  requiring the  defendants  to carry out,  their  fiduciary  duties to the
plaintiffs,  damages  in  unspecified  amounts  alleged  to  be  caused  to  the
plaintiffs,   other  relief  (including   injunctive  relief  or  rescission  or
rescissory   damages  if  the  transaction  is   consummated),   and  costs  and
disbursements, including a reasonable allowance for counsel fees and expenses.

         On January 19, 1999,  counsel for all of the plaintiffs and counsel for
all of the  defendants  entered into a Memorandum of  Understanding  pursuant to
which an  agreement  in  principle to settle all of the lawsuits was reached and
the Sbarro  Family agreed to an increase in the merger  consideration  to $28.85
per share.  The  Memorandum of  Understanding  states that  plaintiffs'  counsel
intend to apply to the Court for an award of attorneys'  fees and  disbursements
in an amount of no more than $2.1 million to be paid by the  Company,  which the
defendants  have agreed not to oppose.  The defendants are also  responsible for
providing  notice of the settlement to all class members.  The settlement  would
result in the complete  discharge and bar of all claims against,  past,  present
and future officers and directors of the Company, and others associated with the
Merger  with  respect to matters  and issues of any kind that have been or could
have been asserted in these lawsuits.  The settlement is subject to, among other
things, (i) completion of a formal stipulation of settlement, (ii) certification
of the lawsuits as a class action  covering all record and beneficial  owners of
the Common  Stock  during the period  beginning on November 25, 1998 through the
effective  date of the Merger,  (iii) court  approval of the settlement and (iv)
consummation of the Merger. It is a condition to Mergeco's obligations under the
Merger  Agreement that holders of no more than 1,000,000  shares of Common Stock
request exclusion from the settlement.

                  In  December  1998,  the  Court  approved,   and  the  Company
completed,  the  settlement  of an action  entitled  Kenneth  Hoffman and Gloria
Curtis,  on behalf of themselves  and all others  similarly  situated v. Sbarro,
Inc.  that was  pending in the United  States  District  Court for the  Southern
District  of New  York.  The  plaintiffs,  former  restaurant  level  management
employees, alleged that the Company required general managers and co-managers to
reimburse  the Company for cash and certain  other  shortages  sustained  by the
Company and thereby lost their status as  managerial  employees  exempt from the
overtime compensation provisions of the Fair Labor Standards Act. The settlement
resulted in a one-time charge of $3,544,000  before tax or $2,197,000  after tax
($.11 basic and diluted earnings per share) in fiscal 1998.

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


                                       -9-

<PAGE>



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

                  Not applicable.

                                     PART II


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

                  The  Company's  Common  Stock is listed on the New York  Stock
Exchange under the symbol "SBA", the range of high and low sales prices of which
for the last two fiscal years is as follows:

                  1998                                        1997             
--------------------------------------     ------------------------------------
Quarter Ended     High       Low           Quarter Ended      High       Low

April 19          $30.13      $25.44       April 20            $28.63    $25.13
July 12           $29.69      $25.56       July 13             $29.75    $26.25
October 4         $27.25      $18.31       October 5           $29.44    $26.06
January 3         $26.69      $19.38       December 28         $29.75    $26.00


                  As of February 26, 1999, there were  approximately 425 holders
of record of the Company's Common Stock,  exclusive of shareholders whose shares
were held by brokerage  firms,  depositories  and other  institutional  firms in
"street name" for their customers.

                  In 1997 and 1996, the Company declared quarterly  dividends of
$.27 per share and $.23 per share, respectively, aggregating $1.08 per share and
$.92 per share for the respective  years.  Dividends were  thereafter  suspended
pending  consideration  by the Company of  proposals  by certain  members of the
Sbarro  family for the  Company's  acquisition  of all Common Stock not owned by
them  (see  "Business  -  Recent  Developments"  in Item 1 of this  Report)  and
consideration of other strategic alternatives.



                                      -10-

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA

         The following  Selected  Financial  Data should be read in  conjunction
with Management's  Discussion and Analysis included in Item 7 of this Report and
the  consolidated  financial  statements  of the Company  and the related  notes
included in Item 8 of this Report, which consolidated  financial statements have
been  audited  and  reported  on by  Arthur  Andersen  LLP,  independent  public
accountants.
<TABLE>
<CAPTION>
                                                                                        Years Ended                             
                                                       Jan. 3,     Dec. 28,         Dec. 29,        Dec. 31,        Jan. 1,
Income Statement Data:                                 1999 (A)        1997             1996            1995           1995
                                                       --------        ----             ----            ----           ----
                                                                (In thousands, except share and per share data)

<S>                                                  <C>             <C>             <C>            <C>              <C>     
Revenues:
   Restaurant sales                                     $361,354        $337,723        $319,315       $310,132         $288,808
   Franchise related income                                8,578           7,360           6,375          5,942            5,234
   Interest income                                         5,120           4,352           3,798           3,08            1,949
                                                     -----------     -----------     -----------     ----------      -----------
                                                         375,232         349,435         329,488        319,155          295,991
                                                       ---------       ---------       ---------      ---------        ---------
   Costs and expenses:
   Cost of food and paper products                        76,572          69,469          68,668         67,361           61,877
   Restaurant operating expenses:
    Payroll and other employee benefits                   93,367          84,910          78,258         78,342           70,849
    Occupancy and other expenses                         101,013          93,528          85,577         84,371           76,353
   Depreciation and amortization                          22,429          23,922          22,910         23,630           21,674
   General and administrative                             19,708          17,762          14,940         16,089           13,319
   Provision for unit closings (B)                         2,515           3,300              -          16,400                -
   Terminated transaction costs (C)                          986               -               -              -                -
   Litigation settlement and
     related costs (D)                                     3,544               -               -              -                -
   Loss on sale of land to be sold (E)                     1,075               -               -              -                -
   Other income                                           (2,680)         (1,653)         (1,171)        (1,359)          (1,351)
                                                     ------------    ------------    ------------   ------------     ------------
                                                         318,529         291,238         269,182        284,834          242,721
                                                       ---------       ---------       ---------      ---------        ---------

Income before income taxes and cumulative
   effect of change in method of accounting
   for start-up costs                                     56,703          58,197          60,306         34,321           53,270
Income taxes                                              21,547          22,115          22,916         13,042           20,244
                                                       ---------       ---------       ---------      ---------        ---------
   Income before cumulative effect
   of accounting changes                                  35,156          36,082          37,390         21,279           33,026
Cumulative effect of change in method
   of accounting for start-up costs                         (822)             -                -             -                - 
                                                    ----------------------------  -----------------------------  ---------------

Net income                                             $  34,334      $  36,082        $ 37,390      $  21,279        $   33,026
                                                       =========      ==========       =========     ==========       ==========

Per share data ( F):
   Basic earnings per share before
    cumulative effect of change in method
    of accounting for start-up costs                       $1.71           $1.77           $1.84          $1.05            $1.63
   Cumulative effect of change in method
    of accounting for start-up costs                        .04               -               -              -                - 
                                                 --------------- ---------------  -----------------------------  ---------------

   Basic earnings per share
                                                          $1.67           $1.77           $1.84          $1.05            $1.63 
                                                   =============    ============     ===========   ============     ============
Number of basic shares
   used in the computation                            20,516,890      20,426,678      20,369,128     20,336,809       20,310,283
                                                      ==========      ==========      ==========     ==========       ==========


                                      -11-

<PAGE>



                                                                                     Years Ended                                
                                                           Jan. 3,          Dec. 28,        Dec. 29,       Dec. 31,         Jan. 1,
                                                           1999             1997            1996           1995             1995
                                                           ------           --------        -------        -------
Income Statement Data:  (continued)

Diluted earnings per share before
   cumulative effect of change in method
   of accounting for start-up costs                        $1.71           $1.76           $1.83          $1.04            $1.62

Cumulative effect of change in method
   of accounting for start-up costs                       ( .04)             -               -              -                  -
                                                      ---------- -------------   -------------   --------------     ------------

Diluted earnings per share                                 $1.67           $1.76           $1.83          $1.04            $1.62
                                                      ==========      ==========      ==========      =========        =========

Number of diluted shares used
   in the computation                                 20,583,367      20,504,303      20,404,620     20,396,704       20,355,275
                                                      ==========      ==========      ==========     ==========       ==========

Dividends declared                                            -           $1.08           $0.92          $0.76            $0.64 
                                                  ==============      ==========      ==========     ==========       ==========



Balance Sheet Data:                                     Jan. 3,         Dec. 28,       Dec. 29,        Dec. 31,          Jan. 1,
                                                        1999            1997             1996           1995              1995
                                                        ------          -------        -------         -------           ------
                                                                                    (In thousands)

Total assets                                            $303,168        $278,649        $258,659       $242,730         $232,051
Working capital                                          121,380          88,006          73,619         57,645           43,271
Shareholders' equity                                     256,917         220,439         205,200        185,666          179,580

Number of Restaurants at End of Period:

Company-owned and operated                                   630             623             597            571              567
Franchised                                                   268             239             219            200              162
                                                             ---             ---             ---            ---              ---

Total (G)                                                   898              862             816            771              729
                                                            ===              ===             ===            ===              ===
</TABLE>

A: The  Company's  fiscal  year ends on the  Sunday  nearest  December  31.  The
Company's  1998 fiscal year ended  January 3, 1999 and  contained 53 weeks.  All
other reported  fiscal years  contained 52 weeks.  Accordingly,  the 1998 fiscal
year  benefitted  from one additional week of operations over the prior reported
fiscal  years.  The  additional  week  in  fiscal  1998  produced   revenues  of
$8,534,000, net income of $1,666,000 and basic and diluted earnings per share of
$.08.

B: In 1998, a provision of $2,515,000  before tax  ($1,559,000 or $.08 basic and
diluted  earnings  per share  after tax) was  established  for the closing of 20
restaurant locations.  In 1997, a provision of $3,300,000 before tax ($2,046,000
or $.10  basic  and  diluted  earnings  per share  after  tax)  relating  to the
Company's  investment  in one of its  joint  ventures  was  established  for the
closing of certain  joint  venture  units.  In 1995, a provision of  $16,400,000
before tax  ($10,168,000  or $0.50  basic and  diluted  per share after tax) was
established for the closing of approximately 40 under-performing restaurants.

C: The 1998  financial  statements  reflect  a charge  of  $986,000  before  tax
($611,000  or $.03 basic and  diluted  earnings  per share  after tax) for costs
associated with the termination of negotiations of the initial  proposal for the
Company's  acquisition  of all shares of its  Common  Stock not owned by certain
members of the Sbarro family.


                                      -12-

<PAGE>



D: The 1998  financial  statements  reflect a charge of  $3,544,000  before  tax
($2,197,000  or  $.11  basic  and  diluted  earnings  per  share  after  tax) in
connection with the settlement of a lawsuit under the Fair Labor Standards Act.

E: During 1998, the Company  received an offer to sell a parcel of Company-owned
land included in  construction-in-progress  for an amount less than its carrying
cost and, accordingly, the 1998 financial statements reflect a reduction of such
carrying  cost of  $1,075,000  ($667,000 or $.03 basic and diluted  earnings per
share).

F: All share and per share data have been  restated to give effect to  Statement
of Financial Accounting Standard No. 128, which became effective for the Company
at the end of 1997,  and have been  adjusted to give  effect to a 3-for-2  stock
split in the form of a 50% stock dividend distributed on September 22, 1994.

G: Excludes (i) kiosks operated by franchisees and (ii) restaurants  operated by
joint  ventures to which the Company is a party other than six mall locations of
one joint venture which are included in the table as "Company-owned and operated
units".

                                      -13-

<PAGE>



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

General

                  On  January  19,  1999,  the  Company  entered  into a  merger
agreement for the merger of a company owned by members of the Sbarro family, the
Company's  principal  shareholders,  with  and  into the  Company  in which  all
outstanding  Common Stock of the Company not owned by those  shareholders are to
be  converted  into the  right to  receive  $28.85  in cash.  The  shares  to be
purchased comprise  approximately  65.6% of the Company's  outstanding shares of
Common Stock. In addition,  all outstanding stock options,  including those held
by those members of the Sbarro family, will be terminated. For each such option,
the holder thereof will be paid the  difference  between $28.85 and the exercise
price  per  share,  multiplied  by the total  number  of shares of Common  Stock
subject to such option.

                  The merger agreement  contains certain  conditions to closing,
including,  among  other  things,  (i)  adoption  of the Merger  Agreement  by a
majority  of  the  votes  cast  (excluding  votes  cast  by the  Sbarro  Family,
abstentions and broker non-votes) at a meeting of the Company's  shareholders to
be  called to  consider  adoption  of the  merger  agreement,  (ii)  receipt  of
financing for the transactions  contemplated by the merger agreement,  (iii) the
continued  suspension  of  dividends by the Company and (iv) the  settlement  of
shareholder class action lawsuits that have been filed relating to the merger.

                  This following  discussion  does not give effect to changes in
the Company that will occur if the merger is consummated.

