SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended JANUARY 1, 2006

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

401 BROADHOLLOW ROAD, MELVILLE, NEW YORK                           11747 - 4714
(Address of principal executive offices)                            (Zip Code)
Registrant's telephone number, including area code:               (631) 715-4100

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

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

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes_____ No__X__

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes __X__ No ____

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 ].

Indicate by check mark whether the registrant is a large accelerated  filer, and
accelerated  filer,  or a  non-accelerated  filer  Large  accelerated  filer  __
Accelerated filer ___ Non-accelerated filer __X_

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes____ No __X__

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

The number of shares of Common Stock of the  registrant  outstanding as of March
31, 2006 was 7,064,328.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


<PAGE>



                                  SBARRO, INC.

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

                           FORWARD-LOOKING STATEMENTS

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

Forward-looking  statements  are subject to a number of known and unknown  risks
and uncertainties,  including,  but not limited,  to those discussed in Item 1A,
"Risk Factors" and elsewhere in this report,  that could cause actual results to
differ   materially   from  those   projected,   expressed  or  implied  in  the
forward-looking statements. These risks and uncertainties, many of which are not
within our control, include but are not limited to:

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





                                     - 2 -
<PAGE>

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

                                     PART I
                                     ------


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

Sbarro, Inc., a New York corporation, was organized in 1977 and is the successor
to a number of family food and restaurant  businesses  developed and operated by
the Sbarro family.  Today,  we are a leading  owner,  operator and franchisor of
quick-service  restaurants,  serving a wide variety of Italian  specialty  foods
with 494  company-owned and 458 franchised  restaurants  worldwide at January 1,
2006. In addition,  since 1995, we have created,  through subsidiaries and joint
ventures,  other  restaurant  concepts  for the  purpose  of  developing  growth
opportunities  in addition to the Sbarro  restaurants.  We presently  operate 25
other concept restaurants through owned subsidiaries and joint ventures. We have
defined  two  reportable  segments,  our  company  owned  restaurant  operations
(including joint ventures) and our franchised operations.

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

Our  business is subject to seasonal  fluctuations,  and the effects of weather,
national security, economic and business conditions.  Revenues have been highest
in our fourth quarter due primarily to increased volume in shopping malls during
the holiday shopping season.  Our annual revenues and earnings can fluctuate due
to the length of the holiday shopping period between Thanksgiving and New Year's
Day and the number of weeks in our fourth quarter.  In recent years,  our fourth
quarter  income  has also  fluctuated  significantly  due to a  number  of other
factors,   including  the  status  of  the  economy  and  significant  year  end
adjustments relating to asset impairment and store closing costs.

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

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





                                     - 3 -
<PAGE>


         GENERAL
         -------

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

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

As of January 1, 2006, we had 952 Sbarro quick service  restaurants,  consisting
of 494 company-owned  restaurants and 458 franchised  restaurants  located in 46
States,  the  District of Columbia,  the  Commonwealth  of Puerto Rico,  certain
United States territories and 29 other 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  25  casual  and fine  dining  restaurants
featuring varying cuisines under other restaurant concepts.

We operate in two segments,  our company owned restaurant  operations (including
joint ventures) and our franchised operations.










                                     - 4 -
<PAGE>



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

The following table summarizes the number of Sbarro owned,  franchised and other
concept  restaurants  in  operation  during each of the years from 2001  through
2005:

<TABLE>
<CAPTION>
                                                                    2005       2004        2003       2002       2001
                                                                    ----       ----        ----       ----       ----

<S>                                                                 <C>        <C>        <C>         <C>        <C>
Company owned Sbarro restaurants:
   Open at beginning of period                                      511        533        563         607        641
   Opened during the period                                           5          2          4          13          9
   Sold to franchisees during period                                 (1)        (3)       (12)         (6)         -
   Closed during period                                             (21)       (21)       (22)        (51)       (43)
                                                                    ----       ----       ----        ----       ----
   Open at end of period                                            494        511        533         563        607

Franchised Sbarro restaurants: (1)
   Open at beginning of  period (2)                                 428        376        361         334        315
   Opened during the period                                          48         63         41          43         42
   Acquired from Sbarro during period                                 1          3         12           6          -
   Closed or terminated during period                               (19)       (14)       (38)        (22)       (23)
                                                                    ----       ----       ----        ----       ----
   Open at end of period                                            458        428        376         361        334

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

All restaurants:
   Open at beginning of  period                                     961        936        951         972        983
   Opened during the period                                          57         65         48          58         55
   Closed or terminated during period                               (41)       (40)       (63)        (79)       (66)
                                                                    ----       ----       ----        ----       ----
   Open at end of period of                                         977        961        936         951        972
                                                                    ===        ===        ===         ===        ===
</TABLE>
------------------
(1) Includes all locations including restaurants, kiosks and vending units.

