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

                                    FORM 10-K

|_| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended DECEMBER 29, 2002

|_| 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 Identification No.)
incorporation or organization)


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

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


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


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

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

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

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

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

     The number of shares of Common Stock of the  registrant  outstanding  as of
March 17, 2003 was 7,064,328.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
-------------------------------------------------------------------------------



<PAGE>


                                  SBARRO, INC.

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

                           FORWARD-LOOKING STATEMENTS

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

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

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

     You are cautioned not to place undue  reliance on these  statements,  which
speak only as of the date of the report. We do not undertake any  responsibility
to release  publicly any revisions to



                                      -2-
<PAGE>

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 911 company-owned and franchised  restaurants  worldwide at
December 29, 2002. In addition,  since 1995, we have created,  primarily through
joint ventures,  other restaurant  concepts for the purpose of developing growth
opportunities  in addition to the Sbarro  restaurants.  We presently  operate 30
other concept units through  majority or minority owned joint ventures or wholly
owned subsidiaries. (See "Other Concepts," below.)

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

     On September  28,  1999,  members of the Sbarro  family (who prior  thereto
owned approximately 34.4% of our common stock) became the holders of 100% of our
issued  and  outstanding  common  stock as a result  of a merger  in which (i) a
company  owned by the members of the Sbarro family merged with and into us, (ii)
our  shareholders  (other than the members of the Sbarro  family and the company
owned  by them)  received  the  right to  receive  $28.85  per  share in cash in
exchange for the approximately 13.5 million shares of our common stock not owned
by the members of the Sbarro family,  and (iii) all  outstanding  stock options,
including  stock  options  held  by the  members  of  the  Sbarro  family,  were
terminated in exchange for a cash payment equal to the number of shares  subject
to the options  multiplied by the excess,  if any, of $28.85 over the applicable
option exercise price. The cost of the merger,  including fees and expenses, was
funded  through  the use of  substantially  all of our cash then on hand and the
placement of $255.0 million of 11.0% senior notes due September 15, 2009 sold at
a price of 98.514% of par to yield 11.25% per annum. In April 2000, we exchanged
these senior  notes for new senior notes having the same terms,  except that the
new senior notes were  registered  under the Securities Act of 1933.  Throughout
this report we are referring to the new senior notes as the "senior  notes." The
old senior notes and the new senior  notes were issued under an indenture  dated
September 28, 1999,  which,  throughout this report,  we are referring to as the
"indenture."  Our  payment  obligations  under the  senior  notes  are  jointly,
severally,  unconditionally  and  irrevocably  guaranteed  by all of our current
restricted  subsidiaries  (as defined in the  indenture)  and is to be similarly
guaranteed by our future restricted subsidiaries.  See "Selected Financial Data"
included in Item 6 of this  report,  "Management's  Discussion  and  Analysis of
Financial  Condition  and  Results  of  Operations"  included  in Item 7 of this
report, "Financial Statements and Supplementary Data" included in Item 8 of this
report and  "Security  Ownership of Certain  Beneficial  Owners and  Management"
included in Item 12 of this report.



                                      -3-
<PAGE>

     GENERAL
     -------

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

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

     As of December 29, 2002, we operated 911 Sbarro quick service  restaurants,
consisting of 558  company-owned  and 353 franchised  restaurants  located in 46
States,  the  District of Columbia,  the  Commonwealth  of Puerto Rico,  certain
United States territories and 27 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  30  casual  and fine  dining  restaurants
featuring varying cuisines under other restaurant concepts.

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

     We grew from 103  Sbarro-owned or franchised  quick service  restaurants at
the time of our  initial  public  offering  in 1985 to 939 at the end of  fiscal
2000.  However,  since  the end of  fiscal  2000,  while  we have  added 50 more
franchised units than were closed, we have closed or sold to franchisees 78 more
company-owned  units  than  we  opened,  resulting  in  a  net  decrease  of  28
Sbarro-owned or franchised  quick service  restaurants.  As a result,  the total
number of  company-owned  and  franchised  units at  December  29, 2002 was 911.
During  2002,  55  new  Sbarro   restaurants  were  opened,  of  which  13  were
company-owned  and  42  were  franchised.   However,  51  company-owned  and  20
franchised Sbarro units were closed, resulting in a decrease of 16 company-owned
and  franchised  units at the end of fiscal 2002 than at the end of fiscal 2001.
Six company-owned units were sold to franchisees.  Therefore, at year-end we had
558  company-owned and 353 franchised Sbarro  restaurants.  In addition,  during
fiscal  2002,  we and the joint  ventures in which we  participate  opened 2 and
closed 7 casual and fine dining units.  As a result,  the total number of casual
and fine dining other  concept  units was 32 at December  29, 2002.  (See "Other
Concepts" below).



                                      -4-
<PAGE>
     The following table  summarizes the number of  Sbarro-owned  and franchised
quick  service  restaurants  in  operation  during  each of the years  from 1998
through 2002:

<TABLE>
<CAPTION>
                                                                                     Fiscal Year
                                                                         ------------------------------------
                                                                 2002        2001       2000       1999       1998
                                                                 ----        ----       ----       ----       ----
Company-owned Sbarro restaurants:
<S>                    <C>                                           <C>         <C>        <C>        <C>        <C>
 Opened during period  (1)                                           13          9          13         24         25
 (Sold to) acquired from franchisees
   during period  (2)                                                (6)         -           1         (1)         1
 Closed during period  (2) (3)                                      (51)       (43)        (16)        (9)       (20)
                                                                    ----       ----        ----        ---       ----
 Open at end of period (2) (4)                                      558        602         636        638        624

Franchised Sbarro restaurants:
 Opened during period                                                42         42          36         49         43
 Acquired from (sold to) Sbarro
    during period                                                     6          -          (1)         1         (1)
 Closed or terminated during period                                 (20)       (20)        (18)       (32)       (13)
                                                                    ----       ----        ----       ----       ----
 Open at end of period                                              353        325         303        286        268

All Sbarro restaurants:
 Opened during period (1)                                            55         51          49         73         68
 Closed or terminated during period  (2) (3)                        (71)       (63)        (34)       (41)       (33)
                                                                    ----       ----        ----       ----       ----
 Open at end of period  (2) (4)                                     911        927         939        924        892

Kiosks  (all franchised) open at end of year                          3          4           5          4          8

</TABLE>

(1)  Excludes 2, 4, 7, 7 and 7 other  concept  units opened  during fiscal 2002,
     2001, 2000, 1999 and 1998, respectively.
(2)  To date in fiscal  2003,  we have closed 7  company-owned  units and sold 2
     company-owned Sbarro units to franchisees.
(3)  See Notes (3) and (4) to "Selected Financial Data" in Item 6 of this report
     for information with respect to charges relating to the closing and planned
     closing of Company-owned units.
(4)  Excludes  32,  37, 33, 26 and 19 other  concept  units at the end of fiscal
     2002,  2001,  2000, 1999 and 1998,  respectively.  See Notes (3) and (4) to
     "Selected  Financial  Data" in Item 6 of this report for  information  with
     respect to charges relating to the closing of other concept locations.

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

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



                                      -5-
<PAGE>

     As of December 29, 2002,  there were 243 "in-line"  Sbarro  restaurants and
661 "food court"  Sbarro quick  service  restaurants.  In addition,  franchisees
operated 7 freestanding Sbarro  restaurants.  "In-line"  restaurants,  which are
self-contained restaurants,  usually occupy between 1,500 and 3,000 square feet,
contain  the space and  furniture  to seat  approximately  60 to 120  people and
employ 10 to 40 persons, including part-time personnel. "Food court" restaurants
are primarily  located in areas of shopping  malls  designated  exclusively  for
restaurant  use and share a common  dining  area  provided  by the  mall.  These
restaurants  generally occupy between 500 and 1,000 square feet and contain only
kitchen and service  areas.  They  frequently  have a more  limited menu than an
"in-line" restaurant and employ 6 to 30 persons, including part-time personnel.

     Sbarro  restaurants  are  generally  open seven days a week serving  lunch,
dinner and, in a limited number of locations,  breakfast,  with hours conforming
to those of the major department  stores or other large retailers in the mall or
trade area in which they are located.  Typically,  mall  restaurants are open to
serve customers 10 to 12 hours a day,  except on Sunday,  when mall hours may be
more limited.  For Sbarro-owned  restaurants open a full year,  average sales in
fiscal 2002 were $0.8  million for  "in-line"  restaurants  and $0.5 million for
"food court" restaurants.

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

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

     Substantially all of the food ingredients and related  restaurant  supplies
used by the restaurants are purchased from a national independent wholesale food
distributor  which is required to adhere to established  product  specifications
for all food products sold to our restaurants.  Breads, pastries, produce, fresh
dairy and certain meat products are purchased locally for each restaurant.  Soft
drink  mixes  are  purchased  from  major  beverage   producers  under  national
contracts.  In early fiscal 2003, we replaced our national independent wholesale
distributor,  with which we did not have a contract, by entering into a contract
with  another  national  independent  wholesale  distributor  due to the  former
distributor's  bankruptcy.  Our current contractual  arrangement  requires us to
purchase 95% of all of our food ingredients  that are not purchased  locally and
related  restaurant  supplies through the new distributor at product prices that
are not  materially  different  from  those  of our  prior  distributor.  As the
majority of the products  used in our  restaurants  are  proprietary  and we are
involved with negotiating  their cost to the wholesaler,  we do not believe that
there will be a material impact on our cost of food and paper products from this
new  contractual  arrangement.  Should the need arise, we believe that there are
other  distributors who would be able to service our needs and that satisfactory
alternative  sources of supply are generally  available for all items  regularly
used in our restaurants.



                                      -6-
<PAGE>

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

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

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

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

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

     As of December 29, 2002, we had 353 franchised Sbarro restaurants  operated
by 101  franchisees in 37 states of the United States as well as its territories
and  in  27  countries  throughout  the  world.  We  are  presently  considering
additional franchise  opportunities in the United States and other countries. In
certain  instances,  we have established  franchise  locations under territorial
agreements in which we have  granted,  for  specified  time  periods,  exclusive
rights to enter  into  franchise  agreements  for  restaurant  units in  certain
geographic areas (primarily  foreign  countries) or venues (primarily  specified
non-mall locations such as for certain toll roads or airports).

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



                                      -7-
<PAGE>

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

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

     Since 1995, we have developed and  established  new restaurant  concepts to
provide  growth  opportunities  that  leverage  our  restaurant  management  and
financial  expertise.  These concepts are operated either by us alone or through
joint ventures with  restauranteurs  experienced in the particular food area. We
participate with our partners in overseeing the operations of each venture.  Our
joint ventures and other wholly-owned concepts presently operate 30 restaurants.
We intend to continue to expand the steakhouse joint venture,  but do not intend
to expand our other joint  venture  operations.  During fiscal 2002, we recorded
charges to earnings of $4.7  million  related to the closing of 7 other  concept
restaurants.  Charges for the impairment of property, equipment and other assets
of 5 of the  locations  closed in fiscal 2002 had been  recorded in fiscal 2001.
Additional  closing costs of approximately  $0.2 million were recorded for these
restaurants in fiscal 2002.

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

o    We  presently  have  a 100%  interest  in a  venture  that  operates  eight
     moderately  priced quick casual dining  restaurants  serving  Italian food,
     under the name "Mama Sbarro." The  restaurants  provide both  quick-service
     and table service, with take-out service available,  and generally cater to
     families.  In March 2001,  we acquired the 20%  ownership  interest in this
     concept  and  another  concept  discussed  below  from our then  partner in
     connection with the settlement of litigation against this partner.  At that
     time,  the locations  were  operated  under either the "Umberto of New Hyde
     Park" or "Tony and Bruno's"  names.  During  fiscal 2002,  we sold two Mama
     Sbarro locations to unaffiliated  third parties after recording a provision
     for  impairment of $1.6 million in fiscal 2001 with respect to these units.
     In  February  2003,  we  sold  two  other  Mama  Sbarro   locations  to  an
     unaffiliated  third  party for an  aggregate  of $0.8  million  in cash and
     notes.  We recorded a provision for  impairment of $0.2 million  related to
     these two  locations  in  fiscal  2002.  This  provision  approximates  the
     estimated  loss from the  sale.  There is a  proposal  for us to sell a 49%
     interest in the 8 remaining  Mama Sbarro  locations  to a company  owned by
     Gennaro J. Sbarro,  who is a Corporate  Vice President and President of our
     Casual and Fine Dining Division.  Mr. Sbarro is a stockholder of Sbarro and
     the son of Joseph  Sbarro,  an officer,  director and one of our  principal
     stockholders.  Mr.  Sbarro  will cease to be an  officer  and  employee  of
     Sbarro, Inc. should the transaction be finalized. The proposed sales price,
     which  is to be paid in  cash,  is $1.3  million.  We  anticipate  that the
     transaction will result in a loss of  approximately  $0.4 million that will
     be recorded in the first quarter of fiscal 2003.  We do not presently  plan
     to open additional Mama Sbarro restaurants in fiscal 2003.

o    We  operate  five  quick  service  units in mall  locations  under the name
     "Umberto of New Hyde Park" in which we own a 100% interest, having acquired
     the  ownership  interest of our former 20% partner as described  above.  We
     closed  one  "Umberto  of New  Hyde  Park"  location  during  fiscal  2002,
     recording a closing cost of approximately $0.1 million.



                                      -8-
<PAGE>

o    We have a 40% interest in a joint  venture that  presently  operates  eight
     casual dining restaurants with a Rocky Mountain  steakhouse motif under the
     name "Boulder Creek Steaks & Saloon." This venture also operates three fine
     dining  steak  restaurants,  two of  which  are  operated  under  the  name
     "Rothmann's Steak House" and the other is operated under the name "Burton &
     Doyle." The joint venture is planning to open additional sites of each type
     of restaurant.

o    We have a 70%  interest in a joint  venture  that  presently  operates  one
     moderately   priced,   table  service   restaurant   featuring  an  Italian
     Mediterranean menu under the name "Salute" in New York City. In early 2002,
     this joint venture closed one of its two remaining locations with a minimal
     charge to earnings that was recorded in fiscal 2001.

o    At the  beginning of fiscal 2002, we had a 50% interest with the same joint
     venture partners in three moderately priced, table service restaurants that
     also  featured an  Italian-Mediterranean  menu.  All three  locations  were
     closed during fiscal 2002. A provision for asset impairment of $7.7 million
     had been recorded  during fiscal 2001 for two of the locations.  Additional
     losses of $0.3 million were recorded  related to these  locations in fiscal
     2002.  We  recorded  a loss on of the  closing of the third  restaurant  in
     fiscal 2002 of approximately  $4.1 million,  for a total restaurant closing
     cost in fiscal 2002 of approximately $4.4 million for this venture.

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

o    We have a 25% interest in a joint venture  formed in 1999 that has operated
     one seafood restaurant under the name "Vincent's Clam Bar."

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

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

     As  of  December  29,  2002,  we  had  an  aggregate  investment,   net  of
write-downs,  impairment charges and losses on sales, in the form of advances to
and property and equipment costs of these other concepts of approximately  $11.7
million.   The  amount  of  our  investment  does  not  include   guarantees  of
indebtedness  and  reimbursement  obligations in respect of letters of credit in
the aggregate amount of approximately $8.5 million (in addition to approximately
$0.3 million of remaining  letters of credit for locations that have closed,  of
which $0.1 million is being used for security under leases that have been sublet
to the new owners  and $0.2  million  is being  held by the  landlord  until the
finalization  of remaining lease issues) and guarantees of certain real property
lease  obligations of these  subsidiaries  and other concepts in the approximate
amount  of  $4.1  million.  In


                                      -9-
<PAGE>

addition,  our other  concepts have  potential  obligations  of $3.3 million for
subleased  real property for locations  that have been sold to the purchasers of
those locations.

     EMPLOYEES
     ---------

     As of December 29, 2002, we employed approximately 5,000 persons, excluding
employees of other concepts,  of whom  approximately  2,750 were full-time field
and  restaurant   personnel,   approximately  2,040  were  part-time  restaurant
personnel and 210 were corporate administrative personnel. None of our employees
are  covered  by  collective  bargaining  agreements.  We believe  our  employee
relations are satisfactory.


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

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

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

     TRADEMARKS
     ----------

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

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

     We are  subject to various  federal,  state and local  laws  affecting  our
businesses,  as are our franchisees.  Each of our restaurants and those owned by
our  franchisees  and joint  ventures are subject to a variety of licensing  and
governmental   regulatory   provisions   relating  to   wholesomeness  of  food,



                                      -10-
<PAGE>

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

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

     Although  alcoholic  beverage  sales are not emphasized in our Sbarro quick
service restaurants,  our new concepts serve alcoholic beverages and some of our
larger restaurants serve beer and wine. Sales of beer and wine have historically
contributed less than 1% of total revenues of Sbarro quick service  restaurants.
We submitted timely  applications  where appropriate to amend our liquor license
applications  to  reflect  the  going  private  transaction  and  have  received
approvals in all jurisdictions.

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

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

     All Sbarro  restaurants  are typically  leased under  ten-year  leases that
often do not  include an option to renew the lease.  We have  historically  been
able to renew or extend  leases on existing  sites.  As of December 29, 2002, we
leased 585  restaurants,  of which 27 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 December 29, 2002 have initial terms expiring
as follows:




                                      -11-
<PAGE>

YEARS INITIAL LEASE                NUMBER OF SBARRO-       NUMBER OF FRANCHISED
TERMS EXPIRE                       OWNED RESTAURANTS            RESTAURANTS
------------                       -----------------            -----------
2003...........................            71 (1)                    3
2004...........................            46                        2
2005...........................            54                        4
2006 ..........................            51                        4
2007...........................            54                        3
Thereafter.....................           282                       11

(1)  Includes 18 restaurants under  month-to-month  tenancies and 16 restaurants
     as to  which  we  pay  only  contingent  rent  based  on the  level  of net
     restaurant sales, the leases for which are generally for one year periods.

     We  own  a  four-story  office  building  in  Melville,   New  York  having
approximately  100,000 square feet and a cafeteria style restaurant  operated by
us. This building was  purchased and renovated at a total cost of  approximately
$21.5 million.  Approximately 73% of the rentable square feet is currently under
lease to unaffiliated third parties.  The remaining 27%, consisting of one floor
of the building,  is occupied by us as our principal executive offices. On March
3, 2000,  we obtained a ten-year,  8.4%,  $16.0  million  mortgage  loan on this
property.

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

     In addition, our other concepts own one facility and lease 29 facilities.

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

     On December 20, 1999,  Antonio Garcia and thirteen other current and former
general managers of Sbarro  restaurants in California  amended a complaint filed
in the Superior  Court of California for Orange  County.  The complaint  alleges
that the plaintiffs  were  improperly  classified as exempt  employees under the
California  wage and hour  law.  The  plaintiffs  are  seeking  actual  damages,
punitive damages and costs of the lawsuit, including reasonable attorney's fees,
each in  unspecified  amounts.  The  plaintiffs  filed a motion to  certify  the
lawsuit as a class action, but the motion was denied by the court.

     On September  6, 2000,  Manuel  Jimenez and seven other  current and former
general managers of Sbarro  restaurants in California filed a complaint  against
Sbarro in the Superior Court of California  for Orange County  alleging that the
plaintiffs were improperly  classified as exempt employees under California wage
and hour law. The plaintiffs are seeking actual  damages,  punitive  damages and
costs of the lawsuit,  including reasonable attorney's fees, each in unspecified
amounts.  We have  separately  settled with two of the  managers for  immaterial
amounts.  The plaintiffs are represented by the same counsel who is representing
the plaintiffs in the Garcia case.



                                      -12-
<PAGE>

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

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

     In addition,  from time to time, we are a party to certain claims and legal
proceedings in the ordinary  course of business,  none of which, in our opinion,
will have a material  adverse  effect on our  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  eight
shareholders of record.  (See Item 12 "Security  Ownership of Certain Beneficial
Owners and Management.")

     During  2002  and  2001,  we  declared  the  following   dividends  to  our
shareholders. Tax distributions are pursuant to a tax payment agreement with our
shareholders 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 on their  pro-rata  share of our taxable  income (see Item 13,  "Certain
Relationships and Related Transactions - Tax Payment Agreement).

