SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended JANUARY 2, 2005.

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

Commission file number 333-90817

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

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


   401 BROADHOLLOW ROAD, MELVILLE, NEW YORK                         11747 - 4714
       (Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:               (631) 715-4100


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


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

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

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

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

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

         The number of shares of Common Stock of the  registrant  outstanding as
of March 31, 2005 was 7,064,328.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

--------------------------------------------------------------------------------
*This Form 10-K is voluntarily  submitted pursuant to a requirement contained in
the indenture governing Sbarro, Inc.'s Senior Notes due 2009.



<PAGE>

                                  SBARRO, INC.
                                  ------------

UNLESS THE CONTEXT  OTHERWISE  REQUIRES,  ALL  REFERENCES  TO "WE," "US," "OUR,"
"SBARRO" OR THE "COMPANY" INCLUDE SBARRO, INC. AND OUR SUBSIDIARIES.

                           FORWARD-LOOKING STATEMENTS

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

         Forward-looking statements are subject to a number of known and unknown
risks and  uncertainties  that could cause actual  results to differ  materially
from those projected,  expressed or implied in the  forward-looking  statements.
These risks and uncertainties, many of which are not within our control, include
but are not limited to:

     o    general economic,  inflation,  national security, weather and business
          conditions;
     o    the availability of suitable restaurant sites in appropriate  regional
          shopping malls and other locations on reasonable rental terms;
     o    changes in consumer tastes;
     o    changes in population and traffic patterns, including the effects that
          military  action  and  terrorism  or  other  events  may  have  on the
          willingness of consumers to frequent malls, airports or downtown areas
          which are the predominant areas in which our restaurants are located;
     o    our ability to continue to attract franchisees;
     o    the success of our present,  and any future,  joint ventures and other
          expansion opportunities;
     o    the availability of food (particularly cheese and tomatoes),  beverage
          and paper products at current prices;
     o    our ability to pass along cost increases to our customers;
     o    increases in the Federal minimum wage;
     o    the continuity of service of members of our senior management team;
     o    our ability to attract and retain  competent  restaurant and executive
          managerial personnel;
     o    competition;
     o    the level of, and our ability to comply with, government regulations;
     o    our ability to generate sufficient cash flow to make interest payments
          and principal under our senior notes and line of credit;
     o    our ability to comply with covenants  contained in the indenture under
          which  the  senior  notes  are  issued,  and  the  effects  which  the
          restrictions  imposed by those  covenants  may have on our  ability to
          operate our business; and
     o    our ability to repurchase  our senior notes to the extent  required in
          the  event we make  certain  asset  sales or  experience  a change  of
          control.



                                      -2-
<PAGE>


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

                                     PART I
                                     ------


ITEM 1.  BUSINESS
-------  --------

         Sbarro, Inc., a New York corporation,  was organized in 1977 and is the
successor to a number of family food and  restaurant  businesses  developed  and
operated by the Sbarro  family.  Today,  we are a leading  owner,  operator  and
franchisor  of  quick-service  restaurants,  serving a wide  variety  of Italian
specialty foods with 927 company-owned and franchised  restaurants  worldwide at
January 2, 2005. In addition,  since 1995, we have created, through subsidiaries
and joint  ventures,  other  restaurant  concepts for the purpose of  developing
growth opportunities in addition to the Sbarro restaurants. We presently operate
24 other concept restaurants through owned subsidiaries and joint ventures.

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

         On September 28, 1999,  members of the Sbarro family (who prior thereto
owned approximately 34.4% of our common stock) became the holders of 100% of our
issued and  outstanding  common stock as a result of a merger in which a company
owned by the members of the Sbarro  family  merged with and into us. The cost of
the  merger,  including  fees  and  expenses,  was  funded  through  the  use of
substantially  all of our cash then on hand and the placement of $255 million of
11% senior  notes due  September  15,  2009 sold at a price of 98.514% of par to
yield 11.25% per annum.  In April 2000, we exchanged  these senior notes for new
senior  notes  having the same  terms,  except  that the new  senior  notes were
registered  under the  Securities  Act of 1933.  Throughout  this  report we are
referring  to the new senior  notes as the "Senior  Notes." The old senior notes
and the new senior  notes were issued  under an indenture  dated  September  28,
1999, which, throughout this report, we are referring to as the "Indenture." Our
payment   obligations   under  the   senior   notes  are   jointly,   severally,
unconditionally  and  irrevocably  guaranteed  by all of our current  restricted
subsidiaries (as defined in the indenture) and are to be similarly guaranteed by
our future restricted subsidiaries.




                                      -3-
<PAGE>


         GENERAL
         -------

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

         Since our inception in 1959,  we have focused on high customer  traffic
venues  due to the large  number of  captive  customers  who base  their  eating
decision primarily on impulse and convenience. We therefore do not have to incur
the significant  advertising and  promotional  expenditures  that certain of our
competitors incur to attract customers to their destination  restaurants.  These
factors,  combined  with  adherence  to strict  cost  controls,  provide us with
reasonable  operating  margin  percentages.  Sbarro  restaurants  are  primarily
located in shopping malls,  downtown  locations and other high customer  traffic
venues,  including toll roads, airports,  sports arenas,  hospitals,  convention
centers,  university  campuses  and  casinos.  We  believe  that  there  may  be
opportunities to open similar Sbarro units in these and other venues.

         As of January 2, 2005,  we had 927 Sbarro  quick  service  restaurants,
consisting  of 511  company-owned  restaurants  and 416  franchised  restaurants
located in 46 States, the District of Columbia, the Commonwealth of Puerto Rico,
certain United States territories and 29 countries throughout the world.

         In addition,  since 1995, we have created and operated other casual and
fine dining  concepts  for the purpose of  developing  growth  opportunities  in
addition to our Sbarro restaurants. With our joint venture partners or in wholly
owned  subsidiaries,  we currently operate 24 casual and fine dining restaurants
featuring  varying  cuisines under other  restaurant  concepts,  including three
opened and one closed in the first quarter of 2005.
















                                      -4-
<PAGE>




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

The following table summarizes the number of Sbarro owned,  franchised and other
concept  restaurants  in  operation  during each of the years from 2000  through
2004:

<TABLE>
<CAPTION>
                                                                   2004       2003        2002       2001       2000
                                                                   ----       ----        ----       ----       ----

Company owned Sbarro restaurants (1):
<S>                                                                 <C>        <C>        <C>         <C>        <C>
   Open at beginning of period                                      533        563        607         641        643
   Opened during the period                                           2          4         13           9         13
   (Sold to) acquired from franchisees
   during period                                                     (3)       (12)        (6)          -          1
   Closed during period                                             (21)       (22)       (51)        (43)       (16)
                                                                    ----       ----       ----        ----       ----
   Open at end of period                                            511        533        563         607        641

Franchised Sbarro restaurants:
   Open at beginning of  period                                     364        349        322         303        286
   Opened during the period                                          63         41         43          42         36
   Acquired from (sold to) Sbarro
   during period                                                      3         12          6           -         (1)
   Closed or terminated during period                               (14)       (38)       (22)        (23)       (18)
                                                                    ----       ----       ----        ----       ----
   Open at end of period                                            416        364        349         322        303

Other concepts (1):
   Open at beginning of period                                       27         27         31          27         25
   Opened during period                                               0          3          2           4          2
   Closed during period                                              (5)        (3)        (6)          0          0
                                                                    ----       ----       ----        ----       ----
     Open at end of period                                           22         27         27          31         27


All restaurants (1):
   Open at beginning of  period                                     924        939        960         971        954
   Opened during the period                                          65         48         58          55         51
   Closed or terminated during period                               (40)       (63)       (79)        (66)       (34)
                                                                    ----       ----       ----        ----       ----
   Open at end of period of                                         949        924        939         960        971

</TABLE>

(1)      The  table  above  reflects  a  reclassification  of our  Umberto  mall
         restaurants  from,  other concepts to Company owned Sbarro  restaurants
         for each of the years presented.






                                      -5-
<PAGE>



         QUICK SERVICE RESTAURANTS
         -------------------------

         Our Quick Service  Restaurants  ("QSR"),  which operate under the names
"Sbarro",  "Sbarro The Italian  Eatery," "Cafe Sbarro",  "Umberto's",  "Tony and
Bruno's" and "La Cuccina",  are family oriented  restaurants  offering cafeteria
and buffet style quick service  designed to minimize  customer  waiting time and
facilitate  table  turnover.  The  decor  of a  QSR  restaurant  incorporates  a
contemporary motif that blends with the characteristics of the surrounding area.

         As of January  2, 2005,  there  were 96  company  owned  "in-line"  QSR
restaurants  and 415 company  owned "food court" QSR  restaurants.  In addition,
franchisees  operated  416 QSR  restaurants.  "In-line"  restaurants,  which are
self-contained restaurants,  usually occupy between 1,500 and 3,000 square feet,
and seat  approximately 60 to 120 people and employ 10 to 40 persons,  including
part-time personnel.  "Food court" restaurants are primarily located in areas of
shopping  malls  designated  exclusively  for  restaurant use and share a common
dining area provided by the mall. These restaurants generally occupy between 500
and 1,000 square  feet,  contain  only  kitchen and service  areas,  have a more
limited menu and employ 6 to 30 persons, including part-time personnel.

         QSR  restaurants  are generally  open seven days a week serving  lunch,
dinner and, in a limited number of locations,  breakfast,  with hours conforming
to those of the major department  stores or other large retailers in the mall or
trade area in which they are located.  Typically,  mall  restaurants are open to
serve customers 10 to 12 hours a day,  except on Sunday,  when mall hours may be
more limited. For company owned QSR restaurants open a full year, average annual
sales in 2004  were  approximately  $840,000  for an  "in-line"  restaurant  and
$562,000  for a "food  court"  restaurant.  Our  business is subject to seasonal
fluctuations,  and the  effects  of  weather,  economic  conditions,  inflation,
national security and business conditions. Sales have been highest in our fourth
quarter due primarily to increased  volume in shopping  malls during the holiday
shopping  season but fluctuate due to the length of the holiday  shopping period
between  Thanksgiving  and New  Year's  Day,  the  number of weeks in our fourth
quarter and weather conditions.

         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.  A
limited number of restaurants  serve  breakfast.  In addition to soft drinks,  a
limited number of the restaurants serve beer and wine.

         All  of our  entrees  are  prepared  fresh  daily  in  each  restaurant
according  to special  recipes  developed  by us. We place  emphasis  on serving
generous  portions  of  quality  Italian  food  at  attractive  prices.   Entree
selections,  excluding  pizza,  generally range in price from $2.79 to $7.99. We
believe  that pizza,  which is sold  predominantly  by the slice,  accounts  for
approximately 50% of QSR restaurant sales.

         Substantially  all of  the  food  ingredients,  beverages  and  related
restaurant  supplies used by our QSR  restaurants  are purchased from a national
independent   wholesale  food  distributor   which  is  required  to  adhere  to
established   product   specifications   for  all  food  products  sold  to  our
restaurants.  Breads,  pastries,  produce, fresh dairy and certain meat products
are purchased  locally for each restaurant.  Soft drink mixes are purchased from
major  beverage  producers  under  national  contracts  and  distributed  by our
national independent  distributor.  Our current contractual  arrangement,  which
expires  in  January  2008,  requires  us to  purchase  95% of  all of our  food
ingredients  that are not  purchased  locally  and related  restaurant  supplies
through the  distributor.  The majority of the products used in our  restaurants
are proprietary and we are involved in negotiating their cost to the



                                      -6-
<PAGE>

wholesaler.  We believe that there are other  distributors  who would be able to
service  our needs  and that  satisfactory  alternative  sources  of supply  are
generally available for all items regularly used in our QSR restaurants.

         RESTAURANT MANAGEMENT
         ---------------------

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

         We  employ  31  Directors  of  Operations,  each of  whom is  typically
responsible  for the  operations  of 13 to 18  company  owned  QSR  restaurants.
Directors  of  Operations  recruit and  supervise  the  managerial  staff of all
company owned QSR  restaurants  and report to one of the five Vice Presidents of
Operations.  The Vice Presidents of Operations  coordinate the activities of the
Directors of Operations and report to our President and Chief Executive Officer.

         FRANCHISE DEVELOPMENT
         ---------------------

         Growth in franchise  operations  occurs  through the opening of new QSR
restaurants  by new and  existing  franchisees.  We rely  principally  upon  our
reputation,  the  strength of our existing  restaurants,  and  participation  in
national franchise conventions to attract new franchisees.

         As of  January  2,  2005,  we had  416  franchised  Sbarro  restaurants
operated  by 106  franchisees  in 38 states of the United  States as well as its
territories  and  in  29  countries  throughout  the  world.  We  are  presently
considering additional worldwide franchise opportunities.  In certain instances,
we have established franchise locations under territorial agreements in which we
have  granted,  for  specified  time  periods,  exclusive  rights to enter  into
franchise agreements for restaurant units in certain geographic areas (primarily
foreign countries).

         In order to obtain a  franchise,  we  generally  require  payment of an
initial fee and continuing  royalties at rates of 3.5% to 10% of gross revenues.
We require the franchise  agreements  to end at the same time as the  underlying
lease,  generally ten years, including a renewal period of the underlying lease,
if  applicable.  Since  1990,  the  renewal  option  has also  been  subject  to
conditions,  including  a remodel or image  enhancement  requirement.  Franchise
agreements  granted under territorial  agreements and those for  non-traditional
sites are at negotiated fees,  royalty rates and terms and conditions other than
those contained in our basic franchise agreement.  The franchise and territorial
agreements  provide us with the right to terminate a franchisee for a variety of
reasons,  including insolvency or bankruptcy,  failure to operate its restaurant
according to Sbarro standards,  understatement of gross receipts, failure to pay
fees, or material misrepresentation on a franchise application.

         We presently  employ 12 management  level employees who are responsible
for overseeing the operations of franchise units and for developing new units.



                                      -7-
<PAGE>

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

         Since 1995, we have developed and established  new restaurant  concepts
to provide  growth  opportunities  that leverage our  restaurant  management and
financial  expertise.  These concepts are operated either by us alone or through
joint ventures with  restauranteurs  experienced in the particular food area. We
participate with our partners in overseeing the operations of each venture.  Our
joint ventures and other wholly-owned concepts presently operate 24 restaurants.
As of January 2, 2005, we are including  our Umberto mall  restaurants  that had
previously  been  included in our "Other  concepts"  with our Company  owned QSR
restaurants.

         The following is a summary of our other concepts:

     o    In early 2005, we opened a casual dining  restaurant  serving  Italian
          food under the name  "Carmela's  of Brooklyn" in Orlando,  Florida The
          restaurant  provides  both take out and table  service,  and generally
          caters to families.  In connection with this concept we entered into a
          Joint Venture Development  Agreement for the Orlando market. The joint
          venture  partner  will  be  required  to  contribute  one  half of the
          estimated  development cost and will share in one half of the profits,
          as defined,  of each location in which it decides to  participate.  We
          plan to open five additional restaurants in 2005.

     o    We operate  eight  casual  dining  restaurants  serving  Italian  food
          principally  under the name "Mama Sbarro" in New York. The restaurants
          provide  both  take-out and table  service,  and  generally  caters to
          families.  We did not open any Mama Sbarro locations in 2004 nor do we
          plan to open any in 2005.

     o    We have a 40% interest in a joint venture that presently  operates ten
          casual dining restaurants,  including one opened in January 2005, with
          a Rocky Mountain steakhouse motif under the name "Boulder Creek Steaks
          & Saloon" in New York.  This joint  venture also  operates  three fine
          dining steak  restaurants,  two of which are  operated  under the name
          "Rothmann's  Steak  House"  and one which is  operated  under the name
          "Burton & Doyle." During 2004, a Boulder Creek location was closed and
          reopened  in January  2005 as a  mid-scale  steakhouse  under the name
          "Sagamore."  We are  planning  to open one fine dining  restaurant  in
          2005.

     o    In January 2005, we sold,  to a related  party,  our 70% interest in a
          joint  venture that,  operated one  moderately  priced,  table service
          restaurant  featuring  an  Italian  Mediterranean  menu under the name
          "Salute"  in New York City.  (See Item 13 "Certain  Relationships  and
          Related Transactions.")

     o    We have a 50%  interest in a joint  venture  which  operates two quick
          service  Mexican  style  restaurants  in strip  centers under the name
          "Baja Grill."

         All  of  our  other  concept   locations   presently   operate  through
unrestricted  subsidiaries  which do not guarantee our senior notes. As such, we
have  certain  restrictions  as to the  financing  we can  provide  to these new
concepts and these entities are not subject to the restrictions contained in the
indenture under which our senior notes are issued.  Ventures which are less than
50% owned and those owned at 50% for which we do not have operating  control and
where we are not considered the primary  beneficiary are accounted for under the
equity method of accounting.



                                      -8-
<PAGE>

         As of  January  2,  2005,  we  had  an  aggregate  investment,  net  of
write-downs,  in these ventures of approximately $4.6 million. The amount of our
investment  does  not  include  our  share of  guarantees  of  indebtedness  and
reimbursement  obligations  with  respect to letters of credit in the  aggregate
amount of  approximately  $7.4 million and  guarantees  of certain real property
lease  obligations of these  subsidiaries  and other concepts in the approximate
amount of $1.8 million.

         All  concepts  which  are  greater  than  50%  owned  or  where  we are
considered the primary beneficiary are consolidated in our financial statements.

         EMPLOYEES
         ---------

         As of  January  2,  2005,  we  employed  approximately  6,500  persons,
excluding  employees of our other  concepts,  of whom  approximately  3,970 were
full-time  field and restaurant  personnel,  approximately  2,400 were part-time
restaurant personnel and 130 were corporate  administrative  personnel.  None of
our employees are covered by collective  bargaining  agreements.  We believe our
employee  relations  are  satisfactory.   In  the  first  quarter  of  2004,  we
implemented a reduction in work force that reduced our corporate  administrative
head count by approximately 35 persons and recorded  severance and other related
costs of approximately $0.7 million.

         COMPETITION
         -----------

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

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

         TRADEMARKS
         ----------

         Our Sbarro restaurants  operate principally under the "Sbarro," "Sbarro
The Italian  Eatery",  "Cafe  Sbarro",  "Umberto's",  "Tony and Bruno's" and "La
Cuccina"  trademarks.   Our  other  concept  locations  operate  under  separate
trademarks,  including "Mama Sbarro" and "Boulder  Creek." In addition,  we have
trademarked  the font and style of "Carmela's of Brooklyn."  The  trademarks are
registered with the United States Patent and Trademark Office with no expiration
date but must be renewed  every ten years.  Such  registered  service  marks may
continually  be renewed for 10-year  periods.  We have also  registered or filed
applications  to register  "Sbarro"  and "Sbarro The Italian  Eatery" in several
other countries. We believe that these marks continue to be materially important
to our  business.  The joint  ventures to which we are a party have also applied
for United States trademarks covering trade names used by them.



                                      -9-
<PAGE>

         GOVERNMENTAL REGULATION
         -----------------------

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

         We are also subject to Federal Trade Commission ("FTC") regulations and
various  state laws  regulating  the offer and sale of  franchises.  The FTC and
various state laws require us to furnish to prospective  franchisees a franchise
offering circular containing prescribed information. We are currently registered
to offer and sell franchises,  or are exempt from registering,  in all states in
which we operate franchised restaurants that have registration requirements. The
states  in  which we are  registered,  and a number  of  states  in which we may
franchise,  require  registration of a franchise  offering  circular or a filing
with   state   authorities.   Substantive   state   laws   that   regulate   the
franchisor-franchisee  relationship  presently exist in a substantial  number of
states,  and bills  have been  introduced  in  Congress  from time to time which
provide for federal  regulation  of the  franchisor-franchisee  relationship  in
certain respects.  The state laws often limit,  among other things, the duration
and scope of  non-competition  provisions  and the  ability of a  franchisor  to
terminate or refuse to renew a franchise.

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

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



AVAILABLE INFORMATION:

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

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



                                      -10-
<PAGE>

         The address of our Internet site is http://www.sbarro.com. Our Internet
site does not  include  reports  we file with the SEC  because  our only  traded
security is our senior notes which are not  actively  traded.  However,  we will
provide to the public,  as soon as reasonably  practical after we electronically
file them with the SEC,  free of charge,  a  reasonable  number of copies of our
periodic reports filed with the SEC, upon written request to our Chief Financial
Officer at our corporate headquarters,  401 Broadhollow Road, Melville, New York
11747-4714.


ITEM 2.  PROPERTIES
-------  ----------

         All Sbarro  restaurants are typically leased under ten-year leases that
often  do not  include  an  option  to renew  the  lease.  We have  historically
generally been able to renew or extend leases on existing  sites.  As of January
2, 2005, we leased 532  restaurants,  of which 29 were  subleased to franchisees
under terms which cover all of our obligations  under the leases.  The remaining
franchisees  directly  lease their  restaurant  spaces.  Most of our  restaurant
leases provide for the payment of base rents plus real estate taxes,  utilities,
insurance,  common area charges and certain other expenses. Some leases provide,
either  exclusively  or in  combination  with base rent,  for  contingent  rents
generally ranging from 8% to 10% of net restaurant  sales,  usually in excess of
stipulated amounts.

Leases to which we were a party at January 2, 2005 have initial  terms  expiring
as follows (excludes unconsolidated joint ventures):

<TABLE>
<CAPTION>
YEARS INITIAL LEASE                                   NUMBER OF SBARRO-               NUMBER OF FRANCHISED
TERMS EXPIRE                                          OWNED RESTAURANTS                    RESTAURANTS
------------                                          -----------------                    -----------
<C>                                                             <C>                             <C>
2005........................................                    34 (1)                          4
2006........................................                    41                              4
2007 .......................................                    68                              6
2008........................................                    63                              2
2009........................................                    70                              3
Thereafter..................................                   230                             10
</TABLE>

(1)   Includes  13  restaurants   under   month-to-month   arrangements  and  16
      restaurants as to which we pay only  contingent rent based on the level of
      net  restaurant  sales,  the leases for which are generally for a one year
      period.

         We own a  four-story  office  building  in  Melville,  New York  having
approximately  100,000 square feet and a cafeteria style restaurant  operated by
us.  Approximately  73% of the rentable  square feet is currently under lease to
unaffiliated third parties. The remaining 27%, consisting primarily of one floor
of the building, is occupied by our Corporate and Principal Executive offices.

         We  occupied  a  two-story  20,000  square  foot  office  building  for
administrative support functions located in Commack, New York. We had leased the
building since May 1986 until April 2004 from a partnership owned by some of our
shareholders.  Our obligation for the remainder of the lease term was terminated
in April 2004 upon the sale of the building.

         In  addition,  our  other  concepts  own one  restaurant  and  lease 23
restaurants.


                                      -11-
<PAGE>

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

         In  December  1999,  fourteen  current and former  general  managers of
Sbarro  restaurants  in California  amended a complaint  against us filed in the
Superior Court of California for Orange County.  The complaint  alleges that the
plaintiffs were improperly  classified as exempt  employees under the California
wage and hour law. The plaintiffs are seeking actual damages,  punitive  damages
and  costs  of the  lawsuit,  including  reasonable  attorneys'  fees,  each  in
unspecified amounts. Plaintiffs filed a motion to certify the lawsuit as a class
action,  but the motion was  denied by the court.  The court  issued a ruling in
December 2003 which was unfavorable to us but did not set the amount of damages.
We are appealing the ruling due to errors that we believe were made by the trial
judge.

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

         In March 2002,  four former general  managers of Sbarro  restaurants in
California filed a complaint  against us in the Superior Court of California for
Los Angeles County.  The complaint  alleged that the plaintiffs were required to
perform labor  services  without proper premium  overtime  compensation  from at
least May 1999.  The  plaintiffs  sought actual  damages,  punitive  damages and
attorneys'  fees and costs,  each in unspecified  amounts.  The case was settled
March 22, 2005 for $48,000,  with our insurance  company  paying  $30,000 and us
paying $18,000.

         In August 2002, a subcontractor and the general contractor, pursuant to
a construction  contract  entered into to build the joint venture  location that
was closed  during  2002 and also the subject of the  lawsuit  discussed  below,
filed a complaint  against the limited  liability joint venture company alleging
that they were owed for  unpaid  billings.  We were a  defendant  in the suit by
reason of the fact that we  guaranteed  the bonds  under which  mechanics  liens
against the  plaintiffs  were bonded.  In late 2004,  we settled the lawsuit for
$500,000.  The  settlement  amount had been paid and  included in our  financial
statements.

         In May 2002, the landlord of the joint venture  described above filed a
complaint  against  Sbarro in the Supreme Court of the New York for  Westchester
County alleging that we were obligated to it,  pursuant to a Guaranty  Agreement
we executed,  for all rent during the remaining lease based on an alleged breach
of the lease by the tenant,  a subsidiary  of the Company.  We believed that our
guarantee  was limited in amount while the landlord  alleged that the  guarantee
covered all amounts that would become due during the remaining  lease term.  The
court issued a ruling in November  2003 which  limited our  liability,  which we
estimated  at  $500,000.   The  landlord  appealed  this  decision.   Given  the
uncertainty of the results of an appeal and liability we would have by reason of
a reversal,  we agreed to settle the matter for $800,000.  Settlement agreements
are currently being drafted.

         In November  2004, a contractor,  pursuant to a  construction  contract
entered into to build a QSR location,  instituted  an action for unpaid  amounts
under the  construction  contract.  We have


                                      -12-
<PAGE>

disputed certain change orders under the contract and seek to invoke the penalty
clause under the contract.  The action is pending in the Broward  County Circuit
Court, State of Florida.  We believe that our ultimate liability will not exceed
$50,000.

