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

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

|X| Annual Report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
Act of 1934 For the fiscal year ended DECEMBER 30, 2001

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

Commission file number 333-90817

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

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

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

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

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

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

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

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

     The 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 15, 2002 was 7,064,328.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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<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 that
time. These statements generally contain words such as "may," "should," "seeks,"
"believes,"  "expects," "intends," "plans," "estimates,"  "projects," "strategy"
and  similar  expressions  or  the  negative  of  those  words.  Forward-looking
statements are subject to a number of known and unknown risks and  uncertainties
that could  cause  actual  results to differ  materially  from those  projected,
expressed  or  implied  in  the  forward-looking  statements.  These  risks  and
uncertainties,  many of which are not within our  control,  include  but are not
limited to:

o    general economic, 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 effect that
     terrorist  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)  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    the effects  which  restrictions  imposed on us under the indenture for the
     senior  notes and the credit  agreement  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 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.


                                      -2-
<PAGE>

                                     PART I
                                     ------

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

     Sbarro,  Inc.,  a New York  corporation,  was  organized in 1977 and is the
successor to a number of family food and  restaurant  businesses  developed  and
operated by the Sbarro  family.  Today,  we are a leading  owner,  operator  and
franchisor  of  quick-service  restaurants,  serving a wide  variety  of Italian
specialty  foods  with 927  restaurants  worldwide  at  December  30,  2001.  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 35 other concept units
through majority or minority owned joint ventures or wholly owned  subsidiaries.
(See "New Concept Development," below.)

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

     On September  28,  1999,  members of the Sbarro  family (who prior  thereto
owned approximately 34.4% of 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 the 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 Senior Notes having the same terms,  except that the new
Senior Notes (the "Senior  Notes") were  registered  under the Securities Act of
1933.  The old senior  notes and the Senior Notes were issued under an Indenture
dated  September 28, 1999 (the  "Indenture").  We also entered into a five year,
$30.0 million  unsecured  senior  revolving bank credit  facility under a Credit
Agreement  dated as of September 23, 1999 (the "Credit  Agreement").  The Credit
Agreement  provides an unsecured  senior revolving credit facility which enables
us to borrow,  on a revolving basis from time to time during its five-year term,
up to $30.0 million,  including a $10.0 million  sublimit for standby letters of
credit. Our payment  obligations under the Senior Notes and the Credit Agreement
are jointly, severally, unconditionally and irrevocably guaranteed by all of our
current  Restricted  Subsidiaries  (as  defined in the  Indenture)  and is to be
similarly guaranteed by our future Restricted  Subsidiaries.  We have received a
waiver  of  compliance  for  fiscal  2001 from  certain  ratios  required  to be
maintained  under the  Credit  Agreement  and an  amendment  to  certain  ratios
required  to be  maintained  for fiscal  2002 and  fiscal  2003.  See  "Selected
Financial Data" included in Item 6 of this report,  "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of
this report, "Financial Statements and Supplementary Data" included in Item 8 of
the report and "Certain Relationships and Related Transactions" included in Item
13 of this report.


                                      -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  margins.  Over the past ten years,  we have  extended the
Sbarro concept from downtown locations and enclosed shopping malls to other high
customer  traffic  venues,  including  toll  roads,  airports,   sports  arenas,
hospitals,  convention centers,  university campuses and casinos. We believe the
opportunity to open additional Sbarro units in these and other new venues should
continue to increase as companies,  municipalities  and others seek to outsource
their non-core food operations to companies with an established brand name.

     As of December 30, 2001, we operated 927 Sbarro quick service  restaurants,
consisting of 602  Company-owned  and 325 franchised  restaurants  located in 47
States,  the  District of Columbia,  the  Commonwealth  of Puerto Rico,  certain
United States territories and 25 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  35  casual  and fine  dining  restaurants
featuring varying cuisines under other restaurant concepts.

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

     We have grown from 103 Sbarro-owned or franchised quick service restaurants
at the time of our initial  public  offering  in 1985 to 927 as of December  30,
2001 excluding 37 new concept units. During 2001, 51 new Sbarro restaurants were
opened,  of  which 9 were  Company-owned  and 42 were  franchised.  However,  43
Company-owned and 20 franchised Sbarro units were closed, resulting in the first
decrease in our history in the number of units  operated by us. In addition,  we
and the other  concepts  in which we  participate  opened  four  casual and fine
dining units in 2001. (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 1997
through 2001:

<TABLE>
<CAPTION>

                                                                                       Fiscal Year

                                                                   2001       2000        1999       1998       1997
                                                                   ----       ----        ----       ----       ----
<S>                                                                <C>        <C>         <C>        <C>        <C>
Company-owned Sbarro restaurants:
Opened during period  (1)                                            9         13          24         25         28
(Sold to) acquired from franchisees
 during period                                                       -          1          (1)         1          4
Closed during period  (2)                                          (43)       (16)         (9)       (20)        (8)
                                                                   ---        ---         ---        ---        ---
Open at end of period (3)                                          602        636         638        624        618

Franchised Sbarro restaurants:
Opened during period                                                42         36          49         43         47
Acquired from (sold to) the Company
 during period                                                       -         (1)          1         (1)        (4)
Closed or terminated during period                                 (20)       (18)        (32)       (13)       (23)
                                                                   ---        ---         ---        ---        ---
Open at end of period                                              325        303         286        268        239

All Sbarro restaurants:
Opened during period (1)                                            49         49          73         68         75
Closed or terminated during period  (2)                            (62)       (34)        (41)       (33)       (31)
                                                                   ---        ---         ---        ---        ---
Open at end of period  (3)                                         927        939         924        892        857

Kiosks  (all franchised) open at end of year                         4          5           4          8          7

</TABLE>

----------

(1)  Excludes 4, 7, 7, 7 and 5 other concept units opened during the  respective
     fiscal years.

(2)  See Note (3) to  "Selected  Financial  Data" in Item 6 of this  Report  for
     information  with respect to charges in 2001, 1998 and 1997 relating to the
     closing and planned closing of certain Company-owned units.

(3)  Excludes  37,  33,  26,  19 and 14  other  concept  units at the end of the
     respective  fiscal  years.  Two of these  units have been  closed in fiscal
     2002.

     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.

     As of December 30, 2001,  there were 247 "in-line"  Sbarro  restaurants and
673 "food court"  Sbarro quick  service  restaurants.  In addition,  franchisees
operated seven 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


                                      -5-
<PAGE>

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 2001 were $0.7  million for  "in-line"  restaurants  and $0.5 million for
"food court" restaurants.

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

     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.


                                      -6-
<PAGE>

     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 to  participation in national
franchise conventions, to attract new franchisees.

     As of December 30, 2001, we had 325 franchised Sbarro restaurants  operated
by 88 franchisees  in 33 states of the United States as well as its  territories
and  in  25  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.

     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  restaurateurs  experienced in the particular  food area. We
are actively  involved in the day-to-day  operations of each venture.  Our joint
ventures and other wholly-owned  concepts  presently operate 35 restaurants.  We
intend to develop and expand the  steakhouse  joint  venture  locations.  We are
evaluating  the continued  development of the "Mama Sbarro"  concept.  We do not
plan to open any additional  restaurants for, and are evaluating the disposition
of, the  balance of the  existing  concepts.  During  fiscal  2001,  we recorded
charges to earnings of $10.6  million  related to the  impairment  of  property,
equipment  and other assets of certain of these  concepts and the closing of two
restaurants and certain conversion costs.


                                      -7-
<PAGE>

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

     o    We operate twelve  moderately  priced quick casual dining  restaurants
          serving Italian food. The restaurants  provide both  quick-service and
          table service, with take-out service available, and generally cater to
          families. Prior to March 2001, when we acquired the ownership interest
          of our 20% partner in this venture in connection  with the  settlement
          of litigation  against this  partner,  these  locations  were operated
          under  either the  "Umberto  of New Hyde  Park" or "Tony and  Bruno's"
          names. Five of our six table service units currently operate under the
          name  "Mama  Sbarro."  Our six quick  service  units  operate  in mall
          locations  under the name  "Umberto of New Hyde Park."  During  fiscal
          2001, we determined  that two proposed "Mama Sbarro"  locations,  with
          accumulated costs of approximately $1.1 million,  would not be opened.
          These  costs  are  included  in the 2001  provision  in our  financial
          statements  for  restaurant   closing  costs.  We  recorded  costs  of
          approximately  $0.2 million for the  conversion of the "Umberto of New
          Hyde Park" and "Tony and Bruno"  locations to "Mama Sbarro" units.  In
          addition,  the provision for asset impairment  includes  approximately
          $1.6 million in fiscal 2001 related to two "Mama Sbarro locations." We
          are planning to open  additional  table service  non-mall sites of the
          Mama Sbarro concept in fiscal 2003.

     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   under  the  names
          "Rothmann's  Steakhouse" and "Burton & Doyle." We are planning to open
          additional sites of this concept.

     o    We have a 70% interest in a joint venture formed to develop moderately
          priced, table service restaurants  featuring an Italian  Mediterranean
          menu. The venture presently  operates one unit under the name "Salute"
          located  in New York  City.  During  1997,  this  venture  closed  two
          restaurants,  resulting in a $3.3 million  before tax, or $2.0 million
          after tax,  charge to our earnings.  An additional $1.0 million charge
          to earnings  before tax, or $0.6  million  after tax,  was recorded in
          1999 when we  subsequently  agreed  to  absorb a portion  of our joint
          venture  partners'  losses on these units upon their  disposition.  In
          early 2002, this venture closed another location with a minimal charge
          to earnings that was recorded in fiscal 2001.

     o    We operate two moderately priced, table service restaurants  featuring
          an Italian Mediterranean menu. One, which opened in the latter part of
          2000 in Las Vegas,  operates under the name "BICE Ristorante," and the
          other,  which opened in mid-2001 in New York City,  operates under the
          name "Medi." A third  location,  "Salute"  (renamed from "The Grill on
          the Park") in New York City,  which opened in late 2000, was closed in
          fiscal 2002.  The provision for asset  impairment  and store  closings
          includes  approximately $7.7 million related to the BICE Las Vegas and
          Salute locations.

     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."


                                      -8-
<PAGE>

     All of the other  concept  locations,  except for four  Umberto of New Hyde
Park mall units and the BICE Ristorante  restaurant in Las Vegas, are located in
the New York City metropolitan area. We are continually evaluating the operating
performance of these ventures to assess their  continued  feasibility and future
growth  potential.  As noted above,  we may seek to expand the "Mama Sbarro" and
steakhouse concepts, but do not plan to open any additional restaurants for, and
are evaluating the disposition of, the other existing concepts.  There can be no
assurance as to the performance of any of the other concept locations.

     All of our other concept locations  presently operate through  unrestricted
subsidiaries  which do not guarantee our Senior Notes and 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 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 30,  2001,  we had an  aggregate  investment  in the form of
advances  to and  property  and  equipment  costs of  these  other  concepts  of
approximately  $30.0  million.  The amount of our  investment  does not  include
guarantees of indebtedness,  reimbursement  obligations in respect of letters of
credit in the aggregate amount of  approximately  $8.4 million and guarantees of
certain real property lease obligations of these subsidiaries and other concepts
in the  approximate  amount of $4.8  million.  In addition,  we have also sublet
locations to,  guaranteed all or portions of other concepts  location leases and
provided other credit enhancements for these joint ventures.

     EMPLOYEES
     ---------

     As of December 30, 2001, we employed approximately 6,600 persons, excluding
employees of new concepts,  of whom approximately 3,000 were full-time field and
restaurant  personnel,  approximately 3,375 were part-time  restaurant personnel
and 225 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,  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.


                                      -9-
<PAGE>

     TRADEMARKS
     ----------

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

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

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

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

     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 contributed less
than  1%  of  our  total  revenues  during  fiscal  2001.  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.


                                      -10-
<PAGE>

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

     All Sbarro  restaurants  are typically  leased under  ten-year  leases that
often do not  include an option to renew the lease.  We have  historically  been
able to renew or extend  leases on existing  sites.  As of December 30, 2001, we
leased 595  restaurants,  of which 23 were subleased to franchisees  under terms
which cover all of our obligations  under the lease.  The remaining  franchisees
directly lease their restaurant  spaces.  Most of our restaurant  leases provide
for the  payment of base rents plus real  estate  taxes,  utilities,  insurance,
common area charges and certain  other  expenses,  as well as  contingent  rents
generally ranging from 8% to 10% of net restaurant sales in excess of stipulated
amounts.

     Leases to which we were a party at  December  30, 2001 have  initial  terms
expiring as follows:

<TABLE>
<CAPTION>

YEARS INITIAL LEASE                                   NUMBER OF SBARRO-       NUMBER OF FRANCHISED
TERMS EXPIRE                                          OWNED RESTAURANTS            RESTAURANTS
------------                                          -----------------            -----------
<S>                                                           <C>                       <C>
2002........................................                  42                        7
2003........................................                  62                        3
2004........................................                  49                        2
2005........................................                  62                        2
2006 .......................................                  46                        3
Thereafter..................................                 311                        6

</TABLE>

     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 35 facilities.