                         AMOUNT
                        PER SHARE           TOTAL               TYPE
                        ---------           -----               ----
     FISCAL 2002
     -----------
     January 15, 2002      $0.44           $3,125,000      Tax Distribution

     FISCAL 2001
     -----------
     January 15, 2001      $0.50           $3,560,613      Tax Distribution
     April 12, 2001         0.71            5,000,000      General Dividend
     April 15, 2001         0.57            4,003,154      Tax Distribution

The tax distribution paid in 2002 related to 2001 taxable earnings. In addition,
on January 21,  2003,  we declared  dividends to our  shareholders  of $0.16 per
share (a total of $1,100,061) as a tax distribution.

The indenture  under which our senior notes are issued and our credit  agreement
contain  various  covenants  that may  limit  our  ability  to make  "restricted
payments,"  including,  among other  things,  dividend  payments  (other than as
distributions  pursuant  to the tax payment  agreement).  Under the terms of the
indenture,  we currently are not permitted to make  "restricted  payments" other
than distributions  pursuant to the tax payment  agreement.  Our ability to make
future dividend payments (other than  distributions  pursuant to the tax payment
agreement)   and  other   restricted   payments  will  depend  upon  our  future
profitability  and certain  other  factors.  At the time of  declaration  of the
dividend, we must have a consolidated interest ratio coverage (as defined in the
indenture),  after giving pro forma effect to the restricted  payments,  for the
four most  recently  ended  fiscal  quarters  of at least 2.0 to 1. For the four
fiscal  quarters  ended December 29, 2002, our  consolidated  interest  coverage
ratio was 1.90 to 1. In any event,  restricted  payments  are  limited in dollar
amount pursuant to a formula contained in the indenture and credit agreement. We
refer  to the  amount  that is  available  for us to make  dividends  and  other
restricted  payments as the "restricted  payment  availability."  We cannot make
restricted  payments  until we  increase  the  restricted  payment  availability
subsequent to December 29, 2002 by approximately $7.2 million,  and then only to
the extent of any excess over that amount.

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



                                      -14-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following  Selected  Financial Data should be read in conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  included  in Item 7 of this report and our  consolidated  financial
statements and the related notes  included in Item 8 of this report.  Our fiscal
2002 consolidated  financial statements have been audited and reported on by BDO
Seidman,  LLP,  independent  certified public accountants,  and our consolidated
statements for years prior to fiscal 2002 were audited and reported on by Arthur
Andersen LLP,  independent  public  accountants.  The audit report  covering our
financial  statements as of and for the fiscal years ended December 30, 2001 and
December 31, 2000 has not been  reissued by Arthur  Andersen  LLP in  connection
with this filing.

<TABLE>
<CAPTION>

                                                                                        FISCAL YEAR
                                                                                        -----------
                                                                                  (DOLLARS IN THOUSANDS)

                                                            2002           2001          2000         1999        1998(1)
                                                            ----           ----          ----         ----        -------

<S>                                                     <C>            <C>           <C>           <C>          <C>
  SYSTEM-WIDE SALES (UNAUDITED)                           $550,279       $570,609      $569,260      $543,219     $524,572
                                                          ========       ========      ========      ========     ========

  INCOME STATEMENT DATA:
  Revenues:
     Restaurant sales                                     $345,206       $372,673      $382,365      $375,514     $370,101
     Franchise related income                               10,070         10,286        11,231         8,688        8,284
     Real estate and other                                   5,104          5,756         5,812         5,495        3,402
                                                          --------      ---------     ---------      --------     --------
       Total revenues                                      360,380        388,715       399,408       389,697      381,787

  Costs and expenses:
     Restaurant operating expenses:
       Costs of food and paper products                     67,593         74,614        74,405        75,956       78,603
        Payroll and other employee benefits                 96,288        103,828       101,553        97,336       93,338
        Other operating costs                              114,892        116,581       114,122       108,599      102,927
     Depreciation and amortization (2)                      20,683         30,375        29,039        25,712       22,784
     General and administrative costs                       23,960         29,472        30,882        28,854       23,999
     Asset impairment, restaurant
       closings and other charges (3)(4)                     9,196         18,224            --         1,013        2,515
     Terminated transaction costs (5)                           --             --            --            --          986
     Litigation settlement and related costs (6)                --             --            --            --        3,544
     Loss on land to be sold (7)                                --             --            --            --        1,075
                                                        ----------      ---------     ---------    ----------     --------
           Total costs and expenses                        332,612        373,094       350,001       337,470      329,771

   Operating income before minority interest                27,768         15,621        49,407        52,227       52,016


   Minority interest                                           (52)            (1)          (46)          266         (101)
                                                        -----------    -----------          ----   ----------         -----

  Operating income                                          27,716         15,620        49,361        52,493       51,915
                                                            ------         ------    ----------     ---------     --------

  Other (expense) income:
      Interest expense                                     (30,959)       (30,950)      (30,243)       (7,899)          --
      Interest income (8)                                      528            756           949         3,828        5,120
      Equity in net income (loss) of
           unconsolidated affiliates                           668            310           303           423         (296)
     Insurance recovery, net (9)                             7,162             --            --            --           --
                                                          --------        -------       -------       -------      -------

            Net other (expense) income                     (22,601)       (29,884)      (28,991)       (3,648)       4,824
                                                           --------       --------      --------       -------       -----


                                      -15-
<PAGE>

                                                                                        FISCAL YEAR
                                                                                        -----------
                                                                                  (DOLLARS IN THOUSANDS)

                                                            2002           2001          2000         1999        1998(1)
                                                            ----           ----          ----         ----        -------

  Income (loss) before income taxes (credit ) and
     cumulative effect of change in method of
     accounting for start-up costs                           5,115        (14,264)       20,370        48,845       56,739

  Income taxes (credit) (10)                                   334            325        (5,075)       19,322       21,547
                                                          --------         ------        -------       ------     --------
  Income (loss) before cumulative effect of
    change in method of accounting for start-up
    costs                                                    4,781        (14,589)       25,445        29,523       35,192
  Cumulative effect of change in method of accounting
  for start-up costs, net of income taxes of $504               --             --            --            --         (858)
                                                            ------         ------        ------        ------    ---------

  Net income (loss)                                         $4,781       $(14,589)      $25,445      $ 29,523     $ 34,334
                                                            ======       =========      =======      ========     ========

  OTHER FINANCIAL AND RESTAURANT DATA:
   Net cash provided by
     operating activities (11)                             $32,453        $34,812       $48,329       $62,282      $59,199
   Net cash used in
     investing activities (11)                             (10,988)       (22,453)      (31,158)      (25,227)     (20,661)
  Net cash used in
    financing activities (11)                               (3,267)       (17,726)       (8,606)     (158,356)      (3,377)
  EBITDA (12)                                              $56,229        $46,305       $78,703       $78,628      $74,403

  Capital expenditures (13)                                $10,988        $22,528       $31,193       $25,282      $28,213

   Number of restaurants at end   of period:
    Company-owned (14)                                         558            602           636           638          624
    Franchised                                                 353            325           303           286          268
                                                               ---            ---           ---    ----------      -------
       Total number of restaurants                             911            927           939           924          892
                                                               ===            ===           ===    ==========      =======

  BALANCE SHEET DATA (AT END OF PERIOD):
  Total assets                                            $404,773       $404,762      $428,555      $417,543     $308,251
  Working capital (deficiency)                              27,095          4,614        10,293        (1,935)     126,619
  Total long-term obligations                              276,415        276,197       274,269       263,090       14,902
  Shareholders' equity                                      88,100         86,444       113,597       110,280      256,918
</TABLE>
----------------

(1)  Our fiscal  year ends on the Sunday  nearest  December  31. Our 1998 fiscal
     year  contained 53 weeks.  All other fiscal  years  presented  contained 52
     weeks. As a result, our 1998 fiscal year benefited from one additional week
     of operations  over the other reported  fiscal years.  The additional  week
     contributed revenues,  net income and EBITDA of approximately $8.6 million,
     $1.7 million and $2.7 million, respectively.

(2)  Includes  amortization  of the excess purchase price over the book value of
     assets  acquired as a result of our going private  transaction on September
     28, 1999 of $5.4  million,  $5.0  million and $2.0  million in fiscal 2001,
     2000 and 1999, respectively. In fiscal 2000, we finalized our allocation of
     the  purchase  price  from  the  going  private  transaction  based  on  an
     evaluation  of



                                      -16-
<PAGE>

     our  net  assets  at  September   28,  1999,   resulting  in  lower  annual
     amortization expense than originally estimated. In July 2001, the Financial
     Accounting   Standards  Board  issued  Statement  of  Financial  Accounting
     Standards ("SFAS") No. 142,  "Goodwill and Other Intangible  Assets," which
     became effective as to us with the beginning of fiscal 2002. Under SFAS No.
     142,  goodwill and intangible  assets with  indefinite  lives are no longer
     amortized but are reviewed  annually for impairment (or more  frequently if
     impairment indicators arise).  Accordingly,  we incurred no amortization of
     goodwill or of  intangible  assets with  indefinite  lives in fiscal  2002.
     Separable  intangible  assets that are not deemed to have indefinite  lives
     will  continue to be amortized  over their useful  lives.  Our goodwill and
     intangible assets with indefinite  lives,  which aggregated $205.1 million,
     net of accumulated  amortization,  at December 29, 2002, is tested annually
     for  impairment.  Our testing  for  impairment  concluded  that there is no
     impairment at the end of fiscal 2002.

(3)  Fiscal 2002  represents a provision  for the  impairment  of assets of $0.4
     million  and  restaurant  closings  of  $8.8  million  relating  to  Sbarro
     restaurant and other concept locations.  Fiscal 2001 represents  provisions
     for asset impairment of $5.5 million,  restaurant closings of $11.7 million
     and other charges of $1.0 million relating to Sbarro  restaurants and other
     concept locations.

(4)  Fiscal 1999 and 1998 represent provisions of a special allocation of losses
     of $1.0  million  in  fiscal  1999  which  arose as a result  of the  final
     disposition  of two other concept unit  closings  recorded in 1997 and $2.5
     million for the closing of 20 restaurants in fiscal 1998, respectively.

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

(6)  Represents a charge in connection with the settlement of a lawsuit.

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

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

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

(10) A credit of $5.6 million was recorded in 2000 to write-off  deferred income
     taxes  as a  result  of  electing  to be  taxed  under  the  provisions  of
     Subchapter  S of the  Internal  Revenue  Code  and,  where  applicable  and
     permitted,  under  similar  state and local  income tax laws  beginning  in
     fiscal 2000. For a discussion of the distributions that we are permitted to
     make  to  our  shareholders  to  pay  taxes  on our  income,  see  "Certain
     Relationships and Related  Transactions - Tax Payment Agreement" in Item 13
     of this report.

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



                                      -17-
<PAGE>

     provided  by  operating  activities  before the change in accrued  interest
     payable was $54.8 million.

(12) EBITDA represents earnings before cumulative effect of change in accounting
     method,  interest  income,   interest  expense,  taxes,   depreciation  and
     amortization. EBITDA includes the effect of the unusual charges included in
     notes 3, 4, 5 and 6 above and the  insurance  recovery  described in note 9
     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 generally  accepted  accounting
     principles  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 and bank credit agreement
     and to determine  the  commitment  fee we pay on the unused  portion of our
     credit  facility.  We also  internally  use EBITDA to determine  whether to
     continue or close  restaurant units since it provides us with a measurement
     of whether we our receiving an adequate cash return on our cash investment.
     Our  calculation  of EBITDA may not be  comparable  to a  similarly  titled
     measure reported by other  companies,  since all companies do not calculate
     this non-GAAP measure in the same manner.  Our EBITDA  calculations are not
     intended to represent cash provided by (used in) operating activities since
     they do not include  interest and taxes and changes in operating assets and
     liabilities,  nor are they  intended to  represent  a net  increase in cash
     since  they do not  include  cash  provided  by  (used  in)  investing  and
     financing  activities.  The following  table  reconciles  EBITDA to our net
     income which we believe is the most direct comparable  financial measure to
     EBITDA, for each of the periods presented (in thousands):

<TABLE>
<CAPTION>
                                                                            FISCAL YEAR
                                                                            -----------
                                                    2002          2001          2000           1999          1998
                                                    ----          ----          ----           ----          ----

<S>                                                 <C>           <C>            <C>           <C>           <C>
EBITDA                                              $56,229       $46,305        $78,703       $78,628       $74,403
Interest expense                                    (30,959)      (30,950)       (30,243)       (7,899)           --
Interest income                                         528           756            949         3,828         5,120
Income (taxes) credit                                  (334)         (325)         5,075       (19,322)      (21,547)
Depreciation and amortization                       (20,683)      (30,375)       (29,039)      (25,712)      (22,784)
Cumulative effect of change in accounting                --             --            --            --          (858)
                                                     ------      ---------       -------       -------       -------
Net income (loss)                                    $4,781      ($14,589)       $25,445       $29,523       $34,334
                                                     ======      =========       =======       =======       =======
</TABLE>

(13) The following  amounts related to the construction of the building in which
     our  headquarters  are located,  which opened in late 1998, are included as
     capital  expenditures:  $0.4 million in fiscal 2000, $1.6 million in fiscal
     1999 and $4.8 million in fiscal 1998.

(14) Excludes  32, 37, 33, 26 and 19 for other  concept  units that were open at
     the end of fiscal 2002, 2001, 2000, 1999 and 1998, respectively.




                                      -18-
<PAGE>

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

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

RESULTS OF OPERATIONS
---------------------

     Our fiscal year ends on the Sunday  nearest to December  31. Each of fiscal
2002,  2001 and 2000  consisted  of 52 weeks.  Our net income of $4.8 million in
fiscal  2002 is  after  charges  of  $9.2  million  for a  provision  for  asset
impairment and restaurant closings.  Net income included income of approximately
$7.2 million,  net of expenses,  from the settlement of our insurance  claim for
the  reimbursement  of lost income  under our  business  interruption  insurance
arising out of the events of September  11, 2001.  Our loss of $14.6  million in
fiscal  2001  includes  charges  of $18.2  million  for a  provision  for  asset
impairment, restaurant closings and other charges discussed below.

FISCAL 2002 COMPARED TO FISCAL 2001:
------------------------------------

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

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




                                      -19-
<PAGE>

increase was offset,  however, by a reduction in income recognized from existing
area development agreements in fiscal 2002 compared to fiscal 2001.

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

     Cost of food  and  paper  products  as a  percentage  of  restaurant  sales
decreased  to 19.6% for fiscal  2002 from  20.0% in the 2001  fiscal  year.  The
improvement was primarily due to both the benefit derived from closing locations
in fiscal  2002 and 2001 that were not able to function  as  efficiently  as our
other quick  service  locations due to their low sales volume and a $1.7 million
benefit in fiscal 2002 from lower average cheese prices that prevailed in fiscal
2001.  Cheese  prices to date in fiscal  2003 are lower than  those  experienced
during the same period in fiscal 2002 and lower than the average  cost per pound
during the 2002 fiscal  year.  In early  fiscal  2003,  we replaced our national
independent  wholesale  distributor with another national independent  wholesale
distributor  due  to  the  bankruptcy  of  our  then  national   wholesale  food
distributor.  As the  majority  of the  products  used  in our  restaurants  are
proprietary and we are involved in negotiating their cost to the wholesaler,  we
do not  believe  there will be a  material  impact on the cost of food and paper
products from this new arrangement.

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

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

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




                                      -20-
<PAGE>

asset  impairment in fiscal 2001 for which no  depreciation  was taken in fiscal
2002 and to decreases in depreciation and amortization for locations that became
fully depreciated during either fiscal 2002 or 2001.

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

     During  fiscal  2002,  we  recorded  a  provision  for  asset   impairment,
restaurant  closings and other charges of $9.2 million.  Of the provision,  $8.7
million was for restaurant  closings,  including $4.7 million for the closing or
sale  of 7 of our  other  concept  restaurants,  and  $0.5  million  was for the
impairment of property and equipment.

     Under  SFAS No.  142,  commencing  in fiscal  2002,  we no longer  amortize
goodwill and  intangible  assets with  indefinite  lives (for which our earnings
were  charged  $5.4  million and $5.0  million in fiscal  2001 and fiscal  2000,
respectively)  but instead we review those assets  annually for  impairment  (or
more frequently if impairment  indicators  arise).  Separable  intangible assets
that are not deemed to have indefinite  lives will continue to be amortized over
their useful lives.  The testing,  as of the end of fiscal 2002, of goodwill and
intangible assets with indefinite lives  (trademarks)  acquired prior to July 1,
2001 ($205.1 million, net of accumulated amortization, at December 29, 2002) for
impairment  by an  independent  valuation  firm  engaged  to  assist  us in  the
determination  of impairment  resulted in no reduction to our carrying  value of
intangible assets with indefinite lives at December 29, 2002. The valuation firm
used the  capitalization of earnings and the guideline company valuation methods
in determining the fair value of these assets.

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

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

     Interest  income was  approximately  $0.5  million in fiscal  2002 and $0.8
million in fiscal 2001. Higher cash available for investment in fiscal 2002 than
in fiscal 2001 was offset by the lower prevailing  interest rates in effect. The
indenture under which our senior notes are issued and our credit agreement limit
the types of investments which we may make.

     Equity  in the net  income  of  unconsolidated  affiliates  represents  our
proportionate  share of earnings and losses in those other  concepts in which we
have a 50% or less ownership  interest.  The increase in our share of the equity
in the net income of  unconsolidated  affiliates  of $0.4 million in




                                      -21-
<PAGE>

fiscal  2002  over  fiscal  2001  was  primarily  as a  result  of the  improved
performance of our steakhouse  joint venture.  We have  determined  that we will
continue to develop and expand the steakhouse  joint venture,  but do not intend
to expand our other joint venture operations.

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

     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 of $0.3 for both fiscal 2002 and
2001 represents taxes owed to jurisdictions  that do not recognize S corporation
status or that tax entities based on factors other than income.

FISCAL 2001 COMPARED TO FISCAL 2000
-----------------------------------

     Restaurant  sales from  Sbarro-owned  quick service units and  consolidated
other concept units  decreased by $9.7 million,  or 2.5%, to $372.7  million for
fiscal 2001 from $382.4 million in fiscal 2000.  Sales increases in consolidated
other concept  units of $4.0 million were offset by a $13.7  million  decline in
sales from quick service  units.  Sales at both Sbarro quick service and some of
our  consolidated  other concept  locations for fiscal 2001 have been  adversely
impacted by the  general  economic  downturn  and were  further  affected by the
events of September  11, 2001.  During fiscal 2001, we closed 34 more units than
we opened which resulted in a net sales reduction of approximately $1.2 million.
Revenues  from new quick  service units did not offset the loss of revenues from
quick service units closed since the beginning of fiscal 2000.  The units closed
since the beginning of fiscal 2000,  with the exception of our high volume owned
unit  destroyed in the collapse of the World Trade Center on September  11, 2001
and the one high volume unit closed in fiscal 2000 and  replaced in fiscal 2001,
were  generally  low volume  units  that did not have a  material  impact on our
results of operations. Following the events of September 11, a number of airport
and other, principally downtown, locations were closed for a period of time, and
those locations, as well as a number of other downtown locations,  experienced a
prolonged period of reduced sales. These units had sales of $8.7 million for the
period from  September 11, 2001 through the end of fiscal 2001 compared to $11.2
million for the similar period in fiscal 2000.

     Comparable Sbarro quick service unit sales decreased 2.1% to $321.0 million
in fiscal 2001. Comparable Sbarro quick service unit sales levels that, as noted
above,  had already been affected by the decrease in mall traffic related to the
general economic downturn in the United States,  were negatively  affected after
the  tragedy  of  September  11.  In late  March  2001  and mid  June  2001,  we
implemented  price  increases  of  0.7%  and  3.3%,   respectively.   Comparable
restaurant  sales are made up of sales at  locations  that were open  during the
entire current and prior fiscal year.