         In May  2004,  a suit  was  filed  by the  landlord  of one of our  QSR
locations as a result of premature  termination of the lease on that location by
one of our  subsidiaries.  The landlord has obtained a consent  judgment against
the subsidiary for approximately  $75,000. The landlord now seeks to enforce the
judgment  against the  subsidiary.  While we do not believe the  judgment can be
enforced  against us, we believe  that our  ultimate  liability  will not exceed
$75,000.

         In  March  2005,  we  settled  a case  relating  to  payments  due to a
contractor for construction done on one of our other concept restaurants.

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







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

         Not applicable.




                                      -13-
<PAGE>






                                     PART II
                                     -------


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

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

         No dividends were declared in 2004. During 2003, we declared  dividends
of $1,782,283 to our shareholders for tax distributions  related to 2002 taxable
earnings  of which $1.1  million  was paid in 2003 and $0.7  million was paid in
March 2004. Tax  distributions are determined under a formula contained in a tax
payment  agreement with our  shareholders  designed to enable them to pay income
taxes  imposed  upon them,  as a result of our  election  to be taxed  under the
provisions of Subchapter S of the Internal Revenue Code, on their pro-rata share
of  our  taxable  income  (See  Item  13,  "Certain  Relationships  and  Related
Transactions - Tax Payment Agreement".)

         The indenture  permits  redemption of the senior notes at our option at
varying  redemption  prices and requires us to offer to purchase senior notes in
the event of a Change of Control  and in  connection  with  certain  Asset Sales
(each as defined). The indenture contains various covenants,  including, but not
limited to, restrictions on the payment of dividends, stock repurchases, certain
investments and other  restricted  payments,  the incurrence of indebtedness and
liens on our assets,  affiliate transactions,  asset sales and mergers by us and
the guaranteeing subsidiaries.  We were in compliance with the various covenants
contained in the indenture as of January 2, 2005;  however, we are not presently
permitted  under  the  indenture  to pay  dividends  (other  than  distributions
pursuant to the tax payment  agreement) make stock  repurchases or, with certain
exceptions, incur indebtedness.




                                      -14-
<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA
-------  -----------------------

         The following  Selected  Financial  Data should be read in  conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations"  included  in Item 7 of this report and our  consolidated  financial
statements  and the related notes  included in Item 8 of this report.  Our 2004,
2003 and 2002 consolidated  financial  statements have been audited and reported
on by BDO Seidman,  LLP, an independent  registered  public accounting firm, and
our consolidated  financial  statements for years 2001 and 2000 were audited and
reported on by Arthur Andersen LLP, independent public accountants.

<TABLE>
<CAPTION>
                                                                                  FISCAL YEAR (1)
                                                                                  ---------------
                                                                              (DOLLARS IN THOUSANDS)
                                                            2004           2003          2002         2001         2000
                                                            ----           ----          ----         ----         ----

<S>                                                       <C>            <C>           <C>           <C>          <C>
  SYSTEM-WIDE SALES (UNAUDITED)(2)                        $584,723       $536,216      $550,279      $570,609     $569,260
                                                          ========       ========      ========      ========     ========

  INCOME STATEMENT DATA:
  Revenues:
     Restaurant sales (1)                                 $331,313       $314,708      $345,206      $372,673     $382,365
     Franchise related income                               12,093         10,868        10,070        10,286       11,231
     Real estate and other                                   5,488          6,748         5,104         5,756        5,812
                      --                                  --------       --------      --------      --------     --------
       Total revenues                                      348,894        332,324       360,380       388,715      399,408
                      --                                  --------       --------      --------      --------     --------

  Costs and expenses:
     Costs of food and paper products                       72,073         67,446        67,593        74,614       74,405
     Payroll and other employee benefits..                  90,857         89,614        96,288       103,828      101,553
     Other operating costs                                 114,571        110,453       114,892       116,581      114,122
     Depreciation and amortization (3)                      16,400         19,712        20,683        30,375       29,039
     General and administrative                             28,576         25,451        23,960        29,472       30,882
     Asset impairment, restaurant
       closings and loss on sale of other
       concept restaurant (4)                                2,202          6,073         9,196        18,224            -
                      --                                  --------       --------      --------      --------     --------
           Total costs and expenses                        324,679        318,749       332,612       373,094      350,001
                      --                                  --------       --------      --------      --------     --------
  Operating income                                          24,215         13,575        27,768        15,621       49,407
                      --                                  --------       --------      --------      --------     --------

  Other (expense) income:
      Interest expense                                     (30,694)       (31,039)      (30,959)      (30,950)     (30,243)
      Interest income                                          654            694           528           756          949
      Equity in net income of
         unconsolidated affiliates                             855            425           668           310          303

    Other income (5)                                         1,181              -         7,162             -            -
                      --                                  --------       --------      --------      --------     --------

    Net other expense                                      (28,004)       (29,920)      (22,601)      (29,884)     (28,991)
                      --                                  --------       --------      --------      --------     --------
    (Loss) income before minority interest (credit)         (3,789)       (16,345)        5,167       (14,263)      20,416
  Minority interest                                              -            (41)          (52)           (1)         (46)
                      --                                  --------       --------      --------      --------     --------
  (Loss) income before income taxes (credit)                (3,789)       (16,386)        5,115       (14,264)      20,370

  Income taxes (credit) (6)                                    534            844           334           325       (5,075)
                      --                                  --------       --------      --------      --------     --------

  Net (loss) income                                        $(4,323)      $(17,230)       $4,781      $(14,589)     $25,445
                                                          =========      =========     ========      =========     =======
</TABLE>




                                      -15-
<PAGE>

<TABLE>
<CAPTION>
                                                                                  FISCAL YEAR (1)
                                                                                  ---------------
                                                                              (DOLLARS IN THOUSANDS)
                                                            2004           2003          2002         2001         2000
                                                            ----           ----          ----         ----         ----


  OTHER FINANCIAL AND RESTAURANT DATA:
   Net cash provided by
<S>                                                        <C>            <C>          <C>           <C>          <C>
     operating activities (7)                              $15,816        $11,034      $32,453       $34,812      $48,329
   Net cash used in
     investing activities (7)                              $(8,906)       $(8,521)    $(10,988)     $(22,453)    $(31,158)
   Net cash used in
    financing activities (7)                                 $(340)       $(1,254)   $  (3,267)     $(17,726)   $  (8,606)
   EBITDA (8)                                              $42,651        $33,671      $56,229       $46,305      $78,703

   Capital expenditures                                     $8,906         $8,521      $10,988       $22,528      $31,193

   Number of restaurants at end of period:
     Company-owned                                             511            533          563           607          641
     Franchised                                                416            364          349           322          303
     Other concepts                                             22             27           27            31           27
                                                         ---------      ---------     --------     ---------   ----------
       Total number of restaurants                             949            924          939           960          971
                                                               ===            ===          ===           ===          ===


  BALANCE SHEET DATA (AT END OF PERIOD):
  Total assets                                            $384,613       $386,830     $404,291      $404,228     $428,020
  Working capital                                          $32,554        $28,352      $27,095        $4,614      $10,293
  Total long-term obligations                             $268,349       $268,152     $267,941      $267,718     $267,478
  Shareholders' equity (as restated) (9)                   $65,334        $69,657      $88,669       $87,013     $113,597

</TABLE>


(1)      Our fiscal year ends on the Sunday nearest  December 31. Our 2004 year,
         which  ended  January  2, 2005,  contained  53 weeks.  All other  years
         presented  contained  52 weeks.  The 53rd week of  operations  produced
         revenues of  approximately  $9 million and  approximate  income  before
         taxes of $2.5 million.

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

<TABLE>
<CAPTION>
                                  2004           2003          2002           2001        2000
                                  ----           ----          ----           ----        ----
<S>                             <C>            <C>          <C>           <C>          <C>
  Restaurant sales              $331,313       $314,708     $345,206      $372,673     $382,365
  Franchise unit sales           253,410        221,508      205,073       197,936      186,895
                                 -------        -------      -------       -------      -------
  System-wide sales             $584,723       $536,216     $550,279      $570,609     $569,260

</TABLE>


                                      -16-
<PAGE>


(3)      Includes  amortization of the excess purchase price over the book value
         of assets  acquired  as a result of our going  private  transaction  on
         September  28, 1999 of $5.4  million and $5.0 million in 2001 and 2000,
         respectively.  In 2000,  we finalized  our  allocation  of the purchase
         price from the going private  transaction based on an evaluation of our
         net  assets  at  September   28,   1999,   resulting  in  lower  annual
         amortization  expense  than  originally  estimated.  In July 2001,  the
         Financial  Accounting  Standards  Board  issued  Statement of Financial
         Accounting  Standards  ("SFAS") No. 142, "Goodwill and Other Intangible
         Assets,"  which  became  effective  for us with the  beginning of 2002.
         Under SFAS No. 142,  goodwill  and  intangible  assets with  indefinite
         lives are no longer amortized but are reviewed  annually for impairment
         (or more frequently if impairment  indicators arise).  Accordingly,  we
         incurred  no  amortization  of goodwill  or of  intangible  assets with
         indefinite lives for years after 2001. Separable intangible assets that
         are not deemed to have  indefinite  lives continue to be amortized over
         their useful lives. Our goodwill and intangible  assets with indefinite
         lives,   which   aggregated   $205.1   million,   net  of   accumulated
         amortization,  at January 2, 2005, are tested  annually for impairment.
         Our testing for  impairment  concluded  that there was no impairment of
         our goodwill or intangible assets for any periods presented.



(4)      Asset impairment, restaurant closings and loss on sale of other concept
         restaurant consists of the following (in millions):

<TABLE>
<CAPTION>

                                          2004           2003            2002             2001            2000
                                          ----           ----            ----             ----            ----

<S>                                       <C>            <C>             <C>              <C>
         Impairment of assets             $1.1           $4.1            $0.4             $5.5             -
         Restaurant
            closings/remodels              0.8            2.0             8.8             12.7             -

         Loss on sale of other
            concept restaurant             0.3              -               -                -             -
                                          ----           ----            ----            -----          ----
         Total                            $2.2           $6.1            $9.2            $18.2             -
                                          ====           ====            ====            =====          ====
</TABLE>


(5)      Other  income in 2004  represents  the  difference  between the amounts
         allegedly owed to a former  distributor  and the negotiated  settlement
         with the  Bankruptcy  Trustee.  Other  income  in 2002  represents  the
         portion  of the  settlement  of our  insurance  claim,  net of  related
         expenses  attributable  to the  reimbursement  of lost income under our
         business interruption  insurance arising out of the events of September
         11, 2001.

(6)      A credit of $5.6  million was  recorded in 2000 to  write-off  deferred
         income  taxes as a result of electing to be taxed under the  provisions
         of Subchapter S of the Internal  Revenue Code and, where applicable and
         permitted,  under similar state and local income tax laws  beginning in
         2000.

(7)      For a more detailed presentation of our cash flow data, see our audited
         consolidated  financial statements and related notes included in Item 8
         of this report.  In 2000,  net cash  provided by



                                      -17-
<PAGE>

         operating  activities  before a change in deferred  taxes caused by the
         conversion  to  Subchapter  S status and a change in  accrued  interest
         payable was $53.3 million.

(8)      EBITDA represents  earnings  (losses) before interest income,  interest
         expense,  taxes,  depreciation and amortization and includes the effect
         of the insurance recovery described in note 4 above.  EBITDA should not
         be  considered in isolation  from, or as a substitute  for, net income,
         cash flow from operations or other cash flow statement data prepared in
         accordance with "GAAP" or as a measure of a company's  profitability or
         liquidity.  Rather, we believe that EBITDA provides relevant and useful
         information  for  analysts  and  investors  in our senior notes in that
         EBITDA is one of the factors in the  calculation of our compliance with
         the ratios in the indenture under which our senior notes are issued. We
         also  internally  use EBITDA to  determine  whether or not to  continue
         operating  restaurant  units since it provides us with a measurement of
         whether we are receiving an adequate cash return on our investment. Our
         calculation  of EBITDA  may not be  comparable  to a  similarly  titled
         measure  reported  by  other  companies,  since  all  companies  do not
         calculate  this  non-GAAP  measure  in  the  same  manner.  Our  EBITDA
         calculations  are not intended to represent  cash provided by (used in)
         operating  activities  since they do not include interest and taxes and
         changes in operating assets and  liabilities,  nor are they intended to
         represent  a net  increase  in  cash  since  they do not  include  cash
         provided by (used in) investing and financing activities. The following
         table  reconciles  EBITDA  to our net  income  (loss)  for  each of the
         periods which we believe is the most direct  comparable  GAAP financial
         measure to EBITDA, presented (in thousands):


<TABLE>
<CAPTION>
                                                      2004          2003          2002           2001          2000
                                                      ----          ----          ----           ----          ----
<S>                                                 <C>           <C>            <C>           <C>           <C>
            EBITDA                                  $42,651       $33,671        $56,229       $46,305       $78,703
            Interest expense                        (30,694)      (31,039)       (30,959)      (30,950)      (30,243)
            Interest income                             654           694            528           756           949
            Income (taxes) credit                      (534)         (844)          (334)         (325)        5,075
            Depreciation and

                amortization                        (16,400)      (19,712)       (20,683)      (30,375)      (29,039)
                                                    --------      --------       --------      --------      --------
            Net (loss) income                       $(4,323)     $(17,230)       $ 4,781      ($14,589)      $25,445
                                                  ==========   ===========        =======      =========      =======
</TABLE>

(9)      In 2004,  the Company noted an error in the minority  interest  account
         and accrued expenses and recorded $569,000 to correct this error, which
         related  to  the  recording  of  income  and  minority  interest  of  a
         consolidated  subsidiary  in years  prior to  December  31,  2000.  The
         correction  was  adjusted  to  opening  retained  earnings.  The  error
         resulted from the  misinterpretation of certain Partnership  Agreements
         concerning  the  sharing of the losses of two of the  locations  within
         this consolidated subsidiary.




                                      -18-
<PAGE>


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

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

RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

         We are a  leading  owner,  operator  and  franchisor  of Quick  Service
Restaurants  ("QSR")  restaurants,  serving a wide variety of Italian  specialty
foods with 927  locations  as of January 2, 2005.  We also  operate,  in certain
cases with joint venture partners, a number of other restaurant concepts with 22
locations as of January 2, 2005. In 2005,  we sold one other concept  restaurant
and we opened three in early 2005.

         While we have been faced with numerous pressures that have affected our
business,  including  the events of  September  11, 2001,  the general  economic
downturn  in recent  years in the United  States,  and the March  2003  military
action in Iraq, we saw increased  sales in all areas of our business as we moved
through  2004  and  into  2005.   Mall  traffic  has   increased  as  retailers,
particularly  high end mall based  retailers,  are serving  more  customers.  In
addition,  during 2004, we re-energized our quick-service  restaurant operations
while continuing to provide a quality product coupled with quality  service.  We
believe our strategy  resulted in the  significant  improvement of our operating
results,  including  higher sales and  earnings.  The increase in mall  traffic,
combined with selective price  increases,  improvements in operational  controls
and upgraded store  management at all levels  produced  increased sales in 2004.
While we have closed  approximately  130 company owned QSR locations since 2001,
net of those opened,  substantially  all those QSR restaurants  which remain are
generating  increased  levels of sales.  As a  result,  earnings  which had been
declining in prior years, improved  significantly in 2004 over those reported in
2003.  Our Franchise  Group has also seen  improvements  in revenues as economic
conditions have improved world wide. Approximately 113 new franchised locations,
net of those closed, have opened since 2001.

         We  developed a new concept,  Carmela's  of Brooklyn,  which opened its
first  restaurant  in early 2005.  Carmela's  of Brooklyn is expected to operate
outside of our traditional mall, hospitality and airport venues. We believe that
the continuing development of this and other concepts,  along with a combination
of our  re-energized QSR restaurants and continued growth in our franchise based
business, should lead to continued improvements in both revenue and profit.

         Since  September  2003, we have  restructured  our corporate  staff. In
September 2003, Michael O'Donnell was hired as our President and Chief Executive
Officer,  while Mario Sbarro remained as Chairman of the Board of Directors.  In
January 2004,  Peter  Beaudrault  joined us as our Corporate  Vice President and
President  of our Quick  Service  Division,  and  Anthony J.  Missano,  formerly
President  of our Quick  Service  Division,  became our  President  of  Business
Development, with responsibilities for real estate, construction, purchasing and
other business  development  matters.  In February 2004,  Anthony J. Puglisi was
hired as our Chief Financial  Officer, a position that had remained vacant since
June 2002. In March 2005,  Michael O'Donnell  resigned his position as



                                      -19-
<PAGE>

President  and Chief  Executive  Officer  and  Peter  Beaudrault  was  appointed
President and Chief Executive  Officer.  Mr.  O'Donnell  remains a member of our
Board of Directors.

SEASONALITY

         Our  business is subject to seasonal  fluctuations,  and the effects of
weather, national security, economic and business conditions. Earnings have been
highest in our fourth  quarter due  primarily  to  increased  volume in shopping
malls during the holiday shopping season.  Our annual earnings can fluctuate due
to the length of the holiday shopping period between Thanksgiving and New Year's
Day and the number of weeks in our fourth quarter.

GOODWILL AND OTHER INTANGIBLE ASSETS

          Due to the seasonality of our business, until we determine the results
of operations for our fourth quarter, we are not able to perform the annual test
for  impairment  on our goodwill and  intangible  assets with  indefinite  lives
acquired prior to July 1, 2001 as required by SFAS No. 142,  "Goodwill and Other
Intangible  Assets," and fully evaluate the  impairment of long-lived  assets as
required  by SFAS No.  144,  "Accounting  for the  Impairment  and  Disposal  of
Long-Lived  Assets." Any required  adjustments  are recorded at that time unless
impairment  factors are present earlier.  Our annual test for impairment charges
of our goodwill and intangible  assets with indefinite  lives at the end of 2004
and 2003  concluded  that  there  were no  impairment  changes  related to these
assets.  However, during 2004 and 2003, we recorded impairment of our long-lived
assets  of $1.1  million  and $4.1  million,  respectively,  as a result  of our
periodic evaluation of impairment  indicators of the property and equipment that
is part of our long lived assets.

ACCOUNTING PERIOD

         Our fiscal  year ends on the Sunday  nearest to  December  31. Our 2004
year contained 53 weeks. All other reported years contain 52 weeks. As a result,
our 2004 year benefited from one  additional  week of operations  over the other
years which generated  approximate revenues of $9 million and approximate income
before taxes of $2.5 million.

PRIMARY FACTORS CONSIDERED BY MANAGEMENT IN EVALUATING OPERATING PERFORMANCE

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

         o        comparable Sbarro owned QSR location sales;

         o        franchise   location  sales  and  their  relationship  to  our
                  franchise revenues;

         o        decisions  to  continue to operate or close  Sbarro  owned QSR
                  locations;

         o        percentage relationship of the cost of food and paper products
                  and payroll and other benefit costs to our restaurant sales;

         o        level of other  operating  expenses and their  relationship to
                  restaurant sales;

         o        relationship of general and administrative costs to revenues;

         o        provision for asset impairment and restaurant closings; and

         o        EBITDA.

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



                                      -20-
<PAGE>

RELEVANT FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                  Fiscal Year
                                                                                  -----------
                                                                    2004                2003                 2002
                                                                    ----                ----                 ----
                                                                                 (in millions)
<S>                                                                 <C>                   <C>                 <C>
Comparable QSR owned sales (1)                                      $309                $288                $298
Comparable QSR owned sales
     - percentage change vs. prior year (1)                          8.2%               -3.4%               -1.3%
Franchise location sales                                            $253                $222                $205
Franchise revenues                                                  $ 12                 $11                 $10
Cost of food and paper products as a
    percentage of restaurant sales                                  21.8%               21.4%               19.6%
Payroll and other benefits as a percentage
    of restaurant sales                                             27.4%               28.5%               27.9%
Other operating expenses as a percentage
    of restaurant sales                                             34.6%               35.1%               33.3%
General and administrative costs as a
    percentage of revenues                                           8.2%                7.7%                6.6%
Provision for asset impairment and
    restaurant closings, loss on sale of other
    concept restaurants                                             $2.2                $6.1                $9.2
EBITDA (2)                                                           $43                 $34                 $56

</TABLE>
(1)      Comparable  QSR owned sales dollars and annual  percentage  changes are
         based on locations that were in operation on a continuing  basis within
         each year presented. Comparable QSR sales in 2004 include the 53rd week
         of approximately  $8.5 million in sales. The 53rd week in 2004 accounts
         for approximately 3% of the 8.2% comparable increase.

(2)      See  "Selected   Financial  Data"  for   information   concerning  this
         "Non-GAAP"  financial measure and a reconciliation of EBITDA to our net
         income (loss), which we believe is the most direct comparable financial
         measure to EBITDA.



IMPACT OF INFLATION AND OTHER FACTORS

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




                                      -21-
<PAGE>


FISCAL 2004 COMPARED TO FISCAL 2003

         Sales by QSR restaurants  and  consolidated  other concept  restaurants
increased  5.3% to $331.3  million  for 2004 from $314.7  million for 2003.  The
increase in sales for 2004 reflects  $16.6 million (5.5%) of higher sales of QSR
restaurants. The sales of consolidated other concept units were essentially flat
in 2004 as compared  to 2003.  Increases  in  comparable  location  sales of $24
million (8.2%) (includes  approximately  $8.5 million of QSR revenue,  or a 3.0%
increase relating to the 53rd week) in 2004 from 2003 was the primary reason for
the improvement in QSR restaurant sales.  Comparable  restaurant sales represent
sales at locations that were open during the entire current and prior years.  We
believe that improved economic  conditions in the United States,  increased mall
traffic,  improvement  in  operational  controls  and  upgraded  field and store
management   combined  with  selective   price   increases   accounted  for  the
improvements.

         Franchise  related income increased 11.3% to $12.1 million in 2004 from
$10.9  million in 2003.  The increase was  attributed  to  additional  locations
opened during the year (net of closed  locations)  and an increase in comparable
sales of 6% for foreign locations and 2% for domestic locations.

         Real estate and other  decreased to $5.5 million in 2004 as compared to
$6.8 million in 2003.  The decrease was  primarily due to $.7 million of rebates
recorded in 2003 resulting from a change in estimate.

         Cost of food and paper  products as a percentage  of  restaurant  sales
increased  by .4% to 21.8%  for 2004  from  21.4%  for  2003.  The cost of sales
percentage  in 2004 was  negatively  impacted by the  increase in cheese  prices
throughout most of the year. Cheese prices in 2004 increased  substantially over
cheese prices in 2003 and were approximately  $0.34 per pound higher for a total
increase of  approximately  $2.9 million or 0.9% of restaurant  sales.  Improved
operational  controls  combined with selective  price  increases of our products
offset  the  effect  of the  increased  cheese  prices on our cost of sales as a
percentage of restaurant sales.

         Payroll and other  employee  benefits  increased $1.2 million but, as a
percentage  of  restaurant  sales,  decreased  to  27.4% in 2004  from  28.5% of
restaurant  sales in 2003. The dollar  increase was primarily due to payroll and
other employee benefits relating to the 53rd week in 2004 of approximately  $2.0
million  offset by better  management  of staff levels and less  restaurants  in
operation  than in 2003.  The decrease as a percentage of  restaurant  sales was
primarily a result of improved  sales  resulting from increased mall traffic and
selective price increases.

         Other  operating costs increased by $4.1 million but decreased to 34.6%
of  restaurant  sales in 2004 from 35.1% in 2003.  The  increase  was  primarily
related  to an  increase  in  restaurant  management  bonuses  of  $2.2  million
resulting from improved profits and an increase in occupancy and other costs due
to the 53rd week in 2004 of approximately $1.6 million.

         Depreciation  and  amortization  expense  decreased  by $3.3 million to
$16.4  million for 2004 from $19.7  million for 2003.  The  reduction was due to
fewer restaurants in operation in 2004, as well as the reduction in depreciation
resulting from the asset impairment charges taken in 2003 and disposal of assets
in 2004.

         General  and  administrative  expenses  were  $28.6  million  for 2004,
compared to $25.5 million for 2003. The principal  factors  contributing  to the
increase were increased bonuses of $1.5 million,  additional litigation reserves
of $1.2  million  and costs  associated  with  additions  and  changes to



                                      -22-
<PAGE>

senior management of $1.2 million. These increases were offset by a reduction in
work force  that  reduced  our 2004  costs by  approximately  $2.5  million.  In
connection  with  this  reduction  in work  force in  early  2004,  we  recorded
severance and other related costs of approximately $1.2 million in 2004.

         During 2004 and 2003,  we recorded a  provision  for asset  impairment,
restaurant  closing  and  remodel  charges  and  loss on sale of  other  concept
restaurant of $2.2 million and $6.1 million, respectively. In 2004, $1.1 million
related  to the  impairment  of  assets as  compared  to $4.1  million  in 2003.
Restaurant  closings and remodels accounted for $0.8 million and $2.0 million in
2004 and 2003,  respectively.  In 2004,  there was a charge of $0.3  million  to
record  the loss on sale of  another  concept  restaurant.  The charge for asset
impairment   resulted  from  our  evaluation  of  impairment   indicators  which
determined  that  the  carrying  amount  of  certain  store  assets  may  not be
recoverable from the estimated undiscounted future cash flows resulting from the
use of those assets.