                                      -11-
<PAGE>

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

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

     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. Plaintiffs are represented by the same counsel who is representing
the plaintiffs in the Garcia case. We believe that we have substantial  defenses
to the claims and are vigorously defending this action.

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

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

     Not applicable.


                                      -12-
<PAGE>

                                     PART II
                                     -------

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

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

     During  2001  and  2000,  we  declared  the  following   dividends  to  our
shareholders  as  distributions  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) or as general
dividends:

                            AMOUNT
     FISCAL 2001           PER SHARE         TOTAL              TYPE
     -----------           ---------         -----              ----

     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

     FISCAL 2000
     -----------

     March 15, 2000          $2.548      $18,000,000      General Dividend
     April 17, 2000           0.072          511,156      Tax Distribution
     June 13, 2000            0.457        3,229,743      Tax Distribution
     September 15, 2000       0.009           59,096      Tax Distribution
     December 15, 2000        0.046          327,870      General Dividend

All tax  distributions  paid in 2001  related  to 2000 tax  basis  earnings.  In
addition,  on January 15, 2002,  we declared  dividends to our  shareholders  of
$0.44 per share (a total of $3,125,000) 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 (in addition to distributions  pursuant to the Tax
Payment  Agreement)  and other  restricted  payments will depend upon our future
profitability  and  having,  at the  time  of  declaration  of the  dividend,  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.


                                      -13-
<PAGE>

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

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

<TABLE>
<CAPTION>

                                                                          FISCAL YEAR
                                                                    (DOLLARS IN THOUSANDS)

                                                  2001          2000         1999        1998(1)       1997
                                                  ----          ----         ----        -------       ----
<S>                                             <C>          <C>          <C>          <C>          <C>
SYSTEM-WIDE SALES (UNAUDITED)                   $ 570,609    $ 569,260    $ 543,219    $ 524,572    $ 473,716
                                                =========    =========    =========    =========    =========
INCOME STATEMENT DATA:
Revenues:
  Restaurant sales                              $ 372,673    $ 382,365    $ 375,514    $ 370,101    $ 344,190
  Franchise related income                         10,286       11,231        8,688        8,284        7,175
  Real estate and other                             5,756        5,812        5,495        3,402        1,764
                                                ---------    ---------    ---------    ---------    ---------
    Total revenues                                388,715      399,408      389,697      381,787      353,129

Costs and expenses:
  Restaurant operating expenses:
    Costs of food and paper products               74,614       74,405       75,956       78,603       70,994
    Payroll and other employee benefits           103,828      101,553       97,336       93,338       85,021
    Other operating costs                         116,581      114,122      108,599      102,927       94,468
  Depreciation and amortization (2)                30,375       29,039       25,712       22,784       24,357
  General and administrative costs                 29,472       30,882       28,854       23,999       21,241
  Provision for asset impairment, restaurant
    closings and other charges (3)(4)              18,224           --        1,013        2,515        3,300
  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                      373,094      350,001      337,470      329,771      299,381

Operating income before minority interest          15,621       49,407       52,227       52,016       53,748

Minority interest                                      (1)         (46)         266         (101)         208
                                                ---------    ---------    ---------    ---------    ---------

Operating income                                   15,620       49,361       52,493       51,915       53,956
                                                ---------    ---------    ---------    ---------    ---------
Other (expense) income:
  Interest expense                                (30,950)     (30,243)      (7,899)          --           --
  Interest income (8)                                 756          949        3,828        5,120        4,352
  Equity in net income (loss) of
    unconsolidated affiliates                         310          303          423         (296)        (111)
                                                ---------    ---------    ---------    ---------    ---------

    Net other (expense) income                    (29,884)     (28,991)      (3,648)       4,824        4,241
                                                ---------    ---------    ---------    ---------    ---------


                                      -14-
<PAGE>

(Loss) income before income taxes and
  cumulative effect of change in method of
  accounting for start-up costs                   (14,264)      20,370       48,845       56,739       58,197
Income taxes (credit) (9)                             325       (5,075)      19,322       21,547       22,115
                                                ---------    ---------    ---------    ---------    ---------
(Loss) income before cumulative effect of
  change in method of accounting for start-up
  costs                                           (14,589)      25,445       29,523       35,192       36,082
Cumulative effect of change in method of
accounting for start-up costs, net of income
taxes of $504                                          --           --           --         (858)          --
                                                ---------    --------     --------     --------     --------

Net (loss) income                               $ (14,589)   $ 25,445     $ 29,523     $ 34,334     $ 36,082
                                                =========    ========     ========     ========     ========

<CAPTION>

                                                  2001          2000         1999        1998(1)       1997
                                                  ----          ----         ----        -------       ----
                                                                    (DOLLARS IN THOUSANDS)
<S>                                             <C>           <C>          <C>          <C>          <C>
OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by
  operating activities (10)                     $  34,812     $ 48,329     $  62,282    $  59,199    $  61,939
Net cash used in
  investing activities (10)                       (22,453)     (31,158)      (25,227)     (20,661)     (27,020)
Net cash used in
  financing activities (10)                       (17,726)      (8,606)     (158,356)      (3,377)     (20,012)

EBITDA (11)                                        46,306       78,703        78,628       74,403       78,202

EBITDA margin (11)                                   11.9%        19.7%         20.2%        19.5%        22.1%

Capital expenditures (12)                       $  22,528     $  31,193    $  25,282    $  28,213    $  29,758
Ratio of earnings to fixed charges (13)               0.7x          1.4x         2.6x         3.8x         4.1x

Number of restaurants at end of period:
  Company-owned (14)                                  602          636           638          624          618
  Franchised                                          325          303           286          268          239
                                                      ---          ---           ---          ---          ---
    Total number of restaurants                       927          939           924          892          857
                                                      ===          ===           ===          ===          ===

<CAPTION>

                                                  2001          2000         1999        1998(1)       1997
                                                  ----          ----         ----        -------       ----
                                                                   (DOLLARS IN THOUSANDS)
BALANCE SHEET DATA (AT END OF PERIOD):
<S>                                             <C>          <C>           <C>          <C>          <C>
Total assets                                    $ 404,762    $ 428,555     $ 417,543    $ 308,251    $ 278,811
Working capital (deficiency)                        4,614       10,293        (1,935)     126,619       93,464

Total long-term obligations                       276,197      274,269       263,090       14,902       17,270
Shareholders' equity                               86,444      113,597       110,280      256,918      220,439

</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 the 1999  going  private  transaction  on
     September 28, 2000 of $5.4 million, $5.0


                                      -15-
<PAGE>

     million and $2.0 million in fiscal 2001,  2000 and 1999,  respectively.  In
     fiscal 2000,  we finalized our  allocation  of the purchase  price from the
     going  private  transaction  based on an  evaluation  of our net  assets at
     September  29, 1999  resulting  in lower annual  amortization  expense than
     originally  estimated.  In July 2001,  the Financial  Accounting  Standards
     Board issued Statements of Financial Accounting Standards ("SFAS") No. 141,
     "Business  Combinations,"  and No.  142,  "Goodwill  and  Other  Intangible
     Assets." SFAS No. 141 requires all business  combinations  initiated  after
     June 30, 2001 to be accounted for using the purchase method. 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).  Our  goodwill and  intangible  assets with
     indefinite   lives   aggregated   $205.2   million,   net  of   accumulated
     amortization, at December 30, 2001. With respect to goodwill and intangible
     assets acquired prior to July 1, 2001, we will adopt SFAS No. 142 effective
     for fiscal 2002.  The  Company's  earnings  were charged with $5.4 million,
     $5.0 million and $2.0 million in fiscal 2001, 2000 and 1999,  respectively,
     for the  amortization  of goodwill and  intangible  assets with  indefinite
     lives.  Under SFAS No. 142, we will not incur similar charges commencing in
     fiscal  2002.  Separable  intangible  assets  that are not  deemed  to have
     indefinite lives will continue to be amortized over their useful lives. Our
     initial  evaluations  of impairment are expected to be completed by the end
     of the first quarter of fiscal 2002.

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

(4)  Fiscal 1999, 1998 and 1997 represent provisions of (a) a special allocation
     of losses in fiscal 1999 which  arose as a result of the final  disposition
     of two joint venture unit closings  recorded in 1997,  (b) $2.5 million for
     the closing of 20  restaurants  in fiscal 1998 and (c) $3.3 million for the
     closing of two joint venture units in fiscal 1997.

(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)  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 provisions beginning in
     fiscal 2000. For a discussion of the distributions that we are permitted to
     make  to  our  shareholders  to  pay  taxes  on our  income,  see  "Certain
     Relationships and Related  Transactions - Tax Payment Agreement" in Item 13
     of this report.


                                      -16-
<PAGE>

(10) 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 the
     change in deferred  taxes caused by the  conversion  to Subchapter S status
     and the change in accrued interest payable was $53.3 million.  In 1999, net
     cash provided by operating activities before the change in accrued interest
     payable was $54.8 million.

(11) 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. EBITDA margin represents EBITDA divided by total
     revenues.  EBITDA  should not be  considered  in  isolation  from,  or as a
     substitute  for, net income,  cash flow from  operations or other cash flow
     statement data prepared in accordance  with generally  accepted  accounting
     principles  or as a measure  of a  company's  profitability  or  liquidity.
     Rather,  EBITDA is presented  because it is a widely accepted  supplemental
     financial  measure,  and we believe  that it provides  relevant  and useful
     information. Our calculation of EBITDA may not be comparable to a similarly
     titled  measure  reported by other  companies,  since all  companies do not
     calculate this non-GAAP measure in the same manner. Our EBITDA calculations
     are not  intended  to  represent  cash  provided  by  (used  in)  operating
     activities  since they do not  include  interest  and taxes and  changes in
     operating assets and liabilities,  nor are they intended to represent a net
     increase  in cash  since they do not  include  cash  provided  by (used in)
     investing and financing activities.

(12) 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:  $5.0 million in fiscal 1997, $4.8 million in fiscal
     1998, $1.6 million in fiscal 1999 and $0.4 million in fiscal 2000.

(13) The ratio of earnings to fixed charges has been  determined by dividing the
     total fixed charges into the sum of income before income taxes,  cumulative
     effect  of change in method of  accounting  for  start-up  costs,  minority
     interests,  equity in net income (loss) of  unconsolidated  affiliates  and
     fixed charges.  Fixed charges consist of interest  expense and one-third of
     rental  expense,  which  we deem to be a  reasonable  approximation  of the
     interest factor of this expense.

(14) Excludes  37, 33, 26, 19 and 14 for other  concept  units that were open at
     the end of fiscal 2001, 2000, 1999, 1998 and 1997, respectively.


                                      -17-
<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
2001,  2000 and 1999  consisted  of 52  weeks.  The going  private  transaction,
including the purchase price  allocation and certain other related  transactions
described  in the notes to the  consolidated  financial  statements,  affect the
comparability of the interest income,  depreciation and  amortization,  interest
expense and income tax line items in our  consolidated  statements of operations
for fiscal 2000 as compared to fiscal 1999  discussed  below.  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.

     One high  volume  Sbarro-owned  quick  service  unit was  destroyed  in the
September  11,  2001  attack on the World  Trade  Center  in New York  City.  In
addition,  a number of airports  were closed due to the events of  September  11
causing  airport  Sbarro-owned  and  franchise  units to close  and a number  of
downtown  locations  experienced  reduced  sales.  We have made claims under our
business  interruption  insurance  policies with respect  thereto.  We are fully
insured  for the cost of the  assets  destroyed  at the  Company  location.  The
estimated amount of the expected recovery is included in accounts  receivable as
of December  30, 2001.  In  addition,  we expect to recover lost income from our
business  interruption  insurance  coverage  but,  under  applicable  accounting
principles,  have  not  reflected  any  estimated  recoveries  in our  financial
statements.

FISCAL 2001 COMPARED TO FISCAL 2000

     Our  consolidated  EBITDA  for the  fiscal  year ended  December  30,  2001
(including the charges  reflected above) was $46.3 million and our EBITDA margin
was 11.9%,  compared to $78.7  million and 19.7%,  respectively,  for the fiscal
year ended  December 31, 2000.  EBITDA  represents  earnings  before  cumulative
effect of change in accounting method, interest income, interest expense, taxes,
depreciation and amortization.  EBITDA margin represents EBITDA divided by total
revenues.  EBITDA should not be considered in isolation from, or as a substitute
for, net income,  cash flow from  operations or other cash flow  statement  data
prepared in accordance  with generally  accepted  accounting  principles or as a
measure of a company's  profitability or liquidity.  Rather, EBITDA is presented
because it is a widely accepted  supplemental  financial measure, and we believe
that it provides relevant and useful information.  Our calculation of EBITDA may
not be  comparable to a similarly  titled  measure  reported by other  companies
since all companies do not calculate  this non-GAAP  measure in the same manner.
Our EBITDA calculations are not intended to represent cash provided by (used in)
operating activities since they do not include interest and taxes and changes in
operating  assets and  liabilities,  nor are they  intended  to  represent a net
increase in cash since they do not include cash  provided by (used in) investing
and financing activities.