Results of Operations

         1998 Compared to 1997

                  The 1998 fiscal year  benefitted  from one additional  week of
operations over the prior reported  fiscal years.  The additional week in fiscal
1998 produced  revenues of  $8,534,000,  net income of $1,666,000  and basic and
diluted earnings per share of $.08.

                  Restaurant  sales from  Company-owned  units and  consolidated
joint venture units  increased 7.1% to $361,534,000  from  $337,723,000 in 1997.
The  increases  resulted  primarily  from a higher  number of units in operation
during the current fiscal year,  selective menu price increases of approximately
1.4% and .7%  which  became  effective  in  September  1998 and  February  1998,
respectively, and sales generated in week 53 of the 1998 fiscal year. Comparable
unit sales  increased  1.6% to  $322,379,000  for the first 52 weeks of the 1998
fiscal year from  $317,209,000  in the 1997 fiscal year.  Comparable  restaurant
sales are made up of sales at locations that were open during the entire current
and prior fiscal years.

                  Franchise related income increased 16.5% to $8,578,000 in 1998
from  $7,360,000  in  1997.  The  increases  resulted  from  greater  continuing
royalties  due to a larger  number of franchise  units in operation in 1998,  an
increase  in  initial  franchise  and  development  fees  due  to  opening  more
international  franchise  units in 1998 than in 1997 and royalties  generated in
week 53 of the 1998 fiscal year. During the year ended January 3, 1999, 13 units
were closed by franchisees. These units did not produce material levels of sales
and,  consequently,  did not generate  material amounts of royalty income to the
Company. In addition, one franchise unit was purchased by the Company.

                                      -14-

<PAGE>



                  Interest   income   increased  to   $5,120,000  in  1998  from
$4,352,000  in 1997.  This  increase  was due to larger  amounts  of cash  being
invested in 1998 than in 1997 and the length of the 1998 fiscal  year.  Interest
rates were comparable in both years.

                  Cost of food and paper products, as a percentage of restaurant
sales,  increased  to 21.2% in 1998 from  20.6% in 1997.  Higher  cheese  prices
during 1998 increased food costs by approximately $2,635,000 or .7% of sales and
was the primary cause of the  increase.  The increase  occurred  during the last
three quarters of the fiscal year.  Cheese prices have  decreased  significantly
since the end of the fiscal year to levels that are  comparable to prices in the
first quarter of fiscal 1998.

                  Restaurant  operating  expenses - payroll  and other  employee
benefits increased to 25.8% of restaurant sales in 1998 from 25.1% of restaurant
sales in 1997.  This  increase was  attributable  to the  $1,150,000  (or .3% of
restaurant sales) payroll and other employee benefit component of start-up costs
expensed  as  incurred  during  1998 under  Statement  of  Position  98-5 of the
American  Institute of Certified Public  Accountants (the "SOP")  implemented by
the Company in the first  quarter of fiscal 1998 (which  expenses in prior years
were capitalized and charged to amortization expense over a two year period). In
addition,  the effects of the Federal  minimum wage,  which became  effective in
September 1997, a strong labor market and an increase in unemployment  and other
payroll taxes  contributed  to the  increase.  Restaurant  operating  expenses -
occupancy and other expenses  increased to 27.9% in 1998 from 27.7% in 1997. The
increase is attributable  principally to such costs  increasing at a rate faster
than the increase in sales in 1998 from 1997.

                  Depreciation   and   amortization    expenses   decreased   to
$22,429,000  from  $23,922,000  principally  as  a  result  of  the  absence  of
amortization of previously capitalized start-up costs which, as discussed below,
were fully written off as of the  beginning of the year with the  implementation
of the SOP.  Had the Company  not  implemented  the SOP, it would have  incurred
amortization  expenses of $1,189,000 in 1998 for prior and current  years' costs
previously  capitalized.  The balance of the decrease  relates to the absence of
depreciation  and  amortization  in 1998 on certain  older units and also to the
closing of certain Company-owned units, as discussed below.

                  General and  administrative  expenses increased to $19,708,000
or 5.3% of revenues in 1998 from  $17,762,000  or 5.1% of revenues in 1997.  The
increases  were  due to  higher  costs  associated  with the  administration  of
Company-owned restaurants and additional supervisory,  administrative and travel
expenses related to increased international franchising activities. In addition,
$829,000 (or .2% of revenues)  of the increase was  attributable  to the general
and  administrative  expense  component of start-up  costs incurred and expensed
during  1998  under the SOP  (which  expenses  in prior  years  would  have been
capitalized and charged to amortization expense over a two year period).

                  Results for fiscal 1998 include  one-time charges to operating
income of $2,515,000  before tax ($1,560,000 or $.08 basic and diluted  earnings
per  share  after  tax) for the  closing  of 20  Company-owned  restaurants  and
$986,000 before tax ($611,000 or $.03 basic and diluted earnings per share after
tax) for  costs  associated  with the  terminated  negotiations  of the  initial
proposal  for the  acquisition  by the  Company of all  shares of the  Company's
Common Stock not owned by certain members of the Sbarro family.  The fiscal year
results also include a provision of $3,544,000  before tax  ($2,197,000  or $.11
basic and diluted  earnings per share after tax) for costs  associated  with the
settlement  approved and  finalized in December 1998 of a lawsuit under the Fair
Labor  Standards  Act and a charge of  $1,075,000  before tax  ($667,000 or $.03
basic and diluted  earnings per share after tax) for the difference  between the
carrying  cost and proposed  selling price of a parcel of land being sold by the
Company.

                                      -15-

<PAGE>



                  Other income  increased to $2,680,000 in 1998 from  $1,653,000
from 1997 primarily as a result of increased incentives from suppliers.

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

                  The  cumulative  effect of the change in method of  accounting
resulted from the Company's  implementation of the SOP which requires  companies
that  have  capitalized  pre-opening  and  similar  costs to write  off all such
existing  costs,  net of tax  benefit,  as a  "cumulative  effect of  accounting
change" and to expense all such costs as incurred in the future.  In  accordance
with its early application provisions, the Company implemented the SOP as of the
beginning  of its 1998 fiscal  year.  In  addition  to  on-going  start up costs
incurred and expensed during 1998 with respect to restaurant  operating expenses
- payroll and other employee benefits and general and administrative expenses as
discussed above, the Company incurred a one-time charge during 1998 of $822,000,
net of an income tax benefit of $504,000  ($.04 basic and diluted  earnings  per
share),  to write off all  start-up  costs  existing as of the  beginning of the
year.


         1997 Compared to 1996

                  Restaurant  sales from  Company-owned  units and  consolidated
joint venture units increased 5.8% to $337,723,000 in 1997 from  $319,315,000 in
1996. The increase resulted from a higher number of units in operation in fiscal
1997  and the  effect  of a full  year of  selective  menu  price  increases  of
approximately  .5% and 1%, which became effective in mid April 1996 and mid July
1996 offset, in part, by a decrease in comparable unit sales of .4%.  Comparable
unit  sales  decreased  to  $305,195,000  in 1997  from  $306,313,000  in  1996.
Comparable  restaurant  sales are made up of sales at  locations  that were open
during the entire current and prior fiscal years.

                  Franchise related income increased 15.5% to $7,360,000 in 1997
from $6,375,000 in 1996. This increase resulted from a higher number of units in
operation  in  1997  than in 1996  and an  increase  in  initial  franchise  and
development  fees due to the  opening  of more  franchise  units in 1997 than in
1996.  During  the year  ended  December  28,  1997,  23 units  were  closed  by
franchisees.  These  units  did  not  produce  material  levels  of  sales  and,
consequently,  did not  generate  material  amounts  of  royalty  income  to the
Company.  In  addition,  four  franchise  units were  purchased  by the Company.
Comparable sales at franchise  locations did not change  significantly in fiscal
1997 from fiscal 1996.

                  Interest   income   increased  to   $4,352,000  in  1997  from
$3,798,000 in 1996.  This increase was due to higher  amounts of cash  available
for investment in 1997 than in 1996 at comparable interest rates.

                  Cost of food and paper  products  decreased as a percentage of
restaurant sales to 20.6% in 1997 from 21.5% in 1996. This improvement  resulted
from lower food prices,  primarily  of cheese from the fourth  quarter of fiscal
1996 into the  fourth  quarter of fiscal  1997,  lower  prices of various  paper
products  and the effect of a full year of the  selective  menu price  increases
implemented in mid 1996.  Cheese prices rose in the middle of the fourth quarter
of fiscal 1997 and remained at prices higher than those in the comparable  prior
year period.

                  Restaurant  operating  expenses - payroll  and other  employee
benefits increased to 25.1% of restaurant sales in 1997 from 24.5% of restaurant
sales in 1996. This percentage  increase was attributable to the higher costs of
providing  benefits to employees and, to a lesser extent, the effects of the two
increases in the Federal  minimum wage which became  effective in September 1997
and 1996,  as well as the  decrease  in  comparable  unit sales in fiscal  1997.
Restaurant operating

                                      -16-

<PAGE>



expenses - occupancy and other expenses  increased to 27.7% of restaurant  sales
in 1997 from 26.8% of restaurant  sales in 1996.  This  percentage  increase was
primarily  attributable to rent and rent related charges  increasing at a faster
rate than sales.

                  Depreciation   and   amortization    expenses   increased   to
$23,922,000 in 1997 from  $22,910,000  in 1996.  This increase was primarily the
result of  additional  Company  owned  units in  operation  during 1997 over the
number of units in operation during 1996.

                  General and  administrative  expenses were $17,762,000 in 1997
or 5.1% of revenues and  $14,940,000 in 1996 or 4.5% of revenues.  This increase
was  due to  hiring  additional  personnel  in  anticipation  of  the  Company's
development plans and increases in executive compensation and legal fees.

                  In 1997, a provision of $3,300,000  before tax  ($2,046,000 or
$.10  after  tax)  relating  to the  Company's  investment  in one of its  joint
ventures was established for the closing of certain joint venture units.

                  The effective income tax rate was 38.0% for 1997 and 1996.

Impact of Inflation

                  Food,  labor,  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  the  Company's  control  that may reduce  available  supply and
increase the price of food stuff and paper products.

Seasonality

                  The  Company's  business is subject to seasonal  fluctuations,
the effects of weather and economic  conditions.  Earnings  have been highest in
its fourth fiscal  quarter due primarily to increased  volume in shopping  malls
during the holiday  shopping  season.  The length of the holiday shopping period
between Thanksgiving and Christmas and the number of weeks in the fourth quarter
produce changes in the fourth quarter earnings  relationship  from year to year.
(See also, "Accounting Period".) The fourth fiscal quarter normally accounts for
approximately  40% of net income for the year. The 1998 year, which contained 53
weeks,  had a 13 week fourth quarter.  The fourth quarter of 1998 (excluding non
recurring  items)  accounted for 41% of net income for the year.  Excluding week
53, the fourth quarter would have accounted for 38% of such net income. In 1997,
the fourth  fiscal  quarter  (prior to the  provision for the closing of certain
joint venture units) accounted for 38% of net income for the year.

Accounting Period

                  The  Company's  fiscal  year  ends on the  Sunday  nearest  to
December 31. The fiscal year which ended on January 3, 1999  contained 53 weeks.
All other reported fiscal years contained 52 weeks.

                                      -17-

<PAGE>




Liquidity and Capital Resources

                  During 1998, operating activities  contributed  $54,204,000 to
cash flow.  This  consisted  primarily  of net income of  $34,334,000,  non-cash
depreciation  and  amortization  of  $22,429,000  and one time charges  totaling
$4,412,000  which were  partially  offset by decreases  in accounts  payable and
accrued  expenses of $2,610,000 and deferred  taxes of $2,078,000.  During 1998,
investing activities used $20,165,000,  with the Company expending approximately
$27,717,000 for the acquisition of property and equipment  related  primarily to
the opening of 26 Company-owned restaurants, the Company's share of construction
costs related to  consolidated  joint venture  operations and the renovation and
equipping of the Company's new  headquarters  building  partially  offset by the
receipt of $7,500,000 from the maturity of its remaining marketable  securities.
Financing  activities in 1998 used  $3,377,000,  with $5,521,000 used to pay, in
early 1998, the quarterly  cash dividend  declared in late 1997 to the Company's
shareholders  partially offset by $2,144,000 received from the exercise of stock
options.

                  At January 3, 1999, the Company had cash and cash  equivalents
of  $150,472,000,  an increase of $30,662,000  from the amount at the end of the
1997 fiscal year, and its working capital was $121,380,000.

                  The Company  anticipates  that in 1999,  approximately  25 new
Company-owned   and  operated   units  will  be  opened  and  that  its  capital
expenditures,  including  new units  and  remodeling  of  existing  units,  will
approximate  $13 million.  From time to time, the Company has the opportunity to
contract for and secure  price  protection  for certain of its raw  ingredients.
Such situations may require the advance outlay of funds for inventories of these
items. No such contracts were entered into during, or outstanding at the end of,
fiscal 1998.

                  The Company believes,  based on current projections,  that its
liquid assets  presently on hand,  together with funds  expected to be generated
from operations,  should be sufficient for its presently contemplated operations
and for the  investment  in property and equipment for the opening of additional
restaurant locations and remodeling of existing restaurants.