         Interest  expense of  approximately  $31 million for both 2004 and 2003
relates to the 11%,  $255  million  senior  notes we issued to finance our going
private transaction ($28.1 million in both 2004 and 2003), the 8.4%, $16 million
mortgage loan on our corporate  headquarters ($1.3 million in both periods).  In
addition,  $1.5  million  in both  2004 and  2003  represents  non-cash  charges
primarily for the accretion of the original  issue  discount on our senior notes
and the  amortization of deferred  financing costs on the senior notes,  and the
mortgage loan.

         Interest income was approximately $0.7 million in both 2004 and 2003.

         Equity in the net income of  unconsolidated  affiliates  represents our
proportionate share of earnings and losses in those other concept restaurants in
which  we have a 50% or less  ownership  interest.  Our  equity  in the  overall
profits  of those  concepts  increased  by $0.4  million  in 2004 from 2003 as a
result of improvements in our steakhouse joint venture.

         In  2003,   we  replaced  our  then  national   independent   wholesale
distributor which had declared  bankruptcy.  In December 2004, we entered into a
settlement  agreement  with  the  bankruptcy  trustee  to  settle  $2.1  million
allegedly  due from us for $0.9  million.  The  difference  between  the alleged
amount due (which we had fully  reserved  for) and the  settlement  agreement of
approximately $1.2 million is reported in other income.

         We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where  applicable and permitted,  under similar state
and local income tax provisions  beginning January 3, 2000. Under the provisions
of  Subchapter  S,  substantially  all  taxes  on our  income  are  paid  by our
shareholders  rather than us. Our tax expense was $0.5  million and $0.8 million
for 2004  and  2003,  respectively.  The  expense  was for  taxes  owed by us to
jurisdictions  that do not recognize S  corporation  status or that tax entities
based on factors  other  than  income  and for taxes  withheld  at the source of
payment on foreign franchise income related payments.






                                      -23-
<PAGE>


FISCAL 2003 COMPARED TO FISCAL 2002

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

         During  2003,  we closed 30 more  units  than we  opened,  causing  the
remaining $12.3 million net reduction in QSR restaurant  sales. The units closed
were  generally  low volume  units  that did not have a  material  impact on our
results of operations.

         Of the decline in consolidated other concept unit sales,  approximately
$0.7 million  resulted from a 4.7%  decrease in  comparable  unit sales to $14.7
million.  We believe that the decline was  attributable to the same factors that
affected QSR restaurant sales. In addition,  during 2003 two consolidated  other
concept  units were closed,  resulting in a net sales  reduction of $7.5 million
for 2003. These units were either unprofitable or marginally profitable and were
part of ventures that we determined to discontinue.

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

         Approximately  $0.7  million of the  increase  in real estate and other
revenues  to $6.8  million  in 2003 from $5.1  million  in 2002 was for  rebates
recorded in 2003 resulting from a change in estimate. Increased usage of certain
other  products that were subject to rebates  accounted for the remainder of the
2003 increase from 2002 levels.

         Cost of food and paper  products as a percentage  of  restaurant  sales
increased to 21.4% for 2003 from 19.6% in 2002. The cost of sales  percentage in
2003 was  negatively  impacted by the  decrease  in  comparable  unit sales.  In
addition,  without  changing  the effect on the final  product,  we modified our
pizza and pasta  sauce  recipes to utilize  ready made sauce  instead of crushed
tomatoes as the base raw material to facilitate  the  consistency  in product in
each  restaurant  unit and reduce  labor  needed to  prepare  our  products.  We
estimate that this added  approximately 3/4 of 1 percentage point to our cost of
food.  The increase in cheese prices that began at the end of the second quarter
resulted in  significantly  higher cheese costs in the third and fourth quarters
of 2003 compared to the similar periods in 2002 causing a 7/10 of 1% increase in
cost of sales for 2003. In early 2003, we replaced our then national independent
wholesale  distributor,  which had declared  bankruptcy,  with another  national
independent wholesale distributor.



                                      -24-
<PAGE>

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

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

         Depreciation  and  amortization  expense  decreased  by $1.0 million to
$19.7 million for 2003 from $20.7  million in 2002.  The reduction was primarily
due to fewer restaurants in operation in 2003.

         General  and  administrative  expenses  were  $25.5  million  for 2003,
compared to $24.0 million in 2002.  The principal  factors  contributing  to the
increase in 2003 were $0.2 million of legal fees incurred in  connection  with a
lawsuit, a $0.2 million allowance for doubtful accounts receivable recorded with
respect to our  franchisee  in Spain that  declared  bankruptcy,  a $0.2 million
allowance against the collectibility of amounts owed by our Israeli  franchisee,
bonuses of $0.7 million that were granted to certain  executive  officers,  $0.5
million of costs and expenses  related to the hiring and  employment of our then
President and Chief Executive Officer and higher QSR field management travel and
related  costs,  offset by a reversal of  approximately  $0.3  million of excess
estimates  for the ultimate  cost of two  lawsuits  related to one of our former
joint venture locations.

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

         Interest  expense  of $31  million  for  both  2003  and  2002  related
primarily to the 11%,  $255 million  senior notes we issued to finance our going
private transaction ($28.1 million in both 2003 and 2002), the 8.4%, $16 million
mortgage  loan on our  corporate  headquarters  in 2001  ($1.3  million  in both
periods).  In addition,  $1.5 million in both 2003 and 2002 represented non-cash
charges for the accretion of the original issue discount on our senior notes and
the  amortization  of  deferred  financing  costs on the  senior  notes  and the
mortgage loan.

         Interest income was approximately $0.7 million in 2003 and $0.5 million
in 2002.  Higher  average cash available for investment in 2003 compared to 2002
was partially offset by lower prevailing interest rates in effect.

         Equity in the net income of  unconsolidated  affiliates  represents our
proportionate  share of earnings and losses in those other  concepts in which we
have a 50% or less  ownership  interest.  Our equity in the  overall  profits of
those  concepts  declined by $0.2 million in 2003 from 2002  resulting  from our
proportionate  share  ($0.5  million)  of the losses from the sale of a clam bar
joint venture



                                      -25-
<PAGE>

location and one of the locations of our steakhouse joint venture.  These losses
offset our equity in the  operating net income of  unconsolidated  affiliates of
approximately $0.9 million in 2003 compared to $0.7 million in 2002.

         We have elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code and, where  applicable and permitted,  under similar state
and local income tax provisions  beginning January 3, 2000. Under the provisions
of  Subchapter  S,  substantially  all  taxes  on our  income  are  paid  by our
shareholders  rather than us. Our tax expense was $0.8  million and $0.3 million
for 2003  and  2002,  respectively.  The  expense  was for  taxes  owed by us to
jurisdictions  that do not recognize S  corporation  status or that tax entities
based on factors  other  than  income  and for taxes  withheld  at the source of
payment on foreign franchise income related payments.

LIQUIDITY AND CAPITAL RESOURCES

CASH REQUIREMENTS

         Our   liquidity   requirements   relate   to  debt   service,   capital
expenditures,  working capital, investments in other ventures,  distributions to
shareholders  when  permitted  under the  indenture  for the senior notes and to
repay any borrowings we may make under our line of credit and general  corporate
purposes.  We incur annual cash interest  expense of  approximately  $29 million
under the senior notes and our mortgage loan and may incur  additional  interest
expense for  borrowings  under our line of credit.  We are not  required to make
principal payments, absent the occurrence of certain events, on our senior notes
until they  mature in  September  2009.  We believe  that  aggregate  restaurant
capital  expenditures  and our  investments  in joint  ventures  during the next
twelve months will be approximately $14 million.

         We expect our primary sources of liquidity to meet current requirements
will be cash flow from operations. Our $3.0 million line of credit which expires
in May 2005 is uncommitted.  Therefore, our lender could refuse to lend to us at
any time. We do not  presently  expect to borrow under our line of credit except
for  required  letters of credit.  The maximum  amount  available of our line of
credit, after given effect to outstanding letters of credit, was $1.2 million at
January 2, 2005. The Company is in  discussions  with several banks to extend or
replace the credit line.

















                                      -26-
<PAGE>

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

         Our  contractual  obligations  with  respect  to both our and the other
concepts  (both those in which we have a majority or minority  interest) were as
follows as of January 2, 2005:

<TABLE>
<CAPTION>
                                                                 PAYMENTS DUE BY PERIOD
                                                                 ----------------------
                                                        LESS THAN                                      MORE THAN 5
                                                        ---------                                      -----------
                                          TOTAL         1 YEAR        1 - 3 YEARS      4 - 5 YEARS     YEARS
                                          -----         ------        -----------      -----------     -----
                                                                             (IN MILLIONS)
Long-Term Debt Obligations:
<S>                                        <C>            <C>           <C>             <C>            <C>
     Senior notes (1)                      $255.0         $   -         $    -          $255.0         $     -
     Mortgage loan (2)                       15.3           0.2            0.4             0.5            14.2
     Credit line (3)                            -             -              -               -               -
Estimated interest expense                  162.0          29.3           87.9            30.5            14.3
      on long-term debt
Letters of credit (4)                         1.8           1.8              -               -               -
Guaranteed indebtedness (5)                   7.4           1.6            3.0             1.7             1.1
Capital lease obligations                       -             -              -               -               -
Operating leases (6)                        290.6          51.4           93.8            69.8            75.6
Purchase obligations (7)                      0.4           0.4              -               -               -
                                          -------        ------         ------         -------         -------

Total                                      $732.5         $84.7         $185.1          $357.5          $105.2
                                           ======        ======         ======         =======         =======
</TABLE>

(1)      There are no  principal  repayment  obligations  under the senior notes
         until  September  2009,  when  the  entire  principal  balance  becomes
         payable.
(2)      Payable in monthly  installments  of  principal  and  interest  of $0.1
         million.  Table includes only the principal  portion of the installment
         payments.
(3)      Our line of credit enables us to borrow,  subject to bank approval,  up
         to $3.0 million,  less outstanding  letters of credit through May 2005.
         There  are  currently  no  amounts  outstanding  under  the new line of
         credit.  The $1.8  million of letters of credit  reflected in the table
         above  reduces  our  availability  under  the  line of  credit  to $1.2
         million.
(4)      Represents our maximum  reimbursement  obligations to the issuer of the
         letters of credit in the event the letters of credit is drawn upon. The
         letters  of  credit  generally  are  issued  instead  of cash  security
         deposits under operating leases or to guarantee  construction costs for
         Sbarro or other concept locations.  Of the outstanding  standby letters
         of credit,  approximately $0.1 million are for locations that have been
         subleased to the buyers of two of our other concept locations.  All the
         standby  letters of credit  supporting  leases are  annually  renewable
         through the expiration of the related lease terms. If not renewed,  the
         beneficiary  may  draw  upon  the  letters  of  credit  as  long as the
         underlying obligation remains outstanding.
(5)      Represents our maximum reimbursement obligations relating to guarantees
         of  our  nonconsolidated   subsidiaries'  debt  and  letter  of  credit
         obligations.   Although   we  do  not  expect  to  have  to  pay  these
         obligations, the amount disclosed represents the full exposure.
(6)      Represents  base rent under operating  leases  including those which we
         either  sublease to, or guarantee the  obligations  of,  franchisees or
         certain of our other concepts.  Excludes real estate taxes,  utilities,
         insurance,  common area charges and other  expenses  that are not fixed
         and  contingent  rent  obligations  which  vary  with the  level of net
         restaurant  sales.  Also excludes leases that are under  month-to-month
         tenancies.


                                      -27-
<PAGE>

(7)      Represents  commitments  for capital  expenditures,  including  for the
         construction of restaurants for which we are  contractually  committed.
         Excludes potential purchases under our contractual arrangement with our
         national independent  wholesale  distributor that commenced in February
         2003 and that requires us, for the next four years,  subject to various
         causes  for  termination,   to  purchase  95%  of  most  all  our  food
         ingredients  and related  restaurant  supplies from them. The agreement
         does not, however, require us to purchase any specific fixed or minimum
         quantities.  Among the factors  that will  affect the dollar  amount of
         purchases we make under the agreement are:

          o    number of Sbarro locations open during the term of the contract;
          o    level of  sales  made at  Sbarro  locations;
          o    market price of mozzarella cheese and other commodity items;
          o    price  of  diesel  fuel;  and
          o    mix of products sold by Sbarro locations.

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

SOURCES AND USES OF CASH

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

                                                        Year Ended
                                             2004                       2003
                                             ----                       ----
                                                       (in millions)
Liquidity at year end
---------------------
Cash and cash equivalents                  $63.0                       $56.4
Working capital                            $32.6                       $28.4

Net cash flows for each year
----------------------------
Provided by operating activities           $15.8                       $11.0
Used in investing activities               $(8.9)                      $(8.5)
Used in financing activities               $(0.3)                      $(1.2)
                                           ------                      ------
Net increase in cash                        $6.6                        $1.3
                                            ====                        ====

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

         Net cash  provided by operating  activities  was $15.8  million in 2004
compared to $11.0 million in 2003 year. This $4.8 million increase was primarily
due to the  improvements  in operating  income of $10.6 million  offset by a non
cash decrease as compared to 2003 primarily of depreciation  and amortization of
$3.3 million and asset impairment, restaurant closings and loss on sale of other
concept restaurants of $3.9 million.

         Net cash used in investing  activities has historically  been primarily
for capital  expenditures.  Net cash used in investing  activities  increased to
$8.9  million  in 2004 from $8.5  million  in 2003.


                                      -28-
<PAGE>

Capital  expenditures  were utilized for QSR restaurant  openings and renovation
activity and for expenditures for consolidated other concept locations.

         Net cash used in financing activities was $0.3 million in 2004 compared
to $1.2 million in 2003.  Cash used in  financing  activities  in 2004  resulted
primarily from a tax distribution to shareholders offset by a reduction in loans
receivable  from  officers.  In March  2000,  we elected  to be taxed  under the
provisions of Subchapter S of the Internal  Revenue Code and,  where  applicable
and  permitted,  under similar state and local income tax  provisions  beginning
January 3, 2000. Under the provisions of Subchapter S,  substantially  all taxes
on our income are paid by our  shareholders.  The indenture for the senior notes
permits  us to  make  distributions  to  shareholders  under a  formula  that is
designed to approximate the income taxes,  including estimated taxes, that would
be payable by our shareholders if their only income were their pro-rata share of
our taxable income and such income were taxed at the highest  applicable federal
and New York State marginal income tax rates.

FINANCING

         In March 2004,  we obtained a line of credit  under which we  currently
have the ability,  subject to bank  approval,  to borrow up to $3 million,  less
outstanding  letters of credit.  At January 2, 2005,  there were $1.8 million of
letters of credit outstanding and, we had $1.2 million of undrawn  availability,
subject to bank approval,  under the line of credit. The line of credit contains
no financial  covenants or unused line fees.  Interest  applicable  to the loans
under  the  line of  credit  is at the  bank's  prime  rate  at the  time of any
borrowings.  The line expires in May 2005.  The Company is in  discussions  with
several banks to extend or replace the line of credit.

         As part of the going private  transaction,  we sold $255 million of 11%
senior notes (at a price of 98.514% of par to yield  11.25% per annum),  the net
proceeds of which,  together with  substantially  all of our then existing cash,
was used to finance the transaction.  The indenture under which our senior notes
are issued  does not require us to make,  except  under  certain  circumstances,
principal payments until September 2009, when the outstanding  principal balance
is due.  The  indenture  contains  various  covenants  that limit our ability to
borrow funds in addition to lending arrangements that existed at the date of the
going  private  transaction  and  replacements  of those  arrangements,  to make
"restricted  payments" including,  among other things,  dividend payments (other
than as  distributions  pursuant  to the  tax  payment  agreement),  and to make
investments  in,  among other  things,  unrestricted  subsidiaries.  Among other
covenants,  the indenture requires that, in order for us to borrow (except under
specifically  permitted  arrangements) our consolidated  interest ratio coverage
(as defined in the Indenture),  after giving pro forma effect to the interest on
the new  borrowings,  for the four most recently ended quarters must be at least
2.5 to 1. As of January 2, 2005,  that ratio was 1.36 to 1. As a result,  we are
not  presently  able to  borrow  funds  except  for the  specifically  permitted
indebtedness, such as up to $75.0 million of revolving credit loans. In order to
make restricted payments, that ratio must be at least 2.0 to 1, after giving pro
forma effect to the restricted  payment and, in any event,  is limited in dollar
amount pursuant to a formula contained in the indenture.  We refer to the amount
that is available for us to make dividends and other restricted  payments as the
"restricted  payment  availability."  We cannot make restricted  payments (other
than distributions  pursuant to the tax payment agreement) until we increase the
restricted payment  availability by approximately $18 million,  and then only to
the extent of any excess over that amount.

         In  March  2000,  one of our  restricted  subsidiaries  obtained  a $16
million,  8.4%  loan  due in  2010,  secured  by a  mortgage  on  our  corporate
headquarters  building. The loan is payable in monthly installments of principal
and interest of $0.1 million. The outstanding principal balance as of



                                      -29-
<PAGE>

January 2, 2005 was $15.3  million.  The  mortgage  agreement  contains  various
covenants,  including a requirement that the subsidiary maintain a minimum ratio
of EBITDA to annual and quarterly debt service of at least 1.2 to 1.0.

         As of January 2, 2005, we were in compliance  with all covenants in the
indenture for the senior notes and our mortgage. Our subsidiary is in compliance
with the covenants for its mortgage.



OFF-BALANCE SHEET ARRANGEMENTS

         We and our  unconsolidated  subsidiaries  have contractual  obligations
that  contingently  require payments under a line of credit,  standby letters of
credit and a mortgage  loan of our  steakhouse  joint venture and a bank loan of
our quick service Mexican-style restaurant joint venture. In addition, we have a
contractual  obligation  for the remainder of the original term of the operating
lease for the clam bar location  which was sold by the joint venture to which we
are a party.

         We are a party to various financial guarantees to a bank for two of our
other concepts. We are jointly liable, along with our joint venture partner, for
a loan  owed by one of the other  concepts.  Our  liabilities  under the line of
credit,  mortgage  loan and $0.1  million  of  letters  of credit to the  second
concept are limited to our minority ownership  percentage.  The remaining letter
of credit for the  second  concept of $0.6  million  is  jointly  and  severally
guaranteed  by each of the partners in the joint  venture.  To varying  degrees,
these   guarantees   involve  elements  of  performance  and  credit  risk.  The
possibility of our having to honor our  contingencies is largely  dependent upon
future  operations of the other concepts.  We record a liability if events occur
that  make  payment  under the  guarantees  probable.  Under FIN No.  45, we are
required to record a liability for the fair value of any  obligation  undertaken
or modified  after  December 31, 2002.  No such  obligation  was  undertaken  or
modified in 2004 or 2003.

         The details of our guarantees as of January 2, 2005 and their terms are
as follows:


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

              Line of credit                   $5.0 million       December 2010
              Loan                              1.4 million       November 2007
              Letters of credit                 0.7 million       December 2010
              Mortgage loan                     0.3 million       August 2019
---------
         (1) Represents our current maximum  exposure under existing  borrowings
and letters of credit.  Our exposure  under the line of credit could increase to
$6.3 million if the full amount of the line of credit is utilized.  In 2003, the
loan  expiration date for all new term loans was extended from December 31, 2008
to December 31, 2010.

         Our  steakhouse  joint  venture  entered  into  construction  contracts
aggregating  approximately  $4.3  million  for three  restaurants,  of which two
opened in early 2005.  Through  March 1, 2005,  payments of  approximately  $2.8
million  have  been  made  against  these  contracts.  The  construction  of the
restaurants is guaranteed by us under the terms of the leases for the locations.
In addition,  we also guarantee the rent through the first year of operations of
one restaurant location and the rent until another restaurant opens.



                                      -30-
<PAGE>

         Our obligation  under the bank loan to our quick service  Mexican-style
restaurant  joint venture is joint and several with our partner's  guarantee and
is therefore up to 100% of the outstanding amount of the loan. Our guarantee was
established  at the inception of the borrowing by the venture to facilitate  its
borrowings  and is  required  to be in place  until  the loan is  repaid.  As of
January 2, 2005, the amount subject to our loan guarantee for this joint venture
was $1.4 million.

         In August 2003, we closed,  sold the assets and  transferred the lease,
subject to our  remaining  $0.15  million  guarantee  for the  remainder  of the
original lease term, of the clam bar location. Our guarantee of the lease became
operable  upon the buyer's  default and will  continue  until the  premises  are
released.

         In certain  instances,  we  guarantee  the leases for  franchisees.  We
currently  guarantee  29  leases  for  franchisees.  Ten of  these  leases  were
guaranteed  after  the  adoption  of FIN No.  45,  "Guarantor's  Accounting  and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness  of Others."  The Company has  recorded a liability of $0.1 million
which represents the fair value of these guarantees as of January 2, 2005.


RELATED PARTY TRANSACTIONS

         We were the sole tenant of an  administrative  office building which we
leased  from a  partnership  owned by  Sbarro  Enterprises,  L.P.,  the  limited
partners of which are Mario Sbarro, our Chairman and a director,  Joseph Sbarro,
our Senior Vice President,  Secretary and a director,  Anthony Sbarro,  our Vice
Chairman,  Treasurer and a director,  and Carmela  Sbarro,  Vice President and a
director.  The annual rent paid was  $100,000,  $300,000  and $300,000 for 2004,
2003 and 2002,  respectively.  We were advised by a real estate  broker that the
rent to be paid by us was comparable to the rent that would have been charged by
an  unaffiliated  third  party.  The lease was  terminated  upon the sale of the
building by the partnership in April 2004.

         On  April  5,  2001,   we  loaned  $3.2   million  to  certain  of  our
shareholders, including: Mario Sbarro, $1.1 million, Joseph Sbarro, $1.2 million
and Anthony Sbarro,  $0.9 million.  The due dates of the related notes have been
extended  to April 6,  2007.  The notes bear  interest  at the rate of 4.63% per
annum,  payable annually.  As of January 2, 2005, the balance of these loans was
$2.9 million.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
including:  Mario Sbarro,  $0.6 million,  Joseph Sbarro,  $0.7 million,  Anthony
Sbarro,  $0.5 million,  and the Trust of Carmela Sbarro,  $1.0 million.  The due
dates of the related  notes have been  extended to December 28, 2007.  The notes
bear interest at the rate of 2.48% per annum, payable annually. As of January 2,
2005, the balance of these loans was $2.6 million.

         In March  2004,  we loaned  $40,000  to  Gennaro  A.  Sbarro,  then our
Corporate  Vice  President  and  President  of  our  Franchising  and  Licensing
Division.  The note was repaid in February 2005 including  interest at 2.69% per
annum.  In connection  with his resignation in 2004, we entered into a severance
agreement providing for a lump sum payment of approximately $453,000.

         In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
a note for  approximately  $90,000 for royalties  due us for 2001 and 2000.  The
note is repayable at approximately $10,000 per year, including interest at 2.96%
per annum, with a balloon payment due on June 30, 2010. The principal balance of
the notes at January 2, 2005 was approximately $79,000.



                                      -31-
<PAGE>

         The  interest  rates  charged  on the  foregoing  related  party  loans
included above  approximate  the Applicable  Federal Rate (AFR) published by the
Internal  Revenue  Service at the time of the loan. We recorded  interest income
from related parties was approximately $211,000,  $223,000 and $221,000 in 2004,
2003 and 2002, respectively.

         Bernard  Zimmerman  & Company,  Inc.,  of which  Bernard  Zimmerman,  a
director of Sbarro, is President and a majority  shareholder,  renders financial
and  consulting  assistance to us, for which it received  fees of  approximately
$26,000 for  services  rendered  during  2004 and $0.3  million in both 2003 and
2002.

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

         We and our other  concepts  have  purchased  printing  services  from a
corporation  owned by a son-in-law of Mario  Sbarro,  for which we and our other
concepts paid, in the aggregate,  $480,000,  $340,000 and $422,000 in 2004, 2003
and 2002, respectively.

         Companies  owned by a son of Anthony  Sbarro are  parties to  franchise
agreements with us containing terms similar to those in agreements  entered into
by us with unrelated franchises.  Royalties under these agreements in 2004, 2003
and 2002 were approximately $89,000, $90,000 and $92,000, respectively.

         As of July 2002,  we sold the assets of a restaurant  to a  corporation
owned by the brother-in-law of our Chairman of the Board for $88,900.  The sales
price  resulted  in a loss of  approximately  $64,000  that was  included in the
provision  for  restaurant  closings.  That  corporation  also  entered  into  a
franchise  agreement  with us.  We  received  promissory  notes  for each of the
purchase price and initial  franchise fee that were payable over seven years and
bore interest on the unpaid  principal  balances at 7% per annum. In addition in
2002, we subleased this location to that franchisee. Payments under the sublease
were being made directly to the landlord by the  franchisee.  Interest  payments
received relating to the promissory notes was  approximately  $4,000 in 2003. No
interest  payments were received in 2004.  Royalties paid under this arrangement
were approximately $1,800 in 2004, $3,300 in 2003 and $6,800 in 2002.

         In March 2005, we  re-purchased  the assets of the restaurant  from the
corporation  for  $88,900.   The  remaining  unpaid  principal  balance  of  the
promissory  notes were offset  against  the  purchase  price of the assets.  The
remaining  balance under the  promissory  notes of  approximately  $22,000,  and
accrued but unpaid royalties of approximately $31,000 had been fully reserved in
2004.