     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


                                      -18-
<PAGE>

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.

     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 the current  fiscal year  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.

     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.  Cheese prices to date in fiscal 2002 are lower than those experienced at
the  comparable  point in time in fiscal 2001 and  significantly  lower than the
average price for all of fiscal 2001.

     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.  Since then,  we have seen 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 and have seen a reduction  of those
costs in the early part of fiscal 2002.

     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.


                                      -19-
<PAGE>

     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  $3.6
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 our 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.  Under SFAS No.
142, "Goodwill and Other Intangible  Assets,"  commencing in fiscal 2002 we will
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 will 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.  With respect to goodwill and  intangible
assets  (trademarks  and  tradenames)  acquired  prior to July 1,  2001  ($205.2
million, net of accumulated  amortization,  at December 30, 2001), we will adopt
SFAS 142 effective with fiscal 2002.  Our initial  evaluations of impairment are
expected to be completed by the end of the first  quarter of fiscal 2002.  We do
not believe an impairment, if any, will be material.

     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  combined  operations  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,  the 8.4%, $16.0 million mortgage loan on
our corporate  headquarters and fees for the unused borrowing capacity under our
Credit  Agreement.  Of  these  amounts,  $1.5  million  in each of 2001 and 2000
represented non-cash charges for the accretion of the original issue discount on
our Senior Notes and the amortization of deferred  financing costs on the Senior
Notes,  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.


                                      -20-
<PAGE>

     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 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 have determined that we will continue to develop and
expand the steakhouse joint venture locations but are evaluating the disposition
of the other concepts in which we have 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 Statement of Financial  Accounting Standards ("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.

FISCAL 2000 COMPARED TO FISCAL 1999

     Our  consolidated  EBITDA for the fiscal year ended  December  31, 2000 was
$78.7  million and our EBITDA  margin was 19.7%,  compared to $78.6  million and
20.2%, respectively, for the fiscal year ended January 2, 2000.

     Restaurant sales from Sbarro-owned quick service units and consolidated new
concept units  increased by $6.9 million,  or 1.8%, to $382.4 million for fiscal
2000  from  $375.5  million  in  fiscal  1999.  Sales  from  new  concept  units
contributed  $5.1  million of the increase in  restaurant  sales.  However,  the
revenues  from new quick  service units did not offset the loss of revenues from
closed quick  service  units as we closed two more units than we opened in 2000,
including two high volume units (one of which is being replaced in fiscal 2001).
No material price increases were implemented in fiscal 2000.  Comparable  Sbarro
quick  service  unit  sales  increased  0.2%  during  fiscal  2000.   Comparable
restaurant  sales are made up of sales at  locations  that were open  during the
entire current and prior fiscal year.

     Franchise  related income  increased  29.3% to $11.2 million for the fiscal
year ended December 31, 2000 from $8.7 million for the fiscal year ended January
2, 2000. The increase resulted from greater continuing royalties due to a higher
number of  franchise  units in  operation,  higher area  development  and higher
initial  franchise  fees in fiscal 2000 than in fiscal 1999,  particularly  from
international  markets, and approximately $1.5 million recognized in fiscal 2000
related to the termination of our  development  agreement and the closing of all
Sbarro  locations  in Japan.  In fiscal 2000,  we entered into area  development
agreements in specific  domestic and  international  venues and markets with two
major food service  operators.  To date,  these  arrangements  have not produced
expected revenues.

     Real estate and other  revenues  increased  by $0.3 million to $5.8 million
for the fiscal  year ended  December  31,  2000 from fiscal 1999 due to the full
year impact from leasing a majority of our corporate  headquarters  building not
occupied by Sbarro to third parties in 1999.


                                      -21-
<PAGE>

     Cost of food  and  paper  products  as a  percentage  of  restaurant  sales
improved  to 19.5% for fiscal  2000 from  20.2% in the 1999  fiscal  year.  This
improvement was primarily due to lower average cheese prices during fiscal 2000.

     Payroll and other employee benefits  increased to 26.6% of restaurant sales
for the year ended  December 31 2000 from 25.9% of restaurant  sales in the year
ended January 2, 2000.  This increase was primarily due to a tight labor market,
resulting in pressures on wages and salaries and associated increases in amounts
paid for payroll taxes.

     Other operating  expenses  increased to 29.8% for fiscal 2000 from 28.9% of
restaurant sales for fiscal 1999 primarily due to increases in rent, utility and
other occupancy related expenses.

     Depreciation and amortization  expense increased by $3.3 million for fiscal
2000 over fiscal 1999.  Depreciation and amortization  expense included $4.8 and
$2.0  million in fiscal 2000 and 1999,  respectively,  for  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
representing  a full year in 2000  compared to three  months in 1999.  In fiscal
2000, we finalized our  allocation of the purchase  price from the going private
transaction  based on an  evaluation  of our net assets at  September  29,  1999
resulting in lower annual amortization expense than originally estimated.

     General  and  administrative  costs  were $30.9  million,  or 7.7% of total
revenues, for fiscal 2000, compared to $28.9 million, or 7.4% of total revenues,
for fiscal 1999.  These  increases  were  primarily due to higher payroll costs,
costs incurred in expanding  franchise and new concept  operations and increases
in various  professional fees,  including  litigation  expenses.  These expenses
include the cost of operating our corporate headquarters building.

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

     Minority interest  represents the share of the minority holders'  interests
in the combined  income in fiscal 2000 and  combined  loss in fiscal 1999 of the
joint ventures in which we have a majority interest.

     Interest  expense  of $30.2  million  for fiscal  2000  relates to the 11%,
$255.0 million  Senior Notes issued to finance our going private  transaction on
September  28, 1999,  the 8.4%,  $16.0  million  mortgage  loan on our corporate
headquarters  in 2000 and line  fees for  unused  borrowing  capacity  under our
Credit  Agreement.  Results for fiscal 1999 included interest only from the date
of the going private transaction through the end of the 1999 fiscal year of $7.9
million for the Senior Notes and Credit  Agreement  line fees. Of these amounts,
$1.5 and $0.4  million  for  fiscal  2000 and  1999,  respectively,  represented
non-cash  charges for the accretion of the original issue discount on our Senior
Notes and the  amortization  of deferred  financing  costs on the Senior  Notes,
Credit Agreement and, in 2000, the mortgage loan.

     Interest  income was  approximately  $0.9  million and $3.8 million for the
fiscal  years  2000 and 1999,  respectively.  We used  substantially  all of our
available  cash on  September  28,  1999 in  order  to fund  the  going  private
transaction.  Therefore,  we had a substantial  reduction in our interest income
for fiscal 2000.


                                      -22-
<PAGE>

     Equity in the net income (loss) 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 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.  As  required  by
Statement of Financial  Accounting  Standards  (SFAS) No. 109,  "Accounting  for
Income Taxes," we recognized a $5.6 million credit  associated with the reversal
of our deferred tax liabilities  upon conversion to S corporation  status in the
first   quarter  of  fiscal  2000.   Under  the   provisions  of  Subchapter  S,
substantially  all taxes on our  income is now paid by our  shareholders  rather
than us. Our tax  expense for the fiscal 2000  included  $0.5  million for taxes
owed to  jurisdictions  that do not recognize S  corporation  status or that tax
entities based on factors other than income.

IMPACT OF INFLATION AND OTHER FACTORS

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

SEASONALITY

     Our  business  is  subject to  seasonal  fluctuations,  and the  effects of
weather and economic conditions. Earnings have been highest in our fourth fiscal
quarter due primarily to increased  volume in shopping  malls during the holiday
shopping  season.  Historically,  the fourth  fiscal  quarter had  accounted for
approximately 40% of annual operating net income before the effect of additional
amortization  associated with the going private transaction ("adjusted operating
income") and 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.
Adjusted  operating  income  for the  fourth  quarter  of  2001  and  2000  were
approximately 24% and 40%,  respectively,  of adjusted  operating income for the
respective  fiscal year. The lower  percentage of adjusted  operating income for
the fourth  quarter of fiscal 2001  reflect  the  adverse  impact of the general
economic downturn and the effect of the events of September 11, 2001

ACCOUNTING PERIOD

     Our fiscal  year ends on the Sunday  nearest to December  31. All  reported
fiscal years contained 52 weeks. Fiscal 2002 will also contain 52 weeks.


                                      -23-
<PAGE>

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 30,
2001, we had unrestricted cash and cash equivalents of $37.0 million and working
capital of $4.6 million  compared to unrestricted  cash and cash  equivalents of
$42.3 million and working capital of $10.3 million as of December 31, 2000.

     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 December  30, 2001 and March 15, 2002,  we had $27.0  million and
$27.3  million  of  undrawn  availability  under our  Credit  Agreement,  net of
outstanding  letters  of credit  and  guarantees  of  reimbursement  obligations
aggregating  approximately  $3.0  and  $2.7  million,  respectively.  We were in
compliance with the various  covenants in the Indenture for the Senior Notes and
the Mortgage as of December 30, 2001.  We have  received a waiver of  compliance
for fiscal 2001 from certain ratios  required to be maintained  under our credit
agreement  at year end and an amendment to certain  annual  ratios  required for
fiscal 2002 and 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  1.25 to 1.0
through  December 28, 2002,  1.90 to 1.0 beginning  December 29, 2002 and 2.0 to
1.0  beginning  December 28, 2003.  We are also  required to maintain a ratio of
consolidated  senior  debt  to  consolidated  EBITDA  (in  each  case  with  the
guaranteeing  subsidiaries)  of 7.25 to 1 through  December 28, 2002, 4.7 to 1.0
beginning  December 29, 2002 and 4.5 to 1.0  beginning  December  28,  2003.  We
anticipate being in compliance with the revised ratios.

     Net cash  provided  by  operating  activities  was $34.8  million and $48.3
million for the fiscal  years ended  December  30, 2001 and  December  31, 2000,
respectively.  The $13.5  million  reduction was primarily due to a reduction in
operating income, before the provision for asset impairment, restaurant closings
and other charges, of $15.5 million.  Net cash provided by operating  activities
before the change in accrued  interest  payable and the reversal of deferred tax
liabilities in 2000 upon conversion to Subchapter S status was $53.5 million for
fiscal 2000.

     Net  cash  used  in  investing  activities  primarily  relates  to  capital
expenditures, including investments made by our consolidated other concepts. Net
cash used in investing  activities  was $22.5 million for 2001 compared to $31.2
million for 2000.

     Net cash used in financing activities was $17.7 million for the fiscal year
ended  December  30,  2001  compared  to $8.6  million for the fiscal year ended
December 31, 2000.  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),  $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.  Cash used in financing  activities for fiscal 2000
resulted   primarily  from  $22.1  million  of  distributions  to  shareholders,
including tax distributions of $3.8 million (see below), and a $2.0 million loan
to our  Chairman,  President  and CEO offset,  in part,  by $15.6 million of net
proceeds  from a $16.0  million  8.4% ten year loan secured by a mortgage on our
corporate headquarters.


                                      -24-
<PAGE>

     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.  We and our shareholders had a tax liability of approximately
46% of our  taxable  income in both 2001 and 2000.  Despite  our book loss,  our
shareholders  are expected to have taxable  income in fiscal 2001 resulting from
differences  in  the  book  and  tax  treatments  of  the  provision  for  asset
impairment,  the  non-deductability of goodwill for tax purposes and significant
differences  in book and tax  depreciation.  The 46% tax rate is higher than our
historical  effective tax rate prior to 2000 due to (i) differences in tax rates
between  individual  and  corporate  taxpayers,   (ii)  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
(iii) 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. 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. We made tax distributions of $3.8 million in fiscal 2000, $7.6 million
in fiscal 2001 (all for fiscal 2000) and $3.1 million in January 2002 related to
2001 tax basis earnings.  We do not expect to make additional tax  distributions
in 2002 related to 2001 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.  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 be  significantly  lower than levels in fiscal 2001 ($22.5  million) due to
reduced  levels of capital  expenditures  proposed  for our  consolidated  other
concepts.  Unpaid capital expenditure commitments aggregated  approximately $1.4
million at December 30, 2001.

     We expect our primary sources of liquidity to meet these needs will be cash
flow from operations and availability under our Credit Agreement.

     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. In order to make restricted payments,
our  ratio  must be at least 2.0 to 1,  after  giving  pro  forma  effect to the
restricted  payment.  As of December  30,  2001,  that ratio was 2.03 to 1. As a
result,  we are not  presently  able to borrow  funds  other  than  specifically
permitted indebtedness, including up to $75.0 million of revolving credit loans.