                                      -22-
<PAGE>

     Excluding  approximately $0.3 million related to the termination of an area
development agreement in Egypt recognized during fiscal 2001 and $1.5 million of
termination  fees related to our  development  agreement  and the closing of all
Sbarro  locations in Japan recognized in fiscal 2000,  franchise  related income
increased 2.8% to $10.0 million for the fiscal year ended December 30, 2001 from
$9.7 million for the fiscal year ended December 31, 2000. The increase  resulted
from greater  continuing  royalties due to a higher number of franchise units in
operation in fiscal 2001 offset,  in large part, by decreases in royalties  from
locations  in  operation  during all of fiscal 2001 and 2000.  Franchises,  both
domestically and internationally,  were also affected by the general economy and
the events of September 11, 2001.

     Real estate and other revenues  decreased $56,000 for the fiscal year ended
December 30, 2001 from fiscal 2000  primarily due to decreases in certain vendor
rebates.

     Cost of food  and  paper  products  as a  percentage  of  restaurant  sales
increased  to 20.0% for fiscal  2001 from  19.5% in the 2000  fiscal  year.  The
increase in fiscal 2001 relates  primarily to higher average cheese prices ($2.7
million),  increased  distribution  fees ($0.5 million) and the reduced level of
sales.

     Payroll and other benefits  increased to 27.9% of restaurant  sales for the
year ended  December 30, 2001 from 26.6% of restaurant  sales for the year ended
December 31, 2000.  The increase was primarily due to the reduced level of sales
and tight labor  market that was  experienced  into the third  quarter of fiscal
2001 that had increased  wages and salaries and the associated  amounts paid for
payroll  taxes.  For the  balance  of the year there was an  abatement  of these
pressures as a result of the continuing economic slowdown.  In addition, we took
steps to reduce payroll expenses during late fiscal 2001.

     Other operating  expenses increased to 31.3% of restaurant sales for fiscal
2001 from 29.8% for fiscal 2000  primarily  due to increases in rent,  utilities
and other occupancy related expenses and the reduced level of sales.

     During  fiscal  2001,  we  recorded  a  provision  for  asset   impairment,
restaurant closings and other charges of $18.2 million.  Of that provision,  (a)
$5.5 million was for property and equipment  asset  impairment,  including  $3.0
million  related to our other  concepts,  (b) $11.7  million was for  restaurant
closings, including $6.7 million for our other concepts and $0.2 million for the
cost of the  conversion  of our Umberto and Tony & Bruno  locations  to the Mama
Sbarro  concept and (c) $1.0 million was for other  charges.  In early 2002,  we
closed two of other  concept  locations  for which  amounts were included in the
provision.

     Depreciation and amortization  expense increased by $1.3 million for fiscal
2001 from fiscal 2000.  Depreciation  and  amortization  expense  included  $5.4
million  and $5.0  million  in  fiscal  2001  and  2000,  respectively,  for the
amortization  of the  excess of the  purchase  price over the cost of net assets
acquired in connection  with the completion of the going private  transaction on
September 28, 1999. The  finalization of the purchase price allocation in fiscal
2000 resulted in a reduction of the originally  estimated amounts in fiscal 2000
while fiscal 2001 represents a full year of such amortization.




                                      -23-
<PAGE>

     General and  administrative  expenses were $29.5 million,  or 7.6% of total
revenues,  for fiscal 2001 compared to $30.9 million, or 7.7% of total revenues,
for fiscal  2000.  General  and  administrative  costs for fiscal  2001  reflect
decreases in field management costs, a reduction in corporate staff costs due to
a cost containment program which we implemented  beginning in the fourth quarter
of fiscal 2001 and lower costs related to litigation  contingencies  offset,  in
part, by a decrease in the amount of overhead  capitalized  in  connection  with
capital projects due to the reduced number of new unit openings.

     Minority interest  represents the share of the minority holders'  interests
in the earnings or loss in each period of the fiscal years being reported of the
joint  ventures in which we have a majority  interest.  In early fiscal 2002, we
closed one of the two  locations  which are included in the  calculation  of the
minority  interest with a minimal charge to earnings that was recorded in fiscal
2001.

     Interest  expense of $31.0  million  and $30.2  million for fiscal 2001 and
2000,  respectively,  relate to the 11%,  $255.0  million senior notes issued to
finance our going private  transaction  ($28.1 and $27.6 million,  respectively,
inclusive  in fiscal  2000 of a  correction  of the prior  year  expense of $0.5
million),  the 8.4%, $16.0 million  mortgage loan on our corporate  headquarters
($1.3 and $1.0 million, respectively) and fees for the unused borrowing capacity
under our  credit  agreement  ($0.1  million).  In  addition,  interest  expense
includes  $1.5  million  in each of 2001 and  2000,  which  represents  non-cash
charges for the accretion of the original issue discount on our senior notes and
the  amortization  of  deferred  financing  costs on the  senior  notes,  credit
agreement and the mortgage loan. The increase in interest expense was due to the
full period impact in fiscal 2001 of the mortgage  loan,  which was entered into
in March 2000.

     Interest  income was  approximately  $0.8  million for fiscal 2001 and $0.9
million for fiscal 2000.  Interest income in fiscal 2001 was affected by reduced
availability of cash for investment and lower prevailing interest rates.

     Equity in the net income of unconsolidated  affiliates represents our share
of earnings  and losses in those new  concepts in which the company has a 50% or
less ownership interest.

     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
rather than us. Our tax expense of $0.3 million and $0.5 million for fiscal 2001
and 2000,  respectively,  represents  taxes  owed to  jurisdictions  that do not
recognize S corporation  status or that tax entities based on factors other than
income.  As  required  by SFAS  No.  109,  "Accounting  for  Income  Taxes,"  we
recognized a $5.6 million  credit  associated  with the reversal of our deferred
tax liabilities upon our conversion to S corporation status in the first quarter
of fiscal 2000.

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




                                      -24-
<PAGE>

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

SEASONALITY
-----------

     Our  business  is  subject to  seasonal  fluctuations,  and the  effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased  volume in shopping  malls during the holiday
shopping season but fluctuates due to the length of the holiday  shopping period
between  Thanksgiving  and New  Year's Day and the number of weeks in our fourth
quarter. In recent years, our fourth quarter income has fluctuated significantly
due to a number of other  factors,  including the adverse  effect of the general
economic downturn, the continuing effect of the events of September 11, 2001 and
significant year end adjustments  relating to asset impairment and store closing
costs. Due to the seasonality of our business, until after our fourth quarter is
completed,  we are not able to perform  the annual  test for  impairment  on our
goodwill and intangible  assets with indefinite  lives acquired prior to July 1,
2001  required by SFAS No. 142 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. See Note 14 of the notes to consolidated
financial statements in Item 8 of this report for further information  regarding
our quarterly financial information.

ACCOUNTING PERIOD
-----------------

     Our fiscal  year ends on the Sunday  nearest to December  31. All  reported
fiscal years contained 52 weeks. Fiscal 2003 will also contain 52 weeks.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     We have historically not required  significant  working capital to fund our
existing  operations and have financed our capital  expenditures and investments
in our joint ventures  through cash generated from  operations.  At December 29,
2002, we had unrestricted cash and cash equivalents of $55.2 million and working
capital of $27.1 million  compared to unrestricted  cash and cash equivalents of
$37.0 million and working capital of $4.6 million as of December 30, 2001.

     Net cash  provided  by  operating  activities  was $32.5  million and $34.8
million for the fiscal  years ended  December  29, 2002 and  December  30, 2001,
respectively.  The $2.3 million  reduction  was  primarily due to a $2.2 million
reduction in accounts receivable  resulting  principally from the payment of our
claim for  property  damage at the World Trade  Center  offset by a $4.1 million
decrease in accounts  payable and accrued expenses that reflect the reduction in
our number of stores and employees.

     Net cash used in investing  activities has historically  been primarily for
capital  expenditures,  including those made by our consolidated other concepts.
Net cash used in  investing  activities  declined to $11.0  million in 2002 from
$22.5  million  in 2001  primarily  due to a decline in quick  service  new unit
openings and renovation  activity,  a reduction in expenditures for consolidated
other concept  locations as the  development of these concepts  slowed,  and the
impact of the  nationwide  maintenance  contracts we entered into in late fiscal
2001 and early fiscal 2002.  Investing  activities  for fiscal 2002 include $1.9
million of the approximately  $2.4 million  committed  relating to an upgrade of
our computer systems.



                                      -25-
<PAGE>

     Net cash used in financing  activities was $3.3 million for the fiscal year
ended  December  29, 2002  compared  to $17.7  million for the fiscal year ended
December 30, 2001.  Cash used in financing  activities  for fiscal 2002 resulted
primarily from $3.1 million of tax  distributions  to shareholders  (see below).
Cash used in financing  activities for fiscal 2001 resulted primarily from $12.6
million of distributions to  shareholders,  including tax  distributions of $7.6
million (see below), and $4.0 million of loans to our shareholders,  net of $2.7
of  repayments  of certain  loans,  and the  purchase of the 20% interest in the
Umberto of New Hyde Park concept in settlement of litigation for $1.0 million.

     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 and the credit  agreement
permit us to make  distributions  to  shareholders  to provide funds to them for
their  payments  of taxes on our  earnings  under a formula  contained  in a tax
payment  agreement  between us and our  shareholders.  The tax payment agreement
permits us to make periodic  distributions  to our  shareholders in amounts that
are intended to approximate the income taxes,  including  estimated taxes,  that
would be payable by our  shareholders  if their only income were their  pro-rata
shares  of our  taxable  income  and  such  income  were  taxed  at the  highest
applicable  federal  and New York State  marginal  income tax rates.  We and our
shareholders had a tax liability of  approximately  46% of our taxable income in
both 2002 and 2001.  There are differences in the book and tax treatments of the
provision  for  asset   impairment   and  the   non-deductibility   of  goodwill
(amortization  of goodwill is not deductible for tax purposes but was an expense
for  financial  reporting  purposes in fiscal 2001),  and there are  significant
differences  in book and tax  depreciation.  The 46% tax rate is higher than our
historical  effective tax rate prior to 2000 due to (a) differences in tax rates
between  individual  and  corporate   taxpayers,   (b)  the  timing  differences
previously  accounted for as deferred taxes in our financial  statements  (which
deferred taxes were eliminated upon our conversion to S corporation  status) and
(c) the effect of double taxation (once on us for our taxable income and once on
our  shareholders  for  dividends  received  from us) in those  state  and local
jurisdictions  that  do  not  recognize  S  corporation   status.  We  made  tax
distributions  of $3.1 million in fiscal 2002 related to 2001 taxable  earnings,
$7.6  million in fiscal 2001  related to fiscal 2000  taxable  earnings and $1.1
million in January 2003 related to 2002  taxable  earnings.  We do not expect to
make additional tax distributions in 2003 related to 2002 earnings.

     We incur annual cash interest expense of approximately  $29.7 million under
the senior notes and mortgage loan and may incur additional interest expense for
borrowings under our credit agreement.

     As part of the going  private  transaction,  we sold $255.0  million of 11%
senior notes (at a price of 98.514% of par to yield  11.25% per annum),  the net
proceeds of which,  together with  substantially  all of our then existing cash,
was used to finance the  transaction,  and entered into a $30.0  million  credit
agreement.

     At March 15, 2003 and December 29, 2002 and December 30, 2001, we had $28.1
million,  $28.1  million  and $27.0  million of undrawn  availability  under our
credit  agreement,  net of  outstanding  letters  of credit  and  guarantees  of
reimbursement  obligations aggregating  approximately $1.9 million, $1.9 million
and $3.0 million,  respectively.  We have  received a waiver of  compliance  for
fiscal  2002 from  certain  ratios  required to be  maintained  under our credit
agreement at year end and an


                                      -26-
<PAGE>

amendment  to certain  annual  ratios for fiscal  2003.  As amended,  the credit
agreement  requires that we maintain a minimum ratio of  consolidated  EBITDA to
consolidated interest expense (in each case with the guaranteeing  subsidiaries)
of at least 1.4 to 1.0  beginning  December  30,  2002 and 1.5 to 1.0  beginning
December  28,  2003.  We are  also  required  to  maintain  a  maximum  ratio of
consolidated  senior  debt  to  consolidated  EBITDA  (in  each  case  with  the
guaranteeing  subsidiaries) of 6.5 to 1.0 beginning December 30, 2002 and 6.0 to
1.0 beginning December 28, 2003. We were in compliance with all covenants in the
indenture for the senior notes and the mortgage as of December 29, 2002.

     Under the  indenture  under which our senior  notes are  issued,  there are
various  covenants that limit our ability to borrow funds in addition to lending
arrangements  that  existed at the date of the going  private  transactions  and
replacements of those  arrangements,  to make "restricted  payments"  including,
among other things,  dividend payments (other than as distributions  pursuant to
the tax payment  agreement),  and to make  investments  in, among other  things,
unrestricted  subsidiaries.  Among other covenants, the indenture requires that,
in order for us to borrow  (except under  specifically  permitted  arrangements,
such as up to  $75.0  million  of  revolving  credit  loans),  our  consolidated
interest  ratio coverage (as defined in the  Indenture),  after giving pro forma
effect to the interest on the new  borrowing,  for the four most recently  ended
fiscal  quarters must be at least 2.5 to 1. As of December 29, 2002,  that ratio
was 1.90 to 1. As a result, we are not presently able to borrow funds except for
the  specifically  permitted  indebtedness,  such  as up  to  $75.0  million  of
revolving credit loans. In order to make restricted payments, that ratio must be
at least 2.0 to 1, after giving pro forma effect to the restricted  payment and,
in any event, is limited in dollar amount pursuant to a formula contained in the
indenture and credit agreement.  We refer to the amount that is available for us
to make  dividends  and other  restricted  payments as the  "restricted  payment
availability."  We  cannot  make  restricted  payments  until  we  increase  the
restricted payment  availability by approximately $7.2 million, and then only to
the extent of any excess over that amount.

     In addition to debt service,  we expect that our other liquidity needs will
relate to capital expenditures,  working capital, investments in other ventures,
distributions  to  shareholders  as permitted under the indenture for the senior
notes and the credit agreement and general corporate  purposes.  We believe that
aggregate  restaurant capital expenditures and our investments in joint ventures
during the next twelve  months will  approximate  the fiscal 2002 level of $11.0
million.  Unpaid capital expenditure  commitments aggregated  approximately $0.9
million  at  December  29,  2002.  In  addition,  we have  committed  additional
expenditures of $0.5 million for the upgrade of our computer system.

     We expect our primary sources of liquidity to meet these needs will be cash
flow from  operations.  We do not  presently  expect to borrow  under our credit
agreement in fiscal 2003.





                                      -27-
<PAGE>


OFF-BALANCE SHEET ARRANGEMENTS

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

     Our obligations under the guarantees for the line of credit, standby letter
and a mortgage  loan of our  steakhouse  joint  venture (our 40% interest in the
joint  venture's  results of  operations  are  included in our equity in the net
income of unconsolidated affiliates in our income statement) are several and, as
a  result,  cover  only  our  share of that  debt.  Our  guarantees  are used to
facilitate the continuing  borrowing by the steakhouse  joint venture and are in
place  should the venture be unable to repay the amounts  owed under the line of
credit and mortgage  loan and should the standby  letter of credit be drawn upon
and the venture not have funds  available for such drawing.  For fiscal 2002, we
included  $0.7 million of our share of this  venture's  net income in our income
statement  and received  $0.3 million of  distributions  during the year.  As of
December  29,  2002,  the amount of the  guarantees  for this joint  venture was
approximately $6.2 million.  Our guarantees,  should the line of credit be fully
utilized, would increase to $7.8 million.

     Our  obligation  under  the bank loan to our  quick  service  Mexican-style
restaurant,  (our 50% interest in the joint venture's  results of operations are
included  in our equity in the net income of  unconsolidated  affiliates  in our
income  statement),  is up to the outstanding  amount of the loan. Our guarantee
was  established  at the inception of the borrowing by the venture to facilitate
its  borrowing  and is  required  to be in place  until the loan is repaid.  For
fiscal  2002,  this  venture had a minimal  loss that was included in our income
statement.  There were no  distributions  from this joint venture  during fiscal
2002.  As of  December  29,  2002,  the amount of our  guarantee  for this joint
venture was $1.9 million.

     Sbarro's contractual obligation under the operating lease for the Vincent's
Clam Bar location (our 25% interest in the joint venture's results of operations
are included in our equity in the net income of unconsolidated affiliates in our
income  statement)  includes  base  rent  plus  real  estate  taxes,  utilities,
insurance, common area charges and certain other expenses, as well as contingent
rentals based on sales amounts in excess of stipulated  amounts.  As of December
29, 2002, our  obligation  for base rent under this operating  lease through the
expiration of the lease term in 2011 was approximately $1.4 million.





                                      -28-
<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)  are as
follows:

<TABLE>
<CAPTION>
                                                                 PAYMENTS DUE BY PERIOD
                                                                 ----------------------
                                                                                                      MORE THAN 5
                                                     LESS THAN                                        -----------
                                       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        $- 0 -          $ - 0 -         $ - 0 -         $ 255.0
     Mortgage Loan (2)                  $  15.7        $  0.1          $   0.3         $   0.3         $  15.0
     Credit agreement (3)               $ - 0 -        $- 0 -          $ - 0 -         $ - 0 -         $ - 0 -
Standby Letters of Credit (4)           $   2.7        $- 0 -          $   0.1         $   0.1         $   2.5
Capitalized Lease Obligations           $ - 0 -        $- 0 -          $ - 0 -         $ - 0 -         $ - 0 -
Operating Leases (5)                    $ 508.5        $ 73.9          $ 140.7         $ 125.1         $ 168.8
Purchase obligations (6)                $   1.4        $  1.4          $ - 0 -         $ - 0 -         $ - 0 -
Other Long-Term Liabilities
     Reflected on Balance Sheet         $ - 0 -        $- 0 -          $ - 0 -         $ - 0 -         $ - 0 -
Total                                   $ 783.3        $ 75.4          $ 141.1         $ 125.5         $ 441.3
</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 principal portion of the installment payments.
(3)  The credit agreement  enables us to borrow,  from time to time, up to $30.0
     million,  less  outstanding  letters of credit  issued  pursuant to a $10.0
     million subfacility.  No repayments are required under the credit agreement
     until September 2004, when the entire  principal  balance becomes  payable.
     There are  currently  no amounts  outstanding  under the credit  agreement.
     However,  of the $2.7 million of letters of credit  reflected  below,  $1.9
     million reduces our availability under the credit agreement.
(4)  Represents  our  maximum  reimbursement  obligations  to the  issuer of the
     letter  of credit in the  event  the  letter of credit is drawn  upon.  The
     letters of credit  generally are issued  instead of cash security  deposits
     under  operating  leases or to guarantee  construction  costs for Sbarro or
     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 (one of which was sold in
     2003 and, upon replacement of the security, we expect to be relieved of our
     security  obligation under the related lease and this letter of credit) and
     approximately  $0.2 million is for another concept location that was closed
     in 2002 that, upon  finalization of remaining lease issues,  is expected to
     be  cancelled.  All the standby  letters of credit are  annually  renewable
     through the  expiration  of the related  lease terms.  If not renewed,  the
     beneficiary  may draw upon the  letter of credit as long as the  underlying
     obligation remains outstanding.
(5)  Represents base rent under operating leases 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.



                                      -29-
<PAGE>

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

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

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

     We, our subsidiaries and our other concepts,  in which we have an interest,
have  purchased  printing  services from a corporation  owned by a son-in-law of
Mario Sbarro for which they paid, in the aggregate, $422,057 during fiscal 2002.
Based on our  experience  with  non-affiliated  printers  that  provide  similar
services to us, we believe the services have been  provided on terms  comparable
to those available from unrelated third parties.

     During fiscal 2002,  we paid cash  dividends to our  shareholders  totaling
$3.1  million in the form of  distributions  made  pursuant  to the tax  payment
agreement  described  above. On January 21, 2003, we paid a cash dividend to our
shareholders of $1.1 million as a distribution  made pursuant to the tax payment
agreement.

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

     On  December  28,  2001,  we  loaned  $2.8  million  to  our  shareholders,
including: Mario Sbarro, $0.60 million, Joseph Sbarro, $0.70 million and Anthony
Sbarro,  $0.49  million  and the Trust of




                                      -30-
<PAGE>

Carmela  Sbarro,  $0.99  million.  The related notes are payable on December 28,
2004, and bear interest at the rate of 2.48%, payable annually.