Year 2000

                  "Year 2000" issues could arise in  situations  where  computer
software or databases  recognize the two digit year "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations that
could cause disruptions in business operations and increased costs in processing
and analyzing data. Since the Company's  information  technology  ("IT") systems
(used primarily for financial,  accounting, human resources, payroll, operations
support and  point-of-  sales  processing  and  reporting)  and  non-information
technology  ("non-IT") systems (used principally in communications  systems) use
computer hardware,  software and related technology, the Company has conducted a
comprehensive review of its computer systems.

                  State of Readiness.  The Company has  determined  that,  while
certain  computer  programs  require  change to  assure  that they are Year 2000
compliant,  all of their  databases are Year 2000 compliant in that they contain
four digit year fields, thereby allowing positive  identification of the century
and year.  The Company's  internal IT systems  utilize a combination of in-house
software  developed  by  the  Company's  IT  department  and  packaged  software
purchased from third parties.

                  During  the  past  five  years,  as  part  of its  ongoing  IT
enhancements,  the Company has either significantly updated software or designed
new software for its point-of-sales system (which

                                      -18-

<PAGE>



performs  cash  register  and  restaurant  management  functions)  and  for  its
restaurant  accounting  system (which  handles  centralized  bookkeeping,  sales
analysis and cash control functions relating to its Company-owned  restaurants).
The Company's  point-of-sales system is currently installed in approximately 300
restaurant  units.  The  balance  of  the  Company's  existing  restaurants  use
electronic  cash  registers.   The  Company  has  been  orally  advised  by  the
manufacturers  of its  electronic  cash  registers that they expect no Year 2000
issues  with  respect  to these  registers.  The  Company  is in the  process of
replacing  the  personal  computers  that  were  part of the  approximately  115
point-of-sales  systems installed in 1995 and early 1996. The Company is also in
the  process  of  updating  and  modifying  its  software  programs  for all 300
restaurants in order to handle Year 2000 issues.  Neither of these  processes is
believed  to be  complex  and both are  expected  to be  completed,  tested  and
implemented  during the summer of 1999. The Company is continuing to install its
point-of-sales system in each new unit, in each existing restaurant as remodeled
and to replace existing registers as needed.

                  The Company uses  software  developed  by a  recognized  third
party  software  provider  for various  corporate  office  functions,  including
financial and  accounting  reporting and  analysis,  human  resource and payroll
processing, inventory purchasing and accounts payable functions. The Company has
reviewed and determined the remediation needed to the third party software,  has
made the  changes  needed  and  recompiled  all  programs  within  the  packaged
software.  The Company has recently commenced testing the remediated system. The
remediation process with respect to its third party software is also expected to
be completed during the summer of 1999.

                  Thereafter,  any  corrections  or changes (which are currently
not anticipated to be significant) to programs or systems that are required as a
result of the testing of its internal  software and third party software will be
addressed.  Final  testing is currently  anticipated  to be  completed,  and the
updated software installed, by the end of November 1999.

                  Non-IT  systems  are used by the Company  primarily  for voice
communications.   The  Company  has  received   written   assurances   from  its
communications  systems provider that the Company's  communications  systems and
equipment  are  Year  2000  compliant.  The  Company  has  not as  yet  received
confirmation  that its voice  messaging  system,  which  utilizes  a  recognized
provider, is Year 2000 compliant. The Company does not believe that interruption
of this service would have a material adverse affect on its operations.

                  The  Company  has been orally  advised by its  principal  food
distributor  that,  while it could operate under its former manual  systems,  it
expects that its computer systems will be Year 2000 compliant on a timely basis.
The Company's  principal  soft drink mix supplier has publicly  reported that it
expects remediation and testing of its key IT systems to be 98% completed by the
end of the second quarter of 1999 and compliant by the fourth quarter of 1999.

                  Costs. To date, all software modification and testing has been
performed by the  Company's  internal IT  department  without the need to employ
additional  staff and without  significant  interruption  of the other functions
performed by the department.  The Company believes it will complete this project
without additional staff and without adversely affecting  day-to-day  operations
and support,  although  some  overtime for  personnel  outside the IT department
staff may be required during the testing phase of the remediated systems.

                  To date,  the  Company  has  expended  less than  $30,000  (in
addition to hardware purchased in the ordinary course,  which purchases were not
accelerated  as a result of the Year 2000 issue) and  anticipates  spending less
than $150,000 for testing, purchasing hardware and for other

                                      -19-

<PAGE>



modification costs to finish the project.  The Company does not separately track
internal  costs  (which are  principally  payroll  and  related  costs of its IT
systems department) incurred as part of its Year 2000 project.

                  Risks.  Although  the Company  believes  its  systems  will be
timely  compliant with Year 2000 issues,  the most reasonably  likely worst case
scenarios facing the Company in the event Year 2000 problems arise involve:  (i)
the timeliness of internal reporting and analyzing corporate information and the
potential of temporarily  supplementing  its staff if the Company is required to
rely, for a period of time, on manual information reporting and processing while
remediation to one or more of its internal IT systems is  effectuated;  (ii) the
processing of payroll;  and (iii) its ability to maintain its traditional levels
of revenues should it experience  temporary supply shortages of food, soft drink
mixes and paper products if its  distributors  experience IT or non-IT Year 2000
problems or should the landlords of the Company's restaurants  experience non-IT
issues  (such as with  microprocessors  that control  door  operators,  elevator
service and heating and cooling  equipment  that the  landlords  are required to
maintain  under their leases with the  Company).  The  Company,  like most other
companies,  is also  subject to certain  risks that are not within its  control,
such as a failure  of IT  systems of banks,  financial  institutions,  telephone
companies and public utilities.

                  Contingency  Plans.  In the event  the  Company's  IT  systems
should  malfunction,  the  Company  believes  it  will  nevertheless  be able to
generate revenues at its existing  restaurants and process data, although delays
may result in reporting and  processing  information.  The Company's  electronic
cash registers operate manually and its  point-of-sales  cash registers can also
operate  independent of the IT system. The Company still utilizes manual systems
both for reporting to its corporate  office by  restaurants  that are not yet on
its  point-of-sales   system  and  as  a  backup  for  units  that  are  on  the
point-of-sales  system.  Depending upon the results of testing of its efforts to
remediate its software during the summer of 1999, the Company intends to develop
contingency   plans  with  respect  to  the  internal   reporting  of  corporate
information in the event of a failure of its IT systems.

                  With  respect  to  its  payroll  functions,  the  Company  has
recently  comprehensively analyzed and worked with an outside payroll processing
service before  determining to continue to perform all payroll functions through
its  internal  systems.  Therefore,  the Company  believes  that it could either
outsource  this function or have an outsourcer of payroll  services  install its
system at the Company with the Company operating the system  internally  without
material delay.

                  The Company  intends to maintain a higher  inventory  level of
food products and soft drink mixes and paper products  toward the end of 1999 as
a  contingency   against  shortages  in  the  event  its  suppliers   experience
unanticipated Year 2000 problems. The levels to be maintained will be based upon
future  consultation with its suppliers to obtain updates on the status of their
Year  2000  compliance  programs.  The  Company  believes  that  there are other
distributors  of food products,  beverages and paper products that would be able
to service the  Company's  needs in the event its primary  suppliers  experience
Year 2000  problems that  adversely  affect their ability to provide the Company
with the quantity of supplies needed.

                  The Company intends to develop additional contingency plans if
and to the extent  additional  significant  risks  become  evident  based on the
testing of its  internal  systems  and future  discussions  with its  suppliers,
landlords and other third party providers of goods and services.

Forward Looking Statement

                  Certain    statements    contained    in   this   Report   are
forward-looking  statements  which are  subject to a number of known and unknown
risks and uncertainties that could cause the Company's


                                      -20-

<PAGE>



actual results and  performance  to differ  materially  from those  described or
implied in the forward- looking statements. These risks and uncertainties,  many
of which are not within the Company's control,  include, but are not limited to,
general economic,  weather and business conditions; the availability of suitable
restaurant sites in appropriate  regional  shopping malls and other locations on
reasonable rental terms;  changes in consumer tastes;  changes in population and
traffic patterns; the ability to continue to attract franchisees; the success of
the  Company's  present,  and any future,  joint  ventures  and other  expansion
opportunities;  the availability of food (particularly  cheese and tomatoes) and
paper  products at  reasonable  prices;  no material  increase  occurring in the
Federal minimum wage; the Company's ability to attract competent  restaurant and
executive managerial personnel;  competition;  government  regulations;  and the
Company's  ability  to  successfully  and  timely  complete  compliance  of  its
information  systems  for the  Year  2000  and the  ability  of  certain  of its
suppliers and landlords to be timely Year 2000 compliant.


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

                  The  Company's  cash  equivalents  are invested in short term,
fixed interest,  highly rated and highly liquid instruments which mature and are
reinvested  throughout  the year.  Therefore,  although the  Company's  existing
investments are not considered at risk with respect to changes in interest rates
or  markets  for  these  instruments,  the  Company's  yield  return  on  future
short-term investments could be affected at the time of reinvestment as a result
of intervening  events.  The Company  presently has no borrowings,  and does not
purchase  interest rate swap or other instruments to hedge against interest rate
fluctuations.

                  The Company does not purchase future, forward, option or other
instruments to hedge against  fluctuations  in the prices of the  commodities it
purchases.

                  All transactions with foreign  franchisees are denominated in,
and all  payments  are  made in,  United  States  dollars,  reducing  the  risks
attendant  in  changes in the values of  foreign  currencies.  Accordingly,  the
Company does not purchase  future  contracts,  options or other  instruments  to
hedge against changes in values of foreign currencies.


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

ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
                  None

                                      -21-

<PAGE>

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The directors  and executive  officers of the Company and their ages at
March 31, 1999 are:


Name                         Age       Position
----                         ---       --------

Mario Sbarro                  57       Chairman of the Board, President, Chief
                                       Executive Officer and Director

Anthony Sbarro                52       Vice Chairman of the Board, Treasurer
                                       and Director

Joseph Sbarro                 58       Senior Executive Vice President,
                                       Secretary and Director

Carmela Sbarro                77       Vice President and Director

John Bernabeo                 42       Vice President - Architecture and
                                       Engineering
Joseph A. Fallarino           47       Vice President - Human Resources

George W. Herz II             43       Vice President and General Counsel

Robert S. Koebele             55       Vice President - Finance and Chief
                                       Financial Officer

Carmela N. Merendino          34       Vice President - Administration

Anthony J. Missano            40       Corporate Vice President - Operations

Genarro A. Sbarro             32       Corporate Vice President - Franchising

Genarro J. Sbarro             36       Corporate Vice President - Operations

Leonard G. Skrosky            67       Senior Vice President - Real Estate and
                                       Lease Administration

Harold L. Kestenbaum          49       Director

Richard A. Mandell            56       Director

Paul A. Vatter                74       Director

Terry Vince                   70       Director

Bernard Zimmerman             66       Director

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

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

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


                                      -22-

<PAGE>



         CARMELA SBARRO has been Vice President of the Company since March 1985.
Mrs.  Sbarro  was a founder  of the  Company,  together  with her late  husband,
Gennaro Sbarro.  Mrs. Sbarro devotes a substantial portion of her time to recipe
and product  development.  The Board  elected  Mrs.  Sbarro as a director of the
Company in January  1998.  Mrs.  Sbarro  previously  served as a director of the
Company  from March 1985 until  December  1988,  when she was  elected  Director
Emeritus of the Company.

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

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

         GEORGE W. HERZ II joined the Company in  November  1995 and was elected
Vice  President  and  General  Counsel in  February  1996.  Prior to joining the
Company,  Mr. Herz served as General  Counsel (from 1993) and Corporate  Counsel
(from 1982 until 1992) of Minuteman Press  International,  Inc. (a franchisor of
printing centers).

         ROBERT S.  KOEBELE  has served as Vice  President  - Finance  and Chief
Financial  Officer of the Company for more than the past five years. Mr. Koebele
has been a certified public accountant in New York for more than the past thirty
years.  Mr.  Koebele has  advised  the Company  that he intends to retire in the
early part of the summer of 1999.

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

         ANTHONY J. MISSANO was elected Corporate Vice President - Operations in
August 1996, prior to which he served as Vice President - Operations (West) from
February 1995, and as a Zone Vice President from June 1992 until February 1995.

         GENNARO A. SBARRO was elected Corporate Vice  President-Franchising  in
August  1996,  prior to which he served as Vice  President -  Franchising  since
February  1995.  For more than five years prior  thereto,  Mr.  Sbarro served in
various capacities for the Company.

         GENNARO J. SBARRO was elected  Corporate Vice President - Operations in
August  1996,  prior to which he served as Vice  President -  Operations  (East)
since  February 1995, and as a Zone Vice President from June 1992 until February
1995.