                                      -25-
<PAGE>

     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>

                                                                           DUE BY PERIOD
                                                     ----------------------------------------------------------
                                                                                                     AFTER 5
CONTRACTUAL OBLIGATIONS                  TOTAL         1 YEAR       1 - 3 YEARS     4 - 5 YEARS       YEARS
-----------------------                  -----         ------       -----------     -----------       -----
                                                                           (IN MILLIONS)
<S>                                    <C>           <C>           <C>              <C>             <C>
Senior Notes (1)                       $   255.0     $     -0-     $      -0-       $      -0-      $    255.0
Mortgage Loan (2)                      $    15.8     $     0.1     $      0.3       $      0.3      $     15.2
Credit Agreement (3)                   $     -0-     $     -0-     $      -0-       $      -0-      $      -0-
Standby Letters of Credit (4)          $     3.0     $     -0-     $      -0-       $      0.1      $      2.9
Guarantees (5)                         $     7.0     $     2.0     $      0.1       $      -0-      $      4.9
Operating Leases (6)                   $   590.9     $     7.8     $    147.4       $    134.1      $    231.6

</TABLE>

(1)  There are no principal  repayment  obligations  under the Senior Note until
     September 2009.
(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,  net of outstanding  letters of credit issued  pursuant to a $10.0
     million subfacility therefor under the Credit Agreement.  No repayments are
     required  under  the  Credit  Agreement  until  September  2004.  There are
     currently no amounts  outstanding under the Credit Agreement.  However,  of
     the $3.0 million of letters of credit reflected below, $2.7 million reduces
     our availability under such 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 leases or to guarantee construction costs for Sbarro or other concept
     locations.  With the  exception of one standby  letter of credit for one of
     our other concept  locations that  guarantees  the payment of  construction
     costs, all the standby letters of credit are annually renewable through the
     expiration of the related lease terms.
(5)  Represents our portion of the  borrowings of our steakhouse  joint venture,
     in which we have a minority interest.  Our obligation under the guaranty is
     several so that we are  potentially  responsible  only for our share of the
     debt. Our potential share is shown in the above table.
(6)  Includes  operating  leases  subleased by us to  franchisees  and operating
     leases for which we  guarantee  the  obligations  for  certain of our other
     concept locations.

     Except  for  the  foregoing,  we  have  no  off-balance  sheet  contractual
arrangements.  We have no  unconditional  purchase  obligations  except that, at
December 30, 2001,  we were a party to contracts  aggregating  $7.0 million with
respect to the construction of restaurants (of which  approximately $1.4 million
remained to be paid thereunder).  Historically, we have not purchased or entered
into  interest  rate  swaps or  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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board issued Statements of
Financial  Accounting  Standards ("SFAS") No. 141, "Business  Combinations," and
No. 142,  "Goodwill  and Other  Intangible  Assets."  SFAS No. 141  requires all
business  combinations  initiated  after June 30, 2001 to be accounted for using
the purchase  method.  Under SFAS No. 142,  goodwill and intangible


                                      -26-
<PAGE>

assets with indefinite lives are no longer  amortized but are reviewed  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  amortization  provisions of SFAS No.
142 have, since July 1, 2001, applied to goodwill and intangible assets acquired
after June 30, 2001.  With respect to goodwill and  intangible  assets  acquired
prior to July 1, 2001, we will adopt SFAS No. 142  effective  December 31, 2001.
The  provisions of SFAS No. 142 that we will adopt  effective  December 31, 2001
will result in a reduction of approximately $5.4 million in annual  amortization
of intangible assets.  Our initial  evaluations of impairment are expected to be
completed by the end of the first quarter of fiscal 2002.

     In August 2001, the Financial  Accounting  Standards  Board 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.  We have adopted
SFAS No. 143 in fiscal  2002.  SFAS No. 143 is not  expected  to have a material
effect on our operations.

     In August 2001, the Financial  Accounting  Standards  Board issued SFAS No.
144,  "Accounting  for the  Impairment or Disposal of  Long-lived  Assets." This
statement  supersedes  SFAS 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-Infrequently  Occurring
Events and Transactions."  This Statement retains the fundamental  provisions of
SFAS  121  for  recognition  and  measurement  of  impairment,  but  amends  the
accounting and reporting standards for segments of a business to be disposed of.
The  adoption of SFAS 144 is not  expected to have a material  impact as we will
continue to assess impairment of the assets of our restaurants as we have in the
past.

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

     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 SFAS No. 5,
"Accounting for Contingencies," and SFAS No. 121, "Accounting for the Impairment
of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of." SFAS No. 5
requires management  judgments regarding the probability and estimated amount of
possible future contingent liabilities,  especially, in our case, legal matters.
SFAS No. 121 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.  In the past we have  made,  and we intend in the
future to make,  decisions  regarding  legal  matters based on the status of the
matter  and our best  estimate  of the  outcome  (we  expense  defense  costs as
incurred) and regarding our long-lived  assets based on our business judgment of
when to close underperforming units. We will be required to periodically assess,
under SFAS 142,  "Goodwill  and Other  Intangible  Assets,"  the  impairment  of
goodwill and intangible  asset  acquired prior to July 1, 2001 ($205.2  million,
net of accumulated amortization,  at December 30, 2001). Our initial evaluations
of  impairment  are expected to be completed by the end of the first  quarter of
fiscal 2002. Any such impairment would affect our earnings but, since any charge
to earnings  would be a non-cash  charge,  would not affect our cash flow. We do
not believe an impairment, if any, will be material.


                                      -27-
<PAGE>

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

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

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

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

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


                                      -28-
<PAGE>

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

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

     In our opinion,  the financial statements referred to above present fairly,
     in all  material  respects,  the  financial  position of Sbarro,  Inc.  and
     subsidiaries as of December 30, 2001 and December 31, 2000, and the results
     of their operations and their cash flows for each of the three fiscal 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


                                      -29-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>

                                                                    DECEMBER 30, 2001   DECEMBER 31, 2000
                                                                    -----------------   -----------------
                                                                       (IN THOUSANDS EXCEPT SHARE DATA)
<S>                                                                      <C>                <C>
Current assets:
  Cash and cash equivalents                                              $ 36,952           $ 42,319
  Restricted cash for untendered shares (Note 2)                               45                153
  Receivables, net of allowance for doubtful accounts of                 $    175
    in 2001 and $211 in 2000
    Franchise                                                               2,162              1,350
    Other                                                                   2,797              1,554
                                                                         --------           --------
                                                                            4,959              2,904

  Inventories                                                               3,537              3,531
  Prepaid expenses                                                          1,242                999
                                                                         --------           --------
     Total current assets                                                  46,735             49,906

  Property and equipment, net (Note 5)                                    132,303            152,468

Intangible assets:
  Trademarks and tradenames, net
    (Notes 2 and 6)                                                       195,916            201,044
  Deferred financing costs and other,
    net (Notes 2 and 6)                                                    16,911             17,008

  Loans receivable from officers (Note 11)                                  6,032              2,000

  Other assets                                                              6,865              6,129
                                                                         --------           --------
                                                                         $404,762           $428,555
                                                                         ========           ========

</TABLE>


                                      -30-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                    DECEMBER 30, 2001   DECEMBER 31, 2000
                                                                    -----------------   -----------------
                                                                       (IN THOUSANDS EXCEPT SHARE DATA)
<S>                                                                      <C>                <C>
Current liabilities:
  Amounts due for untendered shares (Note 2)                              $    45           $    153
  Accounts payable                                                          9,107             10,284
  Accrued expenses (Note 7)                                                24,648             20,865
  Accrued interest payable (Note 9)                                         8,181              8,181
  Current portion of mortgage payable (Note 9)                                140                130
                                                                          --------           --------
     Total current liabilities                                             42,121             39,613

Deferred rent                                                               8,479              7,867

Long-term debt, net of original issue
  discount  (Note 9)                                                      267,718            267,478

Commitments and contingencies (Note 10)

Shareholders' equity (Notes 2 and 13):
  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 30,
    2001 and December 31, 2000                                                 71                 71
  Additional paid-in capital                                                   10                 10
  Retained earnings                                                         86,363            113,516
                                                                          --------           --------
                                                                            86,444            113,597
                                                                          --------           --------
                                                                          $404,762           $428,555
                                                                          ========           ========

</TABLE>

                 See notes to consolidated financial statements


                                      -31-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                            FOR THE FISCAL YEARS ENDED
                                                              --------------------------------------------------------
                                                                DEC. 30, 2001      DEC. 31, 2000      JAN. 2, 2000
                                                                -------------      -------------      ------------
                                                                                   (IN THOUSANDS)
<S>                                                                 <C>                <C>                <C>
Revenues:
  Restaurant sales                                                  $372,673           $382,365           $375,514
  Franchise related income                                            10,286             11,231              8,688
  Real estate and other                                                5,756              5,812              5,495
                                                                    --------           --------           --------
     Total revenues                                                  388,715            399,408            389,697

Costs and expenses:
  Restaurant operating expenses:
     Cost of food and paper products                                  74,614             74,405             75,956
     Payroll and other employee benefits                             103,828            101,553             97,336
     Other operating costs                                           116,581            114,122            108,599
  Depreciation and amortization                                       30,375             29,039             25,712
  General and administrative                                          29,472             30,882             28,854
  Provision for asset impairment, restaurant
     closings and other charges (Note 12)                             18,224                  -              1,013
                                                                    --------           --------           --------
        Total costs and expenses                                     373,094            350,001            337,470
                                                                    --------           --------           --------
Operating income before minority interest                             15,621             49,407             52,227
Minority interest                                                         (1)               (46)               266
                                                                    --------           --------           --------
  Operating income                                                    15,620             49,361             52,493
                                                                    --------           --------           --------
Other (expense) income:
  Interest expense (Note 9)                                          (30,950)           (30,243)            (7,899)
  Interest income                                                        756                949              3,828
  Equity in net income of
     unconsolidated affiliates                                           310                303                423
                                                                    --------           --------           --------
        Net other expense                                            (29,884)           (28,991)            (3,648)
                                                                    --------           --------           --------
(Loss) income before income taxes (credit)                           (14,264)            20,370             48,845
Income taxes (credit) (Note 8)                                           325             (5,075)            19,322
                                                                    --------           --------           --------
Net (loss) income                                                   $(14,589)           $25,445            $29,523
                                                                    ========            =======            =======

</TABLE>

                 See notes to consolidated financial statements


                                      -32-
<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 4, 1999                        20,531,643    $       205    $    34,587    $   222,125    $   256,917

Exercise of stock options                    17,337              -            426              -            426

Net income                                   29,523         29,523

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

Adjustment to original cost
  basis of continuing
  shareholders (Note 2)                           -              -              -       (141,449)      (141,449)
                                         ----------    -----------    -----------    -----------    -----------
Balance at
  January 2, 2000                         7,064,328             71             10        110,199        110,280

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
                                         ==========    ===========    ===========    ===========    ===========

</TABLE>

                 See notes to consolidated financial statements


                                      -33-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                            FOR THE FISCAL YEARS ENDED
                                                             ----------------------------------------------------------
                                                                   DECEMBER 30,       DECEMBER 31,         JANUARY 2,
                                                                       2001               2000                2000
                                                                                    (IN THOUSANDS)
<S>                                                                 <C>               <C>                 <C>
OPERATING ACTIVITIES:
Net (loss) income                                                   $(14,589)         $ 25,445            $ 29,523
Adjustments to reconcile net (loss) income to
  net cash provided by operating activities:
    Depreciation and amortization                                     31,830            30,489              26,088
    Increase in deferred income taxes                                      -                 -                 710
    Increase (decrease) in deferred rent, net                            969               180                (107)
    Non-cash provision for asset impairment, restaurant
      closing and other charges                                       17,352                 -               1,013
    Minority interest                                                      1                46                (266)
    Equity in net income of unconsolidated affiliates                   (310)             (303)               (423)
    Dividends received from unconsolidated affiliates                    244               156                   -
Changes in operating assets and liabilities:
    (Increase) decrease in receivables                                  (553)             (132)                770
(Increase) decrease in inventories                                       (36)              186                (554)
(Increase) decrease in prepaid expenses                                 (424)              698                (408)
(Increase) decrease in other assets                                   (1,135)              304              (2,898)
Decrease (increase) in accounts payable and
accrued expenses                                                       1,463            (3,080)              2,762
    Decrease in income taxes payable                                       -              (732)             (1,408)
                                                                    --------          --------            --------
Net cash provided by operating activities
  before change in deferred taxes due to
  conversion to Subchapter S status and
  increase in accrued interest payable                                34,812            53,257              54,802
Change in deferred taxes due to conversion to
  Subchapter S status                                                      -            (5,629)                  -
Increase in accrued interest payable                                       -               701               7,480
                                                                    --------          --------            --------
Net cash provided by operating activities                             34,812            48,329              62,282
                                                                    ========          ========            ========

</TABLE>

                                   (continued)


                                      -34-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>

                                                                             FOR THE FISCAL YEARS ENDED
                                                                   DECEMBER 30,       DECEMBER 31,         JANUARY 2,
                                                                      2001               2000                2000
                                                                      ----               ----                ----
                                                                                    (IN THOUSANDS)
<S>                                                                  <C>                 <C>                <C>
INVESTING ACTIVITIES:

Purchases of property and equipment                                  (22,528)            (31,193)           (25,282)
Proceeds from disposition of property and
  equipment                                                               75                  35                 55
                                                                     -------             -------            -------
  Net cash used in investing activities                              (22,453)            (31,158)           (25,227)
                                                                     -------             -------            -------
FINANCING ACTIVITIES:

Proceeds from mortgage                                                     -              16,000                  -
Mortgage principal repayments                                           (130)                (81)                 -
Cost of mortgage                                                           -                (397)                 -
Purchase of minority interest                                         (1,000)
Loans to shareholders                                                 (6,732)             (2,000)                 -
Repayment of shareholder loans                                         2,700                   -                  -
Proceeds from long-term debt                                               -                   -            251,211
Cost of merger and related financing                                       -                   -           (411,000)
Accrued and previously paid merger costs                                   -                   -              1,007
Proceeds from exercise of stock options                                    -                   -                426
Tax distributions                                                     (7,564)             (3,800)                 -
Dividends                                                             (5,000)            (18,328)                 -
                                                                     -------             -------            -------
  Net cash used in financing activities                              (17,726)             (8,606)          (158,356)
                                                                     -------             -------            -------
(Decrease) increase in cash and cash
  equivalents                                                         (5,367)              8,565           (121,301)
Cash and cash equivalents at                                          42,319              33,754            155,055
  beginning of year                                                  -------             -------            -------
Cash and cash equivalents at end of year                             $36,952             $42,319            $33,754
                                                                     =======             =======            =======

</TABLE>

                 See notes to consolidated financial statements


                                      -35-

<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          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 2001 and 2000 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,   less   accumulated
          amortization   and   depreciation.   Depreciation   of  equipment  and
          amortization  of  leasehold   improvements  is  provided  for  by  the
          straight-line  method over the estimated useful lives of the assets or
          the lease term,  whichever is shorter.  One-half year of  depreciation
          and  amortization  is  recorded  in the year in which  the  restaurant
          commences operations.