(2) Restated to account for units excluded in prior years





                                     - 5 -
<PAGE>


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

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

As of January 1, 2006, there were 88 company owned "in-line" QSR restaurants and
406  company  owned  "food  court" QSR  restaurants.  In  addition,  franchisees
operated 458 QSR restaurants.  "In-line"  restaurants,  which are self-contained
restaurants,   usually  occupy  between  1,500  and  3,000  square  feet,   seat
approximately 60 to 120 people and employ 10 to 40 persons,  including part-time
personnel.  "Food court"  restaurants are primarily located in areas of shopping
malls  designated  exclusively for restaurant use and share a common dining area
provided by the mall. These  restaurants  generally occupy between 500 and 1,000
square feet,  contain only kitchen and service  areas,  have a more limited menu
and employ 6 to 30 persons, including part-time personnel.

QSR restaurants are generally open seven days a week serving lunch,  dinner and,
in a limited number of locations,  breakfast,  with hours conforming to those of
the major  department  stores or other large retailers in the mall or trade area
in  which  they  are  located.  Typically,  mall  restaurants  are open to serve
customers  10 to 12 hours a day,  except on Sunday,  when mall hours may be more
limited.  For company owned QSR  restaurants  open a full year,  average  annual
sales in 2005  were  approximately  $919,000  for an  "in-line"  restaurant  and
$587,000  for a "food  court"  restaurant.  Our  business is subject to seasonal
fluctuations,  and the  effects  of  weather,  economic  conditions,  inflation,
national security and business conditions. Sales have been highest in our fourth
quarter due primarily to increased  volume in shopping  malls during the holiday
shopping  season but fluctuate due to the length of the holiday  shopping period
between  Thanksgiving  and New  Year's  Day,  the  number of weeks in our fourth
quarter and weather conditions.

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

All of our entrees are  prepared  fresh daily in each  restaurant  according  to
special recipes  developed by us. We place emphasis on serving generous portions
of quality  Italian food at  attractive  prices.  Entree  selections,  excluding
pizza,  generally  range in price from $5.49 to $7.99.  We believe  that  pizza,
which is sold predominantly by the slice,  accounts for approximately 60% of QSR
restaurant sales.

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




                                     - 6 -
<PAGE>

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

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

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

We employ 32 Directors of Operations,  each of whom is typically responsible for
the  operations  of  14  to 18  company  owned  QSR  restaurants.  Directors  of
Operations  recruit and supervise the managerial  staff of all company owned QSR
restaurants  and report to one of the five Vice  Presidents of  Operations.  The
Vice  Presidents of  Operations  coordinate  the  activities of the Directors of
Operations and report to our President and Chief Executive Officer.

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

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

As of January 1, 2006, we had 458 franchised Sbarro  restaurants  operated by 80
franchisees in 38 states of the United States as well as its  territories and in
29 other countries throughout the world. We are presently considering additional
franchise  opportunities  worldwide.  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 with
us for restaurant units in certain geographic areas in foreign countries.

In order to obtain a franchise,  we generally  require payment of an initial fee
and continuing royalties at rates of 4% to 7% of gross revenues.  We require the
franchise agreements to end at the same time as the underlying lease,  generally
ten years,  including a renewal period of the underlying  lease,  if applicable.
Since 1990, the renewal option has also been subject to conditions,  including a
remodel  or  image  enhancement   requirements  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  meet  development
schedules  in cases of  territorial  rights,  failure to operate its  restaurant
according to Sbarro standards,  understatement of gross receipts, failure to pay
fees, or material misrepresentation on a franchise application.

As of January  1, 2006,  we  employed  11  management  level  employees  who are
responsible  for overseeing the operations of franchise units and for developing
new units.







                                     - 7 -
<PAGE>


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

Since 1995, we have developed and established new restaurant concepts to provide
growth  opportunities  that  leverage our  restaurant  management  and financial
expertise.  These  concepts  are  operated  either by us alone or through  joint
ventures  with  restauranteurs  experienced  in the  particular  food  area.  We
participate with our partners in overseeing the operations of each venture.  Our
joint ventures and other wholly-owned concepts presently operate 25 restaurants.

The following is a summary of our other concepts:

   O  In early 2005,  we opened a 100% owned casual  dining  restaurant  serving
      Italian food under the name Carmela's of Brooklyn in Orlando, Florida. The
      restaurant provides both take out and table service,  and generally caters
      to families.  In  connection  with this  concept,  we entered into a joint
      venture  development  Agreement for the Orlando market.  The joint venture
      partner  will  be  required  to  contribute  one  half  of  the  estimated
      development cost and will share in one half of the profits, as defined, of
      each  location in which it decides to  participate.  We plan to open three
      additional restaurants in 2006 under this joint venture agreement.