         LEONARD G. SKROSKY  served the Company as Senior Vice  President - Real
Estate and Lease  Administration  from February 1987 until December  1993.  From
January 1994 until June 1996, Mr. Skrosky was President of The Skrosky  Company,
a real  estate firm  dealing  with site  selection  and lease  negotiations  for
several restaurant and other companies. He rejoined the Company in June 1996 and
was elected Senior Vice President - Real Estate in November 1996.


                                      -23-

<PAGE>



         HAROLD L.  KESTENBAUM has been a practicing  attorney in New York since
1976. He became a director of the Company in March 1985.

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

         PAUL A.  VATTER  has been,  since  his  retirement  in 1995,  Professor
Emeritus,  and from 1970 until his retirement was Lawrence E. Fouraker Professor
of Business Administration,  at Harvard University's Graduate School of Business
Administration,  where he served as a Professor since 1958. He became a director
of the  Company  in March  1985.  Mr.  Vatter  has  advised  the  Company of his
intention  to retire  upon  consummation  of the Merger or, if the Merger is not
consummated,  upon the expiration of his current term at the 1999 Annual Meeting
of Shareholders.

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

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

         The Company's  Certificate of Incorporation  provides that the Board of
Directors shall be divided into three classes, with such classes to be as nearly
equal in number as the then total  number of directors  constituting  the entire
Board  permits.  The  Company's  Board of Directors  presently  consists of nine
members,  with each  class  being  elected  for a term of three  years.  Anthony
Sbarro,  Harold L.  Kestenbaum  and Paul A. Vatter  serve as Class 1  directors,
Joseph Sbarro, Richard A. Mandell and Terry Vince serve as Class 2 directors and
Mario Sbarro,  Carmela Sbarro and Bernard  Zimmerman serve as Class 3 directors,
with terms of office  scheduled to expire at the Company's  1999,  2000 and 2001
Annual Meetings of Shareholders, respectively. At each annual meeting, directors
are  elected to succeed  those in the class  whose term  expires at that  annual
meeting, such newly-elected  directors to hold office until the third succeeding
annual  meeting  and  the  election  and   qualification   of  their  respective
successors.

          The  officers  of the  Company  are  elected  annually by the Board of
Directors  at its  meeting  held  immediately  after the  annual  meeting of the
shareholders,  and hold their respective offices until their successors are duly
elected and qualified. Officers may be removed at any time by the Board.

                                      -24-

<PAGE>




Family Relationships

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

Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange Act requires the  Company's
executive officers and directors, and persons who beneficially own more than 10%
of the Company's Common Stock, to file initial reports of beneficial  ownership,
and  reports  of  changes  of  beneficial  ownership,  of the  Company's  equity
securities  with the  Securities  and Exchange  Commission and furnish copies of
those  reports  to the  Company.  Based  solely on a review of the copies of the
reports  furnished  to the Company to date and written  representations  that no
reports were  required,  the Company  believes  that all reports  required to be
filed by such persons with respect to the Company's fiscal year ended January 3,
1999 were timely filed.

                                      -25-

<PAGE>



ITEM 11.          EXECUTIVE COMPENSATION

Summary Compensation Table

         The following  table sets forth  information  concerning the annual and
long-term  compensation of the Company's chief executive  officer and other five
most highly  compensated  persons who were serving as executive  officers of the
Company  at the end of the  Company's  1998  fiscal  year  for  services  in all
capacities to the Company and its  subsidiaries  during the Company's 1998, 1997
and 1996 fiscal years:
<TABLE>
<CAPTION>

                                                                               Long Term
  Name and                                Annual Compensation                 Compensation
Principal Position       Year             Salary           Bonus                Options (#)  
------------------       ----             ------           -----            ---------------    

<S>                    <C>            <C>                <C>              <C>          
Mario Sbarro             1998           $713,462           $300,000                 ---
Chairman of              1997            700,000            160,000                 250,000
the Board, President     1996            460,000            500,000                 100,000
and Chief Executive
Officer (1)

Anthony Sbarro           1998            305,769            200,000                 ---
Vice Chairman of         1997            300,000            150,000                 100,000
the Board                1996            300,000            ---                     ---
and Treasurer (1)

Joseph Sbarro            1998            305,769            200,000                 ---
Senior                   1997            300,000            150,000                 100,000
Executive Vice           1996            276,000            150,000                  50,000
President and
Secretary

Anthony J. Missano       1998            203,846            100,000                 ---
Corporate Vice           1997            200,000             75,000                  80,000
President-Operations     1996            157,000             65,000                 ---

Gennaro A. Sbarro        1998            203,846            100,000                 ---
Corporate Vice           1997            200,000             75,000                  80,000
President-Franchising    1996            129,000             45,000                 ---

Gennaro J. Sbarro        1998            203,846            100,000                 ---
Corporate Vice           1997            200,000             75,000                  80,000
President-Operations     1996            155,000             65,000                 ---
----------
</TABLE>

(1)      Prior to May 1996,  Mario  Sbarro  served as  Chairman  of the Board of
         Directors and Chief Executive Officer of the Company and Anthony Sbarro
         served as President and Treasurer of the Company.

                                      -26-

<PAGE>



Option/SAR Grants in Last Fiscal Year

         The Company's  1991 Stock  Incentive  Plan permits the grant of options
and stock appreciation  rights to employees of, and consultants and advisors to,
the Company and its  subsidiaries,  including  officers  and  directors  who are
serving in such  capacities.  During fiscal 1998,  the Company did not grant any
options to the executive  officers named in the Summary  Compensation  Table. No
stock appreciation rights have been granted to date.

Aggregated Option Exercises in Last Fiscal Year and Year-End Values

         No  options  to  purchase  shares of the  Company's  Common  Stock were
exercised  during  the  Company's  fiscal  year  ended  January  3,  1999 by the
executive officers named in the Summary  Compensation Table. The following table
sets forth  certain  information  concerning  the number and value at January 3,
1999 of  shares of Common  Stock  subject  to  unexercised  options  held by the
executive officers named in the Summary Compensation Table.


                            Number of Shares             Value of Unexercised
                         Underlying Unexercised          In-the-Money Options
                       Options at Fiscal Year-End       at Fiscal Year-End (1)
    Name               (Exercisable/Unexercisable)   (Exercisable/Unexercisable)
   ------             -----------------------------  ---------------------------

Mario Sbarro               303,333/316,667                $876,037/202,083

Anthony Sbarro             165,000/100,000                $414,060/106,250

Joseph Sbarro              166,667/133,333                $438,018/154,167

Anthony J. Missano          12,500/ 80,000                  $23,438/85,000

Gennaro A. Sbarro           18,251/ 80,000                  $49,312/85,000

Gennaro J. Sbarro           12,500/ 80,000                  $23,438/85,000

-----------------

(1)      Represents the number of shares subject to the option multiplied by the
         difference  between the closing price of the Company's  Common Stock on
         the New York Stock  Exchange on December 31, 1998, the last trading day
         of the Company's 1998 fiscal year, and the respective exercise prices.


                                      -27-

<PAGE>



Compensation of Directors

         Non-employee  directors  currently  receive a  retainer  at the rate of
$16,000 per annum,  $1,000 for each meeting of the Board of  Directors  attended
and $500 for each  meeting  attended of a Committee of the Board of Directors on
which they  serve,  if such  meeting is not held on the same day as a meeting of
the Board of  Directors.  Members of the Special  Committee  (as defined  below)
received  additional  compensation  for service on that committee,  as described
below.  Members of the Board of Directors  also are  reimbursed  for  reasonable
travel expenses incurred in attending Board of Directors and Committee meetings.
The  regular   compensation   of  employee   directors  of  the  Company  covers
compensation for services as a director.

         The Company's 1993 Non-Employee Director Stock Option Plan, as amended,
which was  approved by  shareholders  at the  Company's  1993 Annual  Meeting of
Shareholders,  provides for the automatic  grant of an option to purchase  3,750
shares of Common Stock to each non-employee director in office immediately after
each annual meeting of shareholders. Each option has a ten year term, is subject
to early  termination in certain  instances,  and is exercisable  commencing one
year  following the date of grant at an exercise price equal to 100% of the fair
market value of the Common Stock on the date of grant.

Compensation of Special Committee Members

         In January 1998, the Board of Directors formed a special committee (the
"Special  Committee"),  consisting of Harold L. Kestenbaum,  Richard A. Mandell,
Paul A. Vatter and Terry Vince,  to evaluate the Initial  Proposal.  The Special
Committee  was disbanded in June 1998 when the Initial  Proposal was  terminated
and was  reappointed  in November  1998 to evaluate  the  Revised  Proposal.  As
compensation for serving on the Special  Committee  (including  consideration of
both the Initial Proposal and the Revised  Proposal),  the Company agreed to pay
to each member of the Special  Committee a fee equal to (i) $2,500 for  services
rendered  in any  day on  which  the  member  expended  four  hours  or  more in
performing  services  as a member of the Special  Committee  and (ii) $1,250 for
each day in which such member  expended a  reasonable  amount of time,  but less
than four hours, in performing services as a member of the Special Committee. In
addition  to the  foregoing  fees,  Mr.  Mandell,  as  Chairman  of the  Special
Committee,   received   $10,000   with   respect  to  the  Special   Committee's
consideration  of the Initial  Proposal and is entitled to receive  $10,000 with
respect to the Special Committee's  consideration of the Revised Proposal.  Each
member  of the  Special  Committee  is being  reimbursed  for all  out-of-pocket
expenses  incurred in  performing  his  services.  Through  March 15, 1999,  the
members of the Special  Committee  have earned the following  cash  compensation
(exclusive of travel  reimbursements)  from the Company in  connection  with the
Initial Proposal and the Revised Proposal:



Richard A. Mandell                        $32,500

Harold L. Kestenbaum                       10,000

Paul A. Vatter                              5,000

Terry Vince                                 5,000


                                      -28-

<PAGE>



Compensation Committee Interlocks and Insider Participation

         Bernard  Zimmerman and Company,  Inc.,  of which  Bernard  Zimmerman is
President  and  a  majority   shareholder,   renders  financial  and  consulting
assistance  to the Company,  for which it received  fees of $140,400  during the
Company's  fiscal year ended January 3, 1999.  Mr.  Zimmerman is Chairman of the
Compensation  Committee  of the  Board of  Directors,  but does not serve on the
Stock Option Committee of the Board.


ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
                MANAGEMENT

         The  following  table  sets forth  certain  information  regarding  the
ownership of shares of the Company's Common Stock as of March 1, 1999 (except as
noted  below) with respect to (i) holders  known to the Company to  beneficially
own more than five percent of the outstanding Common Stock of the Company,  (ii)
each director of the Company,  (iii) each executive officer named in the Summary
Compensation Table under the caption "Executive Compensation" in Item 11 of this
Report and (iv) all directors and executive  officers of the Company as a group.
The Company  understands  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>

                                                   Amount and Nature of            Percent of
Beneficial Owner                                   Beneficial Ownership (1)         Class (2) 
----------------                                   ------------------------        -----------

<S>                                                     <C>                     <C> 
Mario Sbarro (3)................................              1,867,586 (4)             8.9%
Anthony Sbarro (3)..............................              1,432,133 (5)             6.9%
Joseph Sbarro (3)...............................              2,007,913 (6)             9.7%
Trust of Carmela Sbarro (3).....................              2,497,884 (7)            12.2%
Carmela Sbarro..................................                 400                    *
Harold L. Kestenbaum............................                 25,500 (8)             *
Richard A. Mandell..............................                 18,750 (9)             *
Paul A. Vatter..................................                 21,000 (9)             *
Terry Vince.....................................                 22,050 (9)             *
Bernard Zimmerman...............................                61,700 (10)             *
Robert S. Koebele...............................                25,666 (11)             *
Anthony J. Missano..............................                39,166 (12)             *
Gennaro A. Sbarro...............................                54,187 (13)             *
Gennaro J. Sbarro...............................                39,166 (12)             *
Joel M. Greenblatt (14).........................             1,917,329 (14)             9.3%
Bank One Corporation (15). . . . . . . . . .                 1,213,600 (15)             5.9%
All directors and executive officers as a group
  (18 persons)..................................             8,171,207 (16)            37.9%
</TABLE>

(1)      Shares  subject to options  are  considered  beneficially  owned to the
         extent currently  exercisable or exercisable within 60 days after March
         1, 1999.

(2)      Asterisk  indicates  less than 1%. Shares  subject to such options that
         are considered to be beneficially owned are considered outstanding only
         for the purpose of computing the percentage of outstanding Common Stock
         which would be owned by the optionee if such  options  were  exercised,
         but  (except  for  the  calculation  of  beneficial  ownership  by  all
         executive

                                      -29-

<PAGE>

         officers and directors as a group) are not considered  outstanding  for
         the purpose of computing  the  percentage of  outstanding  Common Stock
         owned by any other person.