          INTANGIBLE ASSETS:

          Intangible  assets consist of our trademarks and tradenames,  goodwill
          and deferred  financing costs.  Trademark and tradename 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) and are
          being  amortized  on a straight  line  basis  over 40 years.  There is
          additional  goodwill  relating  to the  purchase  of the 20%  minority
          interest in one of our other concepts in March 2001 in connection with
          the settlement of an action against such minority owner.



                                      -36-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          INTANGIBLE ASSETS (CONTINUED):

          In  July  2001,  the  Financial   Accounting  Standards  Board  issued
          Statements  of  Financial   Accounting  Standards  ("SFAS")  No.  141,
          "Business  Combinations,"  and No. 142, "Goodwill and Other Intangible
          Assets."  SFAS No. 141 requires all  business  combinations  initiated
          after June 30, 2001 to be  accounted  for using the  purchase  method.
          SFAS 142  also  requires  that the  amortization  of  goodwill  (which
          resulted  in a charge to  earnings  of $5.4  million in 2001) cease on
          December 31, 2001. 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).  Separable  intangible  assets  that  are not  deemed  to have
          indefinite  lives will  continue  to be  amortized  over their  useful
          lives. The amortization  provisions of SFAS No. 142 apply  immediately
          to goodwill and intangible  assets  acquired after June 30, 2001. With
          respect to goodwill and  intangible  assets  acquired prior to July 1,
          2001 ($205.2 million, net of accumulated amortization, at December 30,
          2001),  we will adopt SFAS No. 142  effective  with fiscal  2002.  Our
          initial  evaluations of impairment are expected to be completed by the
          end of the first quarter of fiscal 2002.

          Deferred  financing  costs  were  incurred  as a result  of the  going
          private  transaction  (see Note 2) and the  mortgage on the  corporate
          headquarters  building  (see  Note  9)  and  are  being  amortized  as
          additional  interest  expense over the respective lives of the related
          debt instrument.

          ASSET RETIREMENT OBLIGATION:

          In August 2001, the Financial  Accounting  Standards Board 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   acquisition,
          construction,  development  and/or the normal  operation of long-lived
          assets,  except for certain obligations of lessees. We will adopt SFAS
          No.  143 in  fiscal  2002.  SFAS  No.  143 is not  expected  to have a
          material effect on our operations.

          LONG-LIVED ASSETS:

          In  connection  with  SFAS  121,  "Accounting  for the  Impairment  of
          Long-lived  Assets  and for  Long-lived  Assets  to be  Disposed  Of,"
          impairment losses are recorded on long-lived assets on a restaurant by
          restaurant  basis  whenever  impairment  factors are  determined to be
          present,  the  undiscounted  cash flows  estimated  to be generated by
          those  assets  are less than the  carrying  value of such  assets  and
          events or changes in  circumstances  indicate that the carrying amount
          may not be recoverable. Additionally, the Company periodically reviews


                                      -37-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          LONG-LIVED ASSETS (CONTINUED):

          the values assigned to goodwill and other acquired  intangibles  which
          resulted from the going private and other transactions to determine if
          they have been permanently  impaired by adverse conditions.  In August
          2001, the Financial  Accounting  Standards Board issued  Statements of
          Financial  Accounting  Standards ("SFAS") No. 144, "Accounting for the
          Impairment   or  Disposal  of  Long-lived   Assets."  This   statement
          supersedes  SFAS 121 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 121 for recognition and measurement of
          impairment,  but amends the  accounting  and  reporting  standards for
          segments of a business to be disposed  of. The adoption of SFAS 144 is
          not expected to have a material  impact as we will  continue to assess
          impairment of the assets of our restaurants as we have in the past.

          EQUITY INVESTMENTS:

          The Company  accounts for its  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 operations.

          COMPREHENSIVE INCOME:

          We  observe  the  provisions  of  Statement  of  Financial  Accounting
          Standards  ("SFAS")  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.  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.


          FRANCHISE RELATED INCOME:

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



                                      -38-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          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,  and,  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.

          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 30, 2001 was approximately  $244,800.  The carrying amount of
          the mortgage  loan  approximates  fair value because the interest rate
          this  instrument  bears is equivalent to the current rates offered for
          debt of similar nature and maturity.



                                      -39-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

          DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

          The  Financial   Accounting  Standards  Board  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, while 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:

          The  Company  maintains  a  401(k)  Plan  ("Plan")  for all  qualified
          employees.  The Plan provides for a 25% matching employer contribution
          of up to four  percent of the  employees'  deferred  savings  (maximum
          contribution of 1% of an employee's  deferred  savings).  The employer
          contributions  vest over five years. The deferred amount cannot exceed
          fifteen  percent of an individual  participant's  compensation  in any
          calendar  year. The Company's  contribution  to the Plan was $137,000,
          $163,000 and $147,000 in fiscal 2001, 2000 and 1999, respectively.

          RECLASSIFICATIONS:

          Certain  items  in  the  financial   statements  presented  have  been
          reclassified to conform to the fiscal 2001 presentation.

          SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                                           FOR THE FISCAL YEARS ENDED
                                ------------------------------------------------
                                DECEMBER 30,      DECEMBER 31,       JANUARY 2,
                                    2001              2000              2000
                                    ----              ----              ----
                                                 (IN THOUSANDS)
              Cash paid for:
              Income taxes           $  1,107         $  3,949          $20,129
                                     ========         ========          =======
              Interest               $ 29,491         $ 28,104          $    30
                                     ========         ========          ========


                                      -40-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.  The cost of the merger,  including fees
          and expenses,  was funded through the use of substantially  all of our
          then cash 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.  We also  entered  into an  unsecured  senior
          revolving bank credit  facility under a Credit  Agreement  dated as of
          September  23, 1999 (the  "Credit  Agreement").  The Credit  Agreement
          provides an unsecured  senior  revolving credit facility which enables
          us to  borrow,  on a  revolving  basis  from time to time  during  its
          five-year  term,  up to  $30.0  million,  including  a  $10.0  million
          sublimit for standby letters of credit.

          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
          30,  2001,  there was  $45,000  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 Emerging  Issues Task Force Issue 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 the Company 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
          education of  depreciation  and  amortization in the fourth quarter of
          fiscal 2000 (see Notes 5 and 14).

          All stock option plans that were in effect as of the date of the going
          private transaction were terminated on September 29, 1999.

          Summarized below are our unaudited pro forma results of operations for
          our 1999 fiscal year ended January 2, 2000, as if the merger had taken
          place as of the beginning of that year.



                                      -41-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.        GOING PRIVATE TRANSACTION (CONTINUED):

          Adjustments  have been made for the  amortization of the excess of the
          purchase  price over the cost basis of net assets  acquired,  interest
          expense,  including  interest on a $16.0  million bank  mortgage  loan
          issued subsequent to fiscal 1999 to one of our subsidiaries  (Note 14)
          and related changes in income tax expense.

                                                   FOR THE FISCAL YEAR ENDED
                                                   -------------------------
                                                         JANUARY 2, 2000
                                                         ---------------
                                                          (IN THOUSANDS)
         Pro Forma:
                  Revenues                                  $389,697
                                                            ========
                  Net income                              $    6,662
                                                         ===========

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

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 to provide growth  opportunities that leverage our restaurant
          management and financial expertise.

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

                                  DECEMBER 30,      DECEMBER 31,     JANUARY 2,
                                      2001              2000            2000
                                      ----              ----            ----

             Sbarro-owned (a)          602               636             638
             Franchised                325               303             286
                                       ---               ---             ---
                                       927               939             924
                                       ===               ===             ===

          (a)  Excludes 37, 33 and 26 other  concept  units as of the end of the
               respective fiscal years.



                                      -42-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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  high sales  revenues and  operating
          income,  the effect on fiscal 2001 was not  material  to  consolidated
          results  as  a  whole.   The  franchise   location  did  not  generate
          significant royalty revenues.  In addition,  a number of airports were
          closed due to the events of September 11 causing airport  Sbarro-owned
          and  franchise  units to close  for  periods  of time and a number  of
          downtown  locations  have  experienced  a prolonged  period of reduced
          sales.

          We are  fully  insured  for the cost of the  assets  destroyed  at the
          Company  location.  The estimated  amount of the expected  recovery is
          included in accounts  receivable as of December 30, 2001. In addition,
          we  expect to  recover  lost  income  from our  business  interruption
          insurance coverage but, under applicable accounting  principles,  have
          not reflected any estimated recoveries in our financial statements.

5.        PROPERTY AND EQUIPMENT, NET:

                                                DECEMBER 30,       DECEMBER 31,
                                                    2001 (A)           2000
                                                    ----               ----
                                                           (IN THOUSANDS)
           Land and improvements                    $  3,781            $  3,781
           Leasehold improvements                    158,934             165,627
           Furniture, fixtures and equipment          72,186              78,237
           Construction-in-progress                      684                 717
                                                    --------            --------
                                                     235,585             248,362
           Less accumulated depreciation and         103,282              95,894
             amortization (b)                       --------            --------

                                                    $132,303            $152,468
                                                    ========            ========

          (a)  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 three other concept locations ($6.5 million).

          (b)  Depreciation  and  amortization  of property  and  equipment  was
               $24.9,  $24.0 and $23.9  million in fiscal  2001,  2000 and 1999,
               respectively.


                                      -43-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6.        ACQUIRED INTANGIBLE ASSETS:

                                              DECEMBER 30,       DECEMBER 31,
                                                 2001               2000
                                                 ----               ----
                                                      (IN THOUSANDS)
             Trademarks and tradenames          $207,590          $207,529
             Goodwill                              9,712             8,519
             Deferred financing costs             10,129            10,101
                                                --------          --------
                                                 227,431           226,149
             Less accumulated amortization        14,604             8,097
                                                --------          --------
                                                $212,827          $218,052
                                                ========          ========

          Amortization of the acquired intangible assets:

                                                FISCAL YEARS ENDED

                                    DECEMBER 30,     DECEMBER 31,     JANUARY 2,
                                       2001             2000             2000
                                       ----             ----             ----
                                                  (IN THOUSANDS)

Trademarks and tradenames               $5,189           $4,723        $2,000
Goodwill                                   244              265             -
Deferred financing costs and other       1,074            1,071           391
                                        ------          -------          ----
                                        $6,507           $6,059        $2,391
                                        ======           ======        ======


7.        ACCRUED EXPENSES:

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

            Compensation                               $ 6,068           $ 5,265
            Payroll and sales taxes                      3,968             3,413
            Rent and related cost                        1,834             2,549
            Provision for restaurant closings            1,467                50
                (Notes 5 and 12)
            Other                                       11,311             9,588
                                                       -------           -------
                                                       $24,648           $20,865
                                                       =======           =======


                                      -44-
<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,  and 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 $7.6 million in fiscal 2001 (all of which  related to our
          fiscal 2000 earnings), $3.8 million in fiscal 2000 and $3.1 million in
          January 2002 related to our fiscal 2001 earnings.  We estimate that no
          additional  distributions  will  be  made  in  2002  related  to  2001
          earnings. Despite our book loss, our shareholders are expected to have
          taxable income in fiscal 2001  resulting from  differences in the book
          and  tax  treatments  of  the  provision  for  asset  impairment,  the
          non-deductability   of  goodwill  for  tax  purposes  and  significant
          differences in book and tax depreciation.