     Companies  owned by a son of  Anthony  Sbarro  paid  royalties  to us under
franchise  agreements  containing  terms similar to those in agreements  entered
into by us with unrelated franchisees.  Royalties paid under these agreements in
fiscal 2002 were  $91,551.  A company  owned by the daughter of Joseph Sbarro is
indebted  to us for  royalties  for 2001 and 2000 in the  approximate  amount of
$90,000.  No royalties were recorded relating to this franchisee in fiscal 2002.
The related  franchise  agreement  contains terms similar to those in agreements
entered into by us with unrelated franchisees.

     As of July 14, 2002, we sold the assets of a Sbarro-owned  location that we
intended to close to a corporation  whose  shareholder is the  brother-in-law of
our Chairman of the Board and President for $88,900. The sales price resulted in
a loss of approximately $64,000 that is included in the provision for restaurant
closings in the  statement of  operations.  At the same time,  that  corporation
entered  into a  franchise  agreement  containing  terms  similar  to  those  in
agreements entered into by us with unrelated franchisees. We received promissory
notes for each of the purchase price and initial  franchise fee that are payable
over seven  years and bear  interest  on the  unpaid  principal  balances  at 7%
interest per annum. In addition,  we subleased this location to that franchisee.
Payments  under the  sublease  are being made  directly  to the  landlord by the
franchisee. Interest income received relating to the promissory notes was $2,850
in fiscal  2002.  Royalties  paid under  this  arrangement  in fiscal  2002 were
$6,723.  Future minimum  rental  payments under the lease for this location over
the term of the lease, which expires in 2010, are approximately $0.6 million.

     On March 3, 2003, a company in which Gennaro J. Sbarro,  who is a Corporate
Vice President and President of our Casual and Fine Dining  Division,  has a 50%
interest,  entered into a franchise  agreement  with us for a new location.  The
terms of the franchise agreement are similar to those in agreements entered into
by us with unrelated franchisees. The lease for the location was entered into in
September  2002  by  one  of our  subsidiaries.  Subsequent  to  that  date,  we
determined  that the  economics  of the  location  would be better  suited for a
franchise  operator.  Payments  under the sublease  will be made directly to the
landlord by the  franchisee.  Future minimum rental payments under the lease for
this  location  over  the  term  of  the  lease,  which  expires  in  2018,  are
approximately  $2.6  million.  The  location  is  expected to open in the second
quarter of fiscal 2003.

     Bernard Zimmerman & Company,  Inc., of which Bernard Zimmerman is President
and a majority  shareholder,  renders financial and consulting assistance to us,
for which it received fees of $315,200 for services during our 2002 fiscal year.
Mr.  Zimmerman  is a member of Board of  Directors.  We have been advised by Mr.
Zimmerman  that these fees were charged on a basis similar to those that Bernard
Zimmerman & Company, Inc. charges to unrelated clients.

     Harold Kestenbaum, P.C., of which Harold Kestenbaum is the shareholder, has
been  assisting  one of our other  concepts  in the  preparation  of its initial
Uniform  Franchise  Offering  Circular,  for  which  the  fee was  $20,000.  Mr.
Kestenbaum  is a member of our Board of  Directors.  We have been advised by Mr.
Kestenbaum  that these fees were charged on a basis similar to those that Harold
Kestenbaum, P.C. charges to unrelated clients.

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




                                      -31-
<PAGE>

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

     o    Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves as Vice
          President -  Administration,  received  $131,288  from us for services
          rendered during fiscal 2002.

     o    Other members of the immediate families of Mario, Anthony,  Joseph and
          Carmela Sbarro who are our employees,  earned an aggregate of $538,856
          during fiscal 2002.

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

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections."  This statement  eliminates the prior  requirement  that gains and
losses on debt  extinguishment  must be classified as extraordinary items in the
income statement and contains other nonsubstantive  corrections to authoritative
accounting  literature  in SFAS No. 4, 44 and 64.  The  changes  in SFAS No. 145
related to debt  extinguishment will be effective for us beginning with our 2003
fiscal  year  and  the  other  changes  were  effective  for us  beginning  with
transactions  after May 15, 2002.  Adoption of this standard has not had, and we
do not expect that it will have, a material effect on our financial position and
results of operations.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities,"  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging  Issues  Task  Force  ("EITF")  Issue No.  94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including certain Costs Incurred in a Restructuring)." SFAS
No.  146  requires  that the  liability  for  costs  associated  with an exit or
disposal  activity be recognized when the liability is incurred.  Under EITF No.
94-3,  a liability  for an exit cost was  recognized  at the date of a company's
commitment  to an exit plan.  SFAS No. 146 also  establishes  that the liability
should initially be measured and recorded at fair value.  Accordingly,  SFAS No.
146 may affect the timing of recognizing future  restructuring  costs (including
our  future  accounting  for  restaurant  closing  costs) as well as the  amount
recognized.  We will  adopt the  provisions  of SFAS No.  146 for  restructuring
activities  initiated after December 29, 2002 and do not anticipate that it will
have a material effect of our financial position or results of operations.

     In  November  2002,  the  FASB  issued   Interpretation   ("FIN")  No.  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of  Indebtedness  of Others" which addresses the accounting
for and disclosure by guarantors regarding  obligations relating to the issuance
of  certain  guarantees.  FIN  No.  45  requires  that,  at the  inception  of a
guarantee,  for all  guarantees  issued or modified  after  December 31, 2002, a
liability  for the fair  value of the  obligation  undertaken  be  recorded.  No
revision of or restatement of accounting for guarantees issued or modified prior
to December 31, 2002 is allowed.  The disclosure  requirements of FIN No. 45 are
effective  with our 2002  financial  statements.  As described in Note 10 to the
consolidated  financial  statements  in Item 8 of this report,  we have provided
certain guarantees that would require  recognition upon issuance or modification
under the provisions of FIN No. 45. While the nature of our business will likely
result in the issuance of certain guarantees in the future, we do not anticipate
that FIN No. 45 will have a material impact on our financial position or results
of  operations.




                                      -32-
<PAGE>

     In November 2002,  the EITF reached a consensus on Issue 02-16  "Accounting
by a Customer (Including a Reseller) for Certain  Consideration  Received from a
Vendor," addressing the accounting of cash consideration  received by a customer
from a vendor,  including  vendor  rebates and refunds.  The  consensus  reached
states that  consideration  received should be presumed to be a reduction of the
price of the vendor's  products or services  and should  therefore be shown as a
reduction  of cost  of  sales  in the  income  statement  of the  customer.  The
presumption could be overcome if the vendor receives an identifiable  benefit in
exchange for the consideration or the  consideration  represents a reimbursement
of a specific incremental  identifiable cost incurred by the customer in selling
the vendor's  product or service.  If one of these  conditions  is met, the cash
consideration  should be characterized as revenues or a reduction of the related
costs,  as applicable,  in the income  statement of the customer.  The consensus
reached also concludes that rebates or refunds based on the customer achieving a
specified  level of  purchases  should be  recognized  as a reduction of cost of
sales based on a systematic and rational  allocation of the  consideration to be
received  relative to the  transactions  that mark the  progress of the customer
toward  earning  the rebate or refund  provided  the amounts  are  probable  and
reasonably estimatable. This standard is effective for arrangements entered into
after  December 31, 2002. Our current  accounting  policy for the accounting for
vendor rebates complies with the consensus reached in the EITF.

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.  Certain critical accounting policies require us to make estimates and
assumptions  that  affect  the  amounts  of assets,  liabilities,  revenues  and
expenses reported in the financial  statements.  Due to their nature,  estimates
involve judgments based upon available information. Therefore, actual results or
amounts  could differ from  estimates and the  difference  could have a material
impact on our  consolidated  financial  statements.  Accounting  policies  whose
application may have a significant  effect on our reported results of operations
and financial  position and that can require  judgments by  management  that can
affect their application, include:

     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  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.

     o SFAS No. 142,  "Goodwill  and Other  Intangible  Assets,"  requires us to
periodically  assess the  impairment of goodwill and  intangible  asset acquired
prior to July 1, 2001  ($205.1  million,  net of  accumulated  amortization,  at
December 29, 2002).  As discussed under " -- Results of Operations"  above,  the
annual test for impairment on our goodwill and intangible assets with indefinite
lives  acquired  prior to July 1, 2001 required by SFAS No. 142  concluded  that
there was no impairment in the carrying  value of such assets as of December 29,
2002.  The  independent  firm we  engaged to assist us in the  determination  of
impairment,  used the  capitalization  of  earnings  and the  guideline  company
valuation  methods in determining  the fair value of our goodwill and intangible
assets with indefinite lives.



                                      -33-
<PAGE>

     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 both of
these  policies  has  affected  the amount  and  timing of charges to  operating
results that have been  significant in recent years.  We evaluate our long-lived
assets for impairment at the individual  restaurant level on an annual basis, or
whenever  events  and  circumstances  indicate  that the  carrying  amount  of a
restaurant may not be  recoverable,  including our business  judgment of when to
close underperforming  units. These impairment evaluations require an estimation
of cash flows over the remaining life of the related  restaurant lease, which is
generally  up to 10 years.  Our  estimates  are based on average cash flows from
recent  operations of the restaurants and, unless specific  circumstances  about
the  location  warrant,  do not include  unsupportable  sales  growth and margin
improvement  assumptions.  Should  the  carrying  amount  not  be  deemed  to be
recoverable, we write the assets down to their fair value.

     o SFAS No.  146,  "Accounting  for Costs  Associated  with Exit or Disposal
Activities,"  which addresses  accounting for  restructuring  and similar costs,
supersedes previous accounting guidance, principally EITF No. 94-3. SFAS No. 146
requires  that the  liability  for  costs  associated  with an exit or  disposal
activity be recognized  when the  liability is incurred.  Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a company's  commitment
to an exit  plan.  SFAS No.  146 also  establishes  that  the  liability  should
initially be measured and recorded at fair value. Accordingly,  SFAS No. 146 may
affect the timing of  recognizing  future  restructuring  costs  (including  our
future  accounting  for  restaurant   closing  costs)  as  well  as  the  amount
recognized.

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 $255.0 Senior notes bear a fixed
interest  rate of 11.0%.  We are not a party to, and do not expect to enter into
any, interest rate swaps or other instruments to hedge interest rates.

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

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



                                      -34-
<PAGE>


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



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




     Board of Directors
     Sbarro, Inc.
     Melville, New York


     We have audited the accompanying consolidated balance sheet of Sbarro, Inc.
     (a New York  corporation) and subsidiaries as of December 29, 2002, and the
     related  consolidated  statements of income,  shareholders' equity and cash
     flows  for  the  year  then  ended.  These  financial  statements  are  the
     responsibility  of  the  Company's  management.  Our  responsibility  is to
     express an opinion on these financial  statements  based on our audit.  The
     Company's  consolidated  financial  statements as of December 30, 2001, and
     for each of the two years in the period ended  December 30, 2001,  prior to
     the  adjustments  discussed  in Note 1, were  audited by auditors  who have
     ceased operations. Those auditors expressed an unqualified opinion of those
     financial statements in their report dated March 21, 2002.

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

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

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

     As discussed above, the consolidated  financial  statements of Sbarro, Inc.
     and  subsidiaries  as of December  30,  2001,  and for the two years in the
     period  ended  December  30, 2001, were audited by other  auditors who have
     ceased operations.  As described in Note 1, these financial statements have
     been revised to include the transitional  disclosures  required by SFAS No.
     142. We  performed  the  following  audit  procedures  with  respect to the
     disclosures  in Note 1 with  respect  to 2001 and 2000.  We agreed  the net
     income (loss) as previously  reported and the  adjustments  to reported net
     income (loss) representing amortization expense recognized in those periods



                                      -35-
<PAGE>

     related  to  goodwill  and  intangible  assets  that  are no  longer  being
     amortized, as a result of initially applying SFAS No. 142, to the Company's
     underlying   records  obtained  from   management,   and  (ii)  tested  the
     mathematical  accuracy of the  reconciliation of adjusted net income (loss)
     to reported net income (loss). In our opinion, the disclosures for 2001 and
     2000 in Note 1 are  appropriate.  However,  we were not  engaged  to audit,
     review,  or apply any procedures to the 2001 and 2000 financial  statements
     of  the  Company  other  than  with  respect  to  such   disclosures   and,
     accordingly, we do not express an opinion or any other form of assurance on
     the 2001 and 2000 consolidated financial statements taken as a whole.



     /s/ BDO Seidman, LLP


     New York, New York
     March 14, 2003,
     except for Note 9, as to
     which the date is March 28, 2003





                                      -36-
<PAGE>



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




     To Sbarro, Inc.:


     We have audited the  accompanying  consolidated  balance  sheets of Sbarro,
     Inc. (a New York  corporation) and subsidiaries as of December 30, 2001 and
     December 31, 2000, and the related  consolidated  statements of operations,
     shareholders'  equity  and cash  flows for each of the  three  years in the
     period  ended  December  30,  2001.  These  financial  statements  are  the
     responsibility  of  the  Company's  management.  Our  responsibility  is to
     express an opinion on these financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
     in all  material  respects,  the  financial  position of Sbarro,  Inc.  and
     subsidiaries as of December 30, 2001 and December 31, 2000, and the results
     of their operations and their cash flows for each of the three years in the
     period ended December 30, 2001, in conformity  with  accounting  principles
     generally accepted in the United States.


                                                      /s/ Arthur Andersen LLP

     New York, New York
     March 21, 2002

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






                                      -37-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS


<TABLE>
<CAPTION>
                                                                       DECEMBER 29, 2002         DECEMBER 30, 2001
                                                                       -----------------         -----------------
                                                                                     (IN THOUSANDS)
Current assets:
<S>                                                                          <C>                        <C>
   Cash and cash equivalents                                                 $55,150                    $36,952
   Restricted cash for untendered shares                                          21                         45
   Receivables, net of allowance for doubtful accounts of $491
     in 2002 and $175 in 2001
     Franchise                                                                 2,059                      2,162
     Other                                                                     1,244                      2,797
                                                                         -----------               ------------
                                                                               3,303                      4,959

   Inventories                                                                 3,285                      3,537
   Prepaid expenses                                                            2,362                      1,242
   Current portion of loans receivable from officers                           3,232                          -
                                                                         -----------               ------------
       Total current assets                                                   67,353                     46,735

   Property and equipment, net                                               115,081                    132,303

Intangible assets:
   Trademarks, net                                                           195,916                    195,916
   Goodwill, net                                                               9,204                      9,204
   Deferred financing costs and other, net                                     6,632                      7,707

   Loans receivable from officers, less current portion                        2,800                      6,032

   Other assets                                                                7,787                      6,865
                                                                         -----------               ------------
                                                                            $404,773                   $404,762
                                                                         ===========               ============
</TABLE>

                 See notes to consolidated financial statements.




                                      -38-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                       DECEMBER 29, 2002         DECEMBER 30, 2001
                                                                            (IN THOUSANDS EXCEPT SHARE DATA)

Current liabilities:
<S>                                                                          <C>                        <C>
    Amounts due for untendered shares                                        $      21                  $      45
    Accounts payable                                                            10,279                      9,107
    Accrued expenses                                                            21,623                     24,648
    Accrued interest payable                                                     8,181                      8,181
    Current portion of mortgage payable                                            154                        140
                                                                             ---------                  ---------
         Total current liabilities                                              40,258                     42,121
                                                                             ---------                  ---------

Deferred rent                                                                    8,474                      8,479
                                                                             ---------                  ---------

Long-term debt, net of original issue discount                                 267,941                    267,718
                                                                             ---------                  ---------

Commitments and contingencies

Shareholders' equity:
    Preferred stock, $1 par value; authorized 1,000,000 shares;
      none issued                                                                    -                          -
    Common stock, $.01 par value; authorized 40,000,000 shares;
      issued and outstanding 7,064,328 shares at December 29,
      2002 and December 30, 2001                                                    71                         71
    Additional paid-in capital                                                      10                         10
    Retained earnings                                                           88,019                     86,363
                                                                             ---------                  ---------
                                                                                88,100                     86,444
                                                                             ---------                  ---------

                                                                              $404,773                   $404,762
                                                                             =========                  =========
</TABLE>


                See notes to consolidated financial statements.




                                      -39-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                            FOR THE FISCAL YEARS ENDED
                                                              --------------------------------------------------------
                                                                DEC. 29, 2002      DEC. 30, 2001      DEC. 31, 2000
                                                                -------------      -------------      -------------
                                                                                  (IN THOUSANDS)
Revenues:
<S>                                                                   <C>                <C>                <C>
    Restaurant sales                                                  $345,206           $372,673           $382,365
    Franchise related income                                            10,070             10,286             11,231
    Real estate and other                                                5,104              5,756              5,812
                                                                     ----------          ---------           --------
       Total revenues                                                  360,380            388,715            399,408
                                                                     ----------          ---------           --------

Costs and expenses:
    Restaurant operating expenses:
       Cost of food and paper products                                  67,593             74,614             74,405
       Payroll and other employee benefits                              96,288            103,828            101,553
       Other operating costs                                           114,892            116,581            114,122
     Depreciation and amortization                                      20,683             30,375             29,039
     General and administrative                                         23,960             29,472             30,882
     Asset impairment, restaurant closings and other charges             9,196             18,224                  -
                                                                     ----------          ---------           --------
         Total costs and expenses                                      332,612            373,094            350,001
                                                                     ----------          ---------           --------
Operating income before minority interest                               27,768             15,621             49,407
Minority interest                                                          (52)                (1)               (46)
                                                                     ----------          ---------           --------
    Operating income                                                    27,716             15,620             49,361
                                                                     ----------          ---------           --------

Other (expense) income:
     Interest expense                                                  (30,959)           (30,950)           (30,243)
     Interest income                                                       528                756                949
     Equity in net income of
         unconsolidated affiliates                                         668                310                303
     Insurance recovery, net                                             7,162                  -                  -
                                                                     ----------          ---------           --------
       Net other expense                                               (22,601)           (29,884)           (28,991)
                                                                     ----------          ---------           --------

Income (loss) before income taxes (credit)                               5,115            (14,264)            20,370
Income taxes (credit)                                                      334                325             (5,075)
                                                                     ----------          ---------           --------
Net income (loss)                                                       $4,781           $(14,589)           $25,445
                                                                     ==========          =========           ========

</TABLE>

                 See notes to consolidated financial statements




                                      -40-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


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

<S>                                     <C>               <C>              <C>             <C>             <C>
Balance at
   January 3, 2000                      7,064,328              $71              $10         $110,199        $110,280

Net income                                      -                -                -           25,445          25,445

Distributions to shareholders                   -                -                -          (22,128)        (22,128)
                                        ---------         --------         --------          --------        --------

Balance at
   December 31, 2000                    7,064,328                7l              10          113,516         113,597

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

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

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

Net income                                      -                -                -            4,781           4,781
                                                -                -                -

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

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

</TABLE>

                See notes to consolidated financial statements.