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

(4)      Includes  (i) 5,450 and 740  shares  owned by a  charitable  foundation
         supported by Mario Sbarro and his wife, of which Mr.  Sbarro,  his wife
         and Bernard  Zimmerman,  a director of the Company,  are the directors,
         and by Mr. Sbarro's wife,  respectively  (as to all of which shares Mr.
         Sbarro disclaims beneficial ownership), and (ii) 336,666 shares subject
         to  options.  Excludes  (i) the  shares  held by the  Trust of  Carmela
         Sbarro,  of which trust Mario  Sbarro  serves as a trustee (as to which
         shares Mr.  Sbarro may be deemed a beneficial  owner with shared voting
         and dispositive power).

(5)      Includes 198,333 shares subject to options.

(6)      Includes (i) 609,000  shares owned by a partnership of which Mr. Sbarro
         is the sole general partner and (ii) 199,999 shares subject to options.

(7)      The trust was  created by Carmela  Sbarro for her  benefit  and for the
         benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
         The  trustees  of the trust are  Franklin  Montgomery,  whose  business
         address is 488 Madison  Avenue,  New York,  New York  10022,  and Mario
         Sbarro. As trustees, Franklin Montgomery and Mario Sbarro may be deemed
         to be the  beneficial  owners of these  shares with  shared  voting and
         dispositive power.

(8)      Represents (i) 6,750 shares owned by Mr. Kestenbaum's wife, as to which
         shares Mr. Kestenbaum disclaims beneficial  ownership,  and (ii) 18,750
         shares subject to options.

(9)      Includes 18,750 shares subject to options.

(10)     Includes  (i) 5,450 shares  owned by a family  foundation  supported by
         Mario  Sbarro and Mario  Sbarro's  wife,  of which Mr.  Zimmerman  is a
         director  (as  to  which  shares  Mr.  Zimmerman  disclaims  beneficial
         ownership),  and (ii) 18,750 and 37,500 shares subject to options held,
         respectively,  by Mr. Zimmerman  individually and Bernard Zimmerman and
         Company,  Inc., a company of which Mr.  Zimmerman  is  President  and a
         majority shareholder.

(11)     Includes 14,666 shares subject to options.

(12)     Represents shares subject to options.

(13)     Includes  (i) 2,400  shares  owned by Mr.  Sbarro's  wife,  as to which
         shares Mr.  Sbarro  disclaims  beneficial  ownership,  and (ii)  16,584
         shares subject to options.

(14)     Based  solely  upon  information  as of March 3,  1999  contained  in a
         Schedule 13G dated March 5, 1999 filed with the Securities and Exchange
         Commission  and the Company by Mr.  Greenblatt,  Gotham Capital V, LLC,
         Gotham  Capital VI, LLC,  and Gotham  Capital VII,  LLC,  each of whose
         address is 100 Jericho Quadrangle,  Suite 212, Jericho, New York 11753.
         The  Schedule 13G  indicates  that Mr.  Greenblatt  has sole voting and
         dispositive  power  with  respect  to 41,500  shares and that he shares
         voting and dispositive power with respect to

                                      -30-
<PAGE>

         974,327 shares with Gotham  Capital V, LLC,  489,000 shares with Gotham
         Capital VI, LLC and 412,502 shares with Gotham Capital VII, LLC.

(15)     Based solely upon  information  as of December 31, 1998  contained in a
         Schedule  13G dated  February  1, 1999  filed with the  Securities  and
         Exchange Commission and the Company by Bank One Corporation,  One First
         National  Plaza,  Chicago,  Illinois 60670 as parent holding company of
         NBD Bank (Indiana), NBD Bank (Michigan) and Pegasus Funds. The Schedule
         13G indicates that Bank One Corporation has sole voting and dispositive
         power with  respect  to  1,209,900  shares and that it has sole  voting
         power with respect to another 3,700 shares.  The Company  believes Bank
         One  Corporation  may have sold some or all of the shares  beneficially
         owned by it.

(16)     Includes  (i)  5,450  owned  by a  charitable  foundation,  of  which a
         director and  executive  officer of the  Company,  his wife and another
         director  of  the  Company  are  directors,  as to  which  shares  each
         disclaims  beneficial  ownership,  (ii) an aggregate  of 17,200  shares
         owned by spouses, and as custodian for minor children, of directors and
         executive  officers,   as  to  which  shares  beneficial  ownership  is
         disclaimed and (iii) 1,052,661 shares subject to options.


                                      -31-

<PAGE>





ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company is the sole tenant of its  administrative  office building,
which is leased  from the  Suffolk  County  Industrial  Development  Agency (the
"Agency") by Sbarro Enterprises,  L.P., a Delaware limited partnership,  and, in
turn, subleased to the Company. The annual rent payable pursuant to the sublease
is $337,000 for the last five years of the sublease term, which expires in 2001.
In  addition,  the Company is  obligated  to pay real estate  taxes,  utilities,
insurance and certain other expenses for the facility. The Company believes that
such rents are comparable to the rents that would be charged by an  unaffiliated
third party.  Principal  and interest and any premium on the bonds issued by the
Agency to fund  construction  of the facility are the  responsibility  of Sbarro
Enterprises,  L.P. and are  severally  guaranteed  by Mario,  Joseph and Anthony
Sbarro.  The limited  partners of Sbarro  Enterprises,  L.P. are Mario,  Joseph,
Anthony and Carmela Sbarro.

         In addition to the compensation of Mario, Anthony,  Joseph,  Gennaro A.
and Gennaro J. Sbarro and Anthony J. Missano,  (i) Carmela Sbarro, the mother of
Mario, Anthony and Joseph Sbarro, who was a co-founder of the Company and serves
as Vice President and a director of the Company,  and (ii) Carmela N. Merendino,
a daughter of Mario Sbarro, who serves as Vice President - Administration of the
Company,  received  $101,923 and  $126,442,  respectively,  from the Company for
services  rendered  during  fiscal  1998.  In  addition,  other  members  of the
immediate  families  of Mario,  Anthony,  Joseph and  Carmela  Sbarro  earned an
aggregate of $523,423 (eleven persons) for services rendered as employees of the
Company during fiscal 1998.

         The  Company,  its  subsidiaries  and the joint  ventures  in which the
Company has 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,
$322,768  during  fiscal 1998.  The Company  believes  that these  services were
provided  on terms  comparable  to those  that would  have been  available  from
unrelated third parties.

         Companies  owned by a son of Anthony  Sbarro and a company owned by the
daughter  of  Joseph  Sbarro  paid  royalties  to the  Company  under  franchise
agreements  containing terms similar to those in agreements  entered into by the
Company  with  unrelated  franchisees.   Such  royalties  paid  to  the  Company
aggregated $95,151 and $10,406, respectively, during fiscal 1998.


                                      -32-

<PAGE>



                                     PART IV

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


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

         Financial Statements                                             Page
         --------------------                                             ----

         Report of Independent Public Accountants                         F-1
         Consolidated Balance Sheets at January 3, 1999 and
         December 28, 1997                                                F-2

         Consolidated Statements of Income for each of the
         years in the three-year period ended January 3, 1999             F-4

         Consolidated Statements of Shareholders' Equity for each of
         the years in the three-year period ended January 3, 1999         F-6

         Consolidated Statements of Cash Flows for each of the
         years in the three-year period ended January 3, 1999             F-7

         Notes to Consolidated Financial Statements                       F-9

         Financial Statement Schedule

         Report of Independent Public Accountants on Schedule             S-1

         II - Valuation and Qualifying Accounts                           S-2

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

(b)      Reports on Form 8-K

         The only  Report on Form 8-K filed by the  Company  during  the  fourth
         quarter of the  Company's  fiscal year ended  January 3, 1999 was dated
         (date of earliest event  reported)  November 25, 1998  reporting  under
         Item 5,  Other  Events,  and  Item 7,  Financial  Statements,  Proforma
         Financial Information and Exhibits. Subsequent to year-end, the Company
         filed a Report  on Form 8-K dated  (date of  earliest  event  reported)
         January  19, 1999  reporting  under Item 5, Other  Events,  and Item 7,
         Financial  Statements,  Proforma Financial Information and Exhibits. No
         financial statements were filed with either report.

                                      -33-

<PAGE>

(c)  Exhibits:

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

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

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

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

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

         * 3.02            By-Laws of the Company,  as amended.  (Exhibit 4.3 to
                           the Company's  Quarterly  Report on Form 10-Q for the
                           quarter ended April 21, 1996, File No. 1-8881)

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

     +   *10.02(a)         1985   Incentive   Stock  Option  Plan,  as  amended.
                           (Exhibit 10.1 to Company's  Quarterly  Report on Form
                           10-Q for the quarter ended October 6, 1996,  File No.
                           33-4380)

     +   *10.02(b)         1991 Stock Incentive Plan, as amended.  (Exhibit 10.1
                           to the  Company's  Quarterly  Report on Form 10-Q for
                           the quarter ended April 20, 1997, File No. 1-8881)

     +   *10.02(c)         Form of Stock  Option  Agreement  dated May 30,  1990
                           between  the  Company  and  each of  Anthony  Sbarro,
                           Joseph  Sbarro  and  Mario  Sbarro,  together  with a
                           schedule,  pursuant to  Instruction  2 to Item 601 of
                           Regulation S-K,


                                      -34-

<PAGE>

                           identifying   the   details   in  which  the   actual
                           agreements  differ from the exhibit  filed  herewith.
                           (Exhibit  10.02(c) to the Company's  Annual Report on
                           Form 10-K for the year ended December 30, 1990,  File
                           No. 1-8881)

     +   *10.02(d)         1993  Non-Employee  Director  Stock Option  Plan,  as
                           amended. (Exhibit 10.2 (d) to the Company's Quarterly
                           Report on Form 10-Q for the  quarter  ended April 20,
                           1997, File No. 1-8881)

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

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

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

     * 10.05               Memorandum  of  Understanding  dated January 19, 1999
                           among  counsel to the  plaintiffs  and counsel to the
                           defendants  in  the  various  class  action  lawsuits
                           instituted  by certain  shareholders  of the Company.
                           (Exhibit 99.01 to the Company  Current Report on Form
                           8-K dated (date of earliest event  reported)  January
                           19, 1999, File No. 1-8881).

      21.01                List of subsidiaries.

      23.01                Consent of Arthur Andersen LLP.

      27.01                Financial Data Schedule.
-----------------------------

 * Incorporated by reference to the document indicated.

 + Management contract or compensatory plan.



                                      -35-

<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 April
2, 1999.


                                     SBARRO, INC.



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



                                      -36-

<PAGE>



         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.
<TABLE>
<CAPTION>

         Signature                                            Title                     Date     
         ---------                                            -----                     ----

<S>                                              <C>                             <C>                     
    /s/  MARIO SBARRO                                Chairman of the Board              April 2, 1999
--------------------------------------------         (Principal Executive Officer)
         Mario Sbarro                                and Director                 
                                                     



    /s/  ROBERT S. KOEBELE                           Vice President-Finance             April 2, 1999
---------------------------------------------        (Chief Financial and 
         Robert S. Koebele                           Accounting Officer)  
                                                     


    /s/  JOSEPH SBARRO                                        Director                  April 2, 1999
---------------------------------------------
         Joseph Sbarro



     /s/ ANTHONY SBARRO                                       Director                  April 2, 1999
---------------------------------------------
         Anthony Sbarro



     /s/ HAROLD KESTENBAUM                                    Director                  April 2, 1999
---------------------------------------------
         Harold Kestenbaum



   /s/   RICHARD A. MANDELL                                   Director                  April 2, 1999
---------------------------------------------
         Richard A. Mandell



   /s/    CARMELA SBARRO                                      Director                  April 2, 1999
---------------------------------------------
          Carmela Sbarro

                                      -37-

<PAGE>


         Signature                                            Title                      Date     
         ---------                                            ------                     ----        



    /s/  PAUL A. VATTER                                       Director                  April 2, 1999
  ---------------------------------------------    
         Paul A. Vatter


     /s/ TERRY VINCE                                          Director                  April 2, 1999
  --------------------------------------------- 
         Terry Vince


     /s/ BERNARD ZIMMERMAN                                    Director                  April 2, 1999
  ---------------------------------------------
         Bernard Zimmerman

</TABLE>

                                      -38-
<PAGE>





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




To the Board of Directors and Shareholders
  of Sbarro, Inc.:


We have audited the accompanying  consolidated balance sheets of Sbarro, Inc. (a
New York  corporation)  and  subsidiaries as of January 3, 1999 and December 28,
1997, and the related  consolidated  statements of income,  shareholders' equity
and cash flows for each of the three years in the period ended  January 3, 1999.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Sbarro,  Inc. and subsidiaries
as of January 3, 1999 and December 28, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended  January 3,
1999, in conformity with generally accepted accounting principles.