          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):



                                      -45-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.        INCOME TAXES (CONTINUED):

                                            FOR THE FISCAL YEARS ENDED
                                    DECEMBER 30,      DECEMBER 31,    JANUARY 2,
                                        2001              2000           2000
                                        ----              ----           ----
                                                    (IN THOUSANDS)
           Federal:
               Current                    $ -             $  -          $14,758
               Deferred                     -           (4,589)             557
                                       ------           -------          ------
                                            -           (4,589)          15,315
                                       ------           -------          ------
           State and local:
               Current                    325              554            3,854
               Deferred                    -            (1,040)             153
                                       ------           -------          ------
                                          325             (486)           4,007
                                       ------           -------          ------

                                         $325          $(5,075)         $19,322
                                         ====          ========         =======

          Our tax expense for fiscal 1999 (prior to our S corporation  election)
          differed from "expected" tax expense (computed by applying the Federal
          corporate  rate of 35% for the fiscal  year ended  January 2, 2000) as
          follows:

<TABLE>
<CAPTION>
                                                                            FOR THE FISCAL YEAR ENDED
                                                                            -------------------------
                                                                                    JANUARY 2,
                                                                                       2000
                                                                                       ----
                                                                                 (IN THOUSANDS)
<S>                                                                                  <C>
          Computed "expected" tax expense                                            $17,096
          Increase (reduction) in income
          taxes resulting from:
            State and local income taxes, net of federal income tax benefit            2,605
            Tax exempt interest income and dividends received deduction               (1,002)
            Amortization of excess purchase price over the cost
              of net assets acquired                                                     700
            Other, net                                                                   (77)
                                                                                     -------
                                                                                     $19,322
                                                                                     =======

</TABLE>
          Deferred income taxes are provided for temporary  differences  between
          financial and tax reporting.  These  differences and the amount of the
          related deferred tax benefit are as follows (in thousands):

                                                     FOR THE FISCAL YEAR ENDED
                                                            JANUARY 2,
                                                               2000

             Depreciation and amortization                    $(408)
             Accrued expenses                                 2,706
             Other                                           (1,588)
                                                             ------
                                                              $ 710
                                                              =====


                                      -46-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.        LONG-TERM DEBT:

          (a) 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 on our
          part and on the part of the guaranteeing subsidiaries,  including, but
          not  limited  to,  restrictions  on our  payment of  dividends,  stock
          repurchases,  certain investments and other restricted  payments,  the
          incurrence  of  indebtedness  and  liens  on  our  assets,   affiliate
          transactions,  asset sales and mergers. We were in compliance with the
          various covenants contained in the Indenture as of December 30, 2001.

          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
          2001 and 2000 and $0.1 million in fiscal 1999.

          (b) 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 30, 2001.

          At our option, the interest rates applicable to loans under the Credit
          Agreement  will be at either (i) the bank's prime rate (4.75% at March
          15,  2002) plus a margin  ranging  from zero to 0.75%  (the  margin at
          March 15, 2002 was 0.75%) or (ii)  reserve  adjusted  LIBOR  (1.90% at
          March 15, 2002) plus a margin ranging from 1.5% to 2.5% (the margin at
          March 15, 2002 was 2.5%).  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



                                      -47-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.        LONG-TERM DEBT (CONTINUED):

          our senior debt to EBITDA. The unused commitment fee at March 15, 2002
          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. In addition, we are required to maintain a minimum ratio of
          consolidated  EBITDA to  consolidated  interest  expense (in each case
          with the  guaranteeing  subsidiaries)  of at least 1.25 to 1.0 through
          December 28, 2002, 1.90 to 1.0 beginning  December 29, 2002 and 2.0 to
          1.0  beginning  December 28, 2003.  We are also required to maintain a
          ratio of consolidated senior debt to consolidated EBITDA (in each case
          with the guaranteeing  subsidiaries) of 7.25 to 1 through December 28,
          2002, 4.7 to 1.0 beginning  December 29, 2002 and 4.5 to 1.0 beginning
          December 28, 2003. We obtained a waiver of compliance  for fiscal 2001
          from the required ratios of  consolidated  senior debt to consolidated
          EBITDA and of consolidated EBITDA to consolidated  interest as defined
          in the Credit Agreement.

          (c) 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  30,  2001 was $15.8  million.  The  mortgage
          agreement contains various covenants, including a requirement that the
          Restricted Subsidiary maintain a minimum ratio of EBITDA to annual and
          quarterly  debt  service  of at  least  1.2  to  1.0.  The  Restricted
          Subsidiary was in compliance with the various  covenants  contained in
          the mortgage agreement as of December 30, 2001.



                                      -48-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.        LONG-TERM DEBT (CONTINUED):

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

          Fiscal years ending:

              December 29, 2002                             $    140
              December 28, 2003                                  155
              January 2, 2005                                    168
              January 1, 2006                                    182
              December 31, 2006                                  197
              Later years                                    269,947
                                                            --------
                                                             270,789

              Less:
              Current maturities                                (140)
              Unaccreted original issue discount              (2,931)
                                                            --------
                                                            $267,718
                                                            ========

10.       COMMITMENTS AND CONTINGENCIES:

          Commitments:

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

          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 30,       DECEMBER 31,     JANUARY 2,
                                     2001               2000             2000
                                     ----               ----             ----
                                                   (IN THOUSANDS)

         Minimum rentals             $52,856           $50,070           $47,627
         Common area charges          15,827            14,819            14,002
         Contingent rentals            4,511             4,827             4,567
                                     -------           -------           -------
                                     $73,194           $69,716           $66,196
                                     =======           =======           =======


                                      -49-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.       COMMITMENTS AND CONTINGENCIES (CONTINUED):

          COMMITMENTS (CONTINUED):

          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 30, 2001 and the existing  leased
          administrative  and support  function  office (Note 11) are as follows
          (in thousands):

                  FISCAL YEARS ENDING:
                  --------------------
                  December 29, 2002                     $76,195
                  December 28, 2003                      73,117
                  January 2, 2005                        70,658
                  January 1, 2006                        67,311
                  December 31, 2006                      63,769
                  Later years                           226,762

         We are the principal lessee under operating leases for certain
         franchised restaurants which are subleased to the franchisee.
         Franchisees pay rent and related expenses directly to the landlord.
         Future minimum rental payments required under these non-cancelable
         operating leases for franchised restaurants that were open as of
         December 30, 2001 are as follows (in thousands):

                   FISCAL YEARS ENDING:
                   --------------------
                   December 29, 2002                     $1,383
                   December 28, 2003                      1,259
                   January 2, 2005                        1,114
                   January 1, 2006                          889
                   December 31, 2006                        855
                   Later years                            1,273

         As of March 1, 2002, future minimum rental payments required under
         non-cancelable operating leases for restaurants which had not as yet
         opened as of December 30, 2001 are as follows (in thousands):

                   FISCAL YEARS ENDING:
                   --------------------
                   December 29, 2002                       $248
                   December 28, 2003                        603
                   January 2, 2005                          615
                   January 1, 2006                          638
                   December 31, 2006                        639
                   Later years                           $3,620


                                      -50-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.       COMMITMENTS AND CONTINGENCIES (CONTINUED):

          COMMITMENTS (CONTINUED):

          We are a party to contracts  aggregating  $7.0 million with respect to
          the  construction  of  restaurants.  Payments  of  approximately  $5.6
          million have been made on those contracts as of December 30, 2001.

          As of March 15,  2002,  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.  We have guaranteed up to $2.1 million of loans,
          $0.3  million of a mortgage,  $0.3  million of letters of credit and a
          $4.6  million  line  of  credit  for  certain  of our  minority  owned
          ventures.

          CONTINGENCIES:

          On November 17, 1999, an action was instituted against us in which the
          plaintiffs  allege  that  they  served  as  store  managers,   general
          managers,  assistant managers or co-managers in our restaurants in the
          State of Washington at various times since November 17, 1996 and that,
          in  connection  with their  employment,  we violated  the overtime pay
          provisions of the State of  Washington's  Minimum Wage Act by treating
          them  as  overtime  exempt  employees,   breached  alleged  employment
          agreements  and statutory  provisions by failing to record and pay for
          hours worked at the contract rates and/or statutory minimum wage rates
          and  failed to  provide  statutorily  required  meal  breaks  and rest
          periods.   The  plaintiffs   represented   substantially  all  of  our
          restaurant  managers  employed  for any  period  of  time on or  after
          November 9, 1996 in the State of Washington.  The settlement agreement
          approved by the court in February 2001 did not have a material  impact
          upon either our financial condition or results of operations.

          On December 20, 1999,  twelve 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  attorney's  fees, each in unspecified  amounts.
          Plaintiffs  filed a motion to certify the  lawsuit as a class  action,
          but the  motion  was  denied by the  court.  We  believe  that we have
          substantial  defenses to the claims and are vigorously  defending this
          action.

          On September 6, 2000,  eight other current and former general managers
          of Sbarro  restaurants in California  filed a complaint  against us in
          the Superior Court of California  for Orange County  alleging that the
          plaintiffs  were  improperly  classified  as  exempt  employees  under
          California  wage and hour  law.  The  plaintiffs  are  seeking  actual
          damages,  punitive  damages  and  costs  of  the  lawsuit,   including
          reasonable attorney's fees, each in unspecified amounts.



                                      -51-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.       COMMITMENTS AND CONTINGENCIES (CONTINUED):

          CONTINGENCIES (CONTINUED):

          Plaintiffs are represented by the same counsel who is representing the
          plaintiffs  in the  case  discussed  in the  preceding  paragraph.  We
          believe  that we  have  substantial  defenses  to the  claims  and are
          vigorously defending this action.

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

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 2001, 2000 and 1999 fiscal years, the annual rent paid
          pursuant to the  sublease  was $0.3  million.  The annual rent payable
          pursuant to the sublease is $0.3  million each year for the  remainder
          of the lease term which expires in 2011. In addition, we are obligated
          to pay real estate  taxes,  utilities,  insurance  and  certain  other
          expenses for the  facility.  We believe that our rent is comparable to
          the rent that would be charged by an unaffiliated third party.

          In April 2000,  we loaned 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.  Such loan was
          prepaid 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,  which  loans were repaid 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.



                                      -52-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.       TRANSACTIONS WITH RELATED PARTIES (CONTINUED):

          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,  $0.3 million, and $0.5 million in the
          2001, 2000, and 1999 fiscal years, respectively.

          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, $487,000, $547,000 and $397,000
          in fiscal 2001, 2000 and 1999, respectively.

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

          During 2001, we recorded a provision for asset impairment,  restaurant
          closings and other charges of $18.2 million. (See Note 5.)

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

13.       DIVIDENDS:

          During 2001, we made distributions to our shareholders  totaling $12.6
          million including $7.6 million for taxes. Distributions for taxes were
          made pursuant to the tax payment agreement described in Note 8. During
          2000,  we  made  distributions  to  our  shareholders  totaling  $22.1
          million, including $3.8 million for taxes. In January, 2002, we made a
          tax distribution of $3.1 million.



                                      -53-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.       QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
                                         FIRST             SECOND             THIRD       FOURTH
                                        QUARTER            QUARTER           QUARTER      QUARTER
                                        -------            -------           -------      -------
                                                                 (IN THOUSANDS)
<S>                                    <C>                 <C>                <C>           <C>
           FISCAL YEAR 2001
           ----------------
           Revenues                    $112,746            $84,467            $88,774       $102,728
           Gross profit (a)              85,778             64,443             67,558         80,280
           Net loss (b)                  (4,109)            (4,598)            (2,151)        (2,731)
                                       ========            =======            =======       ========


           FISCAL YEAR 2000
           ----------------
           Revenues                    $111,369            $88,308            $91,560       $108,171
           Gross profit (a)              86,029             67,038             70,324         84,569
           Net income (b)                 5,194              1,447              2,448         16,356
                                       ========            =======            =======       ========

</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,  restaurant  closings and other charges in 2001.  See
               Note 8 regarding a $5.6 million credit to income tax expense upon
               conversion to an S Corporation  in the first quarter of 2000. See
               Note 2 regarding a reduction of $2.4 million of depreciation  and
               amortization   recorded  in  the  fourth  quarter  of  2000  upon
               finalization  of the  purchase  price  allocation  from the going
               private transaction.

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 30, 2001
               and December 31, 2000 and related  statements of  operations  and
               cash flows for the fiscal years ended December 30, 2001, December
               31, 2000 and January 2, 2000 of (a) Sbarro, Inc., the parent, (b)
               the  guarantor  subsidiaries  as a  group,  (c) the  nonguarantor
               subsidiaries  as a group and (d) the  Company  on a  consolidated
               basis.



                                      -54-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

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

          (3)  Investments  in  subsidiaries  are accounted for by the parent on
               the cost method.