                                      -41-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                            ----------------------------------------------------------
                                                               DECEMBER 29,       DECEMBER 30,        DECEMBER 31,
                                                                   2002               2001                2000
                                                                   ----               ----                ----
                                                                                 (IN THOUSANDS)
OPERATING ACTIVITIES:
<S>                                                                   <C>               <C>                 <C>
Net income (loss)                                                     $4,781            $(14,589)           $25,445
Adjustments to reconcile net income (loss) to
  net cash provided by operating activities:
     Depreciation and amortization                                    22,137              31,830             30,489
     Increase in deferred rent, net                                      212                 969                180
     Asset impairment, restaurant closing and
       other charges                                                   7,922              17,352                  -
     Minority interest                                                    52                   1                 46
     Equity in net income of unconsolidated
       affiliates                                                       (668)               (310)              (303)
     Dividends received from unconsolidated
       affiliates                                                        311                 244                156
Changes in operating assets and liabilities:
     Decrease (increase) in receivables                                1,658                (553)              (132)
     Decrease (increase) in inventories                                  252                 (36)               186
     (Increase) decrease in prepaid expenses                          (1,121)               (424)               698
     (Increase) decrease in other assets                                (429)             (1,135)               304
     (Increase) decrease in accounts payable
       and accrued expenses                                           (2,654)              1,463             (3,080)
     Decrease in income taxes payable                                      -                   -               (732)
                                                                      ------              ------             -------
Net cash provided by operating  activities
  before change in deferred taxes due to
  conversion to Subchapter S status and
  increase in accrued interest payable                                32,453              34,812             53,257
Change in deferred taxes due to conversion to
  Subchapter S status                                                      -                   -             (5,629)
Increase in accrued interest payable                                       -                   -                701
                                                                      ------              ------             ------
Net cash provided by operating activities                             32,453              34,812             48,329
                                                                      ======              ------             ------

</TABLE>

                                   (continued)




                                      -42-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



<TABLE>
<CAPTION>
                                                                           FOR THE FISCAL YEARS ENDED
                                                               DECEMBER 29,       DECEMBER 30,        DECEMBER 31,
                                                                   2002               2001                2000
                                                                   ----               ----                ----
                                                                                 (IN THOUSANDS)
INVESTING ACTIVITIES:

<S>                                                                  <C>                 <C>                <C>
Purchases of property and equipment                                  (10,988)            (22,528)           (31,193)
Proceeds from disposition of property and equipment                        -                  75                 35
                                                                     --------            -------             ------
   Net cash used in investing activities                             (10,988)            (22,453)           (31,158)
                                                                     --------            -------             ------

FINANCING ACTIVITIES:

Mortgage principal repayments                                           (142)               (130)               (81)
Proceeds from mortgage                                                     -                   -             16,000
Cost of mortgage                                                           -                   -               (397)
Purchase of minority interest                                              -              (1,000)
Loans to shareholders                                                      -              (6,732)            (2,000)
Repayment of shareholder loans                                             -               2,700                  -
Tax distributions                                                     (3,125)             (7,564)            (3,800)
Dividends                                                                  -              (5,000)           (18,328)
                                                                     --------            -------             ------
   Net cash used in financing activities                              (3,267)            (17,726)            (8,606)
                                                                     --------            -------             ------

Increase (decrease) in cash and cash equivalents                      18,198              (5,367)             8,565
Cash and cash equivalents at
   beginning of year                                                  36,952              42,319             33,754
                                                                     --------            -------             ------
Cash and cash equivalents at end of year                             $55,150             $36,952            $42,319
                                                                     =======             =======            =======
</TABLE>


                 See notes to consolidated financial statements.




                                      -43-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         BASIS OF FINANCIAL STATEMENT PRESENTATION:

         The consolidated  financial  statements include the accounts of Sbarro,
         Inc.,   its  wholly  owned   subsidiaries   and  the  accounts  of  its
         majority-owned   joint  ventures  (together,   "we,"  "our,"  "us,"  or
         "Sbarro").  All significant intercompany accounts and transactions have
         been eliminated.  Minority  interest includes the interests held by our
         partners in certain of our majority-owned joint ventures.  The minority
         interests at the end of fiscal 2002 and 2001 were not material.

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

         CASH EQUIVALENTS:

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

         INVENTORIES:

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

         PROPERTY AND EQUIPMENT:

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

         INTANGIBLE ASSETS:

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




                                      -44-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Deferred financing costs were incurred as a result of the going private
         transaction (see Note 2) and the mortgage on the corporate headquarters
         building (see Note 8) and are being  amortized as  additional  interest
         expense  over  the  respective  remaining  lives  of the  related  debt
         instruments which range from 1 1/2 years to 7 years.

         TRADEMARKS AND GOODWILL:

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

         SFAS No. 142 prescribes a two-step  process for  impairment  testing of
         goodwill.  The first step of this test,  used to  identify  impairment,
         compares the fair value of a reporting  unit with its  carrying  amount
         including goodwill.  The second step (if necessary) measures the amount
         of the  impairment.  Using  the  guidance  in  SFAS  No.  142,  we have
         determined that Sbarro as a whole is the reporting unit for purposes of
         evaluating   goodwill  for  impairment.   Our  annual  impairment  test
         indicated  that  the fair  value of the  reporting  unit  exceeded  the
         reporting unit's carrying amount.  Accordingly,  the second step of the
         goodwill  impairment  test was not  necessary.  We performed a separate
         impairment  test on the trademarks  based on the discounted  cash flows
         method.  The fair value of the trademarks  exceeded the carrying value.
         We have  noted no  subsequent  indicators  that would  require  testing
         trademarks and goodwill for impairment.

         There were no  changes  in the  carrying  amount of the  trademarks  or
         goodwill  for the years ended  December 29, 2002 and December 30, 2001.
         Supplemental   comparative   disclosure  as  if  the  change  had  been
         retroactively applied, is as follows (in thousands).




                                      -45-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                       Dec. 29, 2002       Dec. 30. 2001    Dec. 31, 2000
                                                       -------------       -------------    -------------
                                                                            (in thousands)

<S>                                                    <C>                 <C>              <C>
         Reported net income (loss)                    $4,781              $(14,589)        $25,445
         Add back:  Amortization of
         goodwill and intangible assets
         with indefinite lives                              -                 5,433           4,988
                                                       ------              ---------        -------

         Adjusted net income (loss)                    $4,781               $(9,156)        $30,433
                                                       ======               ========        =======
</TABLE>

         ASSET RETIREMENT OBLIGATIONS:

         In August  2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset
         Retirement   Obligations."  This  statement   addresses  financial  and
         reporting  obligations  associated  with  the  retirement  of  tangible
         long-lived assets and the associated asset retirement costs. It applies
         to legal  obligations  associated  with the  retirement  of  long-lived
         assets  that  result from the  acquisition,  construction,  development
         and/or the normal  operation of long-lived  assets,  except for certain
         obligations of lessees.  SFAS No. 143 became  effective with respect to
         us with the beginning of fiscal 2002 and has not had a material  effect
         on our financial position or operating results.

         LONG-LIVED ASSETS:

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

         ACCOUNTING FOR VENDOR REBATES:

         In November  2002 the  Emerging  Issues Task Force  ("EITF")  reached a
         consensus on Issue No.  02-16  "Accounting  by a Customer  (Including a
         Reseller) for Certain Consideration




                                      -46-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         Received   from  a  Vendor",   addressing   the   accounting   of  cash
         consideration  received by a customer  from a vendor  including  vendor
         rebates and refunds.  The consensus  reached states that  consideration
         received  should be  presumed  to be a  reduction  of the prices of the
         vendor's  products  or  services  and  should  therefore  be shown as a
         reduction of cost of sales in the income statement of the customer. The
         presumption  could be overcome if the vendor  receives an  identifiable
         benefit  in  exchange  for  the   consideration  or  the  consideration
         represents a reimbursement of a specific incremental  identifiable cost
         incurred by the customer in selling the vendor's product or service. If
         one of those  conditions  is met,  the  cash  consideration  should  be
         characterized as revenues or a reduction of such costs as applicable in
         the income  statement  of the  customer.  The  consensus  reached  also
         concludes  that rebates or refunds  based on the  customer  achieving a
         specified  level of purchases  should be  recognized  as a reduction of
         cost of sales based on a  systematic  and  rational  allocation  of the
         consideration to be received relative to the transactions that mark the
         progress of the customer  toward earning the rebate or refund  provided
         from amounts are probable and  reasonably  estimable.  This standard is
         effective for arrangements entered into after December 31, 2002.

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

         EQUITY INVESTMENTS:

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

         COMPREHENSIVE INCOME:

         We observe the  provisions  of SFAS No. 130,  "Reporting  Comprehensive
         Income,"  which  establishes  rules for the reporting of  comprehensive
         income and its components. The adoption of this statement had no impact
         on  our  net  income  or  shareholders'  equity.  Comprehensive  income
         includes  charges  and  credits  to equity  that are not the  result of
         transactions  with  the  shareholders.  For all  years  presented,  our
         operations  did not give  rise to  items  includible  in  comprehensive
         income which were not already  included in net income.  Therefore,  our
         comprehensive  income  is the same as our net  income  for all  periods
         presented.



                                      -47-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         FRANCHISE RELATED INCOME:

         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 $0.3 million, $.006 million and
         a net recovery of $.006 million in 2002, 2001 and 2000, respectively.

         DEFERRED RENT:

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

         INCOME TAXES:

         In March 2000, we elected to be taxed, beginning January 3, 2000, 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.  We no longer pay  federal  or,  with  certain
         limited exceptions,  state and local income taxes for periods for which
         we are treated as an S corporation.  Rather,  our shareholders  include
         their pro-rata share of our taxable income on their  individual  income
         tax  returns  and thus are  required  to pay taxes on their  respective
         share of our taxable income,  whether or not it is distributed to them.
         We file a  consolidated  federal  income tax  return for  informational
         purposes.

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

         In  accordance  with SFAS No. 109,  "Accounting  for Income  Taxes," we
         reversed our net deferred  taxes upon our  conversion  to S corporation
         status.  This  resulted in a credit to income  taxes of $5.6 million in
         the first quarter of fiscal 2000.




                                      -48-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         ACCOUNTING PERIOD:

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

         FAIR VALUE OF FINANCIAL INSTRUMENTS:

         The  carrying  amounts  of cash,  receivables,  accounts  payable,  and
         accrued  liabilities  approximate  fair value because of the short-term
         nature of these items.  The estimated fair value of the senior notes at
         December 29, 2002 was approximately $235.9 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 similar nature and maturity.

         DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

         The FASB issued SFAS No. 133,  "Accounting  for Derivative  Instruments
         and Hedging  Activities,"  as amended by SFAS No. 137 and SFAS No. 138,
         which is  effective  for fiscal  years  beginning  after June 15, 2000.
         Presently,  we do not use derivative instruments and therefore SFAS No.
         133,   which  became   effective  in  fiscal  2001,  is  not  currently
         applicable.

         SEGMENT REPORTING:

         We have no material reportable segments under SFAS No. 131, "Disclosure
         about  Segments of an Enterprise and Related  Information,"  other than
         our primary quick service restaurant business.

         DEFINED CONTRIBUTION PLAN:

         We have a 401(k) Plan  ("Plan") for all qualified  employees.  The Plan
         provides for a 25% matching  employer  contribution  of up to 4% of the
         employees'   deferred  savings  (maximum   contribution  of  1%  of  an
         employee's deferred savings). The employer contributions vest over five
         years.  The  employee's  deferred  savings  cannot  exceed  15%  of  an
         individual  participant's   compensation  in  any  calendar  year.  Our
         contribution  to the Plan was $36,000,  $137,000 and $163,000 in fiscal
         2002, 2001 and 2000, respectively. The contribution was lower in fiscal
         2002 as our matching  contribution  was suspended for the first half of
         the year.

         NEW ACCOUNTING PRONOUNCEMENTS:

         In April  2002 the  FASB  issued  SFAS  No.  145.  "Rescission  of FASB
         Statements  No. 4, 44 and 64.  Amendment of FASB  Statement  No. 13 and
         Technical Corrections." This statement eliminates the prior requirement
         that  gains and losses on debt  extinguishment



                                      -49-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         must be classified as  extraordinary  items in the income statement and
         contains other nonsubstantive  corrections to authoritative  accounting
         literature  in SFAS No.  4, 44 and 64.  The  changes  in SFAS  No.  145
         related to debt  extinguishment will be effective for us beginning with
         our 2003  fiscal  year and the  other  changes  were  effective  for us
         beginning  with  transactions  after  May 15,  2002.  Adoption  of this
         standard has not had and we do not expect it to have a material  effect
         on our financial position and results of operations.

         In June  2002,  the FASB  issued  SFAS No.  146,  Accounting  for Costs
         Associated with Exit or Disposal Activities which addresses  accounting
         for restructuring  and similar costs. SFAS No. 146 supersedes  previous
         accounting  guidance  principally  EITF Issue No. 94-3  "Liability  for
         Recognition for Certain Employee  Termination  Benefits and Other Costs
         to  Exit  an  Activity   (including   Certain   Costs   Incurred  in  a
         Restructuring)".  SFAS No. 146 requires  that the  liability  for costs
         associated  with an exit or disposal  activity be  recognized  when the
         liability  is incurred.  Under EITF No.  94-3, a liability  for an exit
         cost was  recognized at the date of a company's  commitment for an exit
         plan. SFAS No. 146 also establishes that the liability should initially
         be measured and recorded at fair value.  Accordingly,  SFAS No. 146 may
         affect the timing of recognizing future  restructuring costs (including
         our future  accounting  for  restaurant  closing  costs) as well as the
         amount  recognized.  We have adopted the provisions of SFAS No. 146 for
         restructuring  activities  initiated after December 29, 2002. We do not
         anticipate  that the  adoption  of SFAS No.  146 will  have a  material
         effect on our financial position or results of operations.

         In November 2002, the FASB issued FIN No. 45 Guarantor's Accounting and
         Disclosure Requirements for Guarantees including Indirect Guarantees of
         Indebtedness   of  Others  which   addresses  the  accounting  for  and
         disclosure by guarantors regarding obligations relating to the issuance
         of certain  guarantees.  FIN No. 45 requires that at the inception of a
         guarantee  for all  guarantees  issued or modified  after  December 31,
         1992, a liability  for the fair value of the  obligation  undertaken be
         recorded.  No revision of or  restatement  of accounting for guarantees
         issued  or  modified  prior  to  December  31,  2002  is  allowed.  The
         disclosure  requirements  of FIN No.  45 are  effective  with  our 2002
         financial statements.  As described in Note 10 we have provided certain
         guarantees that would require recognition upon issuance or modification
         under the  provisions  of FIN No. 45.  While the nature of our business
         will likely result in the issuance of certain guarantees in the future,
         we do not anticipate that FIN No. 45 will have a material impact on our
         financial position or results of operations.



                                      -50-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                                                FOR THE FISCAL YEARS ENDED
                                 -----------------------------------------------
                                 DECEMBER 29,       DECEMBER 30,   DECEMBER 31,
                                    2002               2001             2000
                                    ----               ----             ----
                                                  (IN THOUSANDS)
          Cash paid for:
          Income taxes             $   796           $ 1,107           $ 3,949
                                   =======           =======           =======

          Interest                 $29,498           $29,491           $28,104
                                   =======           =======           =======

         RECLASSIFICATIONS:

         Certain  items  in  the  financial   statements   presented  have  been
         reclassified to conform to the fiscal 2002 presentation.

2.       GOING PRIVATE TRANSACTION:

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

         During  the second  quarter of fiscal  2001,  the funds  remaining  for
         untendered shares that had been held by a third party paying agent were
         returned to us. We will hold such funds  until the  related  shares are
         tendered or escheated to the appropriate jurisdiction.  At December 29,
         2002,  there was $21,000  being held by us for such  untendered  shares
         that is shown as restricted cash and amounts due for untendered  shares
         in the consolidated balance sheet.

         In  accordance  with EITF Issue No. 88-16,  "Basis in Leveraged  Buyout
         Transactions,"  the acquisition of all the outstanding shares of common
         stock not owned by the Sbarro family and all outstanding  stock options
         was accounted for under the purchase method of accounting. As a result,
         the  remaining  shares of common  stock owned by the Sbarro  family are
         presented  in  shareholders'  equity  at  their  original  basis in the
         accompanying   consolidated  balance  sheet.  During  fiscal  2000,  we
         finalized an  allocation  of the purchase  price from the going private
         transaction  based on an evaluation of Sbarro at September 29, 1999. As
         a result,  property and equipment and intangible  assets were increased
         by  $7.0  million  and  $216.0   million,   respectively,   and  annual
         depreciation  and  amortization   expense  was  lower  than  originally
         estimated  due to the  allocation  to assets with  different  remaining
         useful lives. This resulted in a $2.4 million reduction in depreciation
         and  amortization in the fourth quarter of fiscal 2000 (see Notes 4 and
         13). In accordance  with SFAS No. 142, we have not amortized any of the
         intangible assets with indefinite lives after fiscal 2001.



                                      -51-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.       DESCRIPTION OF BUSINESS:

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

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

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

                                 DECEMBER 29,    DECEMBER 30,    DECEMBER 31,
                                     2002            2001            2000
                                     ----            ----            ----

              Sbarro-owned (a)        558             602             636
              Franchised              353             325             303
                                      ---             ---             ---
                                      911             927             939
                                      ===             ===             ===

         (a)  Excludes  32, 37 and 33 other  concept  units as of the end of the
         respective fiscal years.

4.       EFFECT OF EVENTS OF SEPTEMBER 11, 2001:

         As a result  of the  events  of  September  11,  2001,  a  Sbarro-owned
         location,  as well as a franchise  location,  that had  operated in the
         World  Trade  Center  in New York  City were  destroyed.  Although  the
         Sbarro-owned   location   generated   substantial  sales  revenues  and
         operating  income,  the effect on our  consolidated  results for fiscal
         2001 was not  material  to our  consolidated  results  as a whole.  The
         franchise location did not generate  significant  royalty revenues.  In
         addition,  a number of  airports  were  temporarily  closed  due to the
         events of September 11 causing airport Sbarro-owned and franchise units
         to close  for  periods  of time.  Due to the  continuing  effect of the
         events of  September  11th,  compounded  by the effect of the  economic
         slowdown in the United States,  those airport locations and a number of
         downtown  locations  continued to  experience a period of reduced sales
         throughout fiscal 2002.

                  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,  less
         the  $1.5  million  advance  received  in May  2002,  was  received  in
         September 2002. Approximately $7.2 million, net of related expenses, of
         the  settlement  relates  to  reimbursement  of lost  income  under our
         business interruption insurance coverage and is included in our results
         of operations for fiscal 2002.




                                      -52-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.       PROPERTY AND EQUIPMENT, NET:

                                                  DECEMBER 29,     DECEMBER 30,
                                                    2002 (A)        2001 (B)

                                                      (IN THOUSANDS)
            Land and improvements                  $ 3,781           $ 3,781
            Leasehold improvements                 155,359           158,934
            Furniture, fixtures and equipment       71,757            72,186
            Construction-in-progress                     -               684
                                                   -------           -------
                                                   230,897           235,585
            Less accumulated depreciation and      115,816           103,282
                                                   -------           -------
               amortization (c)
                                                  $115,081          $132,303
                                                  ========          ========

          (a)  During  2002,  we  recorded  a charge  of $0.5  million  reing to
               impairment  losses  on  property  and  equipment,  of which  $0.2
               million was for other concept locations. In addition, we recorded
               a provision for restaurant closings of approximately $8.7 million
               in  connection  with the  closing  of 57 Sbarro  locations  ($4.0
               million) and 7 other  concept  locations  ($4.7  million)  during
               fiscal 2002.
          (b)  During 2001, we recorded a charge of $5.1 million,  of which $3.3
               million was for our other concepts, relating to impairment losses
               on property and equipment.  In addition,  we recorded a provision
               for  restaurant   closings  of  approximately  $10.8  million  in
               connection with the closing of 43 Sbarro locations ($4.3 million)
               and 3 other concept locations ($6.5 million) during fiscal 2001.
          (c)  Depreciation and amortization of property and equipment was $20.7
               million, $24.9 million and $24.0 million in fiscal 2002, 2001 and
               2000, respectively.

6.       ACQUIRED INTANGIBLE ASSETS:

                                                  DECEMBER 29,      DECEMBER 30,
                                                      2002            2001
                                                      ----            ----
                                                     (IN THOUSANDS)
            Trademarks                             $207,590         $207,590
            Goodwill                                  9,712            9,712
            Deferred financing costs                 10,129           10,129
                                                     ------           ------
                                                    227,431          227,431
            Less accumulated amortization            15,679           14,604
                                                   --------         --------
                                                   $211,752         $212,827
                                                   ========         ========



                                      -53-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         Amortization  expense of the acquired intangible assets for each of the
         2002, 2001 and 2000 fiscal years was as follows:

                                              FOR THE FISCAL YEARS ENDED
                                              --------------------------

                                DECEMBER 29,      DECEMBER 30,    DECEMBER 31,
                                    2002              2001            2000
                                    ----              ----            ----
                                                (IN THOUSANDS)

Trademarks (a)                       $    -           $5,189          $4,723
Goodwill (a)                              -              244             265
Deferred financing costs (b)          1,074            1,074           1,071
                                     ------           ------          ------
                                     $1,074           $6,507          $6,059
                                     ======           ======          ======

(a)  Under SFAS No. 142, as of December 31, 2001, trademarks and goodwill are no
     longer amortized.