         In 2002, a company in which Gennaro J. Sbarro,  then our Corporate Vice
President  and  President of our Casual and Fine Dining  Division and the son of
Joseph  Sbarro has a 50%  interest  (the  other 50% is owned by an  unaffiliated
third  party)  entered  into a sublease  for $50,000  greater than rent or other
charges due under the lease. Rent and other charges due under the lease are paid
directly to the  landlord.  Payment  under the  sublease  are due to us. Rent of
approximately  $23,000  was  included  in the 2004  results  of  operations.  To
reimburse Sbarro for equipment costs, the Company owned by Mr. Sbarro,  issued a
non-interest  bearing  note in our  favor  for  approximately  $55,000,  that is
repayable in eighteen equal monthly  installments of approximately  $3,000 which
commenced in November 2002.  The principal  balance on the note as of January 2,
2005 was approximately $16,000. As of October 31, 2003, Mr. Sbarro resigned from
his  positions  with us and a corporation  owned by Mr.  Sbarro  entered into an
eighteen  month  agreement with us to provide



                                      -32-
<PAGE>

consulting  services  to our  quick  service  and  casual  dining  division  for
approximately  $23,000 per month and the  reimbursement  for customary and usual
expenses  that may be incurred by that  corporation  in the  performance  of its
services.

         In  October  2003,   we  sold  the  assets  of  three   underperforming
Sbarro-owned  restaurants that we proposed to close to entities owned separately
by each of three other of Anthony  Sbarro's  sons,  each of which entered into a
franchise  agreement with us. Two of the locations,  which had no remaining book
value,  were transferred for no consideration  while the third was sold for $0.3
million that was paid in full, and resulted in a gain to Sbarro of approximately
$0.1 million.  In connection  with the sale of the locations,  the employment of
these  individuals with Sbarro was terminated and we included a charge for their
total  severance pay of  approximately  $60,000 in our results of operations for
2003. The franchise  agreements  provide for the payment of 5% of the location's
sales  as a  continuing  franchise  fee  but  did not  provide  for any  initial
franchise  fee.  We have waived  continuing  franchise  fees  through  2006.  In
addition, we subleased two of the locations to two of the franchisees.  Payments
under the subleases  are being made directly to the landlord by the  franchisees
and they are not in default.

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
position as Manager of Administration - Construction. A corporation owned by her
entered into a one year  agreement  to provide  consulting  services  related to
construction  matters to us for a series of monthly payments totaling  $100,000.
In  addition,   that  corporation   provided   consulting  services  related  to
construction matters for our steakhouse joint venture of $18,900 in 2004.

         In February 2005, a joint venture in which we have a 70% interest, sold
the assets of one of our other joint venture  restaurants  to a company owned by
Gennaro  A.  Sbarro our then  Corporate  Vice  President  and  President  of our
Franchising   and  Licensing   Division  and  the  son  of  Mario  Sbarro,   for
approximately  $900,000 (which  approximated  fair value) resulting in a loss of
approximately  $284,000.  The Company  received  $300,000 in cash and promissory
notes of $600,000.  The promissory notes are payable monthly in 72 equal monthly
installments in the amount of $8,333  including  interest at 5% per annum with a
balloon  payment  of  $111,375  at  maturity.  The joint  venture  also sold the
inventory of the  restaurant  for  approximately  $67,000,  with $50,000 paid at
closing and the remainder of $17,000 payable in four equal monthly  installments
from March 2005 to June 2005.  The company  owned by Mr.  Sbarro  entered into a
sublease,  which we guarantee and a Security Agreement to secure the obligations
under the promissory notes. The sublease and Security  Agreement are intended to
enable Sbarro to recapture the business in the event of an uncured default.

         Compensation of related parties includes  salary,  taxable benefits and
accrued bonus.  Salaries for 2004 include one  additional  week of salary due to
our 53 week year in 2004. Compensation is as follows:

          o    Mario  Sbarro was our  Chairman of the Board in 2004 and Chairman
               of the Board,  President and Chief Executive  Officer in 2003 and
               2002.  His  compensation  was  approximately  $884,000  in  2004,
               $700,000 in 2003 and $920,000 in 2002.

          o    Anthony  Sbarro was our Vice  Chairman of the Board and Treasurer
               in 2004,  2003  and  2002.  His  compensation  was  approximately
               $582,000 in 2004, $400,000 in 2003 and $545,000 in 2002.



                                      -33-
<PAGE>

          o    Joseph  Sbarro  was  our  Senior  Executive  Vice  President  and
               Secretary  in  2004,   2003  and  2002.  His   compensation   was
               approximately  $585,000 in 2004, $400,000 in 2003 and $575,000 in
               2002.

         In addition to the compensation of Mario, Anthony, and Joseph Sbarro:

          o    Carmela Sbarro,  the mother of Mario,  Anthony and Joseph Sbarro,
               who was a co-founder of Sbarro and serves as Vice President and a
               director,  received  $100,000  from us for  services  rendered in
               2004, 2003 and 2002.

          o    Other members of the immediate families of Mario, Anthony, Joseph
               and Carmela  Sbarro who are our employees  were paid an aggregate
               of approximately $860,000, $1,344,000 and $1,565,000 during 2004,
               2003 and 2002, respectively.

         The company has a 40% equity  interest in Boulder Creek  Steakhouse and
provided  administrative  services for $165,000,  $172,000 and $148,000 in 2004,
2003 and 2002, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS


SFAS 153:

         In December 2004, the Financial  Accounting  Standards  Board ("FASB"),
issued  Statement  of  Financial  Accounting  Standards  ("SFAS")  SFAS No. 153,
"Exchanges of Non Monetary Assets", which addresses the measurement of exchanges
of nonmonetary  assets and eliminates the exception from fair value  measurement
for nonmonetary  exchanges of similar  productive assets and replaces it with an
exception for exchanges that do not have commercial  substance.  SFAS No. 153 is
effective for nonmonetary asset exchanges  occurring in fiscal periods beginning
after June 15, 2005, with earlier  application  permitted.  We do not anticipate
that SFAS No.  153 will have a  material  impact on our  financial  position  or
results of operations.

SFAS 123R:

         In  December  2004,  the  FASB  issued  a  revision  of SFAS  No.  123,
"Statement  of Financial  Accounting  Standards No. 123 (revised  2004)",  which
requires that the cost resulting from all  share-based  payment  transactions be
recognized in the financial statements. This Statement establishes fair value as
the measurement objective in accounting for share-based payment arrangements and
requires  all  entities  to  apply  a  fair-value-based  measurement  method  in
accounting for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans.  This Statement is effective
as of the beginning of the first annual  reporting period that begins after June
15, 2005. We do not anticipate  SFAS No. 123R will have a material impact on our
financial position or results of operations.


CRITICAL ACCOUNTING POLICIES AND JUDGMENTS

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



                                      -34-
<PAGE>

application  may have the most  significant  effect on our  reported  results of
operations  and  financial  position and that require  judgments,  estimates and
assumptions by management  that can affect their  application and our results of
operations and financial position, are:

         o SFAS No. 5, "Accounting for  Contingencies."  Pursuant to SFAS No. 5,
in the past we have  made,  and we  intend  in the  future  to  make,  decisions
regarding the accounting for legal matters based on the status of the matter and
our best estimate of the outcome (we expense  defense  costs as incurred).  This
requires  management to make judgments  regarding the  probability and estimated
amount of possible future contingent liabilities, especially, in our case, legal
matters.  However,  especially  if a matter goes to a jury trial,  our  estimate
could be off since our estimates are based,  in large part, on our experience in
settling matters. In our judgment, we believe that the estimate of approximately
$3.2 million for outstanding legal actions.

         o SFAS No. 142, "Goodwill and Other Intangible  Assets," requires us to
test annually and  periodically  assess  whether there has been an impairment of
goodwill and indefinite lived  intangible  assets acquired prior to July 1, 2001
($205.1  million,  net of  accumulated  amortization,  at December  28, 2003 and
January 2,  2005).  As  discussed  under  "Results  of  Operations"  above,  the
independent  firm we engaged to assist us in the  determination  of  impairment,
used the discounted cash flow method and the guideline company valuation methods
in determining  the fair value of our goodwill and the discounted  cash flow and
market  approach  methods in  determining  the fair value of our  trademark  and
concluded  that there was no impairment in the carrying value of these assets as
of January 2, 2005. However,  future estimates could change and cause us to take
an impairment charge with respect to those assets.  Further, after taking such a
charge,  should future estimates  determine that the fair value has risen,  SFAS
No. 142 does not allow us to increase the then current value.

         o  SFAS  No.  144,  "Accounting  for  the  Impairment  or  Disposal  of
Long-Lived  Assets." SFAS No. 144 requires judgments  regarding future operating
or disposition plans for marginally  performing  assets. The application of this
policy has affected  the amount and timing of charges to operating  results that
have been  significant  in recent  years ($1.1  million,  $4.1  million and $0.4
million in 2004, 2003 and 2002, respectively). We evaluate our long-lived assets
for  impairment  at the  individual  restaurant  level on an  annual  basis,  or
whenever  events  and  circumstances  indicate  that the  carrying  amount  of a
restaurant may not be  recoverable,  including our business  judgment of when to
close underperforming  units. These impairment evaluations require an estimation
of cash flows over the remaining life of the related  restaurant lease, which is
generally  up to 10 years.  Our  estimates  are based on cash flows from  recent
operations of the  restaurants  and,  unless  specific  circumstances  about the
location  warrant,  do  not  include   unsupportable  sales  growth  and  margin
improvement  assumptions.  Should  the  carrying  amount  not  be  deemed  to be
recoverable,  we write the assets down to their fair value. After the impairment
has been  identified and the related asset written down, in accordance with SFAS
No. 144, the effect cannot be reversed. As a result, the result of evaluation is
not subject to future review and change.

         o SFAS No. 146,  "Accounting for Costs Associated with Exit or Disposal
Activities,"  which addresses  accounting for  restructuring  and similar costs,
supersedes previous accounting guidance, principally EITF No. 94-3. SFAS No. 146
requires  that the  liability  for  costs  associated  with an exit or  disposal
activity  be  recognized  when the  liability  is  incurred.  SFAS No.  146 also
establishes that the liability should initially be measured and recorded at fair
value.  Accordingly,  SFAS No. 146 changes the expense  recognition  for certain
costs we incur while closing  restaurants or undertaking  other exit or disposal
activities.  However,  the timing  difference  is not  typically of  significant
length.



                                      -35-
<PAGE>

         o FIN No. 45, "Guarantor's  Accounting and Disclosure  Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," elaborates
on the  disclosures  to be  made  by a  guarantor  in its  financial  statements
concerning its obligations under certain  guarantees that it has issued. It also
clarifies  (for  guarantees  issued or modified  after January 1, 2003),  that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the  obligations  undertaken in issuing the guarantee.  We
have  guarantees  that would require  recognition  upon issuance or modification
under the  provisions  of FIN No.  45. The nature of our  business  will  likely
result in the issuance of certain guarantees in the future and, as such, we will
be required to evaluate  the fair value of the  obligation  at the  inception of
such  guarantee.  We  recognized a liability  under FIN No. 45 of  approximately
$120,000 in 2004 and $38,000 in 2003. The amount we may be required to recognize
in future  years may be higher  than this  amount  depending  on the  number and
magnitude of guarantees we issue.

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

         o SFAS 13, "Accounting for Leases"  establishes  standards of financial
accounting  for  leases.  Certain  of the  Company's  operating  leases  contain
predetermined  fixed escalations of the minimum rentals during the original term
of the lease.  For these  leases,  the Company  recognizes  the  related  rental
expense  on a  straight-line  basis over the life of the lease and  records  the
difference  between  the  amounts  charged to  operations  and  amounts  paid as
deferred  rent. Any lease  incentives  received by the Company are deferred over
the same period as the lease and amortized over a  straight-line  basis over the
life of the lease as a reduction of rent  expense.  We calculate  deferred  rent
based on the lease term from when we obtain  access or  control  over the leased
property.  Rent expense accrued during the construction period is capitalized as
part of the cost of leasehold improvements. The length of time from when we take
possession of property for our QSR restaurants and when our restaurant  opens is
normally  minimal  (1-2  months) as  compared  to our normal  lease terms of ten
years.





                                      -36-
<PAGE>


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

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

         Future  borrowings  under  our  credit  facility  (none  are  currently
outstanding) will be at rates that float with the market and, therefore, will be
subject to fluctuations in interest rates.  Our $255 million senior notes bear a
fixed  interest  rate of 11%.  We are not a party to, and do not expect to enter
into any, interest rate swaps or other instruments to hedge interest rates.

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

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







                                      -37-
<PAGE>



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



Report of Independent Registered Public Accounting Firm                       39


Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003       40


Consolidated Statements of Operations for the years                           42
    ended January 2, 2005, December 28, 2003 and December 29, 2002


Consolidated Statements of Shareholders' Equity (as restated) for the         43
    years  ended January 2, 2005, December 28, 2003 and December 29, 2002


Consolidated Statements of Cash Flows for  the years                          44
    ended January 2, 2005, December 28, 2003 and December 29, 2002


Notes to Consolidated Financial Statements                                    46






                                      -38-
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------


Board of Directors and Shareholders
Sbarro, Inc.
Melville, New York



We have audited the accompanying consolidated balance sheets of Sbarro, Inc. and
subsidiaries  as of January  2, 2005 and  December  28,  2003,  and the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
the years ended January 2, 2005,  December 28, 2003 and December 29, 2002. 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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   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 consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Sbarro,  Inc. and
subsidiaries  at January 2, 2005 and  December 28, 2003 and the results of their
operations  and their cash flows for the years ended  January 2, 2005,  December
28,  2003  and  December  29,  2002 in  conformity  with  accounting  principles
generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, the Company has
restated its financial statements to reflect a correction of an error related to
the  calculation  of  minority  interest  in prior  years.  The  impact  of this
adjustment is to minority interest, accrued expenses and retained earnings as of
the beginning of the year ended December 29, 2002.

/s/ BDO Seidman, LLP

Melville, New York
March 7, 2005




                                      -39-
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS


<TABLE>
<CAPTION>
                                                                        JANUARY 2, 2005          DECEMBER 28, 2003
                                                                        ---------------          -----------------
                                                                                     (IN THOUSANDS)
<S>                                                                          <C>                        <C>
Current assets:
   Cash and cash equivalents                                                 $63,000                    $56,430
   Receivables, net of allowance for doubtful accounts of $431
     in 2004 and $488 in 2003:
         Franchise                                                             1,846                      1,700
         Other                                                                 1,680                      1,171
                                                                            --------                   --------
                                                                               3,526                      2,871

   Inventories                                                                 2,809                      2,707
   Prepaid expenses                                                            3,877                      3,844
   Current portion of loans receivable from officers                              46                      2,810
                                                                         -----------                   --------
       Total current assets                                                   73,258                     68,662

Property and equipment, net                                                   88,465                     96,604
Trademarks                                                                   195,916                    195,916
Goodwill                                                                       9,204                      9,204
Deferred financing costs, net                                                  4,521                      5,482
Loans receivable from officers, less current portion                           5,602                      3,347
Other assets                                                                   7,647                      7,615
                                                                          ----------                -----------
                                                                            $384,613                   $386,830
                                                                            ========                   ========
</TABLE>

                See notes to consolidated financial statements.



                                      -40-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                        JANUARY 2, 2005             DECEMBER 28, 2003
                                                                        ---------------             -----------------
                                                                             (IN THOUSANDS EXCEPT SHARE DATA)

<S>                                                                            <C>                            <C>
Current liabilities:
    Accounts payable                                                           $11,593                        $13,734
    Accrued expenses                                                            20,748                         18,227
    Accrued interest payable                                                     8,181                          8,181
    Current portion of mortgage payable                                            182                            168
                                                                           -----------                     ----------
         Total current liabilities                                              40,704                         40,310
                                                                             ---------                       --------

Deferred rent                                                                   10,226                          8,711
                                                                           -----------                      ---------

Long-term debt, net of original issue discount                                 268,349                        268,152
                                                                            ----------                        -------

Commitments and contingencies

Shareholders' equity:
    Preferred stock, $1 par value; authorized 1,000,000 shares;
      none issued                                                                    -                              -
    Common stock, $.01 par value; authorized 40,000,000 shares;
      issued and outstanding 7,064,328 shares at January 2, 2005
      and  December 28, 2003                                                        71                             71
    Additional paid-in capital                                                      10                             10
    Retained earnings                                                           65,253                         69,576
                                                                             ---------                       --------
                                                                                65,334                         69,657
                                                                             ---------                       --------
                                                                              $384,613                       $386,830
                                                                              ========                       --------

</TABLE>


                 See notes to consolidated financial statements.





                                      -41-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                              FOR THE FISCAL YEARS ENDED
                                                              --------------------------------------------------------
                                                                   JAN. 2, 2005      DEC. 28, 2003       DEC. 29, 2002
                                                                   ------------      -------------       -------------
                                                                                  (IN THOUSANDS)
<S>                                                                   <C>                <C>                <C>
Revenues:
    Restaurant sales                                                  $331,313           $314,708           $345,206
    Franchise related income                                            12,093             10,868             10,070
    Real estate and other                                                5,488              6,748              5,104
                                                                       --------           --------           --------
       Total revenues                                                  348,894            332,324            360,380
                                                                       --------           --------           --------

Costs and expenses:
    Cost of food and paper products                                     72,073             67,446             67,593
    Payroll and other employee benefits                                 90,857             89,614             96,288
    Other operating costs                                              114,571            110,453            114,892
    Depreciation and amortization                                       16,400             19,712             20,683
    General and administrative                                          28,576             25,451             23,960
    Asset impairment, restaurant closings and
         loss on sale of other concept restaurant                        2,202              6,073              9,196
                                                                       --------           --------           --------
          Total cost and expenses                                      324,679            318,749            332,612
                                                                       --------           --------           --------

Operating income                                                        24,215             13,575             27,768
                                                                       --------           --------           --------

Other (expense) income:
    Interest expense                                                   (30,694)           (31,039)           (30,959)
    Interest income                                                        654                694                528
    Equity in net income of
       unconsolidated affiliates                                           855                425                668
    Other income                                                         1,181                  -              7,162
                                                                       --------           --------           --------
       Net other expense                                               (28,004)           (29,920)           (22,601)
                                                                       --------           --------           --------

(Loss) income before minority interest                                  (3,789)           (16,345)             5,167
                                                                       --------           --------           --------

Minority Interest                                                            -                (41)               (52)
                                                                       --------           --------           --------

(Loss) income before income taxes (credit)                              (3,789)           (16,386)             5,115
Income taxes                                                               534                844                334
                                                                       --------           --------           --------

Net (loss) income                                                      $(4,323)          $(17,230)            $4,781
                                                                       ========          =========            ======
</TABLE>


                 See notes to consolidated financial statements.




                                      -42-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                  (AS RESTATED)

<TABLE>
<CAPTION>
                                            COMMON STOCK
                                            ------------

                                        NUMBER OF                       ADDITIONAL         RETAINED
                                         SHARES           AMOUNT      PAID-IN CAPITAL      EARNINGS          TOTAL
                                         -------          ------      ---------------      --------          -----
                                                            (IN THOUSANDS, EXCEPT SHARE DATA)

<S>                                     <C>                    <C>              <C>          <C>             <C>
Balance at
   December 30, 2001,                   7,064,328              $71              $10          $86,363         $86,444
   as previously reported

Correction of error in
    recording  prior years
    income  of a
    consolidated subsidiary                                                                      569             569
                                        ---------              ---              ---          -------         -------

Balance at
   December 30, 2001,
   as restated                          7,064,328               71               10           86,932          87,013

Net income                                                                                     4,781           4,781

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

Balance at
   December 29, 2002                    7,064,328               71               10           88,588          88,669

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

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

Balance at
   December 28, 2003                    7,064,328               71               10           69,576          69,657

Net loss                                                                                      (4,323)         (4,323)
                                        ---------              ---              ---          -------         -------

Balance at
   January 2, 2005                      7,064,328              $71              $10          $65,253         $65,334
                                        =========              ===              ===          =======         =======
</TABLE>

                 See notes to consolidated financial statements.




                                      -43-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                            ----------------------------------------------------------
                                                                   JANUARY 2,         DECEMBER 28,        DECEMBER 29,
                                                                      2005                2003                2002
                                                                      ----                ----                ----
                                                                                 (IN THOUSANDS)
<S>                                                                  <C>                <C>                  <C>
OPERATING ACTIVITIES:
Net (loss) income                                                    $(4,323)           $(17,230)            $4,781
Adjustments to reconcile net (loss) income to
   net cash provided by operating activities:
     Depreciation and amortization                                    16,400              19,712             20,683
     Amortization of deferred financing cost                             962               1,148              1,074
     Amortization of bond discount                                       379                 379                379
     Allowance for doubtful accounts
       receivable                                                        222                 435                350
     Increase in deferred rent, net                                      273                 242                212
     Asset impairment, restaurant closings and
       loss on sale of other concept restaurant                        2,202               6,073              9,196
     Minority interest                                                     -                  41                 52
     Equity in net income of unconsolidated
       affiliates                                                       (855)               (425)              (668)
     Other                                                               155                  44                (76)
Changes in operating assets and liabilities:
     Decrease (increase) in receivables                                 (877)                191              1,308
     Decrease (increase) in inventories                                 (102)                578                252
     Increase in prepaid expenses                                        (33)               (253)            (1,121)
     Decrease (increase) in other assets                                 458                (366)              (429)
     Increase (decrease)  in accounts payable
       and accrued expenses                                              955                 465             (3,540)
                                                                      ------             -------           ---------
Net cash provided by operating activities                             15,816              11,034             32,453
                                                                      ------             -------           ---------
</TABLE>



                                   (continued)

                                      -44-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



<TABLE>
<CAPTION>
                                                                                FOR THE FISCAL YEARS ENDED
                                                                    JANUARY 2,        DECEMBER 28,        DECEMBER 29,
                                                                    ----------        ------------        ------------
                                                                       2005               2003                2002
                                                                       ----               ----                ----
                                                                                 (IN THOUSANDS)
INVESTING ACTIVITIES:

<S>                                                                   <C>                 <C>               <C>
Purchases of property and equipment                                   (8,906)             (8,521)           (10,988)
                                                                      -------             -------           --------
   Net cash used in investing activities                              (8,906)             (8,521)           (10,988)
                                                                      -------             -------           --------

FINANCING ACTIVITIES:

Mortgage principal repayments                                           (167)               (154)              (142)
Tax distributions                                                       (682)             (1,100)            (3,125)
Reduction in loans receivable from officers                              509                   -                  -
                                                                      -------             -------           --------

   Net cash used in financing activities                                (340)             (1,254)            (3,267)
                                                                      -------             -------           --------

Increase in cash and cash equivalents                                  6,570               1,259             18,198

Cash and cash equivalents at
    beginning of year                                                 56,430              55,171             36,973
                                                                      -------             -------           --------

Cash and cash equivalents at end of year                             $63,000             $56,430            $55,171
                                                                     =======             =======            =======


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for:
Income taxes                                                            $417                $388               $796
                                                                        ====                ====               ====
Interest                                                             $29,352             $29,400            $29,498
                                                                     =======             =======            =======
</TABLE>


                 See notes to consolidated financial statements.





                                      -45-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         BASIS OF FINANCIAL STATEMENT PRESENTATION:

         The consolidated  financial  statements include the accounts of Sbarro,
         Inc.,   its  wholly  owned   subsidiaries   and  the  accounts  of  its
         majority-owned   joint  ventures  (together,   "we,"  "our,"  "us,"  or
         "Sbarro").  All significant intercompany accounts and transactions have
         been eliminated.  Minority  interest includes the interests held by our
         partners in certain of our majority-owned joint ventures.

         ESTIMATES:

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

         CASH EQUIVALENTS:

         Cash equivalents  represent funds invested  overnight and highly liquid
         money  market  accounts  with a maturity of three months or less at the
         time of purchase. Cash equivalents at the end of 2004 and 2003 were $51
         million and $34 million,  respectively. The Company has restricted cash
         of $21,000 which is included in cash in 2004 and 2003.

         INVENTORIES:

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

         PROPERTY AND EQUIPMENT:

         Property  and  equipment  is stated at cost.  Depreciation  is provided
         using the  straight-line  method over the  estimated  useful  lives for
         furniture,  fixtures and  equipment - three to ten years and  leasehold
         improvements  - the lesser of the  useful  lives of the assets or lease
         terms. Rent incurred during the construction period is capitalized.

         INTANGIBLE ASSETS:

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




                                      -46-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

         TRADEMARKS AND GOODWILL:

         There were no  changes  in the  carrying  amount of the  trademarks  or
         goodwill for the years ended  January 2, 2005 and December 28, 2003. We
         test for impairment annually or earlier if impairment indicators exist.
         We follow a two-step  process for impairment  testing of goodwill.  The
         first step of this test, used to identify impairment, compares the fair
         value of a  reporting  unit,  including  goodwill,  with  its  carrying
         amount.  The  second  step (if  necessary)  measures  the amount of the
         impairment.  We have determined that Sbarro as a whole is the reporting
         unit for purposes of  evaluating  goodwill for  impairment.  Our annual
         impairment  test  indicated  that the fair value of the reporting  unit
         exceeded the reporting unit's carrying amount. Accordingly,  the second
         step of the goodwill impairment test was not necessary.  We performed a
         separate impairment test on our trademarks based on the discounted cash
         flows  method  and  market  approach  method.  The  fair  value  of the
         trademarks exceeded the carrying value.