          The principal elimination entries eliminate  intercompany balances and
          transactions.



                                      -55-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                                         CONSOLIDATING BALANCE SHEET

                                           AS OF DECEMBER 30, 2001

                                                     ASSETS



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

Current assets:
<S>                                           <C>             <C>              <C>                            <C>
   Cash and cash equivalents                  $29,673         $5,437           $1,842                         $36,952
   Restricted cash for untendered Shares           45              -                -                              45
   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                       12,079        281,438                -        (293,517)              -

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 and tradenames, net             195,916              -                -               -         195,916
   Deferred financing costs and                16,602            309                -               -          16,911
     other, net

   Loan receivable from officer                 6,032              -                -               -           6,032

   Other assets                                 8,065          1,852             (576)         (2,476)          6,865
                                             --------       --------          --------      ----------       --------
                                             $391,895       $364,549          $13,680       $(365,362)       $404,762
                                             ========       ========          ========      ==========       ========

</TABLE>



                                      -56-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                                           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>



                                      -57-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                                           CONSOLIDATING BALANCE SHEET

                                             AS OF DECEMBER 31, 2000

                                                     ASSETS


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

<S>                                          <C>             <C>            <C>             <C>              <C>
Current assets:
   Cash and cash equivalents                  $36,963          $4,232         $1,124                          $42,319
   Restricted cash for untendered
      shares                                      153               -              -                              153
   Receivables less allowance for
      doubtful accounts of $211:
   Franchise                                    1,350               -              -                            1,350
   Other                                        1,111             370            103             ($30)          1,554
                                             --------        --------       --------        ---------        --------
                                                2,461             370            103              (30)          2,904

   Inventories                                  1,459           1,763            309                -           3,531
   Prepaid expenses                               836             136             27                -             999
                                             --------        --------       --------        ---------        --------
     Total current assets                      41,872           6,501          1,563              (30)         49,906

Intercompany receivables                       20,318         195,470              -         (215,788)              -

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

Property and equipment, net                    45,486          88,026         18,956                -         152,468

Intercompany receivables - long term            3,558               -              -           (3,558)

Intangible assets:
   Trademarks and tradenames, net             201,044               -              -                -         201,044
   Deferred financing costs and other,
      net                                      16,262             373              -                -          16,635

   Loan receivable from officer                 2,000               -              -                -           2,000

   Other assets                                10,788              52           (534)          (3,804)          6,502
                                             --------        --------       --------        ---------        --------
                                             $406,797        $290,422       $ 19,985        ($288,649)       $428,555
                                             ========        ========       ========        ==========       ========

</TABLE>



                                      -58-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                                           CONSOLIDATING BALANCE SHEET

                                             AS OF DECEMBER 31, 2000

                                      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             $153                                                            $153
   Accounts payable                             9,593            $135           $556                           10,284
   Accrued expenses                            20,025          (1,094)         1,934                           20,865
   Accrued interest payable                     8,181               -              -                            8,181
   Current portion of
   Mortgage payable                                 -             130              -                -             130
                                             ---------      ---------       ---------        ---------       --------
     Total current liabilities                 37,952            (829)         2,490                -          39,613

Intercompany payables                         195,470               -         20,318        ($215,788)              -

Deferred rent                                   6,791               -          1,076                            7,867

Long-term debt, net of original issue
   discount                                   251,689          15,789              -                -         267,478

Intercompany payables - long term                   -           3,558              -           (3,558)              -

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          2,507          (67,976)             10
   Retained earnings (deficit)                (85,186)        206,435         (6,406)          (1,327)        113,516
                                             ---------      ---------       ---------        ---------       --------

                                              (85,105)        271,904         (3,899)         (69,303)        113,597
                                             --------        --------        -------        ---------        --------

                                             $406,797        $290,422        $19,985        ($288,649)       $428,555
                                             ========        ========        =======        ==========       ========

</TABLE>




                                      -59-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      CONSOLIDATING STATEMENT OF OPERATIONS
                   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)        388,715
                                             --------         -------       --------       ---------       ----------

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

   Operating income before minority
     interest                                 (11,648)         25,282          1,987                -          15,621
   Minority interest                                -               -             (1)               -              (1)
                                             --------         -------       --------       ---------       ----------
   Operating 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) income                 (26,612)         (1,369)        (1,903)               -         (29,884)

   (Loss) income before income taxes          (38,260)         23,913             83                -         (14,264)
   Income taxes (benefit)                        (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.



                                      -60-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      CONSOLIDATING STATEMENT OF OPERATIONS
                   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) income                    (26,380)          (999)          (1,612)              -         (28,991)

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

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

</TABLE>



                                      -61-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      CONSOLIDATING STATEMENT OF OPERATIONS
                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2000

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

   Restaurant sales                          $162,770        $194,105        $18,639                         $375,514
   Franchise related income                     8,688               -              -                            8,688
   Real estate and other                        2,659           2,913            (77)                           5,495
   Intercompany charges                             -          19,864              -         $(19,864)              -
                                              -------         -------         ------          -------         -------
       Total revenues                         174,117         216,882         18,562          (19,864)        389,697
                                              -------         -------         ------          -------         -------

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           30,297          40,871          4,788                -          75,956
Restaurant operating
     Payroll and other employee
       benefits                                42,844          48,509          5,983                -          97,336
     Other operating costs                     43,198          60,325          5,076                -         108,599
     Depreciation and amortization             12,210          12,703            799                -          25,712
     General and administrative                14,548          12,393          1,913                -          28,854
     Provision for asset impairment,
       restaurant closings and other
       charges                                      -               -          1,013                -           1,013
     Intercompany charges
                                               19,864                -             -          (19,864)              -
                                              -------         -------         ------          -------         -------
       Total costs and expenses               162,961         174,801         19,572          (19,864)        337,470
                                              -------         -------         ------          -------         -------

Operating income (loss) before
   minority interest                           11,156          42,081         (1,010)               -          52,227
Minority interest                                   -               -            266                -             266
                                              -------         -------         ------          -------         -------
Operating income (loss)                        11,156          42,081           (744)               -          52,493

Other (expense) income:
   Interest expense                            (7,899)              -           (997)             997          (7,899)
   Interest income                              4,825               -              -             (997)          3,828
   Equity in net income of
     unconsolidated affiliates                    423               -             -                 -            423
                                              -------         -------         ------          -------         -------
   Net other (expense) income                 ( 2,651)              -           (997)               -         (3,648)
                                              -------         -------         ------          -------         -------

Income (loss) before income taxes               8,505          42,081         (1,741)               -          48,845
Income taxes                                    3,365          16,646           (689)               -          19,322
                                              -------         -------         ------          -------         -------

Net income (loss)                              $5,140         $25,435        $(1,052)         $     -         $29,523
                                               ======         =======        =======          =======         =======

</TABLE>



                                      -62-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      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>
Operating activities:
---------------------

Net income (loss)                          $  (37,972)       $23,327        $      56           $   -      $  (14,589)
Adjustments to reconcile net income to
   net cash provided by operating
   activities
     Depreciation and amortization             12,492         17,827            1,511               -          31,830
     Increase in deferred rent, net               720           (258)             507               -             969
     Non-cash 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                      (1,202)           666              112               -            (424)
       (Increase) decrease in
         other assets                             340         (1,518)              43               -          (1,135)
       (Decrease) increase in accounts
         Payable and accrued expenses          (2,438)         3,438              463               -           1,463
                                               -------        -------          -------      ----------        --------
Net cash (used in) provided by
   operating activities                        (7,494)        43,232             (926)              -          34,812


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

</TABLE>



                                      -63-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                              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 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>



                                      -64-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      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>
Net income (loss)                             ($7,613)       $34,403          $(1,345)          $   -         $25,445
Adjustments to reconcile net income to
   net cash 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>



                                      -65-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      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>


                                      -66-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                                      CONSOLIDATING STATEMENT OF CASH FLOWS
                                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2000


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

<S>                                            <C>            <C>                  <C>          <C>            <C>
Net income (loss)                              $5,140        $25,435          $(1,052)                        $29,523
Adjustments to reconcile net income to
   net cash provided by operating
   activities:
     Depreciation and amortization             13,017         12,269              802                          26,088
     Increase in deferred income taxes            710              -                -                             710
     Decrease in deferred rent, net              (107)             -                -                            (107)
     Provision for asset impairment,
       restaurant closings and other
       charges                                  1,013              -                -                           1,013
     Minority  interest                             -              -             (266)                           (266)
     Equity in income of
       unconsolidated affiliates                 (423)             -                -                            (423)
     Changes in operating assets and
       liabilities:
     Decrease (increase) in receivables           772            (11)               9                             770
     (Increase) decrease  in
       inventories                               (247)          (309)               2                            (554)
     (Increase) decrease in prepaid
       expenses                                  (413)            73              (68)                           (408)
     (Increase) decrease in other
       assets                                  (6,629)           (17)             333          $3,415          (2,898)
     Increase (decrease) in accounts
       payable and accrued expenses             2,967           (594)             389               -           2,762
     (Decrease) increase  in income
       taxes payable                           (1,264)           (92)             (52)              -          (1,408)
                                             ---------     ----------       ----------       --------        ---------
Net cash provided by operating
   activities before change in accrued
   interest payable                            14,536         36,754               97           3,415          54,802

Increase in accrued interest payable            7,480              -                -               -           7,480
                                             ---------       --------          -------        --------        --------

Net cash provided by operating
   activities                                  22,016         36,754               97           3,415          62,282
                                             ---------       --------          -------        --------        --------

Investing activities:
Purchases of property and equipment            (8,877)       (13,750)          (2,655)              -         (25,282)
Proceeds from disposition of property
   and equipment                                   55               -                -               -             55
                                             ---------       --------          -------        --------        --------
Net cash used in investing activities          (8,822)       (13,750)          (2,655)               -        (25,227)
                                             ---------       --------          -------        --------        --------

</TABLE>


                                      -67-
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.       GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS (CONTINUED):

                      CONSOLIDATING STATEMENT OF CASH FLOWS
                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2000


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

<S>                                           <C>             <C>              <C>             <C>            <C>
Financing activities:
---------------------
Proceeds from long-term debt                  251,211              -                -               -         251,211
Cost of merger and related financing         (411,000)             -                -               -        (411,000)
Accrued and previously paid merger
    costs                                       1,007              -                -               -           1,007
Proceeds from exercise of stock options           426              -                -               -             426
Intercompany balances                          24,880        (24,880)           3,415          (3,415)               -
                                              -------         ------            -----          ------         -------
Net cash used in financing activities        (133,476)       (24,880)           3,415          (3,415)       (158,356)
                                              -------         ------            -----          ------         -------

(Decrease) increase in cash and cash
    equivalents                              (120,282)        (1,876)             857               -        (121,301)
Cash and cash equivalents at beginning
    of year                                   148,134          6,268              653               -         155,055
                                              -------         ------            -----          ------         -------
Cash and cash equivalents at end of
    period                                    $27,852         $4,392           $1,510          $    -         $33,754
                                              =======         ======            =====          ======         =======


Supplemental disclosure of cash flow
    information:
Cash paid during the period for income
    taxes                                     $17,540         $2,544            $  45          $    -         $20,129
                                              =======         ======            =====          ======         =======
Cash paid during the period for
    interest                                  $    30         $    -            $   -          $    -         $    30
                                              =======         ======            =====          ======         =======

</TABLE>

                                       68
<PAGE>

ITEM 9.   DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The directors and executive officers of the Company and their ages at March
1, 2002 are:

     NAME                   AGE                     POSITION
     ----                   ---                     --------
     Mario Sbarro            60    Chairman of the Board, President, Chief
                                   Executive Officer and Director
     Anthony Sbarro          55    Vice Chairman of the Board, Treasurer and
                                     Director
     Joseph Sbarro           61    Senior Executive Vice President, Secretary
                                     and Director
     Carmela Sbarro          80    Vice President and Director
     Anthony J. Missano      43    President - Quick Service Division and
                                     Corporate Vice President
     Gennaro A. Sbarro       35    President - Franchising and Licensing
                                     Division and Corporate Vice President
     Gennaro J. Sbarro       39    President - Casual and Fine  Dining
                                     Division  and  Corporate Vice President
     Carmela N. Merendino    37    Vice President - Administration
     John Bernabeo           45    Vice President - Architecture and Engineering
     Steven B. Graham        48    Vice President and Controller
     Ashraf Kilada           38    Vice President - Risk Management and Benefits
     Harold L. Kestenbaum    52    Director
     Richard A. Mandell      59    Director
     Terry Vince             73    Director
     Bernard Zimmerman       69    Director

     MARIO SBARRO has been an officer, a director and a principal shareholder of
Sbarro  since its  organization  in 1977,  serving as  Chairman  of our board of
directors,  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.