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

        FISCAL YEARS ENDING:
        --------------------
        December 28, 2003                               $1,074
        January 2, 2005                                  1,038
        January 1, 2006                                    962
        December 31, 2006                                  962
        December 30, 2007                                  962
        Later years                                      1,634
                                                        ------
                                                        $6,632

7.       ACCRUED EXPENSES:
                                                 DECEMBER 29,       DECEMBER 30,
                                                     2002               2001
                                                     ----               ----
                                                          (IN THOUSANDS)

           Compensation                              $5,502            $6,068
           Payroll and sales taxes                    3,047             3,968
           Rent and related cost                      1,896             1,834
           Provision for restaurant closings          1,452             1,467
               (Notes 5 and 12)
           Other                                      9,726            11,311
                                                    -------           -------
                                                    $21,623           $24,648
                                                    =======           =======





                                      -54-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.       INCOME TAXES:

         In March 2000, we elected to be taxed, beginning January 3, 2000, 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.  We no longer pay  federal  or,  with  certain
         limited exceptions,  state and local income taxes for periods for which
         we are treated as an S corporation.

         Rather,  our  shareholders  include their pro-rata share of our taxable
         income on their individual  income tax returns and thus are required to
         pay taxes on their respective  share of our taxable income,  whether or
         not it is distributed to them.

         In  connection  with the  going  private  transaction  and the  related
         financing,  we have  entered  into a tax  payment  agreement  with  our
         shareholders. The tax payment agreement permits us to make periodic tax
         distributions  to our  shareholders  in amounts  that are  intended  to
         approximate the income taxes,  including estimated taxes, that would be
         payable by our  shareholders  if their only income were their  pro-rata
         share of our  taxable  income and that  income was taxed at the highest
         applicable federal and New York State marginal income tax rates. We may
         only make the tax distributions with respect to periods in which we are
         treated  as  an  S  corporation  for  income  tax  purposes.   We  made
         distributions to our  shareholders,  in accordance with the tax payment
         agreement  of $3.1  million in fiscal  2002  related to our fiscal 2001
         earnings,  $7.6  million in fiscal  2001  related  to our  fiscal  2000
         earnings,  and $1.1  million in January 2003 related to our fiscal 2002
         earnings.  Our shareholders are expected to have taxable income that is
         significantly  higher  than our book  income in fiscal 2002 and despite
         our book loss in fiscal 2001 resulting from differences in the book and
         tax   treatments   of  the   provision   for  asset   impairment,   the
         non-deductability  of goodwill in 2001 for tax purposes and significant
         differences in book and tax depreciation.  However, we estimate that no
         additional distributions will be made in 2003 related to 2002 earnings.

         In  accordance  with SFAS No. 109,  "Accounting  for Income  Taxes," we
         reversed  our net  deferred  income  taxes  upon  our  conversion  to S
         corporation  status.  This resulted in a credit to income taxes of $5.6
         million in the first quarter of fiscal 2000.

         The provision for income taxes is composed of the following (payable by
         us to jurisdictions  that do not recognize S corporation status or that
         tax entities based on factors other than income):




                                      -55-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                          FOR THE FISCAL YEARS ENDED
                                DECEMBER 29,       DECEMBER 30,     DECEMBER 31,
                                    2002               2001             2000
                                    ----               ----             ----
                                                 (IN THOUSANDS)
            Federal:
                Current              $ -               $ -              $  -
                Deferred               -                 -            (4,589)
                                    ----              ----            -------
                                       -                 -            (4,589)
                                    ----              ----            -------
            State and local:
                Current              334               325               554
                Deferred              -                  -            (1,040)
                                    ----              ----            -------
                                     334               325              (486)
                                    ----              ----            -------
                                    $334              $325           $(5,075)
                                    ====              ====           ========

9.       LONG-TERM DEBT:

         INDENTURE:

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

         Interest on the senior notes is payable  semi-annually  on March 15 and
         September 15 of each year and commenced on March 15, 2000.  Our payment
         obligations   under   the   senior   notes  are   jointly,   severally,
         unconditionally  and irrevocably  guaranteed by all of Sbarro's current
         Restricted  Subsidiaries  (as  defined in the  indenture)  and is to be
         similarly guaranteed by our future Restricted Subsidiaries.  The senior
         notes and the subsidiary guarantees are senior unsecured obligations of
         Sbarro and the guaranteeing  subsidiaries,  respectively,  ranking pari
         passu in right of  payment to all of our and their  respective  present
         and future senior debt,  including  amounts  outstanding under the bank
         credit agreement  discussed below. The indenture permits  redemption of
         the  senior  notes at our  option  at  varying  redemption  prices  and
         requires us to offer to purchase  senior notes in the event of a Change
         of  Control  and in  connection  with  certain  Asset  Sales  (each  as
         defined). The indenture contains various covenants,  including, but not
         limited  to,   restrictions   on  the  payment  of   dividends,   stock
         repurchases,  certain  investments and other restricted  payments,  the
         incurrence  of  indebtedness   and  liens  on  our  assets,   affiliate
         transactions,  asset  sales  and  mergers  by us and  the  guaranteeing
         subsidiaries.   We  were  in  compliance  with  the  various  covenants
         contained in the indenture as of December 29, 2002.

         The  discount at which the senior  notes were  issued,  an aggregate of
         approximately $3.8 million,  is being accreted to the senior notes on a
         straight-line  basis  over the  original  ten year  life of the  senior
         notes.  Accretion  of the  discount  was $0.3 million in each of fiscal
         2002, 2001 and 2000.



                                      -56-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         CREDIT AGREEMENT:

         On September  23, 1999,  we entered into a bank credit  agreement  (the
         "credit   agreement")  which  provides  us  with  an  unsecured  senior
         revolving  credit  facility  that enables us to borrow,  on a revolving
         basis from time to time during its five-year term, up to $30.0 million,
         including a $10.0 million  sublimit for standby  letters of credit.  No
         amounts were  outstanding  under the credit facility as of December 29,
         2002.

         At our option,  the interest rates applicable to loans under the credit
         agreement  will be at either (i) the bank's  prime rate (4.25% at March
         14,  2003)  plus a margin  ranging  from zero to 0.75%  (the  margin at
         February 21, 2003 was 0.75%) or (ii) reserve  adjusted  LIBOR (3.59% at
         February 21, 2003) plus a margin  ranging from 1.5% to 2.5% (the margin
         at March 17, 2003 was 2.25%). In each case, the margin depends upon the
         ratio of our senior debt (as defined) to our earnings before  interest,
         taxes and depreciation and amortization  ("EBITDA").  We have agreed to
         pay certain fees in connection with the credit agreement,  including an
         unused  commitment  fee at a rate per year that will vary from 0.25% of
         the undrawn  amount of the  facility to 0.45% of the undrawn  amount of
         the facility per year,  depending  upon the ratio of our senior debt to
         EBITDA. The unused commitment fee at March 14, 2003 was 0.45% per year.

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

         The credit agreement  contains various covenants on our part and on the
         part of the guaranteeing  subsidiaries,  including, but not limited to,
         restrictions on the payment of dividends and making stock  repurchases,
         certain  investments and other restricted  payments,  the incurrence of
         indebtedness,   guarantees,  other  contingent  obligations,  liens  on
         assets, affiliate transactions, asset sales and mergers, consolidations
         and  acquisitions  of  stock  or  assets  by us  and  our  guaranteeing
         subsidiaries.  The credit  agreement  also contains  provisions  which,
         under certain circumstances, prohibit redemptions or repurchases of the
         senior notes,  including  repurchases  that might otherwise be required
         pursuant to the terms of the indenture,  and imposes certain conditions
         on our amending or  supplementing  the  indenture.  We have  received a
         waiver of compliance for fiscal 2002 for certain ratios  required to be
         maintained  under our credit  agreement at year end and an amendment to
         certain annual ratios for fiscal 2003. As amended, the credit agreement
         requires  that we maintain a minimum  ratio of  consolidated  EBITDA to
         consolidated  interest  expense  (in each  case  with the  guaranteeing
         subsidiaries)  of at least 1.4 to 1.0  beginning  December 30, 2002 and
         1.5 to 1.0  beginning  December  28,  2003.  We are  also  required  to
         maintain a maximum ratio of  consolidated  senior debt to  consolidated
         EBITDA (in each case with the




                                      -57-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         guaranteeing  subsidiaries)  of 6.5 to 1.0 beginning  December 30, 2002
         and 6.0 to 1.0 beginning December 28, 2003.

         MORTGAGE:

         In March  2000,  one of our  Restricted  Subsidiaries  obtained a $16.0
         million,  8.4% loan due in 2010, secured by a mortgage on our corporate
         headquarters  building.  The loan is payable in monthly installments of
         principal  and  interest of $0.1  million.  The  outstanding  principal
         balance  as of  December  29,  2002 was  $15.7  million.  The  mortgage
         agreement contains various covenants,  including a requirement that the
         subsidiary  maintain a minimum  ratio of EBITDA to annual and quarterly
         debt service of at least 1.2 to 1.0. The  subsidiary  was in compliance
         with the various  covenants  contained in the mortgage  agreement as of
         December 29, 2002.

         MATURITIES OF LONG-TERM DEBT:

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

         FISCAL YEARS ENDING:
         December 28, 2003                                   $  154
         January 2, 2005                                        168
         January 1, 2006                                        182
         December 31, 2006                                      197
         December 30, 2007                                      215
         Later years                                        269,731
                                                            -------
                                                            270,647
         Less:
         Current maturities                                    (154)
         Unaccreted original issue discount                  (2,552)
                                                            --------
                                                            $267,941
                                                            ========

10.      COMMITMENTS AND CONTINGENCIES:

         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.



                                      -58-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

                                            FOR THE FISCAL YEARS ENDED
                                            --------------------------

                                  DECEMBER 29,     DECEMBER 30,     DECEMBER 31,
                                          2002             2001             2000
                                  ------------     ------------     ------------
                                                  (IN THOUSANDS)

         Minimum rentals              $51,975         $52,856          $50,070
         Common area charges           15,246          15,827           14,819
         Contingent rentals             3,760           4,511            4,827
                                        -----           -----            -----
                                      $70,981         $73,194          $69,716
                                      =======         =======          =======

         Future minimum rental and other payments required under  non-cancelable
         operating  leases  for our  Sbarro  restaurants  and our other  concept
         locations  that were open on December 29, 2002 and the existing  leased
         administrative and support function office (Note 11) are as follows (in
         thousands):

               FISCAL YEARS ENDING:
               --------------------
               December 28, 2003                             $ 71,243
               January 2, 2005                                 69,229
               January 1, 2006                                 66,532
               December 31, 2006                               62,576
               December 30, 2007                               58,264
               Later years                                    160,303
                                                              -------
                                                             $488,147
                                                             ========

         We are the  principal  lessee under certain  operating  leases for four
         other concept  locations that have been sold and sublet to unaffiliated
         third parties.  Future minimum rental payments required under these non
         -  cancelable  operating  leases as of December 29, 2002 are as follows
         (in thousands):

                FISCAL YEARS ENDING:
                --------------------
                December 28, 2003                              $  292
                January 2, 2005                                   221
                January 1, 2006                                   233
                December 31, 2006                                 238
                December 30, 2007                                 238
                Later years                                     2,036
                                                               ------
                                                               $3,258
                                                               ======





                                      -59-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         We  are  the  principal  lessee  under  operating  leases  for  certain
         franchised restaurants which are subleased to franchisees.  Franchisees
         pay rent and related expenses directly to the landlord.  Future minimum
         rental payments  required under these  non-cancelable  operating leases
         for franchised  restaurants  that were open as of December 29, 2002 are
         as follows (in thousands):

                 FISCAL YEARS ENDING:
                 --------------------
                 December 28, 2003                              $1,871
                 January 2, 2005                                 1,699
                 January 1, 2006                                 1,415
                 December 31, 2006                               1,350
                 December 30, 2007                               1,038
                 Later years                                     1,912
                                                                ------
                                                                $9,285
                                                                ======

         We are the principal  lessee under an operating  lease for a franchised
         restaurant  that was sold and  franchised  to a related party (see note
         11) that is subleased to the  franchisee.  The franchisee pays rent and
         related  expenses  directly  to the  landlord.  Future  minimum  rental
         payments  required  under this  non-cancelable  operating  lease are as
         follows (in thousands):

                FISCAL YEARS ENDING:
                --------------------
                December 28, 2003                                $ 80
                January 2, 2005                                    84
                January 1, 2006                                    85
                December 31, 2006                                  85
                December 30, 2007                                  85
                Later years                                       191
                                                                  ---
                                                                 $610
                                                                 ====

         As of March 14, 2003,  future minimum rental payments  required under a
         non-cancelable  operating  lease  for  restaurants  that had not as yet
         opened as of December 29, 2002 are as follows (in thousands):

                FISCAL YEARS ENDING:
                --------------------
                December 28, 2003                              $  397
                January 2, 2005                                   450
                January 1, 2006                                   450
                December 31, 2006                                 458
                December 30, 2007                                 460
                Later years                                     2,357
                                                                -----
                                                               $4,572
                                                               ======



                                      -60-
<PAGE>

         As of March 14, 2003,  future minimum rental payments  required under a
         non-cancelable   operating   lease  for  a  restaurant  that  has  been
         franchised  to a related  party  (see note 11) and which had not as yet
         opened as of December 29, 2002 in which we are the principal lessee are
         as follows (in thousands):

                FISCAL YEARS ENDING:
                --------------------
                December 28, 2003                              $   53
                January 2, 2005                                   159
                January 1, 2006                                   159
                December 31, 2006                                 160
                December 30, 2007                                 160
                Later years                                     1,951
                                                               ------
                                                               $2,642
                                                               ======

         CONSTRUCTION AND COMPUTER SYSTEM:

         We are a party to  contracts  aggregating  $1.4 million with respect to
         the construction of restaurants. Payments of approximately $0.5 million
         have been made on those contracts as of December 29, 2002. In addition,
         we have  committed to spend an additional  $0.5 million  relating to an
         upgrade  of our  computer  systems  for a  total  project  cost of $2.4
         million.

         PURCHASE COMMITMENT:

         We have a contractual arrangement with a national independent wholesale
         distributor  that  commenced in February 2003 and that requires us, for
         the next five years, subject to early termination for certain specified
         causes 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  quantities.  Among the factors that
         will effect 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 o Mix of products sold by Sbarro locations

         LETTERS OF CREDIT:

         There  are $2.7  million  of  letters  of  credit  outstanding  for our
         benefit,  as well as for the benefit of our 100% owned other  concepts,
         that 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




                                      -61-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         locations  (one of  which  was  sold in 2003)  and  approximately  $0.2
         million is for an other concept  location that was closed in 2002 that,
         upon finalization of remaining lease issues, will be cancelled.

         GUARANTEE ARRANGEMENTS PERTAINING TO THE OTHER CONCEPTS:

         We are a party to various financial guarantees to a bank for two of our
         other concepts.  We are jointly liable,  along with our partner,  for a
         loan owed by one of our other concepts.  Our liabilities under the line
         of  credit,  mortgage  loans and $0.1  million  of letters of credit is
         limited  to our  minority  ownership  percentage.  The  balance  of the
         letters of credit of $0.6 million is jointly and  severally  guaranteed
         by each of the partners in the other concept. To varying degrees, these
         guarantees  involve  elements  of  performance  and  credit  risk.  The
         possibility  of our  having  to  honor  our  contingencies  is  largely
         dependent upon future operations of the other concepts. We would record
         a liability if events  occurred that make payment under the  guarantees
         probable.

         The details of our  guarantees  as of December 29, 2002 and their terms
         are as follows:

         TYPE OF GUARANTEE         AMOUNT (1)          TERM
         -----------------         ----------          ----

         Loan                      $1.9 million        November 1, 2007
         Mortgage loan              0.3 million        June 30, 2008
         Letters of credit          1.0 million        Varying through May 2021
         Line of credit             5.2 million        December 31, 2008

         (1) Amount  represents  our current  maximum  exposure  under  existing
         borrowings and letters of credit. Our exposure under the line of credit
         could increase to $7.7 million if the full amount of the line of credit
         was utilized.

         LITIGATION:

         On December 20, 1999,  fourteen  current and former general managers of
         Sbarro  restaurants in California  amended a complaint against us filed
         in the Superior Court of California  for Orange  County.  The complaint
         alleges  that the  plaintiffs  were  improperly  classified  as  exempt
         employees  under the  California  wage and hour law. The plaintiffs are
         seeking  actual  damages,  punitive  damages and costs of the  lawsuit,
         including  reasonable  attorneys'  fees,  each in unspecified  amounts.
         Plaintiffs filed a motion to certify the lawsuit as a class action, but
         the motion was denied by the court.

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




                                      -62-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         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 unmaterial amounts.

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

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

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

11.      TRANSACTIONS WITH RELATED PARTIES:

         We are the sole tenant of an administrative office building in Commack,
         New York  which is leased  from a  partnership  owned by certain of our
         shareholders.  For each of the 2002,  2001 and 2000 fiscal  years,  the
         annual rent paid pursuant to the sublease was $0.3 million.  The annual
         rent payable pursuant to the sublease is $0.3 million each year for the
         remainder of the lease term which expires in 2011. In addition,  we are
         obligated to pay real estate  taxes,  utilities,  insurance and certain
         other expenses for the facility.  We have been advised by a real estate
         broker that our rent is comparable to the rent that would be charged by
         an unaffiliated third party.

         In April 2000, we loaned our Mario Sbarro, our Chairman,  President and
         Chief Executive Officer, $2.0 million,  pursuant to a note due on April
         4, 2002  bearing  interest  at 6.46%,  payable  annually.  The loan was
         prepaid, with interest to the date of repayment, in November 19, 2001.

         On  January 2 and 3,  2001,  we loaned  three  executive  officers  and
         directors,  Mario,  Anthony and Joseph Sbarro,  $200,000,  $300,000 and
         $200,000,  respectively. The loans were repaid





                                      -63-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         on January  15, 2001 with  interest at our bank's  prime rate in effect
         during the time that the loans were  outstanding.

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

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

         A member of our Board of Directors acts as a consultant to us for which
         he received  $0.3  million in each of the 2002,  2001,  and 2000 fiscal
         years, respectively.

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

         We and our other  concepts  have  purchased  printing  services  from a
         corporation  owned by a son-in-law of Mario Sbarro for which we and our
         other concepts paid, in the aggregate,  $422,000, $487,000 and $547,000
         in fiscal 2002, 2001 and 2000, respectively.

         Companies  owned by a son of Anthony  Sbarro are  parties to  franchise
         agreements  with us  containing  terms  similar to those in  agreements
         entered into by us with  unrelated  franchises.  Royalties  under these
         agreements in fiscal 2002 were $91,551. A company owned by the daughter
         of Joseph  Sbarro are indebted to us for  royalties for 2001 and 200 in
         the approximate amount of $90,000.  No royalties were recorded relating
         to this franchise in fiscal 2002.

         As of July 14, 2002, we sold the assets of a Sbarro-owned location that
         we  intended  to  close  to a  corporation  whose  shareholder  is  the
         brother-in-law  of our Chairman of the Board and President for $88,900.
         The sales price  resulted in a loss of  approximately  $64,000  that is
         included in the provision for  restaurant  closings in the statement of
         operations. At the same time, that corporation entered into a franchise
         agreement  containing terms similar to those in agreements entered into
         by us with unrelated franchisees. We received promissory notes for each
         of the purchase  price and initial  franchise fee that are payable over
         seven years and bear  interest on the unpaid  principal  balances at 7%
         interest  per  annum.  In  addition,  we  subleased  the lease for this
         location to that franchisee. Payments under the sublease are being made
         directly to the landlord by the  franchisee.  Interest  income received
         relating to the promissory  notes was $2,850 in fiscal 2002.  Royalties
         paid under this arrangement in fiscal 2002 were





                                      -64-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         $6,723.  Future  minimum  rental  payments  under  the  lease  for this
         location  over the  term of the  lease,  which  expires  in  2010,  are
         approximately $0.6 million.