         LONG-LIVED ASSETS:

         Long-lived  assets are evaluated for impairment  when events or changes
         in  circumstances  indicate that the carrying  amount of the assets may
         not be recoverable through the estimated undiscounted future cash flows
         resulting  from the use of  these  assets.  When  any  such  impairment
         exists, the related assets will be written down to their fair value.

         EXIT OR DISPOSAL ACTIVITIES:

         The liability for costs associated with an exit or disposal activity is
         recognized  when a liability  is incurred  in  accordance  with FAS 146
         "Accounting for Costs Associated with Exit or Disposal  Activities" and
         is measured at fair value.

         GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES:

         At the  inception  of a guarantee  for the  indebtedness  of others,  a
         liability for the fair value of the  obligation  undertaken is recorded
         for all these  guarantees  entered  into or modified  after  January 1,
         2003. As described in Note 10, there are certain arrangements that were
         entered  into  during  2003 and 2004 with  respect  to  guarantees  for
         franchised  locations and restaurants sold to related parties. The fair
         value of these  guarantees  of $120,000  has been  recorded.  While the
         nature of our  business  will likely  result in the issuance of certain
         guarantees in the future,  we do not  anticipate  that they will have a
         material impact on our financial position or operating results.



                                      -47-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         VARIABLE INTEREST ENTITIES:

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

         ACCOUNTING FOR VENDOR REBATES:

         We account for vendor rebates  related to the usage of the products for
         which  rebates are  received in company  owned  Sbarro  locations  as a
         reduction  of the cost of food and  paper  products.  The  rebates  are
         recognized as earned based on our usage, which approximates  purchases,
         of  the  related   products.   We  also  receive   consideration   from
         manufacturers for the usage, which approximates  purchases, of the same
         raw materials by our franchisees.  Those rebate amounts are included in
         "real estate and other" in our statements of operations.

         EQUITY INVESTMENTS:

         We account for our  investments in 50% or less owned joint ventures and
         for 50% owned joint ventures for which we do not have operating control
         and are  not the  primary  beneficiary,  under  the  equity  method  of
         accounting. The equity in the net income (loss) of these unconsolidated
         affiliates  are  included  in "equity  in net income of  unconsolidated
         affiliates"  in our statements of operations and the related assets are
         included in "other assets" in the accompanying balance sheets.


                                      -48-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         CONCENTRATION OF CREDIT RISK:

         Financial   instruments  which  potentially   subject  the  Company  to
         concentrations of credit risk consist  principally of cash and accounts
         receivable.

         The Company maintains its cash in commercial banks insured by the FDIC.
         At times, such cash in banks exceeds the FDIC insurance limit.

         Concentration  of credit risk with  respect to accounts  receivable  is
         generally limited to franchise fees and royalties. Prior to the Company
         entering into an agreement with a new  franchise,  an evaluation of the
         financial position and credit worthiness is completed.  The Company has
         established  an  allowance  for  doubtful  accounts  based upon factors
         surrounding   the  credit   risk  of  certain   franchises   and  other
         information.

         FRANCHISE RELATED INCOME AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:

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

         We  monitor  the  financial  condition  of our  franchisees  and record
         provisions for estimated losses on receivables when we believe that our
         franchisees  are unable to make their required  payments.  While we use
         the  best  information  available  in  making  our  determination,  the
         ultimate recovery of recorded receivables is also dependent upon future
         economic  events and other  conditions  that may be beyond our control.
         Included in general and  administrative  expenses  are  provisions  for
         uncollectible  franchise receivables of $0.2 million, $0.4 million, and
         $0.3 million in 2004, 2003 and 2002, respectively.

         LEASES:

         Certain of the Company's  operating leases contain  predetermined fixed
         escalations  of the minimum  rentals  during the  original  term of the
         lease.  For these leases,  the Company  recognizes  the related  rental
         expense on a straight-line basis over the life of the lease and records
         the  difference  between the amounts  charged to operations and amounts
         paid as deferred rent. Any lease incentives received by the Company are
         deferred  over  the same  period  as the  lease  and  amortized  over a
         straight-line  basis over the life of the lease as a reduction  of rent
         expense.  We calculate  deferred rent based on the lease term from when
         we obtain  access or control  over the leased  property.  Rent  expense
         accrued  during the  construction  period is capitalized as part of the
         cost of leasehold  improvements.  Due to recent  interpretive  guidance
         related to lease  accounting,  the Company  reviewed  their  accounting
         policies for leases.  As of January 2, 2005, we classified $1.3 million
         in net  leasehold  improvements  to account  for the  capitalized  rent
         during the  build-out  period which had been  previously  classified as
         deferred rent.


                                      -49-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         INCOME TAXES:

         We are taxed  under the  provisions  of  Subchapter  S of the  Internal
         Revenue  Code of 1986,  and,  where  applicable  and  permitted,  under
         similar state and local income tax provisions. Therefore, we do not pay
         federal or, with  certain  limited  exceptions,  state and local income
         taxes for periods for which we are treated as an S corporation. Rather,
         our shareholders  include their pro-rata share of our taxable income on
         their individual  income tax returns and thus are required to pay taxes
         on their respective  share of our taxable income,  whether or not it is
         distributed to them. We file a  consolidated  federal income tax return
         for informational purposes. Deferred taxes are not material.

         ACCOUNTING PERIOD:

         Our fiscal  year ends on the Sunday  nearest to  December  31. Our 2004
         fiscal year ended  January 2, 2005 and  contained  53 weeks.  All other
         reported fiscal years contained 52 weeks.

         FAIR VALUE OF FINANCIAL INSTRUMENTS:

         The  carrying  amounts  of  cash,   receivables  and  accounts  payable
         approximate fair value because of the short-term nature of these items.
         Based on the current  quoted market price,  the estimated fair value of
         our senior notes at January 2, 2005 approximated the face value of $255
         million.  The carrying  amount of the mortgage loan  approximates  fair
         value  because the interest  rate this  instrument  bears is reasonably
         equivalent to the current  rates  offered for debt of a similar  nature
         and maturity.

         DEFINED CONTRIBUTION PLAN:

         We have a 401(k) Plan  ("Plan") for all qualified  employees.  The Plan
         provides for a 25% matching  employer  contribution  of up to 4% of the
         employees'   deferred  savings  (maximum   contribution  of  1%  of  an
         employee's  salary).  The employer  contributions vest over five years.
         The  employee's  deferred  savings  cannot  exceed 15% of an individual
         participant's  compensation  in any calendar year. Our  contribution to
         the Plan was  $90,000,  $105,000,  and $36,000 in 2004,  2003 and 2002,
         respectively.  The  contribution  was  lower  in 2002  as our  matching
         contribution was suspended for the first half of the year.

         NEW ACCOUNTING PRONOUNCEMENTS:

         SFAS 153:

         In December  2004,  the FASB issued  Statement of Financial  Accounting
         Standards ("SFAS") No. 153,  "Exchanges of Non Monetary Assets",  which
         addresses  the  measurement  of  exchanges  of  nonmonetary  assets and
         eliminates the exception from fair value  measurement  for  nonmonetary


                                      -50-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         exchanges  of  similar  productive  assets  and  replaces  it  with  an
         exception for exchanges that do not have commercial substance. SFAS No.
         153 is effective for nonmonetary  asset  exchanges  occurring in fiscal
         periods  beginning  after  June  15,  2005,  with  earlier  application
         permitted.  We do not anticipate that SFAS No. 153 will have a material
         impact on our financial position or results of operations.

         SFAS 123R:

         In December  2004, the FASB issued a revision of SFAS No. 123, SFAS No.
         123R  "Statement  of Financial  Accounting  Standards  No. 123 (revised
         2004)",  which requires that the cost  resulting  from all  share-based
         payment  transactions be recognized in the financial  statements.  This
         Statement  establishes  fair  value  as the  measurement  objective  in
         accounting  for  share-based  payment  arrangements  and  requires  all
         entities to apply a  fair-value-based  measurement method in accounting
         for share-based  payment  transactions with employees except for equity
         instruments held by employee share ownership  plans.  This Statement is
         effective as of the beginning of the first annual reporting period that
         begins after June 15,  2005.  We do not  anticipate  that SFAS No. 123R
         will have a material  impact on our  financial  position  or results of
         operations.

         RECLASSIFICATIONS:

         Certain  items  in  the  financial   statements   presented  have  been
         reclassified to conform to the 2004 presentation.

         RESTATEMENT:

         In 2004,  the Company noted an error in the minority  interest  account
         and accrued expenses and recorded $569,000 to correct this error, which
         related  to  the  recording  of  income  and  minority  interest  of  a
         consolidated  subsidiary  in years  prior to  December  31,  2001.  The
         correction  was  adjusted  to  opening  retained  earnings.  The  error
         resulted from the  misinterpretation of certain partnership  agreements
         concerning  the  sharing of the losses of two of the  locations  within
         this consolidated subsidiary.

2.       GOING PRIVATE TRANSACTION:

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

         During the second quarter of 2001,  the funds  remaining for untendered
         shares that had been held by a third party paying  agent were  returned
         to us. We will hold such funds until the related shares are tendered or
         escheated to the appropriate  jurisdiction.  At January 2, 2005,  there
         was $21,000  being held by us for such  untendered  shares  included in
         cash and cash equivalents.



                                      -51-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In  accordance  with EITF Issue No. 88-16,  "Basis in Leveraged  Buyout
         Transactions,"  the acquisition of all the outstanding shares of common
         stock not owned by the Sbarro family and all outstanding  stock options
         was accounted for under the purchase method of accounting. As a result,
         the  remaining  shares of common  stock owned by the Sbarro  family are
         presented  in  shareholders'  equity  at  their  original  basis in the
         accompanying consolidated balance sheet.

         During 2000, we finalized an allocation of the purchase  price from the
         going private transaction based on an evaluation of Sbarro at September
         29, 1999 which increased  property and equipment and intangible  assets
         by $7 million and $216 million,  respectively.  In accordance with SFAS
         No.  142,  we have not,  since 2001,  amortized  any of the  intangible
         assets with indefinite lives.

3.       DESCRIPTION OF BUSINESS:

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

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

         We operate all of these restaurants as one segment.

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

                                 JANUARY 2,       DECEMBER 28,      DECEMBER 29,
                                    2005              2003              2002
                                    ----              ----              ----

         Sbarro owned                511               533               563
         Franchised                  416               364               349
         Other concepts               22                27                27
                                     ---               ---               ---
             All restaurants         949               924               939
                                     ===               ===               ===

4.       OTHER INCOME:

         BANKRUPTCY SETTLEMENT:
         In 2003 we replaced our then national independent wholesale distributor
         which had declared  bankruptcy.  The trustee in bankruptcy alleged that
         we were  indebted to that  distributor  in the amount of  approximately
         $2.1  million  which had been fully  reserved.  In  December  2004,  we
         entered  into a settlement  agreement  with the  bankruptcy  trustee to
         settle the alleged amount due for $0.9 million.  The difference between
         the alleged  amount due and the settlement  agreement of  approximately
         $1.2 million has been reported in other income.


                                      -52-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         EFFECT OF EVENTS OF SEPTEMBER 11, 2001:

         As a result  of the  events  of  September  11,  2001,  a  Sbarro-owned
         location,  as well as a franchise  location,  that had  operated in the
         World  Trade  Center  in  New  York  City  were  destroyed.  Due to the
         continuing  effect of the  events of  September  11  compounded  by the
         effect of the economic slowdown in the United States, airport locations
         and a number of downtown locations  continued to experience a period of
         reduced sales through 2003.

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

5.       PROPERTY AND EQUIPMENT, NET:

                                                  JANUARY 2,        DECEMBER 28,
                                                   2005 (A)            2003 (B)
                                                   ----                ----
                                                          (IN THOUSANDS)

          Land                                      $3,781             $3,781
          Leasehold improvements                   146,362            141,538
          Furniture, fixtures and equipment         64,096             65,594
                                                    ------             ------
                                                   214,239            210,913
          Less accumulated depreciation and
             amortization (c)                      125,774            114,309
                                                   -------            -------
                                                   $88,465            $96,604
                                                   =======            =======

         (a)      During 2004, we recorded a charge of $1.1 million, relating to
                  impairment losses on property and equipment.  In addition,  we
                  recorded a provision for  restaurant  closings and remodels of
                  approximately $0.8 million.

         (b)      During 2003,  we recorded a charge of $4.1  million,  of which
                  $0.4  million  was  for  our  other   concepts,   relating  to
                  impairment losses on property and equipment.  In addition,  we
                  recorded a provision for  restaurant  closings and remodels of
                  approximately $2.0 million.

         (c)      Depreciation  and  amortization  of property and equipment was
                  $16.4 million,  $19.7 million and $20.7 million in 2004,  2003
                  and 2002, respectively.



                                      -53-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.       DEFERRED FINANCING COSTS (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                           JANUARY 2,               DECEMBER 28,
                                                              2005                     2003
                                                              ----                     ----

<S>                                                         <C>                      <C>
                  Deferred financing costs                  $ 9,573                  $ 9,573
                  Less accumulated amortization              (5,052)                  (4,091)
                                                            --------                 -------
                                                            $ 4,521                  $ 5,482
                                                            ========                 =======
</TABLE>

         Amortization  expense of the deferred  financing costs was (included in
         interest  expense)  $962,  $1,148,  and $1,074 for 2004,  2003 and 2002
         respectively.


         Amortization  of deferred  financing costs for the next five years will
         be as follows:

                             2005                   $   962
                             2006                       962
                             2007                       962
                             2008                       962
                             2009                       673
                                                    --------
                                                    $ 4,521


7.       ACCRUED EXPENSES (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                          JANUARY 2,               DECEMBER 28,
                                                             2005                      2003
                                                             ----                      ----

<S>                                                         <C>                       <C>
                  Compensation                              $4,886                     $5,112
                  Payroll, sales and other taxes             3,730                      4,176
                  Rent and related cost                      2,971                      1,725
                  Litigation and legal costs                 2,552                      1,806
                  Rebates and other advances                 2,270                      2,731
                  Other                                      4,339                      2,677
                                                           -------                    -------
                                                           $20,748                    $18,227
                                                           =======                    =======
</TABLE>



                                      -54-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.       INCOME TAXES:

         In  connection  with the  going  private  transaction  and the  related
         financing,   we  entered  into  a  tax  payment   agreement   with  our
         shareholders. The tax payment agreement permits us to make periodic tax
         distributions to our shareholders in amounts determined under a formula
         designed to approximate the income taxes,  including  estimated  taxes,
         that would be payable by our  shareholders  if their only  income  were
         their pro-rata share of our taxable income and that income was taxed at
         the highest  applicable  federal and New York State marginal income tax
         rates. We may only make the tax  distributions  with respect to periods
         in which we are treated as an S corporation for income tax purposes. We
         made no  distribution  to our  shareholders  in accordance with the tax
         payment  agreement  with  respect  to our  2004  and  2003  results  of
         operations.  However,  we made  distributions to our  shareholders,  in
         accordance with the tax payment agreement, of $1.8 million with respect
         to our 2002 results of operations and $3.1 million with respect to 2001
         results of operations.

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


<TABLE>
<CAPTION>
                                                   JANUARY 2,           DECEMBER 28,       DECEMBER 29,
                                                      2005                  2003               2002
                                                      ----                  ----               ----
                                                                       (IN THOUSANDS)
<S>                                                  <C>                     <C>                <C>
                 Current state and local:            $(133)                  $500               $17
                 Foreign:                              667                    344               317
                                                      ----                   ----              ----
                                                      $534                   $844              $334
                                                      ====                   ====              ====
</TABLE>

9.       LONG-TERM DEBT:

         INDENTURE:

         The going  private  transaction  (Note 2) was  partially  funded by the
         placement of $255 million of 11% senior notes due September 15, 2009.

         Interest on the senior notes is payable  semi-annually  on March 15 and
         September  15 of each year.  Our payment  obligations  under the senior
         notes  are  jointly,   severally,   unconditionally   and   irrevocably
         guaranteed  by all of  Sbarro's  current  Restricted  Subsidiaries  (as
         defined in the  indenture)  and is to be  similarly  guaranteed  by our
         future  Restricted  Subsidiaries.  The senior notes and the  subsidiary
         guarantees  are  senior   unsecured   obligations  of  Sbarro  and  the
         guaranteeing  subsidiaries,  respectively,  ranking equally in right of
         payment to all of our and their  respective  present and future  senior
         debt,  including  amounts  outstanding  under  the bank  line of credit
         agreement  discussed  below.  The indenture  permits  redemption of the
         senior notes at our



                                      -55-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         option  at  varying  redemption  prices  and  requires  us to  offer to
         purchase  senior  notes  in the  event of a Change  of  Control  and in
         connection  with certain  Asset Sales (each as defined).  The indenture
         contains various covenants, including, but not limited to, restrictions
         on the payment of dividends, stock repurchases, certain investments and
         other restricted payments,  the incurrence of indebtedness and liens on
         our assets,  affiliate transactions,  asset sales and mergers by us and
         the guaranteeing  subsidiaries.  We were in compliance with the various
         covenants contained in the indenture as of January 2, 2005; however, we
         are not presently permitted under the indenture to pay dividends,  make
         stock repurchases or, with certain exceptions, incur indebtedness.

         We are in compliance with all covenants in the indenture for the senior
         notes and our mortgage as of January 2, 2005.

         The senior notes were issued, at an aggregate discount of approximately
         $3.8  million,  which  is  being  accreted  to the  senior  notes  on a
         straight-line  basis  over the  original  ten year  life of the  senior
         notes.  Accretion  of the  discount  was $0.4  million in each of 2004,
         2003, and 2002.

         LINE OF CREDIT:

         In March  2004,  we  entered  into a line of  credit  arrangement  that
         enables us to borrow,  subject to bank approval, $3 million through May
         2005,  subject to reduction for standby letters of credit issued by the
         bank ($1.8  million at January 2, 2005).  Interest  applicable to loans
         under the line of credit is to be at the bank's  prime rate at the time
         of any  borrowings.  There  are no  unused  line  fees  to be  paid  or
         covenants  to be met  under  the line of  credit.  Each of our  current
         guaranteeing   subsidiaries   (the  same  entities  as  the  Restricted
         Subsidiaries  under the Indenture) have agreed to  unconditionally  and
         irrevocably guarantee our obligations under the new line of credit on a
         joint and  several  basis.  No amounts  have been  borrowed  under this
         agreement. The Company is in discussion with several banks to extend or
         replace the credit line.

         During 2003,  we  terminated  a previous  bank credit  agreement  which
         provided us with an unsecured  senior  revolving  credit  facility that
         enabled us to borrow,  on a revolving basis until September 2004, up to
         $30 million,  including a $10 million sub limit for standby  letters of
         credit.  No amounts had been borrowed under the credit  agreement.  The
         outstanding  letters of credit under this facility were  transferred to
         our new line of credit facility.

         MORTGAGE:

         In  March  2000,  one of our  Restricted  Subsidiaries  obtained  a $16
         million,  8.4% loan due in 2010, secured by a mortgage on our corporate
         headquarters  building.  The loan is payable in monthly installments of
         principal  and  interest of $0.1  million.  The  outstanding  principal
         balance as of January 2, 2005 was $15.3 million. The mortgage agreement
         contains various covenants, including a requirement that the subsidiary
         maintain a minimum ratio of EBITDA to annual and quarterly debt service
         of at least  1.2 to 1.0.  The  subsidiary  was in  compliance  with the
         various covenants  contained in the mortgage agreement as of January 2,
         2005.



                                      -56-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         MATURITIES OF LONG-TERM DEBT:

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

           2005                                                  $182
           2006                                                   197
           2007                                                   215
           2008                                                   235
           2009                                               255,255
           Thereafter                                          14,240
                                                               ------
                                                              270,324
                                                              -------

           Current maturities                                    (182)
           Unaccreted original issue discount                  (1,793)
                                                             --------
                                                             $268,349
                                                             ========

10.      COMMITMENTS AND CONTINGENCIES:

         EMPLOYMENT AGREEMENT:

         On September  8, 2003,  we entered into an  employment  agreement  with
         Michael O'Donnell,  our then President and Chief Executive Officer, for
         a term ending on December 31, 2006,  subject to earlier  termination by
         us or Mr. O'Donnell  following specified notice. Mr. O'Donnell resigned
         his  employment  effective  March 2005. The agreement  provided,  among
         other  things,   for  an  annual  salary  of  $450,000  and  an  annual
         performance bonus beginning in 2004 to be based upon the achievement of
         increases in EBITDA,  as defined,  and other objectives to be set forth
         in business  plans and budgets  approved from time to time by our Board
         of Directors. The Company paid Mr. O'Donnell a bonus for the year ended
         January 2, 2005 of approximately  $142,000. No further payments are due
         under this agreement as a result of Mr. O'Donnell's resignation.

         SPECIAL EVENT BONUS:

         We entered into  special  event bonus  agreements  on December 10, 2004
         with Carmela Merendino, our Vice President-Administration,  and Anthony
         Missano,  President of our Business Development Division, which provide
         for them to  receive a bonus in the event of a public  offering  of our
         common stock, a change in control of Sbarro,  including by merger, sale
         of stock or sale of assets,  or a liquidation or dissolution of Sbarro.
         The  special  event bonus will be based on the per share  proceeds  (as
         defined in the  agreements)  received by our  shareholders if a special
         event  occurs  in  excess  of a  certain  threshold  amount.  A similar
         agreement  was entered  into with a member of the law firm we retain as
         general  counsel.  This  agreement  is in  addition  to the  payment of
         services at fair value.



                                      -57-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         As part of their "at will" employment letter agreements entered into by
         us  with  Peter  Beaudrault,  our new  President  and  Chief  Executive
         Officer, and Anthony J. Puglisi, our Vice President and Chief Financial
         Officer they received similar special bonus arrangements.

         When the special events  referenced in the agreements become probable a
         fair value model will be used to determine the value of such award.

         LEASES:

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

         Rental expense under operating leases was as follows:


<TABLE>
<CAPTION>
                                           2004                  2003                 2002
                                           ----                  ----                 ----
                                                          (IN THOUSANDS)

<S>                                       <C>                  <C>                  <C>
         Minimum rentals                  $52,100              $51,089              $51,975
         Common area charges               14,748               14,702               15,246
         Contingent rentals                 4,321                4,112                3,760
                                          -------              -------              -------
                                          $71,169              $69,903              $70,981
                                          =======              =======              =======
</TABLE>

         Future minimum rental and other payments required under  non-cancelable
         operating  leases  for our  Sbarro  restaurants  and our other  concept
         locations are as follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               2005                                           $71,557
               2006                                            69,021
               2007                                            65,234
               2008                                            59,474
               2009                                            52,014
               Thereafter                                     137,267
                                                              -------
                                                             $454,567
                                                             ========



         We are the  principal  lessee under certain  operating  leases for four
         other concept  locations that have been sold and sublet to unaffiliated
         third parties for which we are contingently responsible. Future minimum
         rental payments required under these non-cancelable operating leases as
         of January 2, 2005 are as follows (in thousands):



                                      -58-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                FISCAL YEARS ENDING:
                --------------------
                2005                                              $321
                2006                                               329
                2007                                               330
                2008                                               277
                2009                                               279
                Thereafter                                       2,796
                                                                 -----
                                                                $4,332
                                                                ======

         We  are  the  principal  lessee  under  operating  leases  for  certain
         franchised restaurants which are subleased to franchisees.  Franchisees
         pay rent and related expenses directly to the landlord.  Future minimum
         rental payments  required under these  non-cancelable  operating leases
         for franchised  restaurants that were open as of January 2, 2005 are as
         follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               2005                                             $1,785
               2006                                              1,730
               2007                                              1,300
               2008                                                805
               2009
                                                                   661
               Thereafter                                        1,128
                                                                 -----
                                                                $7,409
                                                                ======

         We are the principal lessee under operating leases for three franchised
         restaurants  that were sold and franchised to related parties (see Note
         11) and are subleased by us to the  franchisees.  The  franchisees  pay
         rent and  related  expenses  directly  to the  landlord.  In  2005,  we
         repurchased  one restaurant.  Future minimum rental  payments  required
         under  these  non-cancelable   operating  leases  are  as  follows  (in
         thousands):

               FISCAL YEARS ENDING:
               --------------------
               2005                                               $288
               2006                                                181
               2007                                                156
               2008                                                157
               2009                                                158
               Thereafter                                          486
                                                                   ---
                                                                $1,426
                                                                ======

         Future minimum rental payments required under non-cancelable  operating
         leases for restaurants that had not as yet opened as of January 2, 2005
         are as follows (in thousands):


                                      -59-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               FISCAL YEARS ENDING:
               --------------------
               2005                                                $17
               2006                                                 97
               2007                                                248
               2008                                                280
               2009                                                310
               Thereafter                                        2,613
                                                                 -----
                                                                $3,565
                                                                ======

         In  accordance  with  FIN No.  45,  we have  recorded  a  liability  of
         approximately $120,000 in 2004 and $38,000 in 2003 which represents the
         fair  value of the  guarantees  related  to our  guarantee  of  certain
         leases.

         CONSTRUCTION CONTRACTS AND OTHER:

         As of January 2, 2005,  we are a party to a contract  of  approximately
         $390,000 with respect to the new construction of a restaurant. Payments
         of approximately $215,000 were made on that contract in 2004.