                                                     /s/ Arthur Andersen LLP




New York, New York
February 10, 1999

                                       F-1

<PAGE>

<TABLE>
<CAPTION>


                          SBARRO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS





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

<S>                                                                  <C>                                    <C>     
Current assets: 
     Cash and cash equivalents                                           $150,472                               $119,810

      Marketable securities                                                      -                                  7,500

      Receivables:
        Franchisees                                                          1,342                                    810
        Other                                                                2,185                                  1,565
                                                                      ------------                           ------------

                                                                             3,527                                  2,375
                                                                      ------------                           ------------

Inventories                                                                  3,122                                  2,962

Prepaid expenses                                                             1,291                                  1,768
                                                                      ------------                            -----------

      Total current assets                                                 158,412                                134,415


Property and equipment, net (Note 3 and 10)                                138,126                                136,798

Other assets, net                                                            6,630                                  7,436
                                                                       -----------                            -----------

                                                                          $303,168                               $278,649
                                                                          ========                               ========



</TABLE>


                                   (continued)


                                       F-2

<PAGE>
<TABLE>
<CAPTION>





                          SBARRO, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



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


<S>                                                                      <C>                                    <C>    
Current liabilities:
      Accounts payable                                                     $    7,122                             $10,086
      Accrued expenses (Note 4)                                                25,764                              26,025
      Dividend payable                                                              -                               5,521
      Income taxes (Note 5)                                                     4,146                               4,777
                                                                           ----------                            --------

         Total current liabilities                                             37,032                              46,409

Defered income taxes (Note 5)                                                   9,219                              11,801

Commitments and contingencies (Notes 6 and 7)


Shareholder's equity (Note 9):
      Preferred stock, $1 par value: authorized
         1,000,000 shares; none issued
      Common stock, $1.01 par value; authorized                                                                           
       40,000,000 shares at January 3, 1999 and                                                                           
      20,446,654 shares at December 28, 1997                                      205                                 204
      Additional paid-in capital                                               34,587                              32,444
      Retained earnings                                                       222,125                             187,791
                                                                            ---------                           ---------
                                                                              256,917                             220,439
                                                                            ---------                           ---------

                                                                             $303,168                            $278,649
                                                                             ========                            ========


</TABLE>

                 See notes to consolidated financial statements

                                       F-3

<PAGE>
<TABLE>
<CAPTION>




                          SBARRO, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME


                                                                        (In thousands, except share data)    
                                                       -------------------------------------------------------             
                                                                               For the Years Ended      
                                                       -------------------------------------------------------                    

                                                       January 3,             December 28,        December 29,
                                                           1999                     1997              1996
                                                       ---------              ------------        -----------    
<S>                                                     <C>                      <C>                   <C>     
Revenues:
    Restaurant sales                                    $361,534                 $337,723              $319,315
    Franchise related income                               8 578                    7,360                 6,375
    Interest income                                        5,120                    4,352                 3,798
                                                      ----------               ----------            ----------
      Total revenues                                     375,232                  349,435               329,488
                                                        --------                 --------              --------

Costs and expenses:
    Cost of food and paper products                       76,572                   69,469                68,668
    Restaurant operating expenses:
      Payroll and other employee benefits                 93,367                   84,910                78,258
      Occupancy and other expenses                       101,013                   93,528                85,577
    Depreciation and amortization                         22,429                   23,922                22,910
    General and administrative                            19,708                   17,762                14,940
    Provision for unit closings  (Note 10)                 2,515                    3,300                     -
    Terminated transaction costs (Note 6)                    986                        -                     -
    Litigation settlement and  related
      costs (Note 7)                                       3,544                        -                     -
    Loss on sale of land to be sold (Note 3)               1,075                        -                     -
    Other income                                          (2,680)                  (1,653)               (1,171)
                                                       ---------                ---------             ---------
      Total costs and expenses                           318,529                  291,238               269,182
                                                        --------                 --------              --------

Income before income taxes and
    cumulative effect of change in method
    of accounting for start-up costs                      56,703                   58,197                60,306
Income taxes  (Note 5)                                    21,547                   22,115                22,916
                                                          ------                   ------                ------
Income before cumulative effect
    of accounting change                                  35,156                   36,082                37,390

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

Net income                                               $34,334                  $36,082               $37,390
                                                         =======                  =======               =======

</TABLE>
 
                                      F-4

<PAGE>

<TABLE>
<CAPTION>



                          SBARRO, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

                                                                        (In thousands, except share data)    
                                                       --------------------------------------------------------             
                                                                                For the Years Ended    
                                                       --------------------------------------------------------                  

                                                       January 3,           December 28,          December 29,
                                                        1999                   1997                1996
                                                       ---------            -----------           ------------
<S>                                                     <C>                      <C>                   <C>  
Per share information:
    Net income per share:

    Basic:
      Income before accounting change                      $1.71                    $1.77                 $1.84
      Accounting change                                     (.04)                       -                     -
                                                         -------                 --------              --------

      Net income                                           $1.67                    $1.77                 $1.84
                                                           =====                    =====                 =====

    Diluted:

      Income before accounting change                      $1.71                    $1.76                 $1.83
      Accounting change                                     (.04)                       -                     -
                                                          ------                  -------               -------

      Net Injcome                                          $1.67                    $1.76                 $1.83
                                                           =====                    =====                 =====

Shares used in computing net income per share:

    Basic                                             20,516,890               20,426,678            20,369,128
                                                      ==========               ==========            ==========

    Diluted                                           20,583,367               20,504,303            20,404,620
                                                      ==========               ==========            ==========

Dividends declared  (Note 11)                                  -                    $1.08                 $0.92
                                               =================          ===============      ================



</TABLE>


                 See notes to consolidated financial statements


                                       F-5

<PAGE>
<TABLE>
<CAPTION>



                          SBARRO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


                                                          (In thousands, except share data)  
                                  -------------------------------------------------------------------------------                  
                                                                      Common stock       
                                  -------------------------------------------------------------------------------                  

                                                                      Additional
                                   Number of                           paid-in           Retained
                                    shares            Amount            capital          earnings           Total   
                                   ---------          ------          ----------         --------           -----


<S>                            <C>                 <C>             <C>             <C>               <C>     
Balance at
    December 31, 1995                20,345,483          $203            $30,330         $155,133          $185,666

Exercise of stock options                47,426             1                889                                890

Net income                                                                                 37,390            37,390

Dividends declared                                                                        (18,746)          (18,746)
                                 ------------------  --------          ---------          --------          --------

Balance at
    December 29, 1996                20,392,909           204             31,219          173,777            205,200

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

Net income                                                                                 36,082             36,082

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

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

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

Net income                                                                                  34,334            34,334
                                -----------------    --------         -----------       ----------          --------



Balance at
    January 3, 1999                  20,531,643          $205            $34,587         $222,125          $256,917
                                     ==========          ====            =======         ========          ========


</TABLE>



                 See notes to consolidated financial statements


                                       F-6

<PAGE>

<TABLE>
<CAPTION>



                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                              (In thousands)      
                                                          -----------------------------------------------------                   
                                                                           For the Years Ended   
                                                          -----------------------------------------------------                    

                                                          January 3,          December 28,        December 29,
                                                              1999                1997               1996
                                                          ---------           -----------         ------------          

<S>                                                       <C>                    <C>                <C>    
Operating activities:
Net income                                                  $34,334                $36,082               $37,390
Adjustments to reconcile net
   income to net cash provided
    by operating activities:
     Cumulative effect of change in method
      of accounting for start-up costs                          822
     Depreciation and amortization                           22,429                 23,922                22,910
     Decrease in deferred income taxes                       (2,078)                (1,844)                 (442)
     Provision for unit closings                              2,515                  3,300
     Loss on sale of land to be sold                          1,075

Changes in operating assets and liabilities:
    (Increase) decrease  in receivables                      (1,152)                  (510)                  739
    Increase in inventories                                    (160)                  (121)                  (78)
    Decrease (increase) in prepaid
     expenses                                                   477                   (359)                  268
    Increase in other assets                                   (817)                (2,468)               (3,048)
    (Decrease) increase in accounts payable
     and accrued expenses                                    (2,610)                 3,534                (4,309)
    Increase (decrease) in income taxes
     payable                                                   (631)                  (510)                  579
                                                           ----------              ---------           ---------

Net cash provided by
   operating activities                                      54,204                 61,026                54,009
                                                           --------               --------               -------

</TABLE>


                                   (continued)


                                       F-7

<PAGE>

<TABLE>
<CAPTION>




                          SBARRO, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                                                                             (In thousands)     
                                                         -----------------------------------------------------                     
                                                                          For the Years Ended       
                                                         -----------------------------------------------------                

                                                         January 3,          December 28,         December 29,
                                                             1999                   1997              1996
                                                             ----                   ----              ----

<S>                                                       <C>                    <C>  
Investing activities:

Proceeds from maturities of marketable
   securities                                                 7,500                  2,500
Purchases of property and equipment                         (27,717)               (28,556)              (25,928)
Proceeds from disposition of property
   and equipment                                                 52                     34                   266
                                                         ----------             ----------             ---------

Net cash used in investing activities                       (20,165)               (26,022)              (25,662)
                                                            -------                 ------              --------

Financing activities:

Proceeds from exercise of stock
   options                                                    2,144                  1,225                   890
Cash dividends paid                                          (5,521)               (21,237)              (17,920)
                                                            --------                 ------             --------

Net cash used in
   financing activities                                      (3,377)               (20,012)              (17,030)
                                                           ---------              -- ------             --------

Increase in cash and cash
   equivalents                                               30,662                 14,992                11,317
Cash and cash equivalents at
   beginning of year                                        119,810                104,818                93,501
                                                          ---------              ---------             ---------

Cash and cash equivalents at end
   of year                                                 $150,472               $119,810              $104,818
                                                           ========               ========              ========
</TABLE>


                 See notes to consolidated financial statements

                                       F-8

<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. and its wholly-owned  subsidiaries  (together,  the "Company") and
         the  accounts of its joint  ventures.  All  intercompany  accounts  and
         transactions have been eliminated.

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

         Cash equivalents:

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

         Marketable securities:

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

         Inventories:

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

         Property and equipment and depreciation:

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


                                       F-9

<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.       Summary of significant accounting policies (continued):

         Deferred charges:

         The Company  accounts for  pre-opening  and similar costs in accordance
         with  Statement  of  Position  (SOP) 98-5 of the  Accounting  Standards
         Executive  Committee  of the American  Institute  of  Certified  Public
         Accountants  which requires  companies to write off all such costs, net
         of tax benefit,  as a "cumulative  effect of accounting  change" and to
         expense all such costs as incurred in the future.  In  accordance  with
         its early application provisions, the Company implemented the SOP as of
         the beginning of its 1998 fiscal year.  Application of the SOP resulted
         in a charge of $1,226,000  ($822,000 or $.04 basic and diluted earnings
         per share after tax).

         Comprehensive income:

         In the  first  quarter  of  1998,  the  Company  adopted  Statement  of
         Financial Accounting  Standards ("SFAS") 130, "Reporting  Comprehensive
         Income", which establishes new rules for the reporting of comprehensive
         income and its components. The adoption of this statement had no impact
         on the Company's net income or shareholders' equity. For the 1998, 1997
         and 1996 fiscal years,  the Company's  operations  did not give rise to
         items  includible  in  comprehensive  income  which  were  not  already
         included in net income.  Therefore,  the Company's comprehensive income
         is the same as its net income for all periods presented.

         Franchise related income:

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

         Stock based compensation plans:

         In accordance with Accounting  Principles Board Opinion ("APB") No. 25,
         "Accounting    for   Stock   Issued   to   Employees,"    and   related
         interpretations, compensation cost for stock options is measured as the
         excess,  if any, of the quoted market price of the  Company's  stock at
         the date of grant over the amount an  employee  must pay to acquire the
         stock. (See Note 9).

         Accounting period:

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

                                      F-10

<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.       Summary of significant accounting policies (continued):


         Per share data:

         The provisions of SFAS No. 128,  "Earnings Per Share" became  effective
         for the Company's  quarter and year ended  December 28, 1997.  SFAS No.
         128 requires the  presentation  of both basic and diluted  earnings per
         share on the  face of the  income  statement.  SFAS  No.  128  replaced
         primary  and fully  diluted  earnings  per share with basic and diluted
         earnings  per share,  respectively.  Earnings  per share is  calculated
         using the weighted average number of shares of common stock outstanding
         for the period,  with basic earnings per share  excluding,  and diluted
         earnings per share including,  potentially dilutive securities, such as
         stock  options that could result in the issuance of common  stock.  The
         number of shares of common stock subject to stock  options  included in
         diluted  earnings  per share  were  66,477 in 1998,  77,625 in 1997 and
         35,492 in 1996.

         Long-lived Assets:

         SFAS No. 121  "Accounting  for the Impairment of Long-Lived  Assets and
         for  Long-Lived  Assets to Be Disposed  Of"  requires  that  long-lived
         assets,  certain identifiable  intangibles and goodwill be reviewed for
         impairment  whenever events or changes in  circumstances  indicate that
         the carrying  amount of those assets may not be  recoverable.  SFAS No.
         121  did  not  have a  material  effect  on the  Company's  results  of
         operations or financial position in 1998, 1997 or 1996.

         Supplemental disclosures of cash flow information:


                                         (In Thousands)
                      -------------------------------------------------
                                    For The Years Ended
                      -------------------------------------------------

                      January 3,      December 28,        December 29,
                          1999            1997                1996
                      ---------       -----------         -----------
Cash paid for:
     Income taxes       $24,235         $24,297             $23,143
                        =======         =======             =======


                                      F-11

<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.       Description of business:

         The Company and its  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 United  States and  overseas,  principally  in shopping
         malls and other high traffic locations.