         On March 3,  2003,  a company  in which  Gennaro  J.  Sbarro,  who is a
         Corporate  Vice  President  and President of our Casual and Fine Dining
         Division,  has a 50% interest,  entered into a franchise agreement with
         us for a new location. The terms of the franchise agreement are similar
         to those in agreements  entered into by us with unrelated  franchisees.
         The lease for the location was entered into in September 2002 by one of
         our  subsidiaries.  Subsequent  to that date,  we  determined  that the
         economics  of the  location  would be  better  suited  for a  franchise
         operator.  Payments  under the  sublease  will be made  directly to the
         landlord by the  franchisee.  Future minimum rental  payments under the
         lease for this  location  over the term of the lease,  which expires in
         2018, are approximately $2.6 million.  The location is expected to open
         in the second quarter of fiscal 2003.

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

         During 2002, we recorded an $9.2 million  provision  for  impairment of
         property  and  equipment  (based  on the  remaining  net book  value of
         property and equipment) and for lease termination costs associated with
         restaurant closings (see Note 5).

         During 2001,  we recorded a provision  for  impairment  of property and
         equipment  (based  on the  remaining  net book  value of  property  and
         equipment) and for lease  termination  costs associated with restaurant
         closings and for other charges of $18.2 million (see Note 5).

13.      DIVIDENDS:

         During  2002,  we made a  distribution  to our  shareholders  for taxes
         totaling $3.1 million.

         During 2001, we made  distributions to our shareholders  totaling $12.6
         million, including $7.6 million for taxes.

         In January, 2003, we made a tax distribution of $1.1 million.

         Distributions for taxes were made pursuant to the tax payment agreement
         described in Note 8.




                                      -65-
<PAGE>

14.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

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

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

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         FISCAL YEAR 2001
         ----------------
         Revenues                      $112,746        $84,467            $88,774       $102,728
         Gross profit (a)                85,778         64,437             67,558         80,286
         Net loss (b)                    (4,109)        (4,598)            (2,151)        (3,731)
</TABLE>

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

          (b)  See Note 12 for  information  regarding  the  provision for asset
               impairment  of property and  equipment,  restaurant  closings and
               other  charges  in 2002  and  2001.  See  Note 4 for  information
               regarding  an insurance  recovery in the third  quarter of fiscal
               2002.

15.      GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:

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

         The following condensed consolidating financial information presents:

          (1)  Condensed  consolidating  balance  sheets as of December 29, 2002
               and December 30, 2001 and related  statements  of income and cash
               flows for the fiscal years ended December 29, 2002,  December 30,
               2001 and December 31, 2000 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.




                                      -66-
<PAGE>


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














                                      -67-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 29, 2002

                                     ASSETS

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

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

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

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

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

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

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

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

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

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



                                      -68-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 29, 2002

                       LIABILITIES AND SHAREHOLDERS EQUITY



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

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

Intercompany payables                         313,877             293          5,197        $(319,074)              -
                                             ---------      ---------         -------        --------         -------

Deferred rent

                                                7,793               -            681                -           8,474
                                             ---------      ---------         -------        --------         -------

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

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

Shareholders' equity (deficit):
   Preferred stock, $1 par value;
     authorized 1,000,000 shares; None
     issued                                         -               -              -                -               -
   Common stock, $.01 par value:
     authorized 40,000,000 shares;
     issued and outstanding 7,064,328
     shares                                        71               -              -                -              71
   Additional paid-in capital                      10          65,469          2,477          (67,946)             10
   Retained earnings (deficit)               (212,802)        304,394         (3,573)               -          88,019
                                             ---------      ---------         -------        --------         -------

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

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

</TABLE>




                                      -69-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 30, 2001

                                     ASSETS

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

<S>                                             <C>            <C>               <C>           <C>              <C>
Current assets:
   Cash and cash equivalents                  $29,673         $5,437           $1,842                         $36,952
   Restricted cash for untendered                  45              -                -                              45
     shares
   Receivables less allowance for
     doubtful accounts of $175:
     Franchise                                  2,162              -                -                           2,162
     Other                                      2,069            613              115                           2,797
                                              -------          -----             ----                         -------
                                                4,231            613              115                           4,959

   Inventories                                  1,413          1,771              353                           3,537
   Prepaid expenses                             1,916           (530)            (144)                          1,242
                                                -----          ------          -------                        -------
     Total current assets                      37,278          7,291            2,166                          46,735

Intercompany receivables                       12,078        281,438                -       $(293,516)              -

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

Property and equipment, net                    46,554         73,659           12,090               -         132,303

Intercompany receivables - long term            3,900              -                -          (3,900)              -

Intangible assets:
   Trademarks, net                            195,916              -                -               -         195,916
   Goodwill, net                                9,204              -                -               -           9,204
   Deferred financing costs, net                7,398            309                -               -           7,707

   Loans receivable from officers               6,032              -                -               -           6,032

   Other assets                                 8,066          1,852             (576)         (2,477)          6,865
                                           ----------         ------           -------       ---------     ----------
                                             $391,895       $364,549          $13,680       $(365,362)       $404,762
                                             ========       ========          =======       ==========       ========

</TABLE>




                                      -70-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                             AS OF DECEMBER 30, 2001

                       LIABILITIES AND SHAREHOLDERS EQUITY

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

<S>                                          <C>             <C>             <C>          <C>               <C>
Current liabilities:
   Amounts due for untendered shares         $     45                                                     $       45
   Accounts payable                             8,014         $   164     $      929                           9,107
   Accrued expenses                            19,392           1,824          3,432                          24,648
   Accrued interest payable                     8,181               -              -                           8,181
   Current portion of mortgage payable              -             140              -                             140
                                            ----------       --------       ---------                       --------
     Total current liabilities                 35,632           2,128          4,361                          42,121
                                            ----------       --------       ---------                       --------

Intercompany payables                         281,438               -         12,078      ($293,516)               -
                                            ----------       --------       ---------     ----------        --------

Deferred rent                                   7,512               -            967               -           8,479
                                            ----------       --------       ---------     ----------        --------

Long-term debt, net of
   original issue discount                    252,070          15,648              -               -         267,718
                                            ----------       --------       ---------     ----------        --------

Intercompany payables - long term                    -          3,900              -         (3,900)                -
                                            ----------       --------       ---------     ----------        --------

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)               (184,838)        277,404         (6,203)              -         ,86,363
                                            ----------       --------       ---------     ----------        --------

                                             (184,757)        342,873         (3,726)       (67,946)          86,444
                                            ----------       --------       ---------     ----------        --------

                                             $391,895        $364,549        $13,680      ($365,362)        $404,762
                                            =========       =========       ========      ==========        ========

</TABLE>





                                      -71-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        CONSOLIDATING STATEMENT OF INCOME
                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002

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

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

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


Operating (loss) income before
   minority interest                           (5,226)         30,122          2,872                -          27,768
Minority interest                                   -               -            (52)               -             (52)
                                             ---------       --------         ------     -------------         ------
Operating income (loss)                        (5,226)         30,122          2,820                -          27,716
                                             ---------       --------         ------     -------------         ------

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 income taxes
   (credit)                                   (26,468)         28,763          2,820                -           5,115
Income taxes (credit)                          (1,629)          1,773            190                -             334
                                             ---------       --------         ------     -------------         ------

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


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




                                      -72-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         CONSOLIDATING STATEMENT OF LOSS
                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001

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

<S>                                           <C>             <C>             <C>             <C>             <C>
Revenues:

   Restaurant sales                          $155,310        $189,731        $27,632                         $372,673
   Franchise related income                    10,286               -              -                           10,286
   Real estate and other                        3,078           3,548              -       $     (870)          5,756
   Intercompany charges                             -          13,020              -          (13,020)               -
                                            ----------        -------        -------       ----------         --------
       Total revenues                         168,674         206,299         27,632          (13,890)        388,710
                                            ----------        -------        -------       ----------         --------

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

   Operating (loss) income before
     minority interest                        (11,648)         25,282          1,987                -          15,621
   Minority interest                                -               -             (1)               -              (1)
                                            ----------        -------        -------       ----------         --------
   Operating (loss) income                    (11,648)         25,282          1,986                -          15,620
                                            ----------        -------        -------       ----------         --------

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

   Net other expense                          (26,612)         (1,369)        (1,903)                -        (29,884)
                                            ----------        -------        -------       ----------         --------

   (Loss) income before income taxes
     (credit)                                 (38,260)         23,913             83                -         (14,264)
   Income taxes (credit)                         (288)            586             27                -             325)
                                            ----------        -------        -------       ----------         --------

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

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





                                      -73-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        CONSOLIDATING STATEMENT OF INCOME
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000


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

   Restaurant sales                          $163,903       $194,797          $23,665                        $382,365
   Franchise related income                    11,231              -                -                          11,231
   Real estate and other                        3,161          3,490                -           ($839)          5,812
   Intercompany charges                             -         16,991                -         (16,991)              -
                                            ----------       -------         ---------     ----------         --------
       Total revenues                         178,295        215,278           23,665         (17,830)        399,408
                                            ----------       -------         ---------     ----------         --------

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           28,760         39,186            6,459               -          74,405
     Payroll and other employee
       benefits                                39,571         53,671            8,311               -         101,553
     Other operating costs                     46,929         60,667            6,526               -         114,122
     Depreciation and amortization             14,894         13,112            1,033               -          29,039
     General and administrative                18,173         12,497            1,051            (839)         30,882
     Intercompany charges                      16,991               -               -         (16,991)              -
                                            ----------       -------         ---------     ----------         --------
       Total costs and expenses               165,318        179,133           23,380         (17,830)        350,001
                                            ----------       -------         ---------     ----------         --------

Operating income before minority
   interest                                    12,977         36,145              285               -          49,407
Minority interest                                   -              -              (46)              -             (46)
                                            ----------       -------         ---------     ----------         --------
Operating income                               12,977         36,145              239               -          49,361
                                            ----------       -------         ---------     ----------         --------

Other (expense) income:
   Interest expense                           (29,244)          (999)          (1,612)          1,612         (30,243)
   Interest income                              2,561              -                -          (1,612)            949
   Equity in net income of
     unconsolidated affiliates                    303              -                -               -             303
                                            ----------       -------         ---------     ----------         --------

Net other expense                             (26,380)          (999)          (1,612)              -         (28,991)
                                            ----------       -------         ---------     ----------         --------

Income (loss) before income taxes
   (credit)                                   (13,403)        35,146           (1,373)              -          20,370
Income taxes (credit)                          (5,790)           743              (28)              -          (5,075)
                                            ----------       -------         ---------     ----------         --------

Net income (loss)                             $(7,613)       $34,403          $(1,345)      $       -         $25,445
                                            ==========       ========         ========     ==========         =======

</TABLE>




                                      -74-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002


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

<S>                                            <C>             <C>             <C>              <C>            <C>
Net (loss) income                            $(24,839)       $26,990           $2,630                          $4,781
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization             12,551          8,325            1,261                          22,137
     Increase in deferred income taxes
     Decrease in deferred rent, net               421           (135)             (74)                            212
     Provision for asset impairment,
       restaurant closings and other
       charges                                  3,453              -            4,469                           7,922
     Minority  interest                             -              -               52                              52
     Equity in income of
       unconsolidated affiliates                 (668)             -                -                            (668)
     Dividends received from
       unconsolidated affiliates                  311              -                -                             311
     Changes in operating assets and
       liabilities:
     Decrease (increase) in receivables         2,105           (475)              28                           1,658
     (Increase) decrease  in
       inventories                                 (4)            46              210                             252
     (Increase) decrease in prepaid
       expenses                                  (763)          (187)            (171)                         (1,121)
     (Increase) decrease in other
       assets                                    (438)           282             (273)                           (429)
     (Decrease) increase in accounts
       payable and accrued expenses            (2,475)         1,827           (1,886)          $(120)         (2,654)
                                              --------        -------        ---------        --------       ---------

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

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

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





                                      -75-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 29, 2002


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

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

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


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

</TABLE>





                                      -76-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001

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

<S>                                        <C>               <C>              <C>               <C>        <C>
Net (loss) income                          $  (37,972)       $23,327          $    56           $   -      $  (14,589)
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities
     Depreciation and amortization             12,491         17,827            1,511               -          31,830
     Increase in deferred rent, net               720           (258)             507               -             969
     Provision for asset impairment,
       restaurant closings and other
       charges                                 20,914              -           (3,562)              -          17,352
     Minority interest                              -              -                1               -               1
     Equity in income of
       unconsolidated affiliates                 (310)             -                -               -            (310)
     Dividends received from
       unconsolidated affiliates                  244              -                -               -             244
     Changes in operating assets and
       liabilities:
       Increase in receivables                   (298)          (243)             (12)              -            (553)
       Decrease (increase) in
         inventories                               16             (7)             (45)              -             (36)
       (Increase) decrease in
         prepaid expenses                      (1,200)           666              112               -            (424)
       (Increase) decrease in
         other assets                             339         (1,518)              43               -          (1,135)
       (Decrease) increase in accounts
         payable and accrued expenses          (2,438)         3,438              463               -           1,463
                                               -------        -------          -------        --------        --------
Net cash (used in) provided by
   operating activities                        (7,494)        43,232             (926)              -          34,812
                                               -------        -------          -------        --------        --------


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

</TABLE>





                                      -77-
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001


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

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


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

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


Supplemental disclosure of cash flow information:

Cash paid during the period for income
   taxes                                       $  562           $628       $       7        $       -          $1,107
                                              =======         ======       =========        =========         =======

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

</TABLE>




                                      -78-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000


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

<S>                                           <C>            <C>              <C>               <C>           <C>
Net (loss) income                             ($7,613)       $34,403          $(1,345)          $   -         $25,445
Adjustments to reconcile net (loss)
   income to net cash (used in)
   provided by operating activities:
     Depreciation and amortization             17,324         12,131            1,034               -          30,489
     Increase in deferred rent, net               180              -                -               -             180
     Minority interest                              -              -               46               -              46
     Equity in income of
       unconsolidated affiliates                 (303)             -                -               -            (303)
     Dividends received from
       unconsolidated affiliates                  156              -                -               -             156
     Changes in operating assets and
       liabilities:
     Decrease (increase) in receivables           248           (354)             (26)              -            (132)
     Decrease (increase) in inventories           134            201             (149)              -             186
     Decrease (increase)in prepaid
       expenses                                 1,177           (513)              34               -             698
     (Increase) decrease in other
       assets                                  (9,441)           242            2,443           7,060             304
     (Decrease) increase in accounts
       payable and accrued expenses            (3,912)          (438)           1,270               -          (3,080)
     (Decrease) increase in income
       taxes payable                             (985)           180               73               -            (732)
                                               -------       --------         --------         -------        --------
Net cash (used in) provided by
   operating activities before change
   in accrued interest payable and
   effect of conversion to Subchapter
   S status                                    (3,035)        45,852            3,380           7,060          53,257

Change in deferred taxes due to
   Subchapter S conversion                     (5,629)             -                -               -          (5,629)
Increase in accrued interest payable              701              -                -               -             701
                                               -------       --------         --------         -------        --------
Net cash (used in) provided by
   operating activities                        (7,963)        45,852            3,380           7,060          48,329
                                               -------       --------         --------         -------        --------

Investing activities:
Purchases of property and equipment            (7,628)       (12,740)         (10,825)              -         (31,193)
Proceeds from disposition of property
   and equipment                                   35               -                -               -             35
                                               -------       --------         --------         -------        --------
Net cash used in investing activities          (7,593)       (12,740)         (10,825)               -        (31,158)
                                               -------       --------         --------         -------        --------

</TABLE>





                                      -79-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000


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

<S>                                            <C>           <C>                <C>            <C>             <C>
Financing activities:
---------------------
Proceeds from mortgage                              -         16,000                -               -          16,000
Mortgage principal repayments                       -            (81)               -               -             (81)
Cost of mortgage                                    -           (397)               -               -            (397)
Loan to officer                                (2,000)             -                -               -          (2,000)
Tax distributions                              (3,800)             -                -               -          (3,800)
Dividends                                     (18,328)             -                -               -         (18,328)
Intercompany balances                          48,793        (48,793)           7,060          (7,060)              -
                                             ---------        ------           -------     ----------        --------
Net cash (used in) provided by
   financing activities                        24,665        (33,271)           7,060          (7,060)         (8,606)
                                             ---------        ------           -------     ----------        --------

Increase (decrease) in cash and cash
   equivalents                                  9,109           (159)            (385)              -           8,565
Cash and cash equivalents at beginning
   of year                                     27,853          4,391            1,510               -          33,754
                                             ---------        ------           -------     ----------        --------
Cash and cash equivalents at end of
   year                                       $36,962         $4,232           $1,125      $        -         $42,319
                                              =======         ======           =======     ==========         =======

Supplemental disclosure of cash flow information:
Cash paid during the period for income
   taxes                                       $3,240           $676              $33      $        -          $3,949
                                               ======           ====              ===      ==========          ======
Cash paid during the period for
   interest                                   $27,152           $999           $    -      $        -         $28,151
                                              =======           ====           ======      ==========         =======

</TABLE>



                                      -80-
<PAGE>


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

         On May 22, 2002,  our board of directors,  upon  recommendation  of the
         audit  committee,  decided to end the engagement of Arthur Andersen LLP
         as our independent public accountants, and authorized the engagement of
         BDO  Seidman,  LLP  to  serve  as  our  independent   certified  public
         accountants  for the fiscal  year ending  December  29,  2002.  None of
         Arthur Andersen's reports on our consolidated  financial statements for
         the  fiscal  years  ended  December  30,  2001 and  December  31,  2000
         contained an adverse opinion or disclaimer of opinion, nor was any such
         report  qualified  or  modified  as  to  uncertainty,  audit  scope  or
         accounting principles.

         During our fiscal years ended  December 30, 2001 and December 31, 2000,
         there  were no  disagreements  between us and  Arthur  Andersen  on any
         matter  of  accounting  principle  or  practice,   financial  statement
         disclosure,  or auditing scope or procedure  which,  if not resolved to
         Arthur  Andersen's  satisfaction,   would  have  caused  them  to  make
         reference to the subject matter in connection  with their report on our
         consolidated  financial  statements  for such years;  and there were no
         reportable  events as defined in Item 304 (a) (1) (v) of Securities and
         Exchange Commission Regulation S-K.

         During the fiscal years ended  December 30, 2001 and December 31, 2000,
         and  prior  to its  appointment  as our  independent  certified  public
         accountants,  we did not consult with BDO Seidman,  LLP with respect to
         the  application of accounting  principles to a specified  transaction,
         either  completed or proposed,  or the type of audit opinion that might
         be  rendered on our  consolidated  financial  statements,  or any other
         matters or reportable  events as set forth in Items 304 (a) (2) (i) and
         (ii) of Regulation S-K.





                                      -81-
<PAGE>


                                    PART III
                                    --------

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

     Our directors and executive officers and their ages at March 15, 2003 are:

<TABLE>
<CAPTION>
        NAME                   AGE                 POSITION
        ----                   ---                 --------
<S>                             <C>   <C>
        Mario Sbarro            61    Chairman of the Board, President, Chief
                                      Executive Officer and Director
        Anthony Sbarro          56    Vice Chairman of the Board, Treasurer and
                                          Director
        Joseph Sbarro           62    Senior Executive Vice President, Secretary
                                        and Director
        Carmela Sbarro          81    Vice President and Director
        Anthony J. Missano      44    President - Quick Service Division and Corporate Vice
                                        President
        Gennaro A. Sbarro       36    President - Franchising and Licensing
                                        Division and Corporate Vice President
        Gennaro J. Sbarro       40    President - Casual and Fine  Dining  Division  and  Corporate
                                        Vice President
        Carmela N. Merendino    38    Vice President - Administration
        John Bernabeo           46    Vice President - Architecture and Engineering
        Steven B. Graham        49    Vice President and Controller
        Ashraf Kilada           39    Vice President - Risk Management and Benefits
        Harold L. Kestenbaum    53    Director
        Richard A. Mandell      60    Director
        Terry Vince             74    Director
        Bernard Zimmerman       70    Director

</TABLE>
     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,  President  and Chief  Executive  Officer for more than the past five
years.

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

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

     CARMELA SBARRO has been a Vice President for more than the past five years.
Mrs.  Sbarro was a founder of Sbarro,  together with her late  husband,  Gennaro
Sbarro.  Mrs.  Sbarro  devotes a  substantial  portion of her time to recipe and
product development. Our board of directors elected Mrs. Sbarro as a director in
January 1998. Mrs. Sbarro  previously served as a director from



                                      -82-
<PAGE>

March  1985  until  December  1988,  following  which she was  elected  director
emeritus until her reelection to our board of directors.