         Our joint  venture  entered  into  construction  contracts  aggregating
         approximately  $4,326,000 for three  restaurants of which two opened in
         early 2005. Through March 1, 2005, payments of approximately $2,816,000
         have  been  made  against  these  contracts.  The  construction  of the
         restaurants  is guaranteed by the Company under the terms of the leases
         for the locations.  In addition, we also guarantee the rent through the
         first year of operations of one restaurant  location and the rent until
         another restaurant opens.

         PRODUCT PURCHASE DISTRIBUTION ARRANGEMENT:

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

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



                                      -60-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         LETTERS OF CREDIT:

         As of January 2, 2005, there are $1.8 million of bank letters of credit
         issued under our line of credit to support potential  obligations.  The
         letters of credit have been issued  instead of cash  security  deposits
         under operating leases.  Of the outstanding  standby letters of credit,
         approximately  $0.1 million are for locations  that have been subleased
         to the buyers of two of our other concept locations.

         GUARANTEE ARRANGEMENTS PERTAINING TO THE OTHER CONCEPTS:

         We are a party to various financial guarantees to a bank for two of our
         other  concepts.  We are jointly  liable,  along with our joint venture
         partner, for a loan owed by one of the other concepts.  Our liabilities
         under the line of credit,  mortgage loan and $0.1 million of letters of
         credit to the second  concept  are  limited to our  minority  ownership
         percentage.  The remaining  letter of credit for the second  concept of
         $0.6  million  is  jointly  and  severally  guaranteed  by  each of the
         partners in the concept.  To varying degrees,  these guarantees involve
         elements of performance  and credit risk. The possibility of our having
         to honor our  contingencies is largely dependent upon future operations
         of the other  concepts.  We record a liability if events  occurred that
         make payment under the  guarantees  probable.  Under FIN No. 45, we are
         required  to record a  liability  for the fair value of any  obligation
         undertaken or modified after December 31, 2002. No such  obligation was
         undertaken or modified in 2004 or 2003.

         The details of our guarantees as of January 2, 2005 and their terms are
         as follows:


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

              Line of Credit                    $5.0 million      December 2010
              Loan                               1.4 million      November 2007
              Letters of credit                  0.7 million      December 2010
              Mortgage Loan                      0.3 million      August 2019

(1)      Represents our current maximum  exposure under existing  borrowings and
         letters of credit. Our exposure under the line of credit could increase
         to $6.3  million if the full amount of the line of credit is  utilized.
         In 2003, the loan  expiration  date for all new term loans was extended
         from December 31, 2008 to December 31, 2010.




                                      -61-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         LITIGATION:

         There is approximately $3.2 million included in the Company's financial
         statements  as  a  reserve  for  contingent   liabilities   related  to
         litigation.

         In  December  1999,  fourteen  current and former  general  managers of
         Sbarro  restaurants in California  amended a complaint against us filed
         in the Superior Court of California  for Orange  County.  The complaint
         alleges  that the  plaintiffs  were  improperly  classified  as  exempt
         employees  under the  California  wage and hour law. The plaintiffs are
         seeking  actual  damages,  punitive  damages and costs of the  lawsuit,
         including  reasonable  attorneys'  fees,  each in unspecified  amounts.
         Plaintiffs filed a motion to certify the lawsuit as a class action, but
         the  motion  was  denied by the  court.  The  court  issued a ruling in
         December 2003 which was unfavorable to us but did not set the amount of
         damages. We are appealing the ruling due to errors that we believe were
         made by the trial judge.

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

         In March 2002,  four former general  managers of Sbarro  restaurants in
         California  filed a  complaint  against  us in the  Superior  Court  of
         California  for Los Angeles  County.  The  complaint  alleged  that the
         plaintiffs  were  required to perform  labor  services  without  proper
         premium  overtime  compensation  from at least May 1999. The plaintiffs
         sought actual damages,  punitive damages and attorneys' fees and costs,
         each in  unspecified  amounts.  The case was settled March 22, 2005 for
         $48,000,  with our  insurance  company  paying  $30,000  and us  paying
         $18,000.

         In August 2002, a subcontractor and the general contractor, pursuant to
         a  construction  contract  entered  into to  build  the  joint  venture
         location  that was  closed  during  2002 and  also the  subject  of the
         lawsuit  discussed  below,   filed  a  complaint  against  the  limited
         liability joint venture company alleging that they were owed for unpaid
         billings. We were a defendant in the suit by reason of the fact that we
         guaranteed the bonds under which mechanics liens against the plaintiffs
         were bonded.  In late 2004,  we settled the lawsuit for  $500,000.  The
         settlement   amount  had  been  paid  and  included  in  our  financial
         statements.

         In May 2002, the landlord of the joint venture  described above filed a
         complaint  against  Sbarro  in the  Supreme  Court  of the New York for
         Westchester County alleging that we were obligated to it,



                                      -62-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         pursuant to a Guaranty  Agreement we executed,  for all rent during the
         remaining  lease based on an alleged breach of the lease by the tenant,
         a subsidiary of the Company. We believed that our guarantee was limited
         in amount while the landlord  alleged  that the  guarantee  covered all
         amounts  that would  become due during the  remaining  lease term.  The
         court  issued a ruling in November  2003 which  limited our  liability,
         which we estimated at $500,000 and we have  included this amount in our
         financial  statements in 2003.  The landlord  appealed  this  decision.
         Given the  uncertainty  of the  results of an appeal and  liability  we
         would have by reason of a reversal,  we agreed to settle the matter for
         $800,000 and have increased the estimated  reserve in 2004.  Settlement
         agreements are currently being drafted.

         In November  2004, a contractor,  pursuant to a  construction  contract
         entered into to build a QSR  location,  instituted an action for unpaid
         amounts  under the  construction  contract.  We have  disputed  certain
         change orders under the contract and seek to invoke the penalty  clause
         under the contract. The action is pending in the Broward County Circuit
         Court,  State of Florida.  We believe that our ultimate  liability will
         not exceed  $50,000.  Provisions  have been made in the 2004  financial
         statements for this amount.

         In May  2004,  a suit  was  filed  by the  landlord  of one of our  QSR
         locations as a result of our premature termination of the lease on that
         location by one of our subsidiaries The landlord has obtained a consent
         judgment against the subsidiary for approximately $75,000. The landlord
         now seeks to enforce the judgment  against the subsidiary.  While we do
         not believe the  judgment  can be enforced  against us, we believe that
         its ultimate  liability will not exceed  $75,000.  Provisions have been
         made in the 2004 financial statements for this amount.

         In  March  2005,  we  settled  a case  relating  to  payments  due to a
         contractor  for   construction   done  on  one  of  our  other  concept
         restaurants.  The matter was settled for $90,000 and has been  recorded
         in the 2004 financial statements.

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

11.      TRANSACTIONS WITH RELATED PARTIES:

         We were the sole tenant of an  administrative  office building which we
         leased  from a  partnership  owned by  Sbarro  Enterprises,  L.P.,  the
         limited  partners  of  which  are  Mario  Sbarro,  our  Chairman  and a
         director,  Joseph Sbarro,  our Senior Vice  President,  Secretary and a
         director, Anthony Sbarro, our Vice Chairman,  Treasurer and a director,
         and Carmela Sbarro, Vice President and a director. The annual rent paid
         was  $100,000,   $300,000  and  $300,000  for  2004,   2003  and  2002,
         respectively.  We were advised by a real estate broker that the rent to
         be paid by us was  comparable  to the rent that would have been charged
         by an unaffiliated  third party. The lease was terminated upon the sale
         of the building by the partnership in April 2004.



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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         On  April  5,  2001,   we  loaned  $3.2   million  to  certain  of  our
         shareholders,  including:  Mario Sbarro,  $1.1 million,  Joseph Sbarro,
         $1.2 million and Anthony  Sbarro,  $0.9  million.  The due dates of the
         related  notes  have been  extended  to April 6,  2007.  The notes bear
         interest  at the rate of  4.63%  per  annum,  payable  annually.  As of
         January 2, 2005, the balance of these loans was $2.9 million.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
         including:  Mario Sbarro,  $0.6 million,  Joseph Sbarro,  $0.7 million,
         Anthony Sbarro,  $0.5 million,  and the Trust of Carmela  Sbarro,  $1.0
         million.  The due dates of the  related  notes  have been  extended  to
         December  28,  2007.  The notes bear  interest at the rate of 2.48% per
         annum  payable  annually.  As of January 2, 2005,  the balance of these
         loans was $2.6 million.

         In March  2004,  we loaned  $40,000  to  Gennaro  A.  Sbarro,  then our
         Corporate Vice President and President of our Franchising and Licensing
         Division.  The note was repaid in February 2005  including  interest at
         2.69% per annum.  In connection with his resignation in 2004 we entered
         into  a  severance  agreement  providing  for a  lump  sum  payment  of
         approximately $453,000.

         In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
         a note for  approximately  $90,000  for  royalties  due us for 2001 and
         2000.  The  note  is  repayable  at  approximately  $10,000  per  year,
         including  interest at 2.96% per annum,  with a balloon  payment due on
         June 30, 2010.  The  principal  balance of the notes at January 2, 2005
         was approximately $79,000.

         The  interest  rates  charged  on the  foregoing  related  party  loans
         included above approximate the Applicable  Federal Rate (AFR) published
         by the Internal  Revenue  Service at the time of the loan.  We recorded
         interest  income  from  related  parties  was  approximately  $211,000,
         $223,000 and $221,000 in 2004, 2003 and 2002, respectively.

         Bernard  Zimmerman  & Company,  Inc.,  of which  Bernard  Zimmerman,  a
         director of Sbarro,  is President and a majority  shareholder,  renders
         financial and  consulting  assistance to us, for which it received fees
         of  approximately  $26,000 for services  rendered  during 2004 and $0.3
         million in both 2003 and 2002.

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

         We and our other  concepts  have  purchased  printing  services  from a
         corporation owned by a son-in-law of Mario Sbarro, for which we and our
         other concepts paid, in the aggregate,  $480,000, $340,000 and $422,000
         in 2004, 2003 and 2002, respectively.

         Companies  owned by a son of Anthony  Sbarro are  parties to  franchise
         agreements  with us  containing  terms  similar to those in  agreements
         entered into by us with  unrelated  franchises.  Royalties  under these
         agreements in 2004, 2003 and 2002 were approximately  $89,000,  $90,000
         and $92,000, respectively.



                                      -64-
<PAGE>
                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         As of July 2002,  we sold the assets of a restaurant  to a  corporation
         owned by the  brother-in-law  of our Chairman of the Board for $88,900.
         The sales price  resulted in a loss of  approximately  $64,000 that was
         included in the provision for  restaurant  closings.  That  corporation
         also entered into a franchise agreement with us. We received promissory
         notes for each of the  purchase  price and initial  franchise  fee that
         were payable over seven years and bore interest on the unpaid principal
         balances  at 7% per annum.  In  addition  in 2002,  we  subleased  this
         location to that  franchisee.  Payments  under the sublease  were being
         made  directly to the  landlord by the  franchisee.  Interest  payments
         received relating to the promissory notes was  approximately  $4,000 in
         2003. No interest payments were received in 2004.  Royalties paid under
         this arrangement were approximately  $1,800 in 2004, $3,300 in 2003 and
         $6,800 in 2002.

         In March 2005, we  re-purchased  the assets of the restaurant  from the
         corporation for $88,900.  The remaining unpaid principal balance of the
         promissory  notes were offset against the purchase price of the assets.
         The  remaining  balance  under the  promissory  notes of  approximately
         $22,000, and accrued but unpaid royalties of approximately  $31,000 had
         been fully reserved in 2004.

         In 2002, a company in which Gennaro J. Sbarro,  then our Corporate Vice
         President and President of our Casual and Fine Dining  Division and the
         son of Joseph Sbarro,  has a 50% interest (the other 50% is owned by an
         unaffiliated  third party) entered into a sublease for $50,000  greater
         than rent or other charges due under the lease.  Rent and other charges
         due under the lease are paid  directly to the  landlord.  Payment under
         the sublease are due to us. Rent of approximately  $23,000 was included
         in the 2004 results of  operations.  To reimburse  Sbarro for equipment
         costs, the Company owned by Mr. Sbarro,  issued a non-interest  bearing
         note in our favor  for  approximately  $55,000,  that is  repayable  in
         eighteen  equal  monthly  installments  of  approximately  $3,000 which
         commenced in November  2002.  The  principal  balance on the note as of
         January 2, 2005 was approximately  $16,000. As of October 31, 2003, Mr.
         Sbarro  resigned from his positions with us and a corporation  owned by
         Mr. Sbarro entered into an eighteen month  agreement with us to provide
         consulting services to our quick service and casual dining division for
         approximately $23,000 per month and the reimbursement for customary and
         usual  expenses  that  may  be  incurred  by  that  corporation  in the
         performance of its services.

         In  October  2003,   we  sold  the  assets  of  three   underperforming
         Sbarro-owned  restaurants  that we proposed to close to entities  owned
         separately  by each of three other of Anthony  Sbarro's  sons,  each of
         which entered into a franchise agreement with us. Two of the locations,
         which  had  no  remaining   book  value,   were   transferred   for  no
         consideration  while the third was sold for $0.3  million that was paid
         in  full,  and  resulted  in a gain to  Sbarro  of  approximately  $0.1
         million.  In connection with the sale of the locations,  the employment
         of these  individuals  with  Sbarro was  terminated  and we  included a
         charge for their total  severance pay of  approximately  $60,000 in our
         results of operations  for 2003. The franchise  agreements  provide for
         the payment of 5% of the location's sales as a continuing franchise fee
         but did not  provide  for any  initial  franchise  fee.  We have waived
         continuing  franchise fees through 2006. In addition,  we subleased two
         of  the



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

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         locations to two of the  franchisees.  Payments under the subleases are
         being made directly to the landlord by the franchisees and they are not
         in default.

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
         position as Manager of  Administration  -  Construction.  A corporation
         owned by her entered into a one year  agreement  to provide  consulting
         services related to construction  matters to us for a series of monthly
         payments  totaling  $100,000.  In addition,  that corporation  provided
         consulting services related to construction  matters for our steakhouse
         joint venture of $18,900 in 2004.

         In February 2005, a joint venture in which we have a 70% interest, sold
         the assets of one of our other joint venture restaurants,  to a company
         owned by  Gennaro A.  Sbarro  our then  Corporate  Vice  President  and
         President  of our  Franchising  and  Licensing  Division and the son of
         Mario Sbarro for approximately $900,000 (which approximated fair value)
         resulting in a loss of  approximately  $284,000.  The Company  received
         $300,000 in cash and promissory notes of $600,000. The promissory notes
         are payable  monthly in 72 equal monthly  installments in the amount of
         $8,333  including  interest  at 5% per annum with a balloon  payment of
         $111,375 at maturity.  The joint venture also sold the inventory of the
         restaurant for  approximately  $67,000 with $50,000 paid at closing and
         the  remainder of $17,000  payable in four equal  monthly  installments
         from March 2005 to June 2005.  The company owned by Mr. Sbarro  entered
         into a sublease,  which we guarantee and a Security Agreement to secure
         the obligations  under the promissory  notes. The sublease and Security
         Agreement  are intended to enable  Sbarro to recapture  the business in
         the event of an uncured default.

         Compensation of related parties includes  salary,  taxable benefits and
         accrued bonus.  Salaries for 2004 include one additional week of salary
         due to our 53 week year in 2004. Compensation is as follows:

          o    Mario  Sbarro was our  Chairman of the Board in 2004 and Chairman
               of the Board,  President and Chief Executive  Officer in 2003 and
               2002.  His  compensation  was  approximately  $884,000  in  2004,
               $700,000 in 2003 and $920,000 in 2002.

          o    Anthony  Sbarro was our Vice  Chairman of the Board and Treasurer
               in 2004,  2003  and  2002.  His  compensation  was  approximately
               $582,000 in 2004, $400,000 in 2003 and $545,000 in 2002.

          o    Joseph  Sbarro  was  our  Senior  Executive  Vice  President  and
               Secretary  in  2004,   2003  and  2002.  His   compensation   was
               approximately  $585,000 in 2004, $400,000 in 2003 and $575,000 in
               2002.




                                      -66-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         In addition to the compensation of Mario, Anthony, and Joseph Sbarro:

          o    Carmela Sbarro,  the mother of Mario,  Anthony and Joseph Sbarro,
               who was a co-founder of Sbarro and serves as Vice President and a
               director,  received  $100,000  from us for  services  rendered in
               2004, 2003 and 2002.

          o    Other members of the immediate families of Mario, Anthony, Joseph
               and Carmela  Sbarro who are our employees  were paid an aggregate
               of approximately $860,000, $1,344,000 and $1,565,000 during 2004,
               2003 and 2002, respectively.

         The company has a 40% equity  interest in Boulder Creek  Steakhouse and
         provided administrative services for $165,000, $172,000 and $148,000 in
         2004, 2003 and 2002, respectively.

12.      PROVISION FOR ASSET IMPAIRMENT,  RESTAURANT CLOSINGS,  AND LOSS ON SALE
         OF OTHER CONCEPT  RESTAURANT  (IN  THOUSANDS):

         The provision for asset impairment,  restaurant closings/remodels,  and
         loss on sale of other concept restaurant consists of the following:

<TABLE>
<CAPTION>
                                                  2004                    2003                   2002
                                                  ----                    ----                   ----
<S>                                              <C>                     <C>                     <C>
         Impairment of assets                    $1,103                  $4,100                  $400
         Restaurant closings/remodels               815                   2,000                 8,800
         Loss on sale of other
         concept restaurant                         284                       -                     -
                                                 ------                  ------                ------
                                                 $2,202                  $6,100                $9,200
                                                 ======                  ======                ======

</TABLE>

13.      DIVIDENDS:

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

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

         o        $3.1 million  with respect to our taxable  income for 2001 was
                  paid in 2002.





                                      -67-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                           FIRST            SECOND            THIRD          FOURTH
                                          QUARTER          QUARTER           QUARTER         QUARTER
                                          -------          -------           -------         -------
                                                               (IN THOUSANDS)
<S>                                       <C>              <C>               <C>            <C>
         2004
         Revenues                         $96,211          $72,717           $78,306        $101,660
         Gross profit (a)                  70,837           52,747            57,988          77,668
         Net (loss) income (d)             (6,161)          (4,556)           (1,029)          7,423


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

</TABLE>
         (a)      Gross profit  represents  the  difference  between  restaurant
                  sales and the cost of food and paper products.

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

         (c)      We recorded a provision  for asset  impairment of $3.0 million
                  and $1.1  million  in the third and fourth  quarters  of 2003,
                  respectively.

         (d)      In the fourth  quarter of 2004,  we recorded a  provision  for
                  asset impairment of $1.1 million,  litigation  expense of $1.2
                  million and  reversed an accrual  for a rebate  receivable  of
                  $0.3  million.  In  addition,  we  reduced  our tax  liability
                  reserve by  approximately  $0.4 million to reflect our current
                  estimated  tax exposure and reported  income of  approximately
                  $1.2 million for a settlement  agreement  with the  bankruptcy
                  trustee of our former distributor.







                                      -68-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.      EQUITY INVESTMENT IN BOULDER CREEK STEAKHOUSE:

         The company has a 40% equity interest in Boulder Creek Steakhouse.  The
         combined condensed  financial  statements below include the accounts of
         Boulder  Creek  Holding  LLC  ("Holding"),  Boulder  Creek  Venture LLC
         ("Venture") and Boulder Creek Properties LLC  ("Properties")  and their
         wholly owned subsidiaries  (collectively  "Boulder Creek").  Properties
         holds  the  trademark  used  by  Holding  and  Venture.   All  material
         intercompany   accounts  and  transactions   have  been  eliminated  in
         combination.

         The  members  of  Holding,   Venture  and  Properties  are  Scotto  LLC
         ("Scotto") (40%),  Sbarro Boulder LLC ("Sbarro  Boulder") (40%) and Fee
         Fee LLC ("Fee Fee") (20%) (the "member  LLCs").  Sbarro Boulder is 100%
         owned by Sbarro, Inc.

         INCOME STATEMENT DATA (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                        2004                     2003                   2002
                                                        ----                     ----                   ----
<S>                                                    <C>                      <C>                   <C>
         Net sales                                     $49,697                  $50,141               $39,889
         Costs and expenses                             47,149                   46,960                37,344
         Interest expense, net                             477                      531                   611
         Loss from discontinued
              operations                                    47                      901                   157
                                                        ------                   ------                ------
         Net income                                     $2,024                   $1,749                $1,777
                                                        ======                   ======                ======
</TABLE>




         BALANCE SHEET DATA (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                          2004                     2003
                                                          ----                     ----
<S>                                                    <C>                      <C>
         Total assets                                  $30,031                  $27,290
         Total liabilities                             $21,628                  $20,147
         Members' equity                               $ 8,403                   $7,143
</TABLE>







                                      -69-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.      GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:

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

         The following condensed consolidating financial information presents:

         (1)      Condensed  consolidating  balance sheets as of January 2, 2005
                  and December 28, 2003 and related statements of operations and
                  cash  flows  for the  fiscal  years  ended  January  2,  2005,
                  December 28, 2003 and  December 29, 2002 of (a) Sbarro,  Inc.,
                  the parent, (b) the guarantor subsidiaries as a group, (c) the
                  nonguarantor  subsidiaries  as a  group  and (d)  Sbarro  on a
                  consolidated basis.

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

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




                                      -70-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                              AS OF JANUARY 2, 2005

                                 (IN THOUSANDS)

                                     ASSETS



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

<S>                                             <C>           <C>              <C>           <C>              <C>
Current assets:
   Cash and cash equivalents                    $57,150       $4,680           $1,170        $      -         $63,000
   Restricted cash for untendered shares
   Receivables less allowance for
     doubtful accounts of $431:
     Franchise                                    1,846            -                -               -           1,846
     Other                                           53        1,053              574               -           1,680
                                               --------     --------           ------       ---------        --------
                                                  1,899        1,053              574               -           3,526

   Inventories                                    1,204        1,465              140               -           2,809
   Prepaid expenses                               4,020         (199)              56               -           3,877
   Current portion of loans receivable
       from officers                                 46            -                -               -              46
                                               --------     --------           ------       ---------        --------
     Total current assets                        64,319        6,999            1,940               -          73,258

Intercompany receivables                            406      439,364           (1,875)       (437,895)              -

Investment in subsidiaries                       67,570        1,944                -         (69,514)              -

Property and equipment, net                      33,307       50,799            4,359               -          88,465


Intangible assets:
   Trademarks, net                              195,916            -                -               -         195,916
   Goodwill                                       9,204            -                -               -           9,204
   Deferred financing costs, net                  4,326          195                -               -           4,521

Loans receivable from officers less               5,602            -                -               -           5,602
current portion

Other assets                                      5,906        1,720               21               -           7,647
                                               --------     --------           ------       ---------        --------
                                               $386,556     $501,021           $4,445       $(507,409)       $384,613
                                               ========     ========           ======       ==========       ========

</TABLE>

                                      -71-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                              AS OF JANUARY 2, 2005

                                 (IN THOUSANDS)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



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

<S>                                           <C>                <C>            <C>             <C>           <C>
Current liabilities:
   Accounts payable                           $10,877            $190           $526       $       -          $11,593
   Accrued expenses                            16,802           2,474          1,472               -           20,748
   Accrued interest payable                     8,181               -              -               -            8,181
   Current portion of mortgage payable              -             182              -               -              182
                                             --------        --------         ------       ---------         --------
     Total current liabilities                 35,860           2,846          1,998               -           40,704
                                             --------        --------         ------       ---------         --------

Intercompany payables                         437,895               -              -        (437,895)               -
                                             --------        --------         ------       ---------         --------

Deferred rent                                   9,811               -            415               -           10,226
                                             --------        --------         ------       ---------         --------

Long-term debt, net of
   original issue discount                    253,207          15,142              -               -          268,349
                                             --------        --------         ------       ---------         --------


Shareholders' equity (deficit):
   Preferred stock, $1 par value;
     authorized 1,000,000 shares; none
     issued
   Common stock, $.01 par value:
     authorized 40,000,000 shares;
     issued and outstanding 7,064,328
     shares                                        71               -              -               -               71
   Additional paid-in capital                 (65,479)        133,671          3,018         (71,200)              10
   Retained earnings (deficit)               (284,809)        349,362           (986)          1,686           65,253
                                             --------        --------         ------       ---------         --------
                                             (350,217)        483,033          2,032         (69,514)          65,334
                                             --------        --------         ------       ---------         --------
                                             $386,556        $501,021         $4,445       $(507,409)        $384,613
                                             ========        ========         ======       ==========        ========
</TABLE>






                                      -72-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 28, 2003

                                 (IN THOUSANDS)

                                     ASSETS



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

<S>                                             <C>           <C>              <C>        <C>                 <C>
Current assets:
   Cash and cash equivalents                    $49,536       $5,595           $1,299     $         -         $56,430
   Receivables net of allowance for
     doubtful accounts of $488:
     Franchise                                    1,700            -                -               -           1,700
     Other                                        (191)          966              396               -           1,171
                                               --------     --------           ------       ---------        --------
                                                  1,509          966              396               -           2,871

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

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

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

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


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

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

Other assets                                      7,476        1,822             (653)         (1,030)          7,615
                                               --------     --------           ------       ---------        --------
                                               $388,717     $382,719           $5,947       $(390,553)       $386,830
                                               ========     ========           ======       ==========       ========
</TABLE>