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


                            January 3,    December 28,    December 29,
                               1999           1997            1996
                            ---------     -----------     -----------

Company-owned                  630             623            597
Franchised                     268             239            219
                               ---             ---            ---
                               898             862            816
                               ===             ===            ===


3.       Property and equipment:

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

Leasehold improvements                    $191,192        $168,581
Furniture, fixtures and equipment          107,891          97,688
Construction-in-progress  (A)                2,662          20,096
                                             -----          ------
                                           301,745         286,365
Less accumulated depreciation and                                
amortization                               163,619         149,567
                                           -------         -------

                                          $138,126        $136,798
                                          ========        ========

         (A) During  1998 the  Company  recorded  a charge of $1,075  before tax
         ($667 or $.03 basic and diluted  earnings  per share after tax) for the
         difference  between the carrying  cost and proposed  selling price of a
         parcel of land being sold by the  Company.  As of  December  28,  1997,
         construction  in progress  includes  $15,651 related to the acquisition
         and improvement of the Company's new corporate headquarters.

4.       Accrued expenses:

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

Compensation                                   $4,109             $5,051
Payroll and sales taxes                         3,193              3,494
Rent                                            6,786              6,699
Provision for unit closings (Note 10)           2,867              4,351
Other                                           8,809              6,430
                                                -----              -----
                                              $25,764            $26,025
                                              =======            =======


                                      F-12

<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.       Income taxes:


                                                  (In Thousands)
                           ---------------------------------------------------
                                             For The Years Ended
                           ---------------------------------------------------

                                 January 3,       December 28,     December 29,
                                    1999              1997             1996
                                 ---------        -----------      -----------
Federal:
     Current                         $19,421           $19,868          $19,216
     Deferred                         (2,209)           (1,557)            (322)
                                      ------            ------             ----
                                      17,212            18,311           18,894
                                      ------            ------           ------
State and local:
     Current                           4,708             4,091            4,142
     Deferred                           (373)             (287)            (120)
                                        ----              ----             ----
                                       4,335             3,804            4,022
                                       -----             -----            -----
                                     $21,547           $22,115          $22,916
                                     =======           =======          =======

         Deferred income taxes are comprised of the following:


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

Depreciation and amortization              $15,805                   $15,782
Deferred charges                                 -                       475
Other                                          101                        60
                                               ---                        --
Gross deferred tax liabilities              15,906                    16,317
                                            ------                    ------

Accrued expenses                            (4,776)                   (2,431)
Deferred income                             (1,483)                   (1,949)
Other                                         (428)                     (136)
                                              ----                      ----
Gross deferred tax assets                   (6,687)                   (4,516)
                                            ------                    ------
                                            $9,219                   $11,801
                                            ======                   =======


                                      F-13

<PAGE>




                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.       Income taxes (continued):

         Actual tax expense  differs from  "expected"  tax expense  (computed by
         applying the Federal  corporate rate of 35% for the years ended January
         3, 1999, December 28, 1997, and December 29, 1996) as follows:

<TABLE>
<CAPTION>

                                                                  (In Thousands)
                                        ------------------------------------------------------------------
                                                               For The Years Ended
                                        ------------------------------------------------------------------

                                                 January 3,           December 28,          December 29,
                                                   1999                  1997                  1996
                                                 ---------            -----------           -----------

                                                                                 
<S>                                                 <C>                   <C>                   <C>    
Computed "expected" tax   
   expense                                             $19,382               $20,369               $21,108
Increase (reduction in income taxes resulting from:
State and local income taxes, net                                                                          
   of Federal income tax benefit                         2,725                 2,429                 2,614
Tax exempt interest income                                 (43)                  (59)                  (63)
Other, net                                                (517)                 (624)                 (743)
                                                          ----                  ----                  ----
                                                       $21,547               $22,115               $22,916
                                                       =======               =======               =======
</TABLE>

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


                                                  (In Thousands)
                                       -----------------------------------------
                                                 For The Years Ended
                                       -----------------------------------------

                                        January 3,   December 28,   December 29,
                                            1999          1997           1996
                                        ---------    -----------    -----------

Depreciation and amortization            $(1,891)      $(1,824)       $(1,397)
Accrued expenses                            (261)         (624)         1,791
Other                                       (430)          604           (836)
                                            ----           ---           ----
                                         $(2,582)      $(1,844)      $   (442)
                                         =======       =======        =======



                                      F-14

<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.       Proposed merger:

         On January 19, 1999,  the Company  entered into a merger  agreement for
         the merger of a company  owned by members  of the  Sbarro  family,  the
         Company's  principal  shareholders,  with and into the Company in which
         all  outstanding  Common  Stock  of the  Company  not  owned  by  those
         shareholders  are to be converted  into the right to receive  $28.85 in
         cash. The shares to be purchased  comprise  approximately  65.6% of the
         Company's  outstanding  shares  of  Common  Stock.  In  addition,   all
         outstanding stock options, including those held by those members of the
         Sbarro family,  will be terminated  (see Note 9). For each such option,
         the holder thereof will be paid the  difference  between $28.85 and the
         exercise  price per share,  multiplied by the total number of shares of
         Common Stock subject to such option.

         The merger agreement contains certain conditions to closing, including,
         among  other  things,  (i)  approval  by a  majority  of the votes cast
         (excluding votes cast by the Sbarro Family, abstentions and broker non-
         votes)  at a  meeting  of the  Company's  shareholders  to be called to
         consider  adoption of the merger  agreement,  (ii) receipt of financing
         for the transactions  contemplated by the merger  agreement,  (iii) the
         continued   suspension  of  dividends  by  the  Company  and  (iv)  the
         settlement of  shareholder  class action  lawsuits that have been filed
         relating to the merger.

         Following the Company's  announcement of the proposal by members of the
         Sbarro  family  for  the  merger,  seven  class  action  lawsuits  were
         instituted by  shareholders  against the Company,  those members of the
         Sbarro  Family who are  directors of the Company and all or some of the
         other  directors of the Company.  While the  complaints  in each of the
         lawsuits  vary,  in general,  they allege that the  directors  breached
         fiduciary duties,  that the then proposed price of $27.50 to be paid to
         shareholders other than the Sbarro Family was inadequate and that there
         were inadequate procedural protections for those shareholders. Although
         varying, the complaints seek, generally,  a declaration of a breach of,
         or an order  requiring  the  defendants to carry out,  their  fiduciary
         duties to the plaintiffs,  damages in unspecified amounts alleged to be
         caused to the plaintiffs,  other relief (including injunctive relief or
         rescission or rescissory  damages if the  transaction is  consummated),
         and costs and  disbursements,  including  a  reasonable  allowance  for
         counsel fees and expenses.

         On January 19, 1999,  counsel for all of the plaintiffs and counsel for
         all of  the  defendants  entered  into a  Memorandum  of  Understanding
         pursuant  to which an  agreement  in  principle  to  settle  all of the
         lawsuits was reached and the Sbarro Family agreed to an increase in the
         merger   consideration   to  $28.85  per  share.   The   Memorandum  of
         Understanding  states that  plaintiffs'  counsel intend to apply to the
         Court for an award of attorneys' fees and disbursements in an amount of
         no  more  than  $2.1  million  to be  paid by the  Company,  which  the
         defendants  have  agreed  not  to  oppose.   The  defendants  are  also
         responsible  for  providing  notice  of the  settlement  to  all  class
         members.  The settlement would result in the complete discharge and bar
         of all claims against,  past, present and future officers and directors
         of the Company and others  associated  with the merger with  respect to
         matters  and  issues  of any kind  that  have  been or could  have been
         asserted in these  lawsuits.  The settlement is subject to, among other
         things,  (i) completion of a formal  stipulation  of  settlement,  (ii)
         certification of the lawsuits as a class action covering all record and
         beneficial  owners of the Common Stock  during the period  beginning on
         November 25, 1998 through the effective date of the merger, (iii) court
         approval of the settlement and (iv) consummation of the merger. It is a
         condition to the Sbarro family's obligations under the merger agreement
         that holders of no more than  1,000,000  shares of Common Stock request
         exclusion from the settlement.

                                      F-15

<PAGE>




         In connection  with the  termination  of  negotiations  for the initial
         proposal of the Company's acquisition of all shares of common stock not
         owned by such members of the Sbarro family, in fiscal 1998, the Company
         recorded  a charge of  $986,000  ($611,000  or $.03  basic and  diluted
         earnings per share after tax).

7.       Commitments and contingencies:

         Commitments:

         The Company conducts all of its operations in leased  facilities.  Most
         of the  Company's  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, are as follows:

                                                   (In thousands)  
                                     -------------------------------------------
                                                  For the Years Ended           
                                     ------------------------------------------ 
                                     January 3,    December 28,    December 29,
                                         1999           1997           1996
                                         ----           ----            ----

         Minimum rentals             $43,387          $40,365        $36,383
         Common area charges          13,314          12,541          11,303
         Contingent rentals            3,011            2,910          2,819
                                   ---------        ---------      ---------
                                     $59,712          $55,816        $50,505
                                     =======          =======        =======

         Future minimum rental and other payments required under  non-cancelable
         operating  leases for Company-  operated  restaurants that were open on
         January 3, 1999 and the  existing  leased  administrative  and  support
         function office (Note 8) are as follows (in thousands):

                                                     Years ending:
                                                     ------------

                     January 2, 2000                     $65,075
                     December 31, 2000                    63,472
                     December 30, 2001                    60,409
                     December 29, 2002                    56,000
                     December 28, 2003                    51,180
                     Later years                         134,673
                                                         -------
                                                        $430,809
                                                        ========


                                      F-16

<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.       Commitments and contingencies  (continued):

         The Company is the principal  lessee under operating leases for certain
         franchised   restaurants   which  are  subleased  to  the   franchisee.
         Franchisees  pay rent and related  expenses  directly to the  landlord.
         Future minimum  rental  payments  required  under these  non-cancelable
         operating  leases  for  franchised  restaurants  that  were  open as of
         January 3, 1999 are as follows (in thousands):

                           Years ending:
                           ------------

                           January 2, 2000                     $1,352
                           December 31, 2000                    1,088
                           December 30, 2001                      954
                           December 29, 2002                      626
                           December 28, 2003                      475
                           Later years                            727
                                                            ---------

                                                               $5,222
                                                            ==========


         As of February 10, 1999,  future minimum rental payments required under
         non-cancelable  operating  leases for restaurants  which had not as yet
         opened as of January 3, 1999 are as follows (in thousands):

                           Years ending:
                           ------------

                           January 2, 2000                   $1,537
                           December 31, 2000                  2,023
                           December 30, 2001                  2,026
                           December 29, 2002                  1,931
                           December 28, 2003                  2,053
                           Later years                       10,923
                                                           --------

                                                            $20.493
                                                           ========

         The Company is a party to contracts aggregating $3,159,000 with respect
         to the construction of restaurants.  Payments of approximately $385,000
         have been made on those contracts as of January 3, 1999.

         One of the joint ventures in which the Company is a partner has entered
         into a contract to purchase the land on which a restaurant  is located,
         at the end of its  five  year  lease  on such  property  in  2002,  for
         $950,000.

         The Company is a guarantor of its pro rata interest (up to  $4,400,000)
         of a line of credit  granted to one of the joint  ventures in which the
         Company is a partner.


                                      F-17

<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         Contingencies:

         In  December  1998,  the Court  approved,  and Company  completed,  the
         settlement of an action entitled Kenneth Hoffman and Gloria Curtis,  on
         behalf of themselves and all others similarly situated v. Sbarro,  Inc.
         that was pending in the United States  District  Court for the Southern
         District  of  New  York.  The  plaintiffs,   former   restaurant  level
         management  employees,   alleged  that  the  Company  required  general
         managers and  co-managers to reimburse the Company for cash and certain
         other shortages  sustained by the Company and thereby lost their status
         as  managerial   employees   exempt  from  the  overtime   compensation
         provisions of the Fair Labor Standards Act. The settlement  resulted in
         a one-time  charge of $3,544,000  before tax or $2,197,000  ($.11 basic
         and diluted earnings per share after tax) in fiscal 1998.

8.       Transactions with related parties:

         In May 1986,  the Company  entered into a fifteen year  sublease with a
         partnership owned by certain shareholders of the Company in Commack for
         its present  administrative and support function offices.  For 1998 and
         1997 and for each of the remaining years of the lease, the rent expense
         is $337,000 per year.  In 1996,  the Company  incurred rent expense for
         such  building of  $298,000.  Management  believes  that such rents are
         comparable to the rents that would be charged by an unaffiliated  third
         party.

         A member of the Board of Directors  acts as a consultant to the Company
         for which he received  $140,400 in 1998,  $116,400 in 1997 and $106,100
         in 1996.

9.       Stock options:

         The Company's Board of Directors has adopted, and its shareholders have
         approved, a 1991 Stock Incentive Plan (the "1991 Plan"), which replaced
         the Company's 1985 Incentive Stock Option Plan, and a 1993 Non-Employee
         Director Stock Option Plan (the "1993 Plan").