                                      -69-
<PAGE>

     CARMELA SBARRO has been one of our Vice  Presidents  since March 1985. Mrs.
Sbarro was a founder of Sbarro, together with her late husband,  Gennaro Sbarro.
Mrs.  Sbarro  devotes a  substantial  portion of her time to recipe and  product
development. Our board of directors elected Mrs. Sbarro as a director in January
1998. Mrs. Sbarro previously served as a director from March 1985 until December
1988,  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 joined Sbarro in August 1992 and served in various capacities
prior to his election as Vice  President - Architecture  and  Engineering in May
1997.

     ASHRAF KILADA was elected Vice President - Risk  Management and Benefits in
March 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 since 1976.
He became a director of Sbarro in March 1985. Mr.  Kestenbaum is also a director
of RezConnect Technologies, Inc. and Uptown Restaurant Group, 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 MCM, 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,  since  October 1990 and
Chairman of the Board of Fame



                                      -70-
<PAGE>

Corp., a food service management company, since January 1994. Mr. Vince became a
director of Sbarro in December 1988.

     BERNARD ZIMMERMAN has been President of Bernard Zimmerman & Co., Inc. since
October 1972 and was Senior Vice  President of The  Zimmerman  Group,  Inc. from
January 1991 to November 1996, two financial and  management  consulting  firms.
Mr. Zimmerman also served as President and a director of Beacon Hill Management,
Inc.,  an advisor to Beacon Hill Mutual Fund,  Inc.,  from  December  1994 until
October 1997.  From September  1986 until  September  1993,  Mr.  Zimmerman also
served as Chairman and  President of St.  Lawrence  Seaway  Corp.,  an owner and
manager of agricultural  properties.  Mr.  Zimmerman has been a certified public
accountant  in New York for more than the past  thirty-five  years.  He became a
director of Sbarro in March 1985.

     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 2001, the Company's officers, directors and shareholders were
not required to file reports under Section 16(a) of the Securities  Exchange Act
of 1934.




                                      -71-
<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 2001  fiscal  year for
services in all capacities to us and our subsidiaries  during our 2001, 2000 and
1999 fiscal years:

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

<S>                                                         <C>        <C>             <C>             <C>        <C>
Mario Sbarro..........................................      2001      $700,000            --                  --
Chairman of the Board, President and                        2000       700,000       $ 300,000                --
      Chief Executive Officer                               1999       700,000         300,000         $2,221,987 (1)

Anthony Sbarro........................................      2001       300,000           --                  --
Vice Chairman of the Board and Treasurer                    2000       300,000         200,000               --
                                                            1999       300,000         200,000         $1,145,242 (1)

Joseph Sbarro.........................................      2001       300,000           --                  --
Senior Executive Vice President and                         2000       300,000         200,000               --
     Secretary                                              1999       300,000         200,000         $1,323,743 (1)

Anthony J. Missano....................................      2001       220,000           --                  --
Corporate Vice President and President - Quick              2000       200,000         150,000               --
     Service Division                                       1999       200,000         150,000           $348,000 (1)

Gennaro A. Sbarro.....................................      2001       220,000           --                  --
Corporate Vice President and President -                    2000       200,000         150,000               --
     Franchise and Licensing Division                       1999       200,000         150,000           $389,168 (1)

Gennaro J. Sbarro.....................................      2001       220,000           --                  --
Corporate Vice President and President -                    2000       200,000         150,000               --
     Casual and Fine Dining Division                        1999       200,000         150,000          $348,000 (1)
--------------------
</TABLE>

(1)  All option plans were  terminated  upon the completion of the going private
     transaction. All of the options held by each executive officer named in the
     Summary Compensation Table were terminated in the going private transaction
     in exchange for a cash payment equal to the number of shares subject to the
     options  multiplied  by the  excess of $28.85  over the  applicable  option
     exercise price.



                                      -72-
<PAGE>


OPTIONS/SAR GRANTS IN LAST FISCAL YEAR.

     We did not  grant any  options  to  purchase  our  securities  or any stock
appreciation rights during fiscal 2001.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR END VALUES

     No  options  were  exercised   during  fiscal  2001  and  no  options  were
outstanding at the end of fiscal 2001.

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.

     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 2001
fiscal year.

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 and directors,  as well as
Bernard  Zimmerman,  a  director  and a  consultant  to us, may  participate  in
deliberations of our board concerning executive officer compensation.

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






                                      -73-
<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 1, 2001 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.

<TABLE>
<CAPTION>
                                                                SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER                                                 NUMBER           PERCENT
----------------                                                 ------           -------
<S>                                                             <C>                 <C>
Mario Sbarro (1)........................................        1,524,730 (2)       21.6%
Anthony Sbarro (1)......................................        1,233,800           17.5%
Joseph Sbarro (1).......................................        1,756,022 (3)       24.9%
Trust of Carmela Sbarro (1).............................        2,497,884 (4)       35.4%
Harold L. Kestenbaum....................................               --            --
Richard A. Mandell......................................               --            --
Terry Vince.............................................               --            --
Bernard Zimmerman.......................................               --            --
Anthony J. Missano......................................           25,946 (5)        0.4%
Gennaro A. Sbarro.......................................               --            --
Gennaro J. Sbarro.......................................           25,946            0.4%
All directors and executive officers as a group
    (15 persons)........................................        7,064,328          100.0%

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

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

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

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

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




                                      -74-
<PAGE>


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference is made to the caption  "Compensation  Committee  Interlocks  and
Insider  Participation  in  Compensation   Decisions"  in  Item  11,  "Executive
Compensation,"  in this report for information  concerning the  participation of
Messrs. Mario Sbarro, Anthony Sbarro and Joseph Sbarro in executive compensation
determinations.

     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 joint  ventures in which we have an interest
have  purchased  printing  services from a corporation  owned by a son-in-law of
Mario Sbarro for which they paid, in the aggregate, $487,825 during fiscal 2001.
We believe that these  services were provided on terms  comparable to those that
would have been available from unrelated third parties.

     During fiscal 2001,  we paid cash  dividends to our  shareholders  totaling
$12.6 million  including $7.6 million of distributions  made pursuant to the tax
payment agreement described below.

     On January 2 and 3, 2001, we loaned  $200,000 to Mario Sbarro,  $300,000 to
Joseph Sbarro and $200,000 to Anthony  Sbarro which loans were repaid on January
15, 2001 with  interest at the prime rate at European  American  Bank (which has
since  been  acquired  by  Citicorp)   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.

     On January 15, 2002,  we paid a cash dividend to our  shareholders  of $3.1
million as a distribution made pursuant to the tax payment agreement.

     A company owned by the daughter of Joseph  Sbarro and 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  2001 were  $44,000
(which,  together  with $40,000 of fiscal 2000  royalties,  have not as yet been
paid) and $88,008, respectively.



                                      -75-
<PAGE>

     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 2001 fiscal year.

     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 2001; and

     o    Carmela N. Merendino,  a daughter of Mario Sbarro,  who serves as Vice
          President -  Administration,  received  $211,684  from us for services
          rendered during fiscal 2001.

     o    Other members of the immediate families of Mario, Anthony,  Joseph and
          Carmela Sbarro who are our employees,  earned an aggregate of $577,169
          during fiscal 2001.

         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 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 $7.6 million in
fiscal 2001,  $3.8 million in fiscal 2000 and $3.1 million in January 2002 (with
respect to fiscal 2001 taxes). We do not expect to make additional distributions
in fiscal 2002 for fiscal 2001 earnings. Despite our book loss, our shareholders
are expected to have taxable income in fiscal 2001 resulting from differences in
the  book  and  tax  treatments  of the  provision  for  asset  impairment,  the
non-deductability  of goodwill for tax purposes and  significant  differences in
book and tax depreciation.

     The tax payment  agreement  provides for  adjustments  of the amount of tax
distributions  previously  paid in  respect  of a year  upon the  filing  of our
federal income tax return for that year,  upon the filing of an amended  federal
income tax return or as a result of an audit. In these  circumstances,  if it is
determined that the amount of tax distributions previously made for the year was
less than the amount  computed  based upon our federal  income tax  return,  our
amended  federal



                                      -76-
<PAGE>

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.

                                     PART IV
                                     -------

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

(a)(1)     Consolidated Financial Statements

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

<TABLE>
<CAPTION>
                                                                                           Page
                                                                                           ----

<S>                                                                                          <C>
         Report of Independent Public Accountants                                            29

         Consolidated Balance Sheets at December 30, 2001 and
         December 31, 2000                                                              30 - 31

         Consolidated Statements of Operations for each of the fiscal years
         in the three-year period ended December 30, 2001                                    32

         Consolidated Statements of Shareholders' Equity for each of the fiscal
         years in the three-year period ended December 30, 2001                              33

         Consolidated Statements of Cash Flows for each of the fiscal years in the
         three-year period ended December 30, 2001                                      34 - 35

         Notes to Consolidated Financial Statements                                     36 - 68

</TABLE>
(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 30, 2001. 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.




                                      -77-
<PAGE>


(a)(3)     Exhibits

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

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

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

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

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

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

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



                                      -78-
<PAGE>

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

      *10.01(a)     Building  Lease  between  Sbarro  Enterprises,  L.P. and the
                    Company   (Exhibit  10.04  to  the  Company's   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 the Company, (Exhibit 10.01(b) to the
                    Company's  Annual  Report  on Form  10-K for the year  ended
                    December 30, 2001, File No. 333-90817)

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

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

      12.01         Statement of computation of earnings to fixed charges

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

      99.01         Letter  dated  March  25,  2002  from  the  Company  to  the
                    Securities  and  Exchange  Commission  pursuant to Temporary
                    Note 3T of Article 3 of  Regulation  S-X regarding the audit
                    of the Company's financial statements as at and for the year
                    ended December 30, 2001 by Arthur Andersen LLP.

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

(b)                 Reports on Form 8-K

     No Reports  on form 8-K were  filed by us during the fourth  quarter of our
fiscal year ended December 30, 2001.






                                      -79-
<PAGE>

                                   UNDERTAKING

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






                                      -80-
<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 25, 2002.

                                       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 25, 2002
------------------------        (Principal Executive Officer)
Mario Sbarro                    and Director



/s/ STEVEN B. GRAHAM            Vice President and                March 25, 2002
------------------------
Steven B. Graham                Controller (Principal
                                Accounting Officer)


/s/ JOSEPH SBARRO               Director                          March 25, 2002
------------------
Joseph Sbarro



/s/ ANTHONY SBARRO              Director                          March 25, 2002
------------------------
Anthony Sbarro


/s/ HAROLD L. KESTENBAUM        Director                          March 25, 2002
------------------------
Harold L. Kestenbaum



                                      -81-
<PAGE>



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


/s/  RICHARD A. MANDELL         Director                          March 25, 2002
------------------------
Richard A. Mandell



/s/ CARMELA SBARRO              Director                          March 25, 2002
------------------------
Carmela Sbarro


/s/ TERRY VINCE                 Director                          March 25, 2002
------------------------
Terry Vince


/s/ BERNARD ZIMMERMAN           Director                          March 25, 2002
------------------------
Bernard Zimmerman









                                      -82-
<PAGE>


              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE




To Sbarro, Inc.:


We have audited, in accordance with auditing standards generally accepted in the
United  States,  the  consolidated  financial  statements  of Sbarro,  Inc.  and
subsidiaries  included in this filing and have issued our report  thereon  dated
March 21,  2002.  Our audits  were made for the purpose of forming an opinion on
the basic financial  statements taken as a whole.  The accompanying  schedule is
the responsibility of the Company's  management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  fairly states in all material  respects the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.




                                             /s/ Arthur Andersen LLP



New York, New York
March 21, 2002










                                       S-1



<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         Charged to
                                        at                to              Other                           Balance at
                                     Beginning         Costs and        Accounts        Deductions           End of
Description                          of Period         Expenses         Describe        Describe           Period
-----------                          ---------         --------         ---------       ---------------     ------


<S>                                      <C>             <C>                               <C>   <C>       <C>
December 30, 2001
-----------------

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

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


January 2, 2000:
----------------

Allowance for doubtful
  accounts receivable                     $38              $381                                           $419
                                          ===              ====                                           ====

Provision for store closing              $105            $1,121                           ($363) (3)     $863
                                         ====            ======                           ======         ====

</TABLE>

(1)    Collection of previously reserved receivables.
(2)    Write off of uncollectible accounts.
(3)    Payments to landlords and others for closed locations.



                                      S-2
<PAGE>



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

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

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

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

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

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

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

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

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



<PAGE>

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


      *10.01(a)     Building  Lease  between  Sbarro  Enterprises,  L.P. and the
                    Company   (Exhibit  10.04  to  the  Company's   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 the Company, (Exhibit 10.01(b) to the
                    Company's  Annual  Report  on Form  10-K for the year  ended
                    December 30, 2001, File No. 333-90817)

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

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

      12.01         Statement of computation of earnings to fixed charges

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

      99.01         Letter  dated  March  25,  2002  from  the  Company  to  the
                    Securities  and  Exchange  Commission  pursuant to Temporary
                    Note 3T of Article 3 of  Regulation  S-X regarding the audit
                    of the Company's financial statements as at and for the year
                    ended December 30, 2001 by Arthur Andersen LLP.

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