                                      -73-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 28, 2003

                                 (IN THOUSANDS)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



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

<S>                                           <C>                <C>            <C>           <C>             <C>
Current liabilities:
   Accounts payable                           $11,859            $129           $419         $1,327           $13,734
   Accrued expenses                            14,974           1,447          1,806              -            18,227
   Accrued interest payable                     8,181               -              -              -             8,181
   Current portion of mortgage payable              -             168              -              -               168
                                             --------        --------         ------      ---------          --------
     Total current liabilities                 35,014           1,744          2,225          1,327            40,310
                                             --------        --------         ------      ---------          --------

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

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

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


Shareholders' equity (deficit):
   Preferred stock, $1 par value;
     authorized 1,000,000 shares; none
     issued                                         -               -              -              -                 -
   Common stock, $.01 par value:
     authorized 40,000,000 shares;
     issued and outstanding 7,064,328
     shares                                        71               -              -              -                71
   Additional paid-in capital                      10          65,469          2,477        (67,946)               10
   Retained earnings (deficit)               (224,450)        297,223         (3,197)             -            69,576
                                             --------        --------         ------      ---------          --------

                                             (224,369)        362,692           (720)       (67,946)           69,657
                                             --------        --------         ------      ---------          --------

                                             $388,717        $382,719         $5,947      $(390,553)         $386,830
                                             ========        ========         ======     ===========         ========
</TABLE>





                                      -74-
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2005

                                 (IN THOUSANDS)


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

<S>                                          <C>            <C>               <C>           <C>            <C>
   Restaurant sales                          $143,649       $172,361          $15,303       $       -      $  331,313
   Franchise related income                    12,093              -                -               -          12,093
   Real estate and other                        1,838          3,547              103               -           5,488
   Intercompany charges                        11,747              -                -         (11,747)              -
                                              -------        -------           ------       ---------      ----------
       Total revenues                         169,327        175,908           15,406         (11,747)        348,894
                                              -------        -------           ------       ---------      ----------

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           28,948         39,001            4,124               -          72,073
     Payroll and other employee
         benefits                              38,641         47,212            5,004               -          90,857
     Other operating costs                     51,444         58,925            4,202               -         114,571
     Depreciation and amortization              7,145          8,347              908               -          16,400
     General and administrative                17,143         11,254              179               -          28,576
     Asset impairment, restaurant
         closings & loss on sale of             2,202              -                -               -           2,202
         other concept restaurant
     Intercompany charges                           -         11,747                -         (11,747)              -
                                              -------        -------           ------       ---------      ----------
       Total costs and expenses               145,523        176,486           14,417         (11,747)        324,679
                                              ========       ========          ======       ==========     ==========

Operating income (loss)                        23,804           (578)             989               -          24,215
                                              -------        -------           ------       ---------      ----------

Other (expense) income:
   Interest expense                           (29,361)        (1,333)               -               -         (30,694)
   Interest income                                654              -                -               -             654
   Equity in net income of
         unconsolidated affiliates                855              -                -               -             855
   Other income                                 1,181              -                -               -           1,181
                                              -------        -------           ------       ---------      ----------
Net other expense                             (26,671)        (1,333)               -               -         (28,004)
                                              -------        -------           ------       ---------      ----------

(Loss) income before taxes                     (2,867)        (1,911)             989               -          (3,789)

Income taxes                                      500             -                34               -             534
                                              -------        -------           ------       ---------      ----------
Net (loss) income                             $(3,367)       $(1,911)            $955       $       -         $(4,323)
                                              ========       ========          ======       ==========     ===========
</TABLE>






                                      -75-
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                           GUARANTOR      NONGUARANTOR                    CONSOLIDATED
                                            PARENT       SUBSIDIARIES     SUBSIDIARIES    ELIMINATIONS       TOTAL
                                            ------       ------------     ------------    ------------       -----
Revenues:
<S>                                          <C>            <C>               <C>        <C>                 <C>
   Restaurant sales                          $135,295       $164,535          $14,878    $          -        $314,708
   Franchise related income                    10,868              -                -               -          10,868
   Real estate and other                        4,077          2,586               85               -           6,748
   Intercompany charges                        10,728              -                -         (10,728)              -
                                             ---------       --------         -------      ----------        ---------
       Total revenues                         160,968        167,121           14,963         (10,728)        332,324
                                             ---------       --------         -------      ----------        ---------

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

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

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

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

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

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





                                      -76-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002

                                 (IN THOUSANDS)

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

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

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


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

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

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



                                      -77-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2005

                                 (IN THOUSANDS)


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

<S>                                           <C>            <C>                 <C>         <C>              <C>
Net (loss) income                             $(3,367)       $(1,911)            $955        $      -         $(4,323)
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization              7,145          8,347              908               -          16,400
     Amortization of deferred
       financing costs                            962              -                -               -             962
     Amortization of bond discount                379              -                -               -             379
     Allowance for doubtful accounts
       receivable                                 222              -                -               -             222
     Asset impairment, restaurant
       closings and loss on sale of
         other concept restaurant               2,202              -                -               -           2,202
     Increase (decrease) in deferred
       rent, net                                  502              -             (229)              -             273
     Equity in net income of
       unconsolidated affiliates                 (855)             -                -               -            (855)
     Other                                        155              -                -               -             155
     Changes in operating assets and
       liabilities:
     Increase in receivables                     (612)           (87)            (178)              -            (877)
     Decrease (increase) in inventories           (27)           (78)               3               -            (102)
     Increase in prepaid expenses                  (2)           (28)              (3)              -             (33)
     Decrease (increase) in other
       assets                                   2,117            103             (732)         (1,030)            458
     Increase (decrease) in accounts
       payable and accrued expenses              (936)         1,088             (227)          1,030             955
                                               -------        -------            -----        -------          -------
Net cash provided by operating
   activities                                   7,885          7,434              497               -          15,816
                                               -------        -------            -----        -------          -------

Investing activities:

Purchases of property and equipment            (6,103)        (2,144)            (659)              -          (8,906)
                                               -------        -------            -----        -------          -------

Net cash used in investing activities          (6,103)        (2,144)            (659)              -          (8,906)
                                               -------        -------            -----        -------          -------
</TABLE>







                                      -78-
<PAGE>




                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2005

                                 (IN THOUSANDS)



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

<S>                                             <C>        <C>              <C>             <C>                   <C>
Financing activities:
Mortgage principal repayments                       -           (167)               -               -            (167)
Tax distributions                                (682)             -                -               -            (682)
Reduction in loans receivable from
   officers                                       509              -                -               -             509
                                                                   -                -
Intercompany balances                           6,005         (6,039)              34               -               -
                                               ------         ------       ----------      ----------         --------
Net cash (used in) provided by
   financing activities                         5,832         (6,206)              34               -            (340)
                                               ------         ------       ----------      ----------         --------

Increase (decrease) in cash and cash
   equivalents                                  7,614           (916)            (128)              -           6,570
Cash and cash equivalents at beginning
   of year                                     49,536          5,596            1,298               -          56,430
                                               ------         ------       ----------      ----------         --------

Cash and cash equivalents at end of
   year                                       $57,150         $4,680           $1,170               -         $63,000
                                              =======         ======           ======       =========         =======

Supplemental disclosure of cash flow
   information:

Cash paid during the period for income
   taxes                                         $417         $    -       $        -      $        -            $417
                                               ------         ------       ----------      ----------         --------
Cash paid during the period for
   interest                                    28,058         $1,294       $        -      $        -         $29,352
                                               ======         ======       ==========      ==========         =======
</TABLE>




                                      -79-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)


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

<S>                                          <C>             <C>                 <C>      <C>                <C>
Net (loss) income                            $(10,874)       $(7,171)            $815     $         -        $(17,230)
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization              8,674         10,029            1,009               -          19,712
       Amortization of deferred
         financing                              1,148              -                -               -           1,148
       Amortization of bond discount              379              -                -               -             379
     Allowance for doubtful accounts
       receivable                                 435              -                -               -             435
     Asset impairment, restaurant
       closings and loss on sale of
         other concept restaurant               4,199          1,452              422               -           6,073
     Minority interest                                                             41               -              41
     Increase in deferred rent, net               200              -               42               -             242
     Equity in net income of
       unconsolidated affiliates                 (425)             -                -               -            (425)
        Other                                      44              -                -               -              44
     Changes in operating assets and
        liabilities:
     Decrease in receivables                       15            121               55               -             191
     Decrease in inventories                      239            339                -               -             578
     Increase in prepaid expenses                (185)           (41)             (27)              -            (253)
     Decrease (increase) in other
       assets                                     816            (49)             194         $(1,327)           (366)
     Increase (decrease) in accounts
       payable and accrued expenses               849         (1,108)            (603)          1,327             465
                                                -----          -----            -----      ----------          ------
Net cash provided by operating
   activities                                   5,514          3,572            1,948               -          11,034
                                                -----          -----            -----      ----------          ------

Investing activities:

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







                                      -80-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)



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

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

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

Increase (decrease) in cash and cash
   equivalents                                  1,879           (943)             323               -           1,259
Cash and cash equivalents at beginning
   of year                                     47,657          6,539              975               -          55,171
                                               ------         -------          -------    -----------          ------

Cash and cash equivalents at end of
   year                                       $49,536         $5,596           $1,298               -         $56,430
                                              =======         ======           ======     ===========         =======

Supplemental disclosure of cash flow
   information:
Cash paid during the period for income
   taxes                                         $290            $85              $13     $         -            $388
                                              =======         ======           ======     ===========         =======
Cash paid during the period for
   interest                                   $28,192         $1,208           $    -     $         -         $29,400
                                              =======         ======           ======     ===========         =======
</TABLE>




                                      -81-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002

                                 (IN THOUSANDS)

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

<S>                                          <C>             <C>               <C>       <C>                   <C>
Net (loss) income                            $(24,839)       $26,990           $2,630    $          -          $4,781
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization             11,097          8,325            1,261               -          20,683
     Allowance for doubtful accounts
       receivable                                 350              -                -               -             350
     Amortization of deferred financing         1,074              -                -               -           1,074
     Amortization of bond discount                379              -                -               -             379
     Increase (decrease) in deferred
       rent, net                                  421           (135)             (74)              -             212
     Asset impairment, restaurant
       closings and loss on sale of
         other concept restaurant               4,727              -            4,469               -           9,196
     Equity in net income of
       unconsolidated affiliates                 (668)             -                -               -            (668)
     Minority interest                                                             52               -              52
     Other                                        (76)             -                -               -             (76)
     Changes in operating assets and
       liabilities:
     Decrease (increase) in receivables         1,755           (475)              28               -           1,308
     (Increase) decrease  in
       inventories                                 (4)            46              210               -             252
     (Increase) decrease in prepaid
       expenses                                  (763)          (187)            (171)              -          (1,121)
     (Increase) decrease in other
       assets                                    (438)           282             (273)              -            (429)
     (Decrease) increase in accounts
       payable and accrued expenses            (3,361)         1,827           (1,886)           (120)         (3,540)
                                            ----------      ---------      -----------    -----------       ----------

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

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

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




                                      -82-
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)

                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002

                                 (IN THOUSANDS)


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

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

(Decrease) increase in cash and cash
    equivalents                                17,963          1,102             (867)              -          18,198
Cash and cash equivalents at beginning
    of year                                    29,694          5,437            1,842               -          36,973
                                             --------        -------         --------       ---------         -------
Cash and cash equivalents at end of
    period                                    $47,657         $6,539             $975       $       -         $55,171
                                             ========        =======         ========       =========         =======


Supplemental disclosure of cash flow
    information:
Cash paid during the period for income
    taxes                                        $533           $262               $1             $ -            $796
                                             ========        =======         ========       =========         =======

Cash paid during the period for
    interest                                  $28,171         $1,327          $     -       $       -         $29,498
                                             ========        =======         ========       =========         =======
</TABLE>





                                      -83-
<PAGE>

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

NONE


Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

         The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of l934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer, have concluded that the disclosure controls and
procedures are not effective for the reasons specified below.

         In connection with the year ended 2004 closing process and the delay in
the filing of our Form 10-K, the following issues were identified:

         o        We had  insufficient  staffing in the accounting and reporting
                  function  and certain  changes in  management  and  accounting
                  personnel  during the course of the audit which  strained  our
                  existing  resources.  We have  been  addressing  the  issue of
                  upgrading  our  finance,   accounting  and  internal   control
                  functions since prior to the  commencement of the audit to add
                  personnel of skills and training  that will not only enable us
                  to accelerate the audit closing  function but also will expand
                  the number of members of our staff with knowledge of technical
                  accounting literature. In this regard, we have changed certain
                  senior   accounting   personnel   and  added  a  director   of
                  compliance. We are continuing to expand our personnel in these
                  areas by adding three  additional  senior  accountants  in our
                  corporate  accounting  department,  one of whom just  recently
                  joined  us.  We  will  continue  to  review  whether  we  need
                  additional accounting personnel.

         o        Our existing accounting resources were further strained by our
                  need to  analyze  the  impact of the views of the Staff of the
                  Securities and Exchange Commission set forth in a letter dated
                  February 7, 2005 from the Chief  Accountant of the  Securities
                  and  Exchange  Commission  to the  Chairman  of the Center for
                  Public Company Audit Firms of the American Institute of Public
                  Accountants  concerning the  accounting for operating  leases,
                  which  has  effected  many  companies,  especially  restaurant
                  companies,  with significant leases. As we have just completed
                  this analysis, we are in the process of examining the steps to
                  be taken to strengthen our procedures in this area,  including
                  providing training to all present and future staff accountants
                  to ensure,  on a  prospective  basis,  the proper  accounting,
                  reporting,  documentation  and  application  of SFAS  No.  13,
                  "Accounting for Leases" and FASB Technical  Bulletin No. 85-3,
                  "Accounting   for  Operating   Leases  with   Scheduled   Rent
                  Increases."

Internal Control Over Financial Reporting.

         Except as  described  above,  there  have not been any  changes  in the
Company's internal control over financial  reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) since the beginning of the
fourth quarter of 2004 that have materially  affected,  or are reasonable likely
to materially affect, the Company's internal control over financial reporting.

                                      -84-
<PAGE>

ITEM 9B. OTHER INFORMATION
-------- -----------------

On February 17, 2005 our Board of Directors authorized our payment of bonuses to
all of our salaried  employees and certain hourly employees relating to our 2004
results of  operations.  The bonuses  approximate  $1.3  million  and,  with the
exception  of the bonuses to Messrs.  Mario  Sbarro,  Joseph  Sbarro and Anthony
Sbarro (see "Executive  Compensation" in Item 11 of this report),  were based on
percentages of the employee's  compensation,  which percentages varied depending
upon their category of employment.  The bonuses to the executive  officers named
in the summary compensation table under the caption "Executive  Compensation" in
Item 11 of this report were as follows:

         Michael O'Donnell                                 $141,750

         Mario Sbarro                                      $157,500

         Anthony Sbarro                                    $157,500

         Joseph Sbarro                                     $157,500

         Peter Beaudrault                                  $ 94,500



As part of their at will employment agreements we entered into letter agreements
on  December  10,  2004  with,  among  others,   Carmela  Merendino,   our  Vice
President-Administration,   and  Anthony  Missano,  President  of  our  Business
Development  Division,  which provide for them to receive a special bonus in the
event of a public  offering of our common stock,  a change in control of Sbarro,
including  by  merger,  sale of stock or sale of  assets,  or a  liquidation  or
dissolution of Sbarro. The special bonus will be based on the per share proceeds
(as defined in the letter agreements)  received by our shareholders in excess of
a threshold amount.

Similar agreements were previously entered into by us with Peter Beaudrault, our
new  President and Chief  Executive  Officer,  and Anthony J. Puglisi,  our Vice
President  and  Chief  Financial  Officer,  as part of their at will  employment
arrangements   entered  into  at  the  time  they  joined  us.  (See  "Executive
Compensation" in Item 11 of this report.)







                                      -85-
<PAGE>


                                    PART III
                                    --------


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

         Our directors  and executive  officers and their ages at March 31, 2005
         are:

         NAME                    AGE                POSITION
         ----                    ---                --------
         Mario Sbarro             63      Chairman of the Board and Director
         Anthony Sbarro           58      Vice Chairman of the Board, Treasurer
                                            and Director
         Joseph Sbarro            64      Senior Executive Vice President,
                                            Secretary and Director
         Carmela Sbarro           83      Vice President and Director
         Peter  Beaudrault        50      President - Chief Executive Officer
         Anthony J. Missano       46      President,  Business Development and
                                            Corporate Vice President
         Carmela N. Merendino     40      Vice President - Administration
         Anthony J. Puglisi       55      Vice President and Chief Financial
                                            Officer
         Harold L. Kestenbaum     55      Director
         Richard A. Mandell       62      Director
         Michael O'Donnell        49      Director
         Terry Vince              76      Director
         Bernard Zimmerman        72      Director

         MARIO  SBARRO  has  been  an  officer,   a  director  and  a  principal
shareholder of Sbarro since its organization in 1977, serving as Chairman of our
board of  directors,  and  until  September  2003,  as our  President  and Chief
Executive Officer.

         ANTHONY  SBARRO  has  been  an  officer,  a  director  and a  principal
shareholder of Sbarro since its  organization in 1977,  serving as Vice Chairman
of our board of directors and Treasurer for more than the past five years.

         JOSEPH  SBARRO  has  been  an  officer,  a  director  and  a  principal
shareholder  of  Sbarro  since  its  organization  in 1977,  serving  as  Senior
Executive Vice President and Secretary for more than the past five years.

         CARMELA  SBARRO has been a Vice  President  for more than the past five
years.  Mrs.  Sbarro was a founder of Sbarro,  together  with her late  husband,
Gennaro Sbarro.  Mrs. Sbarro devotes a substantial portion of her time to recipe
and product  development.  Mrs.  Sbarro has been a director  since January 1998.
Mrs.  Sbarro  also  served as a director  from March 1985 until  December  1988,
following which she was elected  director  emeritus until her re-election to our
board of directors.





                                      -86-
<PAGE>

         PETER BEAUDRAULT was elected  President and Chief Executive  Officer in
March 2005 to succeed Mr.  O'Donnell.  Prior there to, Mr.  Beaudrault served as
Corporate  Vice  President  and President of our Quick  Service  Division  since
joining  us in March  2004.  Prior to  joining  Sbarro,  Mr.  Beaudrault  was an
industry consultant from January 2003 and for more than five years prior to that
was  the  President  and  Chief   Executive   Officer  of  the  Hard  Rock  Cafe
International, a restaurant chain.

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

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

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

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

         RICHARD A. MANDELL has been a private investor and financial consultant
since  April  1998.  Prior  to  that  date,  he was  Vice  President  -  Private
Investments  of Clariden  Asset  Management  (NY) Inc., a subsidiary of Clariden
Bank, a private Swiss bank,  from January 1996 until  February  1998.  From 1982
until  June  1995,  Mr.  Mandell  served as a Managing  Director  of  Prudential
Securities  Incorporated,  an  investment  banking firm. He became a director of
Sbarro in March 1986.  Mr.  Mandell is also a director of Encore  Capital Group,
Inc.  and Smith &  Wollensky  Restaurant  Group,  Inc.  Mr.  Mandell  has been a
certified public accountant in New York for more than the past thirty years.

         MICHAEL  O'DONNELL has been  Chairman of the Board of Directors,  Chief
Executive  Officer and  President of Champps  Entertainment,  Inc., a restaurant
chain  operator  and  franchisor,  since March 2, 2005,  when he resigned as our
President and Chief Executive  Officer, a position he held since September 2003.
Mr.  O'Donnell  remains a director  of the  Company,  a position in which he has
served since September 2003. He joined us as President,  Chief Executive Officer
and was  elected to our Board of  Directors  in  September,  2003.  Prior to his
joining Sbarro,  Mr. O'Donnell was an industry  consultant from January 2003 and
for more than five years  prior to that was the  President  and Chief  Executive
Officer of New Concepts at Outback  Steakhouse  Inc., a  restaurant  chain.  Mr.
O'Donnell is a director of Champps Entertainment and Boston Inner City Schools.



                                      -87-
<PAGE>

         TERRY VINCE has been  Chairman of the Board and  President of Sovereign
Hotels,  Inc.,  a company  that owns and  manages  hotels.  Mr.  Vince  became a
director of Sbarro in December 1988.

         BERNARD ZIMMERMAN has been President of Bernard Zimmerman & Co., Inc. a
financial and management  consulting  firm, for over 30 years. In addition,  Mr.
Zimmerman is the President and Chief  Executive  Officer and a director of FCCC,
Inc.,  and GVC  Venture  Corporation,  both  companies  are  engaged  in seeking
business  combinations,  mergers and/or  acquisitions.  Mr. Zimmerman has been a
certified  public  accountant  in New York for  more  than the past  thirty-five
years. He became a director of Sbarro in March 1985.

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

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

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

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

         During 2004, our officers, directors and shareholders were not required
to file reports under Section 16(a) of the Securities Exchange Act of 1934.

         We have  adopted a Code of Ethics that applies to,  among  others,  our
principal executive officer,  principal financial officer,  principal accounting
officer, controller and other persons performing similar functions.

         We undertake to provide to any person,  without charge, upon request, a
copy of our Code of  Ethics.  If you wish a copy of our Code of  Ethics,  please
write to our Chief  Financial  Officer,  Sbarro,  Inc.,  401  Broadhollow  Road,
Melville, New York 11747-4714.






                                      -88-
<PAGE>



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

SUMMARY COMPENSATION TABLE

         The following table sets forth information  concerning the compensation
of Michael  O'Donnell who served as our chief executive  officer during 2004 and
other  five most  highly  compensated  persons  who were  serving  as  executive
officers at the end of our 2004 year (including Peter  Beaudrault,  who replaced
Mr. O'Donnell as our Chief Executive  Officer in March 2005) for services in all
capacities to us and our subsidiaries during our 2004, 2003 and 2002 years:

<TABLE>
<CAPTION>
                                                                                ANNUAL                  ALL OTHER
                                                                             COMPENSATION             COMPENSATION
NAME AND                                                                     ------------             ------------
PRINCIPAL POSITION                                          YEAR        SALARY        BONUS (1)
------------------                                          ----        ------        ---------

<S>                                                         <C>       <C>             <C>              <C>
Michael O'Donnell (2).................................      2004      $465,418        $141,750         $1,080(3)
President and Chief Executive Officer                       2003       133,816            --              360


Mario Sbarro..........................................      2004      $726,321        $157,500             --
Chairman of the Board, President and                        2003       700,000            --               --
      Chief Executive Officer                               2002       700,000         220,000             --

Anthony Sbarro........................................      2004      $424,631        $157,500             --
Vice Chairman of the Board and Treasurer                    2003       400,000            --               --
                                                            2002       325,000         220,000             --

Joseph Sbarro.........................................      2004      $427,792        $157,500             --
Senior Executive Vice President and                         2003       400,000            --               --
     Secretary                                              2002       325,000         250,000             --

Peter Beaudrault (4)..................................      2004      $303,808         $94,500             --
Corporate Vice President and President - Quick
     Service Division
</TABLE>



         (1)      Annual  compensation  includes  bonuses  in the year  they are
                  earned. Bonuses are paid the year following the year earned.

         (2)      Mr.  O'Donnell  joined us on September 8, 2003 and resigned as
                  an officer effective in March 2005.

         (3)      Represents premium on a $1,000,000 life,  accidental death and
                  dismemberment insurance policy on Mr. O'Donnell.

         (4)      Mr.  Beaudrault was elected our President and Chief  Executive
                  Officer on March 4, 2005 to replace Mr. O'Donnell.



                                      -89-
<PAGE>

COMPENSATION OF DIRECTORS

         The  compensation  of non-employee  directors  previously in effect was
increased  effective March 29, 2004.  Non-employee  directors will now receive a
retainer at the rate of $20,000  (formerly  $16,000) per annum,  a fee of $1,500
(formerly  $1,000) for each  meeting of the Board  attended  and a fee of $1,000
(formerly  $500) for each meeting of a committee of the Board  attended on which
the  director  serves if the meeting is not held on the same day as a meeting of
the Board. The Chairman of the Audit Committee will continue to receive a $2,500
per  annum  retainer  in  addition  to  regular   committee   compensation   and
non-employee  directors  will  continue to be  reimbursed  for their  reasonable
travel and other expenses incurred in attending Board and committee meetings.


EMPLOYMENT AGREEMENTS

         On March 2, 2005, Michael O'Donnell,  who at the time was our President
and  Chief  Executive  Officer,  resigned  to  take a  similar  position  with a
publicly-held  non-competitive  restaurant chain. In connection with his joining
us on September 8, 2003, we entered into an employment  agreement with him which
was in effect until his resignation.  That agreement  provided for a term ending
on December  31, 2006,  subject to earlier  termination  by us or Mr.  O'Donnell
following specified notice. The agreement  provided,  among other things, for an
annual salary of $450,000, subject to increase at the discretion of our board of
directors,  an annual  performance  bonus beginning in 2004 to be based upon the
achievement of increases in EBITDA,  as defined,  and other objectives to be set
forth in  business  plans and budgets  approved  from time to time by our board,
which  bonus,  for the year ending  December  31,  2004,  would not be less than
$112,500 (the bonus paid for 2004 was $141,750);  $1,000,000 of life  insurance;
the  reimbursement of Mr. O'Donnell for certain  relocation,  travel and housing
expenses  incurred;  and a special  incentive award. The special incentive award
was designed to have  rewarded Mr.  O'Donnell for  improvements  in our adjusted
EBITDA,  cash  position  and  long  term  debt  position  over  the  term of the
agreement.  Mr.  O'Donnell  forfeited his special  incentive  award and right to
severance pay by virtue of his voluntary termination of employment.