     ANTHONY J. MISSANO has been a Corporate  Vice  President  for more than the
past five years and was  elected  President  of our Quick  Service  Division  in
January 2000.

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

     GENNARO J. SBARRO has been a  Corporate  Vice  President  for more than the
past five years and was elected President of our Casual and Fine Dining Division
in January 2000.

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

     JOHN BERNABEO has been Vice President - Architecture  and  Engineering  for
more than the past five years.

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

     STEVEN B. GRAHAM was elected Vice President in January 2000. Mr. Graham has
served as our Controller for more than the past five years.  Mr. Graham has been
a certified public accountant in New York for over 20 years.

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

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

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

     BERNARD  ZIMMERMAN  has been  President of Bernard  Zimmerman & Co., Inc. a
financial and management consulting firm, for more than the past five years. Mr.
Zimmerman has



                                      -83-
<PAGE>

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

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

     During fiscal 2002,  our  officers,  directors  and  shareholders  were not
required to file reports under Section 16(a) of the  Securities  Exchange Act of
1934.







                                      -84-
<PAGE>


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

SUMMARY COMPENSATION TABLE

     The following table sets forth  information  concerning the compensation of
our chief executive officer and other five most highly  compensated  persons who
were  serving  as  executive  officers  at the end of our 2002  fiscal  year for
services in all capacities to us and our subsidiaries  during our 2002, 2001 and
2000 fiscal years:

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

<S>                                                 <C>        <C>          <C>
Mario Sbarro...................................     2002      $700,000         --
Chairman of the Board, President and                2001       700,000         --
      Chief Executive Officer                       2000       700,000      $300,000

Anthony Sbarro.................................     2002       325,000         --
Vice Chairman of the Board and Treasurer            2001       300,000         --
                                                    2000       300,000       200,000

Joseph Sbarro..................................     2002       325,000         --
Senior Executive Vice President and                 2001       300,000         --
     Secretary                                      2000       300,000       200,000

Anthony J. Missano.............................     2002       220,000         --
Corporate Vice President and President - Quick      2001       220,000         --
     Service Division                               2000       200,000       150,000

Gennaro A. Sbarro..............................     2002       220,000         --
Corporate Vice President and President -            2001       220,000         --
     Franchise and Licensing Division               2000       200,000       150,000

Gennaro J. Sbarro..............................     2002       220,000         --
Corporate Vice President and President -            2001       220,000         --
     Casual and Fine Dining Division                2000       200,000       150,000

</TABLE>

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

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR.

     We did not  grant any  options  to  purchase  our  securities  or any stock
appreciation rights during fiscal 2002.




                                      -85-
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END VALUES

     No  options  were  exercised   during  fiscal  2002  and  no  options  were
outstanding at the end of fiscal 2002.

COMPENSATION OF DIRECTORS

     Our  non-employee  directors  currently  receive a retainer  at the rate of
$16,000 per annum,  $1,000 for each  meeting of the Board  attended and $500 for
each  meeting  attended of a  committee  of the board on which they serve if the
meeting is not held on the same day as a meeting  of the  board.  Members of the
board also are reimbursed for reasonable  travel expenses  incurred in attending
board and committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

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

     Bernard Zimmerman & Company,  Inc., of which Bernard Zimmerman is President
and a majority  shareholder,  renders financial and consulting assistance to us,
for which it received  fees of $315,200  for services  rendered  during our 2002
fiscal year.

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






                                      -86-
<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 15, 2003 with  respect to (1) holders
known to us to beneficially own more than five percent of our outstanding common
stock, (2) each of our directors,  (3) our Chief Executive  Officer and our five
next most highly compensated executive officers and (4) all of our directors and
executive  officers as a group. We understand that,  except as noted below, each
beneficial owner has sole voting and investment power with respect to all shares
attributable to such owner.

                                                       SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER                                       NUMBER           PERCENT
----------------                                       ------           -------
Mario Sbarro (1)...................................    1,075,230 (2)     15.2%
Anthony Sbarro (1).................................    1,233,800         17.5%
Joseph Sbarro (1)..................................    1,306,522 (3)     18.5%
Trust of Carmela Sbarro (1)........................    2,497,884 (4)     35.4%
Harold L. Kestenbaum...............................           --          --
Richard A. Mandell.................................           --          --
Terry Vince........................................           --          --
Bernard Zimmerman..................................           --          --
Anthony J. Missano.................................      475,446(5)       6.7%
Gennaro A. Sbarro..................................      449,500          6.3%
Gennaro J. Sbarro..................................       25,946          0.4%
All directors and executive officers as a group
    (16 persons)...................................    7,064,328        100.0%

----------------------
(1)  The business  address of each beneficial owner of more than five percent of
     our common stock is 401 Broadhollow Road, Melville, New York 11747.

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

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

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

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

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




                                      -87-
<PAGE>

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

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

     We, our  subsidiaries  and the other  concents in which we have an interest
have  purchased  printing  services from a corporation  owned by a son-in-law of
Mario Sbarro for which they paid, in the aggregate, $422,057 during fiscal 2002.
We believe that these  services were provided on terms  comparable to those that
would have been available from unrelated third parties.

     During fiscal 2002,  we paid cash  dividends to our  shareholders  totaling
$3.1  million in the form of  distributions  made  pursuant  to the tax  payment
agreement  described  below. On January 21, 2003, we paid a cash dividend to our
shareholders of $1.1 million as a distribution  made pursuant to the tax payment
agreement.

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

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

     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  franchisees.  Royalties  under these  agreements in fiscal
2002 were $91,551. A company owned by the daughter of Joseph Sbarro are indebted
to us for royalties for 2001 and 2000 in the approximate  amount of $90,000.  No
royalties were recorded relating to this franchisee in fiscal 2002.

     As of July 14, 2002, we sold the assets of a Sbarro-owned  location that we
intended to close to a corporation  whose  shareholder is the  brother-in-law of
our Chairman of the Board and President for $88,900. The sales price resulted in
a loss of approximately $64,000 that is included in the provision for restaurant
closings in the  statement of  operations.  At the same time,  that  corporation
entered  into a  franchise  agreement  containing  terms  similar  to  those  in
agreements entered into by us with unrelated franchisees. We received promissory
notes for each of the purchase price and initial  franchise fee that are payable
over seven  years and bear  interest  on the  unpaid  principal  balances  at 7%
interest per annum. In addition,  we subleased this location to that franchisee.
Payments  under the  sublease  are being made  directly  to the  landlord by the
franchisee. Interest income received relating to the promissory notes was $2,850
in fiscal  2002.  Royalties  paid under  this  arrangement  in fiscal  2002 were
$6,723.  Future minimum  rental  payments under the lease for this location over
the term of the lease, which expires in 2010, are approximately $0.6 million.




                                      -88-
<PAGE>

     On March 3, 2003, a company in which Gennaro J. Sbarro,  who is a Corporate
Vice President and President of our Casual and Fine Dining  Division,  has a 50%
interest,  entered into a franchise  agreement  with us for a new location.  The
terms of the franchise agreement are similar to those in agreements entered into
by us with unrelated franchisees. The lease for the location was entered into in
September  2002  by  one  of our  subsidiaries.  Subsequent  to  that  date,  we
determined  that the  economics  of the  location  would be better  suited for a
franchise  operator.  Payments  under the sublease  will be made directly to the
landlord by the  franchisee.  Future minimum rental payments under the lease for
this  location  over  the  term  of  the  lease,  which  expires  in  2018,  are
approximately  $2.6  million.  The  location  is  expected to open in the second
quarter of fiscal 2003.

     There is a proposal for us to sell a 49%  interest in the 8 remaining  Mama
Sbarro  locations to a company  owned by Gennaro J.  Sbarro,  who is a Corporate
Vice President and President of our Casual and Fine Dining Division.  Mr. Sbarro
is a stockholder  of Sbarro and the son of Joseph Sbarro,  an officer,  director
and one of our  principal  stockholders.  Mr. Sbarro will cease to be an officer
and employee of Sbarro,  Inc. should the transaction be finalized.  The proposed
sales price,  which is to be paid in cash, is $1.3 million.  We anticipate  that
the transaction will result in a loss of approximately $0.4 million that will be
recorded in the first quarter of fiscal 2003.

     Bernard Zimmerman & Company,  Inc., of which Bernard Zimmerman is President
and a majority  shareholder,  renders financial and consulting assistance to us,
for which it received fees of $315,200 for services during our 2002 fiscal year.

     During  fiscal 2002 and 2003,  Harold  Kestenbaum,  P.C.,  of which  Harold
Kestenbaum is the  shareholder,  has been assisting one of our other concepts in
the preparation of its initial Uniform Franchise  Offering  Circular,  for which
the fee was $20,000.

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

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

     o    Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves as Vice
          President -  Administration,  received  $131,288  from us for services
          rendered during fiscal 2002.

     o    Other members of the immediate families of Mario, Anthony,  Joseph and
          Carmela Sbarro who are our employees,  earned an aggregate of $538,856
          during fiscal 2002.

     TAX PAYMENT AGREEMENT

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




                                      -89-
<PAGE>

and thus are  required to pay taxes with respect to their  respective  shares of
our taxable income, whether or not it is distributed to them.

     We have entered into a tax payment agreement with our shareholders. The tax
payment  agreement  permits  us  to  make  periodic  tax  distributions  to  our
shareholders  in amounts  that are  intended to  approximate  the income  taxes,
including  estimated  taxes,  that would be payable by our shareholders if their
only income was their  pro-rata  share of our taxable income and that income was
taxed at the highest  applicable  federal and New York State marginal income tax
rates. We may only make the tax  distributions  with respect to periods in which
we are treated as an S  corporation.  We made  distributions  of $3.1 million in
fiscal 2002 for fiscal 2001  earnings and $7.6 million in fiscal 2001,  and $1.1
million in January 2003 (with respect to fiscal 2002 taxes).

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

ITEM 14. CONTROLS AND PROCEDURES
--------------------------------

     (a) Evaluation of disclosure controls and procedures

     Within 90 days prior to the date of this report,  an evaluation was carried
out of the effectiveness of the design and operation of our "disclosure controls
and procedures," as defined in, and pursuant to, Rule 13a -14c of the Securities
Exchange  Act of 1934 by our  Chairman  of the Board,  President  and  principal
executive  officer  and Vice  President,  Controller  and  principal  accounting
officer (the person performing the function of our principal financial officer).
Based on that evaluation these officers  concluded that, as of the date of their
evaluation, our disclosure controls and procedures were effective to ensure that
material information relating to us and our subsidiaries is made known to them.

     (b) Changes in internal controls

     There were no  significant  changes in our  internal  controls  or in other
factors that could  significantly  affect these internal controls  subsequent to
the evaluation discussed above.



                                      -90-
<PAGE>


                                     PART IV

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

(a) (1)     Consolidated Financial Statements

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

     Report of Independent Certified Public Accountants                 35-36

     Copy of Report of Independent Public Accountants (Arthur
     Andersen LLP)                                                      37

     Consolidated Balance Sheets at December 29, 2002 and
     December 30, 2001                                                  38-39

     Consolidated Statements of Operations for each of the fiscal
     years in the three-year period ended December 29, 2002             40

     Consolidated Statements of Shareholders' Equity for each of the
     fiscal years in the three-year period ended December 29, 2002      41

     Consolidated Statements of Cash Flows for each of the fiscal
     years in the three-year period ended December 29, 2002             42-43

     Notes to Consolidated Financial Statements                         44-80

(a) (2)     Financial Statement Schedules

     The  following  financial  statement  schedule  is  filed as a part of this
Report on Page S-2:  Schedule II - Valuation  and  Qualifying  Accounts  for the
three fiscal years ended  December 29, 2002. All other  schedules  called for by
Form 10-K are omitted because they are inapplicable or the required  information
is shown in the financial statements, or notes thereto, included herein.

(a) (3)     Exhibits

   Exhibits:
   --------

       *2.01      Agreement  and Plan of Merger  dated as of  January  19,  1999
                  among  Sbarro,  Inc.,  Sbarro  Merger LLC, a New York  limited
                  liability company,  Mario Sbarro, Joseph Sbarro, Joseph Sbarro
                  (1994) Family Limited  Partnership,  Anthony Sbarro, and Mario
                  Sbarro  and  Franklin  Montgomery,  not  individually  but  as
                  trustees  under that certain Trust  Agreement  dated April 28,
                  1984 for the  benefit of Carmela  Sbarro and her  descendants.
                  (Exhibit 2 to our


                                      -91-
<PAGE>

                  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)

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

       *4.02(b)   Letter  agreement  dated  March 18,  2002 with  respect to the
                  Credit  Agreement  dated  as of  September  23,  1999  between
                  Sbarro,  Inc.  and  Citibank,  N.A. as  successor  to European
                  American  Bank,  as agent.  (Exhibit  4.02(a) to our Quarterly
                  Report on Form 10-Q for the quarter ended April 21, 2002, File
                  No.  333-90817)

       4.02(c)    Letter  agreement  dated  March 26,  2003 with  respect to the
                  Credit  Agreement  dated  as of  September  23,  1999  between
                  Sbarro,  Inc.  and  Citibank,  N.A. as  successor  to European
                  American Bank, as agent.




                                      -92-
<PAGE>

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

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

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

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

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

       12.01      Statement of computation of earnings to fixed charges

       *16.01     Letter of Arthur  Andersen LLP regarding  change in certifying
                  accountant.  (Exhibit  16 to our  Current  Report  on Form 8-K
                  (date of  earliest  event  reported)  May 22,  2002,  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)

       99.01      Certification  of Principal  Executive  Officer pursuant to 18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.

       99.02      Certification   of  Vice  President,   Controller,   Principal
                  Accounting Officer,  the person performing the function of our
                  principal  financial  officer,  pursuant to 18 U.S.C.  Section
                  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002.

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

(b)      Reports on Form 8-K




                                      -93-
<PAGE>

     No Reports  on form 8-K were  filed by us during the fourth  quarter of our
fiscal year ended December 29, 2002.

                                   UNDERTAKING

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






                                      -94-
<PAGE>

                                   SIGNATURES
                                   ----------

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 31, 2003.

                                      SBARRO, INC.


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

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

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


/s/ MARIO SBARRO                    Chairman of the Board         March 31, 2003
---------------------------         (Principal Executive
Mario Sbarro                        Officer) and Director


/s/ STEVEN B. GRAHAM                Vice President and            March 31, 2003
---------------------------         Controller (Principal
Steven B. Graham                    Accounting Officer)


/s/ JOSEPH SBARRO                   Director                      March 31, 2003
---------------------------
Joseph Sbarro



/s/ ANTHONY SBARRO                  Director                      March 31, 2003
---------------------------
Anthony Sbarro


/s/ HAROLD L. KESTENBAUM            Director                      March 31, 2003
---------------------------
Harold L. Kestenbaum




                                      -95-
<PAGE>


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

/s/  RICHARD A. MANDELL             Director                      March 31, 2003
---------------------------
Richard A. Mandell



/s/ CARMELA SBARRO                  Director                      March 31, 2003
---------------------------
Carmela Sbarro


/s/ TERRY VINCE                     Director                      March 31, 2003
---------------------------
Terry Vince


/s/ BERNARD ZIMMERMAN               Director                      March 31, 2003
---------------------------
Bernard Zimmerman





                                      -96-
<PAGE>

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mario Sbarro, certify that:

1.       I have reviewed this Annual Report on Form 10-K of Sbarro, Inc.;

2.  Based on my  knowledge,  this  Annual  Report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this Annual
Report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this Annual  Report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this Annual Report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this Annual Report (the "Evaluation Date"); and

     c)   presented   in  this   Annual   Report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;



                                      -97-
<PAGE>

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors:

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6. The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003                        /s/ MARIO SBARRO
                                            -----------------------------
                                            Mario Sbarro,
                                            Chairman of the Board and President
                                            (Principal Executive Officer)





                                      -98-
<PAGE>

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven B. Graham, certify that:

1.       I have reviewed this Annual Report on Form 10-K of Sbarro, Inc.;

2.  Based on my  knowledge,  this  Annual  Report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this Annual
Report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this Annual  Report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this Annual Report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this Annual Report (the "Evaluation Date"); and

     c)   presented   in  this   Annual   Report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;



                                      -99-
<PAGE>

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors:

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6. The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant  changes in internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003                     /s/ STEVEN B. GRAHAM
                                         -----------------------------------
                                         Steven B. Graham,
                                         Vice President and Controller
                                         (Principal Accounting Officer and
                                         person performing the function of our
                                         principal financial officer)




                                     -100-
<PAGE>



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


Board of Directors
Sbarro, Inc.
Melville, New York


The audit referred to in our report dated March 14, 2003,  except for Note 9, as
to which the date is March 28,  2003,  relating  to the  consolidated  financial
statements  of Sbarro,  Inc. and  subsidiaries,  which is contained in Item 8 of
this  Form  10-K  included  the audit of the  accompanying  financial  statement
schedule.  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 audit.

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



/s/ BDO Seidman, LLP

New York, New York
March 14, 2003












                                      S-1

<PAGE>







              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
              ----------------------------------------------------


To Sbarro, Inc.:


We have audited, in accordance with auditing standards generally accepted in the
United  States,  the  consolidated  financial  statements  of Sbarro,  Inc.  and
subsidiaries  included in this filing and have issued our report  thereon  dated
March 21,  2003.  Our audits  were made for the purpose of forming an opinion on
the basic financial  statements taken as a whole.  The accompanying  schedule is
the responsibility of the Company's  management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.



                                                      /s/ Arthur Andersen LLP



New York, New York
March 21, 2002


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





                                      S-2

<PAGE>

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

                            FOR THE THREE YEARS ENDED

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


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

Allowance for doubtful
<S>                                      <C>               <C>                               <C>              <C>
  accounts receivable                    $175              $350                              $34(2)           $ 491
                                         ====              ====                              ===              =====

Provision for store closings           $1,467            $8,689                           $1,333(3)          $1,452
                                       ======            ======                           ======             ======

                                                                                          $7,413(4)
                                                                                            $(42)(5)

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

Allowance for doubtful
 accounts receivable                     $211           $    61                              $97(2)           $175
                                         ====           =======                              ===              ====

Provision for store closings              $50            $1,881                             $464(3)         $1,467
                                          ===            ======                             ====            ======



December 31, 2000
-----------------

Allowance for doubtful                                    ($120) (1)
 accounts receivable                     $419           $   60                              $148(2)          $211
                                         ====           =======                             ====             ====

Provision for store closings             $863            $   94                             $907(3)         $  50
                                         ====            ======                             ====            =====

</TABLE>




(1)    Collection of previously reserved receivables.
(2)    Write off of uncollectible accounts.
(3)    Payments to landlords and others for closed locations.
(4)    Write off of property and equipment.
(5)    Transfer of miscellaneous balances.



                                      S-3
<PAGE>


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

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

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

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

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

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

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

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

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

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



<PAGE>

*4.02(b)       Letter  agreement dated March 18, 2002 with respect to the Credit
               Agreement dated as of September 23, 1999 between Sbarro, Inc. and
               Citibank,  N.A. as successor to European American Bank, as agent.
               (Exhibit  4.02(a)  to our  Quarterly  Report on Form 10-Q for the
               quarter ended April 21, 2002, File No. 333-90817)

4.02(c)        Letter  agreement dated March 26, 2003 with respect to the Credit
               Agreement dated as of September 23, 1999 between Sbarro, Inc. and
               Citibank, N.A. as successor to European American Bank, as agent.

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

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

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

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

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

12.01          Statement of computation of earnings to fixed charges

*16.01         Letter of Arthur  Andersen  LLP  regarding  change in  certifying
               accountant.  (Exhibit 16 to our Current  Report on Form 8-K (date
               of earliest event reported) May 22, 2002), 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)

99.01          Certification  of  Principal  Executive  Officer  pursuant  to 18
               U.S.C.  Section 1350,  as adopted  pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.



<PAGE>

99.02          Certification of Vice President, Controller, Principal Accounting
               Officer,  the person  performing  the  function of our  principal
               financial officer, pursuant to 18 U.S.C. Section 1350, as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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