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

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


                                      F-18

<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.       Stock options (continued):

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

                                                   1998                          1997                         1996
                                                   ----                          ----                         ----
                                                Weighted-              Weighted-                    Weighted-
                                                 Average                   Average                   Average
                                                Exercise                   Exercise                 Exercise
                                            Shares     Price         Shares      Price         Shares      Price
        
<S>                                      <C>            <C>          <C>         <C>         <C>           <C>   
         Options outstanding,
             beginning of period         1,638,339      $25.85       934,836     $25.57      717,712       $24.97
         Granted                             23,750     $24.22       777,750     $25.96      378,750       $25.55
         Exercised                         (84,989)     $25.23      (53,745)     $22.78      (47,426)      $18.24
         Canceled or expired               (16,668)     $25.15      (20,502)     $24.66     (114,200)      $24.84
                                        ----------------------    ---------------------     ---------------------
         Options outstanding,
             end of period                1,560,432     $25.87     1,638,339     $25.85      934,836       $25.57
         Options exercisable,
             end of period                  617,515     $25.99       573,880     $26.05      534,214       $25.89
</TABLE>

         Of the  options  outstanding  at January 3, 1999,  options to  purchase
         78,182  shares had  exercise  prices  ranging from $15.17 to $21.83 per
         share, with a weighted average exercise price of $21.36 per share and a
         weighted  average  remaining  contractual  life of 5.53 years, of which
         options to purchase  76,515  shares were  exercisable,  with a weighted
         average  exercise price of $21.36 per share.  The remaining  options to
         purchase  1,482,250  shares had exercise  prices ranging from $23.05 to
         $28.88 per share,  with a weighted average exercise price of $26.11 per
         share and a weighted average  remaining  contractual life of 6.8 years,
         of which options to purchase  541,000  shares are  exercisable,  with a
         weighted  average  exercise  price of $26.65 per  share.  At January 3,
         1999,  there were an aggregate of 2,054,730 shares available for option
         grants under the 1991 and 1993 Plans.

         The foregoing  table  includes  options  granted in 1997 under the 1991
         Plan to the  Company's  Chairman of the Board and President to purchase
         100,000   and   150,000   shares  at  $25.13   and  $28.88  per  share,
         respectively,  and to the  Company's  Vice  Chairman  of the  Board and
         Senior Executive Vice President to purchase 100,000 and 100,000 shares,
         respectively,  at $25.13  per  share;  options  granted  in 1996 to the
         Company's Chairman of the Board and President and Senior Executive Vice
         President  to purchase  100,000  and 50,000  shares,  respectively,  at
         $24.75 per share;  and  options  granted in 1993 under the 1991 Plan to
         the Company's Chairman of the Board and President, Vice Chairman of the
         Board and Senior Executive Vice President and one non-employee director
         to purchase 120,000, 90,000, 75,000 and 37,500 shares, respectively, at
         $27.09 per share.  Each such option was  granted at an  exercise  price
         equal to the fair market  value of the  Company's  common  stock on the
         date of grant and is  exercisable  for 10 years from the date of grant.
         Such options remain unexercised.

         In addition to the foregoing,  in 1990,  shareholder  approved  options
         were granted to the Company's Chairman of the Board and President, Vice
         Chairman of the Board and Senior  Executive  Vice President to purchase
         150,000, 75,000 and 75,000 shares,  respectively,  at $20.67 per share,
         the fair  market  value of the  Company's  common  stock on the date of
         grant,  for a period of 10 years from the date of grant.  Such  options
         remain unexercised.

         See Note 6 for the effect of the proposed acquisition of all shares not
         owned by the Sbarro family on the options  outstanding as of January 3,
         1999.

                                      F-19

<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



         The Company has adopted the pro forma disclosure provisions of SFAS No.
         123,  "Accounting  for  Stock-Based  Compensation".   Accordingly,   no
         compensation  cost has been recognized for the stock option plans.  Had
         compensation  cost for the Company's stock option plans been determined
         under SFAS No. 123,  the  Company's  net income and  earnings per share
         would have approximated the pro forma amounts below:

                                          (In thousands, except per share data)

         Net income:                             1998          1997        1996
                                                 ----          ----        ----
         As Reported                           34,334        36,082      37,390
                                               ======        ======      ======
         Pro Forma                             33.770        35,089      37,160
                                               ======        ======      ======

         Per share information:
         Net income per share (as reported):
         Basic                                  $1.67         $1.77       $1.84
                                                =====         =====       =====
         Diluted                                $1.67         $1.76       $1.83
                                                =====         =====       =====

         Net income per share (pro forma):
         Basic                                  $1.65         $1.72       $1.82
                                                =====         =====       =====
         Diluted                                $1.64         $1.71       $1.82
                                                =====         =====       =====

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

                                              1998            1997        1996
                                              ----            ----        ----
         Expected life (years)                 .5             1.5          4
         Interest rate                        5.15%           5.82%        6.53%
         Volatility                             31%             21%          28%
         Dividend yield                       0.00%           4.00%        3.50%
         Weighted average fair value
             of options granted              $2.38           $2.79        $5.75
                                             =====           =====        =====


10.      Provision for unit closings:

         A provision for restaurant  closings of $2,515,000  ($1,559,000 or $.08
         basic and  diluted  earnings  per share after tax) was  established  in
         fiscal 1998 relating to the closing of 20 restaurant locations.

         A  provision  for  restaurant  closings  in the  amount  of  $3,300,000
         ($2,046,000  or $.10 basic and  diluted  earnings  per share after tax)
         relating to the Company's  investment in one of its joint  ventures was
         established  in 1997 for the closing of certain of the joint  venture's
         units.

11.      Dividends:

         In 1997 and 1996, the Company declared quarterly  dividends of $.27 per
         share and $.23 per share, respectively, aggregating $1.08 per share and
         $.92 per share for the  respective  years.  Dividends  were  thereafter
         suspended pending  consideration by the Company of proposals by certain
         members  of the  Sbarro  family for the  Company's  acquisition  of all
         Common  Stock not owned by them and  consideration  of other  strategic
         alternatives.


                                      F-20

<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.      Quarterly financial information (unaudited):
<TABLE>
<CAPTION>

                                                                 (In thousands, except share data)                 
                                                  First             Second             Third         Fourth
                                                 Quarter            Quarter           Quarter      Quarter (b)
                                                 -------            -------           -------      ----------
         Fiscal year 1998
         ----------------                        
<S>                                             <C>                 <C>                <C>           <C>     
         Revenues                               $101,883            $78,844            $85,907       $108,598
         Gross profit (a)                         77,463             60,142             65,035         82,322
         Net income (b)                            7,138              5,107              7,081         15,008
                                              ==========           ========           ========         ======

         Per share information:
         Net income per share:
           Basic                                   $.35               $.25               $.34            $.73
                                                   ====               ====               ====            ====
           Diluted                                 $.35               $.25               $.34            $.73
                                                   ====               ====               ====            ====

         Shares used in computation of net income per share:

           Basic                             20,491,939         20,526,633          20,528,309      20,529,006
                                            -----------         ----------          ----------      ----------
           Diluted                           20,665,846         20,605,477          20,530,983      20,539,488
                                            -----------         ----------         -----------     -----------

         Fiscal year 1997
         Revenues                               $95,364            $75,301             $82,678         $96,092
         Gross profit (a)                        73,324             57,976              63,314          73,640
         Net income (c)                           7,885              6,733               9,206          12,258
                                               ========           ========            ========         =======

         Per share information:
         Net income per share:
           Basic                                   $.39               $.33               $.45             $.60
                                                   ====               ====               ====             ====
           Diluted (d)                             $.39               $.33               $.45             $.60
                                                   ====               ====               ====             ====

         Shares used in computation of net income per share:

           Basic                             20,401,538         20,428,711          20,440,596      20,444,678
                                             ----------         ----------          ----------      ----------
           Diluted                           20,454,534         20,599,676          20,526,757      20,529,233
                                             ----------         ----------          ----------      ----------
</TABLE>

         (a) Gross profit  represents  the  difference  between  restaurant
             sales and the cost of food and paper products.
         (b) See  Notes  1, 3, 6, 7 and 10 for  information  regarding  unusual
             charges.  
         (c) See Note 10.
         (d) The sum of the  quarters  does not  equal  the full  year per share
             amounts included in the accompanying statement of income due to the
             effect of the weighted average number of shares  outstanding during
             the fiscal year as compared to the quarters.


                                      F-21

<PAGE>




              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE




To the Board of Directors and Shareholders
  of Sbarro, Inc.:


We have audited, in accordance with generally accepted auditing  standards,  the
consolidated financial statements of Sbarro, Inc. and subsidiaries,  included in
this filing and have issued our report  thereon  dated  February 10,  1999.  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
February 10, 1999


                                       S-1

<PAGE>
<TABLE>
<CAPTION>



                                   SCHEDULE II
                          SBARRO, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

                                             FOR THE THREE YEARS ENDED

COLUMN A                             COLUMN B                 COLUMN C                COLUMN D           COLUMN E
--------                             --------               --------------           --------           --------
                                                              ADDITIONS   
                                                            ---------------   
                                      Balance            Charged      Charged to
                                        at                to           Other                            Balance at
                                     Beginning          Costs and     Accounts         Deductions       End of
Description                          of Period          Expenses      Describe         Describe         Period
-----------                          ---------          ----------    ----------       ----------       -----------
<S>                              <C>                  <C>           <C>             <C>               <C>
January 3, 1999:
Accumulated amortization
 of deferred charges (2)               $1,269                                            $(1,269) (1)

Accumulated amortization
 of Canadian development
 rights (3)                               481               $12                                                 493

Accumulated amortization
 of purchased leasehold
 rights (3)                               96                85                                                  181 
                                       ------             -----                           --------           ------
                                       $1,846              $97                            $(1,269)            $674 
                                       ======              ====                           ========            =====

December 28, 1997
Accumulated amortization
 of deferred charges                   $1,436            $1,495                          $(1,662) (2)        $1,269

Accumulated amortization
 of Canadian development
 rights (3)                               424                57                                                 481

Accumulated amortization
 of purchased leasehold
 rights (3)                               943               213                            (1,060) (2)           96
                                       ------           -------                          ---------         --------
                                       $2,803            $1,765                           $(2,722)           $1,846
                                       ======            ======                           ========           ======
December 29, 1996:
Accumulated amortization
 of deferred charges                   $1,573            $1,432                          $(1,569) (2)        $1,436

Accumulated amortization
 of Canadian development
 rights (3)                               368                56                                                 424

Accumulated amortization
 of purchased leasehold
 rights (3)                               764               179                                                 943
                                      -------           -------                          ---------          -------
                                       $2,705            $1,667                           $(1,569)           $2,803
                                       ======            ======                           ========           ======
</TABLE>

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

                                       S-2

<PAGE>





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

Exhibit Number                                       Description
--------------                                       ------------

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

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

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

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

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

         * 3.02            By-Laws of the Company,  as amended.  (Exhibit 4.3 to
                           the Company's  Quarterly  Report on Form 10-Q for the
                           quarter ended April 21, 1996, File No. 1-8881)

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

     +   *10.02(a)         1985   Incentive   Stock  Option  Plan,  as  amended.
                           (Exhibit 10.1 to Company's  Quarterly  Report on Form
                           10-Q for the quarter ended October 6, 1996,  File No.
                           33-4380)

     +   *10.02(b)         1991 Stock Incentive Plan, as amended.  (Exhibit 10.1
                           to the  Company's  Quarterly  Report on Form 10-Q for
                           the quarter ended April 20, 1997, File No. 1-8881)

     +   *10.02(c)         Form of Stock  Option  Agreement  dated May 30,  1990
                           between  the  Company  and  each of  Anthony  Sbarro,
                           Joseph  Sbarro  and  Mario  Sbarro,  together  with a
                           schedule,  pursuant to  Instruction  2 to Item 601 of
                           Regulation S-K,  identifying the details in which the
                           actual agreements differ from the exhibit

<PAGE>



                           filed  herewith.  (Exhibit  10.02(c) to the Company's
                           Annual  Report  on  Form  10-K  for  the  year  ended
                           December 30, 1990, File No. 1-8881)

     +   *10.02(d)         1993  Non-Employee  Director  Stock Option  Plan,  as
                           amended. (Exhibit 10.2 (d) to the Company's Quarterly
                           Report on Form 10-Q for the  quarter  ended April 20,
                           1997, File No. 1-8881)

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

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

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

         *10.05            Memorandum  of  Understanding  dated January 19, 1999
                           among  counsel to the  plaintiffs  and counsel to the
                           defendants  in  the  various  class  action  lawsuits
                           instituted  by certain  shareholders  of the Company.
                           (Exhibit 99.01 to the Company  Current Report on Form
                           8-K dated (date of earliest event  reported)  January
                           19, 1999, File No. 1-8881).

           21.01           List of subsidiaries.

           23.01           Consent of Arthur Andersen LLP.

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