         We are also a party to a letter  agreement of employment dated December
29, 2003 with Peter J.  Beaudrault  providing for him to serve as Corporate Vice
President  and  President  - Quick  Service  Division.  On  March 4,  2005,  Mr.
Beaudrault  was elected by our Board of Directors as our new President and Chief
Executive Officer to replace Mr. O'Donnell. Mr. Beaudrault's letter agreement of
employment is on an "at will" basis, provides for a salary of $300,000 per annum
(which  has been  increased  to  $450,000  per annum  with his  election  as our
President and Chief  Executive  Officer) and a bonus under our corporate  office
employee  bonus  plan.  In  addition,  in the event of a public  offering of our
common stock, a change in control of Sbarro,  including by merger, sale of stock
or sale of  assets,  or a  liquidation  or  dissolution  of  Sbarro,  he will be
entitled to a special event bonus based on the per share proceeds (as defined in
the letter  agreement)  received  by our  shareholders  in excess of a threshold
amount as if he held 160,000  shares of our common stock.  We are in the process
of negotiating a revised employment agreement with Mr. Beaudrault.



                                      -90-
<PAGE>

SPECIAL EVENT BONUS ARRANGEMENTS

         In addition to the special event bonus  arrangement with Mr. Beaudrault
described  above,  we have entered into a similar  arrangement  with three other
executive officers.

COMPENSATION  COMMITTEE  INTERLOCKS AND INSIDER  PARTICIPATION  IN  COMPENSATION
DECISIONS

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

         Bernard  Zimmerman  & Company,  Inc.,  of which  Bernard  Zimmerman,  a
director of Sbarro, is President and a majority  shareholder,  renders financial
and  consulting  assistance to us, for which it received  fees of  approximately
$26,000 for services rendered during our 2004 year.

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





                                      -91-
<PAGE>


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
--------  ---------------------------------------------------
          MANAGEMENT
          ----------

         The  following  table  sets forth  certain  information  regarding  the
ownership  of shares of our  common  stock as of March 31,  2005 by (1)  holders
known to us to beneficially own more than five percent of our outstanding common
stock,  (2)  each  of our  directors,  (3)  the  persons  named  in the  summary
compensation  table in Item 11 of the  report and (4) all of our  directors  and
executive  officers as a group. We understand that,  except as noted below, each
beneficial owner has sole voting and investment power with respect to all shares
attributable to such owner.

<TABLE>
<CAPTION>
                                                                                   SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER                                                                  NUMBER               PERCENT
----------------                                                                  ------               -------
<S>                                                                               <C>                   <C>
Mario Sbarro (1).......................................................           1,524,730 (2)         21.5%
Anthony Sbarro (1).....................................................           1,233,800             17.5%
Joseph Sbarro (1)......................................................           1,756,022 (3)         24.8%
Trust of Carmela Sbarro (1)............................................           2,497,884 (4)         35.4%
All directors and executive officers as a group
    (13 persons)  .....................................................           7,038,382 (5)         99.6%
</TABLE>

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

(1)      The business  address of these  stockholders is 401  Broadhollow  Road,
         Melville, New York 11747.

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

(3)      Excludes 25,946 shares  beneficially  owned by each of Mr. Sbarro's son
         and daughter.

(4)      The trust was  created by Carmela  Sbarro for her  benefit  and for the
         benefit of her descendants, including Mario, Joseph and Anthony Sbarro.
         The  trustees  of the trust are  Franklin  Montgomery,  whose  business
         address is 1270 Avenue of the Americas,  New York, New York 10020,  and
         Mario,  Anthony and Joseph Sbarro. Each trustee may be deemed to be the
         beneficial owner of all these shares with shared voting and dispositive
         power.

(5)      Includes 25,946 shares owned by the wife of an executive  officer.  The
         executive officer disclaims beneficial ownership of these shares.

No other executive officer included in the Summary Compensation Table in Item 11
or director  beneficially  owned any shares of our common  stock as of March 31,
2005.


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




                                      -92-
<PAGE>




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

         We were the sole tenant of an  administrative  office building which we
leased  from a  partnership  owned by  Sbarro  Enterprises,  L.P.,  the  limited
partners of which are Mario Sbarro, our Chairman and a director,  Joseph Sbarro,
our Senior Vice President,  Secretary and a director,  Anthony Sbarro,  our Vice
Chairman,  Treasurer and a director,  and Carmela  Sbarro,  Vice President and a
director.  The annual rent paid was  $100,000,  $300,000  and $300,000 for 2004,
2003 and 2002,  respectively.  We were advised by a real estate  broker that the
rent to be paid by us was comparable to the rent that would have been charged by
an  unaffiliated  third  party.  The lease was  terminated  upon the sale of the
building by the partnership in April 2004.

         On  April  5,  2001,   we  loaned  $3.2   million  to  certain  of  our
shareholders, including: Mario Sbarro, $1.1 million, Joseph Sbarro, $1.2 million
and Anthony Sbarro,  $0.9 million.  The due dates of the related notes have been
extended  to April 6,  2007.  The notes bear  interest  at the rate of 4.63% per
annum,  payable annually.  As of January 2, 2005, the balance of these loans was
$2.9 million.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
including:  Mario Sbarro,  $0.6 million,  Joseph Sbarro,  $0.7 million,  Anthony
Sbarro,  $0.5 million,  and the Trust of Carmela Sbarro,  $1.0 million.  The due
dates of the related  notes have been  extended to December 28, 2007.  The notes
bear interest at the rate of 2.48% per annum payable annually.  As of January 2,
2005, the balance of these loans was $2.6 million.

         In March  2004,  we loaned  $40,000  to  Gennaro  A.  Sbarro,  then our
Corporate  Vice  President  and  President  of  our  Franchising  and  Licensing
Division.  The note was repaid in February 2005 including  interest at 2.69% per
annum.  In connection  with his  resignation in 2004 we entered into a severance
agreement providing for a lump sum payment of approximately $453,000.

         In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
a note for  approximately  $90,000 for royalties  due us for 2001 and 2000.  The
note is repayable at approximately $10,000 per year, including interest at 2.96%
per annum, with a balloon payment due on June 30, 2010. The principal balance of
the notes at January 2, 2005 was approximately $79,000.

         The  interest  rates  charged  on the  foregoing  related  party  loans
included above  approximate  the Applicable  Federal Rate (AFR) published by the
Internal  Revenue  Service at the time of the loan. We recorded  interest income
from related parties was approximately $211,000,  $223,000 and $221,000 in 2004,
2003 and 2002, respectively.

         Bernard  Zimmerman  & Company,  Inc.,  of which  Bernard  Zimmerman,  a
director of Sbarro, is President and a majority  shareholder,  renders financial
and  consulting  assistance to us, for which it received  fees of  approximately
$26,000 for  services  rendered  during  2004 and $0.3  million in both 2003 and
2002.

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



                                      -93-
<PAGE>

         We and our other  concepts  have  purchased  printing  services  from a
corporation  owned by a son-in-law of Mario  Sbarro,  for which we and our other
concepts paid, in the aggregate,  $480,000,  $340,000 and $422,000 in 2004, 2003
and 2002, respectively.

         Companies  owned by a son of Anthony  Sbarro are  parties to  franchise
agreements with us containing terms similar to those in agreements  entered into
by us with unrelated franchises.  Royalties under these agreements in 2004, 2003
and 2002 were approximately $89,000, $90,000 and $92,000, respectively.

         As of July 2002,  we sold the assets of a restaurant  to a  corporation
owned by the brother-in-law of our Chairman of the Board for $88,900.  The sales
price  resulted  in a loss of  approximately  $64,000  that was  included in the
provision  for  restaurant  closings.  That  corporation  also  entered  into  a
franchise  agreement  with us.  We  received  promissory  notes  for each of the
purchase price and initial  franchise fee that were payable over seven years and
bore interest on the unpaid  principal  balances at 7% per annum. In addition in
2002, we subleased this location to that franchisee. Payments under the sublease
were being made directly to the landlord by the  franchisee.  Interest  payments
received relating to the promissory notes was  approximately  $4,000 in 2003. No
interest  payments were received in 2004.  Royalties paid under this arrangement
were approximately $1,800 in 2004, $3,300 in 2003 and $6,800 in 2002.

         In March 2005, we  re-purchased  the assets of the restaurant  from the
corporation  for  $88,900.   The  remaining  unpaid  principal  balance  of  the
promissory  notes were offset  against  the  purchase  price of the assets.  The
remaining  balance under the  promissory  notes of  approximately  $22,000,  and
accrued but unpaid royalties of approximately $31,000 had been fully reserved in
2004.

         In 2002, a company in which Gennaro J. Sbarro,  then our Corporate Vice
President  and  President of our Casual and Fine Dining  Division and the son of
Joseph  Sbarro,  has a 50% interest  (the other 50% is owned by an  unaffiliated
third  party)  entered  into a sublease  for $50,000  greater than rent or other
charges due under the lease. Rent and other charges due under the lease are paid
directly to the  landlord.  Payment  under the  sublease  are due to us. Rent of
approximately  $23,000  was  included  in the 2004  results  of  operations.  To
reimburse Sbarro for equipment costs, the Company owned by Mr. Sbarro,  issued a
non-interest  bearing  note in our  favor  for  approximately  $55,000,  that is
repayable in eighteen equal monthly  installments of approximately  $3,000 which
commenced in November 2002.  The principal  balance on the note as of January 2,
2005 was approximately $16,000. As of October 31, 2003, Mr. Sbarro resigned from
his  positions  with us and a corporation  owned by Mr.  Sbarro  entered into an
eighteen  month  agreement with us to provide  consulting  services to our quick
service and casual dining division for  approximately  $23,000 per month and the
reimbursement  for  customary  and usual  expenses  that may be incurred by that
corporation in the performance of its services.

         In  October  2003,   we  sold  the  assets  of  three   underperforming
Sbarro-owned  restaurants that we proposed to close to entities owned separately
by each of three other of Anthony  Sbarro's  sons,  each of which entered into a
franchise  agreement with us. Two of the locations,  which had no remaining book
value,  were transferred for no consideration  while the third was sold for $0.3
million that was paid in full, and resulted in a gain to Sbarro of approximately
$0.1 million.  In connection  with the sale of the locations,  the employment of
these  individuals with Sbarro was terminated and we included a charge for their
total  severance pay of  approximately  $60,000 in our results of operations for
2003. The franchise  agreements  provide for the payment of 5% of the location's
sales



                                      -94-
<PAGE>

as a continuing franchise fee but did not provide for any initial franchise fee.
We have waived continuing franchise fees through 2006. In addition, we subleased
two of the locations to two of the franchisees. Payments under the subleases are
being made  directly  to the  landlord  by the  franchisees  and they are not in
default.

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
position as Manager of Administration - Construction. A corporation owned by her
entered into a one year  agreement  to provide  consulting  services  related to
construction  matters to us for a series of monthly payments totaling  $100,000.
In  addition,   that  corporation   provided   consulting  services  related  to
construction matters for our steakhouse joint venture of $18,900 in 2004.

         In February  2005, a joint venture in which we have a 70% interest sold
the assets of one of our other joint venture  restaurants  to a company owned by
Gennaro  A.  Sbarro our then  Corporate  Vice  President  and  President  of our
Franchising   and  Licensing   Division  and  the  son  of  Mario  Sbarro,   for
approximately  $900,000 (which  approximated  fair value) resulting in a loss of
approximately  $284,000.  The Company  received  $300,000 in cash and promissory
notes of $600,000.  The promissory notes are payable monthly in 72 equal monthly
installments in the amount of $8,333  including  interest at 5% per annum with a
balloon  payment  of  $111,375  at  maturity.  The joint  venture  also sold the
inventory  of the  restaurant  for  approximately  $67,000  with $50,000 paid at
closing and the remainder of $17,000 payable in four equal monthly  installments
from March 2005 to June 2005.  The company  owned by Mr.  Sbarro  entered into a
sublease,  which we guarantee and a Security Agreement to secure the obligations
under the promissory notes. The sublease and Security  Agreement are intended to
enable Sbarro to recapture the business in the event of an uncured default.

         Compensation of related parties includes  salary,  taxable benefits and
accrued bonus.  Salaries for 2004 include one  additional  week of salary due to
our 53 week year in 2004. Compensation is as follows:

          o    Mario  Sbarro was our  Chairman of the Board in 2004 and Chairman
               of the Board,  President and Chief Executive  Officer in 2003 and
               2002.  His  compensation  was  approximately  $884,000  in  2004,
               $700,000 in 2003 and $920,000 in 2002.

          o    Anthony  Sbarro was our Vice  Chairman of the Board and Treasurer
               in 2004,  2003  and  2002.  His  compensation  was  approximately
               $582,000 in 2004, $400,000 in 2003 and $545,000 in 2002.

          o    Joseph  Sbarro  was  our  Senior  Executive  Vice  President  and
               Secretary  in  2004,   2003  and  2002.  His   compensation   was
               approximately  $585,000 in 2004, $400,000 in 2003 and $575,000 in
               2002.











                                      -95-
<PAGE>

         In addition to the compensation of Mario, Anthony, and Joseph Sbarro:

          o    Carmela Sbarro,  the mother of Mario,  Anthony and Joseph Sbarro,
               who was a co-founder of Sbarro and serves as Vice President and a
               director,  received  $100,000  from us for  services  rendered in
               2004, 2003 and 2002.

          o    Other members of the immediate families of Mario, Anthony, Joseph
               and Carmela  Sbarro who are our employees  were paid an aggregate
               of approximately $860,000, $1,344,000 and $1,565,000 during 2004,
               2003 and 2002, respectively.

         The company has a 40% equity  interest in Boulder Creek  Steakhouse and
provided  administrative  services for $165,000,  $172,000 and $148,000 in 2004,
2003 and 2002, respectively.

          TAX PAYMENT AGREEMENT

          We are taxed under the  provisions  of  Subchapter  S of the  Internal
Revenue Code, and, where applicable and permitted, under similar state and local
income tax provisions. Therefore, we do not pay federal or, with certain limited
exceptions, state and local income taxes for periods for which we are treated as
a Subchapter S corporation ("S corporation").  Rather, our shareholders  include
their  pro-rata  share of our  taxable  income on their  individual  income  tax
returns  and thus are  required  to pay taxes on their  respective  share of our
taxable income, whether or not it is distributed to them.

          In  connection  with our  going  private  transaction  in 1999 and the
related   financing,   we  entered  into  a  tax  payment   agreement  with  our
shareholders.  The  tax  payment  agreement  permits  us to  make  periodic  tax
distributions to our shareholders in amounts determined under a formula designed
to  approximate  the income  taxes,  including  estimated  taxes,  that would be
payable by our  shareholders  if their only income were their  pro-rata share of
our taxable income and that income was taxed at the highest  applicable  federal
and New  York  State  marginal  income  tax  rates.  We may  only  make  the tax
distributions  with  respect  to  periods  in  which  we  are  treated  as  an S
corporation for income tax purposes. We made no distribution to our shareholders
in accordance with the tax payment agreement with respect to 2004.  However,  in
March 2004 we made distributions to our shareholders, in accordance with the tax
payment  agreement,  of $0.7 million with  respect to 2002 taxable  income.  Our
shareholders  taxable income is  significantly  higher and their taxable loss is
significantly  lower  than  the  related  book  income  or loss  resulting  from
differences in the book and tax treatments of the provision for asset impairment
and significant differences in book and tax depreciation.

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




                                      -96-
<PAGE>



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

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

AUDIT FEES:

The aggregate audit fees billed for each of the last two years for  professional
services  rendered  by our  principal  accountants  for the audit of our  annual
financial  statements  included  in our  report on Form  10-K and  review of our
quarterly  financial  statements  included  in our  Reports  on Form  10-Q  were
$150,000 and $116,000 in 2004 and 2003, respectively.

AUDIT-RELATED FEES:

The  aggregate  fees  billed  in each of our last two years  for  assurance  and
related services by our principal accountants that are reasonably related to the
performance  of the audit or review of our financial  statements not included in
Audit Fees were $12,500 in 2004 and $19,400 in 2003.  The services  included the
audit of our 401K savings plan in 2004, an individual  store  location  audit in
2004 and 2003 and  consultation  on various new  accounting  pronouncements  and
their impact on us in 2003 and 2004.

TAX FEES:

The  aggregate  fees  billed  in each of the last  two  years  for  professional
services  rendered by our principal  accountants for tax compliance,  tax advice
and tax planning were $59,000 and $64,550 in 2004 and 2003, respectively.  These
services included,  in each year reported,  a review of our corporate income and
franchise tax returns,  tax planning advice related to our tax returns and those
of  our  shareholders   and  tax  advice  relating  to  contemplated   corporate
transactions.

ALL OTHER FEES:

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

PRE-APPROVAL POLICIES AND PROCEDURES:

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





                                      -97-
<PAGE>


                                     PART IV
                                     -------


ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
--------   ------------------------------------------

(a)      Consolidated Financial Statements

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





Report of Independent Registered Public Accounting Firm                       39


Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003       40


Consolidated Statements of Operations for the years                           42
    ended January 2, 2005, December 28, 2003 and December 29, 2002


Consolidated Statements of Shareholders' Equity (as restated) for the         43
    years  ended January 2, 2005, December 28, 2003 and December 29, 2002


Consolidated Statements of Cash Flows for  the years                          44
    ended January 2, 2005, December 28, 2003 and December 29, 2002


Notes to Consolidated Financial Statements                                    46



                                      -98-
<PAGE>


(b)      Exhibits:

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

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

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

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

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

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

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

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

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



                                      -99-
<PAGE>

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

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

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

            *10.05(b)   Letter  Agreement  dated January 1, 2003 between Sbarro,
                        Inc. and Vistar Corporation  (confidential treatment has
                        been granted  with  respect to certain  portions of this
                        letter  agreement).  (Exhibit  10.05  (b) of our  Annual
                        Report  on Form  10-K for the year  ended  December  28,
                        2004, File No. 333-908177.

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

            +10.07      Letter agreement dated December 29, 2003 between Sbarro,
                        Inc. and Peter J. Beaudrault  regarding Mr. Beaudrault's
                        employment with Sbarro.

            +10.08      Letter agreement dated December 23, 2003 between Sbarro,
                        Inc.  and Anthony J.  Puglisi  regarding  Mr.  Puglisi's
                        employment with Sbarro.

            +10.09      Letter  dated  December  10, 2004 from  Sbarro,  Inc. to
                        Anthony  Missano  regarding   potential  "Special  Event
                        Bonus."

            +10.10      Letter  dated  December  10, 2004 from  Sbarro,  Inc. to
                        Carmela  Merendino  regarding  potential  "Special Event
                        Bonus."

            *+10.11     Corporate  Office  Employee  Bonus Plan (Exhibit 99.1 to
                        our  Current  Report on Form 8-K dated (date of earliest
                        event reported) April 7, 2005, File No. 333-90817)

            *+10.12     Resolution regarding  non-employee director compensation
                        (Exhibit  99.2 to our  Current  Report on Form 8-K dated
                        (date of earliest event  reported)  April 7, 2005,  File
                        No. 333-90817)

            12.01       Computation of ratio of earnings to fixed charges



                                     -100-
<PAGE>

            *14.01      Code of Ethics - For Executive Officers and Directors of
                        Sbarro, Inc. (Exhibit 14.01 of our Annual Report on Form
                        10-K for the year  ended  December  28,  2004,  File No.
                        333-90817)

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

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

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

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

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

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





         The following  financial  statement schedule is filed as a part of this
Report:


              Report of Independent Registered Public Accounting Firm      S-1

              Valuation and Qualifying Accounts for 2004, 2003 and 2002    S-2



         All other  schedules  called for by Form 10-K are omitted  because they
are  inapplicable  or  the  required  information  is  shown  in  the  financial
statements, or notes thereto, included herein.






                                     -101-
<PAGE>


                                   UNDERTAKING

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






                                     -102-
<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
22, 2005.

                                    SBARRO, INC.


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

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


SIGNATURE                       TITLE                         DATE
---------                       -----                         ----


/s/  Peter Beaudrault           President and Chief           April 22, 2005
--------------------------      Executive Officer
Peter Beaudrault                Principal Executive Officer




/s/  Anthony Puglisi            Vice President,               April 22, 2005
--------------------------      Chief Financial Officer
Anthony Puglisi                 And Principal Accounting
                                Officer




/s/  Mario Sbarro               Director                      April 22, 2005
--------------------------
Mario Sbarro



/s/  Joseph Sbarro              Director                      April 22, 2005
--------------------------
Joseph Sbarro





<PAGE>


/s/  Anthony Sbarro             Director                      April 22, 2005
--------------------------
Anthony Sbarro


/s/  Harold Kestenbaum          Director                      April 22, 2005
--------------------------
Harold L. Kestenbaum



/s/  Richard A. Mandell         Director                      April 22, 2005
--------------------------
Richard A. Mandell



/s/  Michael O'Donnell          Director                      April 22, 2005
--------------------------
Michael O'Donnell



/s/  Carmela Sbarro             Director                      April 22, 2005
--------------------------
Carmela Sbarro




/s/  Terry Vince                Director                      April 22, 2005
--------------------------
Terry Vince



/s/  Bernard Zimmerman          Director                      April 22, 2005
--------------------------
Bernard Zimmerman



<PAGE>


                                                                             S-1


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            -------------------------------------------------------


Board of Directors and Shareholders
Sbarro, Inc.
Melville, New York



The  audits  referred  to in our  report  dated  March 7, 2005  relating  to the
consolidated  financial  statements of Sbarro,  Inc. and subsidiaries,  which is
contained in Item 8 of this Form 10-K  included  the audits of the  accompanying
financial  statement schedule for the years ended January 2, 2005,  December 28,
2003  and  December  29,  2002.  This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.

In our opinion,  such  financial  statement  schedule  presents  fairly,  in all
material respects, the information set forth therein.



/s/ BDO Seidman, LLP

Melville, New York
March 7, 2005



<PAGE>



                                                                             S-2


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

                            FOR THE THREE YEARS ENDED



<TABLE>
<CAPTION>
                                        Balance         Charged
                                          at               to          Charged to                        Balance at
                                       Beginning       Costs and         Other                             End of
Description                            of Period        Expenses      Accounts(5)    Deductions            Period
-----------                            ---------        --------      -----------    ----------            ------

<S>                                        <C>              <C>            <C>              <C>                 <C>
January 2, 2005
---------------

Allowance for doubtful
  accounts receivable                      $488             $222                            $279(1)            $431
                                         ======           ======             ===          ======             ======

Provision for store closings               $987             $815           $(889)           $851(2)             $62
                                         ======           ======             ===          ======             ======


December 28, 2003
-----------------

Allowance for doubtful
 accounts receivable                       $491             $435                             438(1)            $488
                                         ======           ======                          ======             ======

Provision for store closings             $1,452           $2,030           $(111)         $2,384(3)            $987
                                         ======           ======             ===          ======             ======

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

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

Provision for store closings             $1,467           $8,689             $42          $8,746(4)          $1,452
                                         ======           ======             ===          ======             ======
</TABLE>

(1) Includes write off of uncollected accounts.

(2)  Includes  write off of  property  and  equipment  of  $1,089,  payments  to
landlords  and others for closed  locations of $181 offset by proceeds  received
upon sale of equipment $419.

(3)  Includes  write off of  property  and  equipment  of  $2,474,  payments  to
landlords  and others for closed  locations of $787 offset by proceeds  received
upon sale of equipment of $877.

(4)  Includes  write off of property  and  equipment  of $7,413 and  payments to
landlord and others for closed locations of $1,333.

(5) Represents reclassifications to other accounts.






<PAGE>


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


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

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

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

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

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

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

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

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

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

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



<PAGE>

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

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

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

            *10.05(b)   Letter  Agreement  dated January 1, 2003 between Sbarro,
                        Inc. and Vistar Corporation  (confidential treatment has
                        been granted  with  respect to certain  portions of this
                        letter  agreement).  (Exhibit  10.05  (b) of our  Annual
                        Report  on Form  10-K for the year  ended  December  28,
                        2004, File No. 333-908177.

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

            +10.07      Letter agreement dated December 29, 2003 between Sbarro,
                        Inc. and Peter J. Beaudrault  regarding Mr. Beaudrault's
                        employment with Sbarro.

            +10.08      Letter agreement dated December 23, 2003 between Sbarro,
                        Inc.  and Anthony J.  Puglisi  regarding  Mr.  Puglisi's
                        employment with Sbarro.

            +10.09      Letter  dated  December  10, 2004 from  Sbarro,  Inc. to
                        Anthony  Missano  regarding   potential  "Special  Event
                        Bonus."

            +10.10      Letter  dated  December  10, 2004 from  Sbarro,  Inc. to
                        Carmela  Merendino  regarding  potential  "Special Event
                        Bonus."

            *+10.11     Corporate  Office  Employee  Bonus Plan (Exhibit 99.1 to
                        our  Current  Report on Form 8-K dated (date of earliest
                        event reported) April 7, 2005, File No. 333-90817)

            *+10.12     Resolution regarding  non-employee director compensation
                        (Exhibit  99.2 to our  Current  Report on Form 8-K dated
                        (date of earliest event  reported)  April 7, 2005,  File
                        No. 333-90817)

            12.01       Computation of ratio of earnings to fixed charges



<PAGE>

            *14.01      Code of Ethics - For Executive Officers and Directors of
                        Sbarro, Inc. (Exhibit 14.01 of our Annual Report on Form
                        10-K for the year  ended  December  28,  2004,  File No.
                        333-90817).

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

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

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

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

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

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