   O  We operate six casual dining restaurants  serving Italian food principally
      under the name  Mama  Sbarro in New York.  The  restaurants  provide  both
      take-out and table service,  and generally caters to families.  We did not
      open any Mama Sbarro locations in 2005 nor do we plan to open any in 2006.
      We sold one location in March of 2006.

   O  We have a 40%  interest in a joint  venture  that  presently  operates ten
      casual dining  restaurants,  including one opened in January 2005,  with a
      Rocky  Mountain  steakhouse  motif under the name  Boulder  Creek Steaks &
      Saloon.   This  joint   venture  also  operates  five  fine  dining  steak
      restaurants,  two of which are operated  under the name  Rothmann's  Steak
      House and the remaining three operate under the names respective  Burton &
      Doyle, Sagamore and Blackstone.

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

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

All of our  other  concept  locations  presently  operate  through  unrestricted
subsidiaries  which do not guarantee our senior notes.  As such, we have certain
restrictions  as to the financing we can provide to these new concepts and these
entities are not subject to the  restrictions  contained in the indenture  under
which our senior notes are issued.

All  concepts  which are greater than 50% owned or where we are  considered  the
primary beneficiary are consolidated in our financial statements. Ventures which
are  less  than  50%  owned  and  those  owned  at 50% for  which we do not have
operating  control and where we are not considered the primary  beneficiary  are
accounted for under the equity method of accounting.




                                     - 8 -
<PAGE>

As of January 1, 2006, we had an aggregate  investment,  net of write-downs,  in
these ventures of approximately $4.2 million and note receivable of $.6 million.
The  amount  of our  investment  does not  include  our share of  guarantees  of
indebtedness and reimbursement  obligations with respect to letters of credit in
the aggregate amount of approximately $7.8 million.

EMPLOYEES
---------

As of  January 1, 2006,  we  employed  approximately  5,500  persons,  excluding
employees of our other  concepts,  of whom  approximately  3,900 were  full-time
field and restaurant  personnel,  approximately 1,500 were part-time  restaurant
personnel and 133 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 compete in each market in which
we operate with locally-owned restaurants, as well as with national and regional
restaurant chains. We believe we compete on the basis of menu selection,  price,
service,  location and food quality. Factors that affect our business operations
include  changes in consumer  tastes,  inflation,  national,  regional and local
economic  conditions,  population,  traffic  patterns,  changes in discretionary
spending  priorities,  demographic trends,  national security,  military action,
terrorism,  consumer  confidence  in food  wholesomeness,  handling  and safety,
weather conditions,  the type, number and location of competing  restaurants and
other factors.  There is also active  competition  for management  personnel and
attractive  commercial  shopping mall, city centers and other locations suitable
for  restaurants.  Increased food,  beverage,  labor,  occupancy and other costs
could also adversely affect us.

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

TRADEMARKS
----------

Our Sbarro restaurants  operate principally under the name "Sbarro," "Sbarro The
Italian Eatery",  "Sbarro Fresh Italian Cooking," "Cafe Sbarro," and "Umberto's"
.. Sbarro, Sbarro The Italian Eatery, Cafe Sbarro, La Cucina and Tony and Bruno's
are registered  trademarks of the company.  Our other concept  locations operate
under separate registered  trademarks,  including "Mama Sbarro." In addition, we
have trademarked the font and style of "Carmela's  Pizzeria." 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




                                     - 9 -
<PAGE>

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

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

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

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

AVAILABLE INFORMATION:
----------------------

We are not required to file reports with the Securities and Exchange  Commission
("SEC") as a result of our going private  transaction,  we voluntarily file with
the SEC  current  reports in Form 8-K,  Quarterly  reports on Form 10-Q,  annual
reports on Form 10-K,  and  amendments  to these reports in order to fulfill our
obligations under the indenture.

The  public  may read and copy any  materials  that we file  with the SEC at the
SEC's Public  Reference  Room at 100 Fifth St., NE,  Washington,  DC 20549.  The
public can obtain  information on the operation of the Public  Reference Room by
calling the SEC at  1-800-SEC-0330.  In addition,  the SEC maintains an Internet
site, with an address of  http://www.sec.gov  that contains  reports,  proxy and
information  statements and other information,  including our electronic filings
with the SEC.

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





                                     - 10 -
<PAGE>




ITEM 1A.   RISK FACTORS
--------   ------------

An investment in our senior notes  involves a number of risks.  Our business and
future operating results may be affected by many risks,  uncertainties and other
factors,  including those set forth below. If any of the following risks were to
occur, our business,  financial condition,  results of operations cash flows and
prospects  could be materially and adversely  affected,  the price of our senior
notes could decline and you may lose all or part of your investment.  The risks,
uncertainties  and other factors  described in this report are not the only ones
we face. There may be additional risks,  uncertainties and other factors that we
do not currently consider material or that are not presently known to us.

                       RISKS RELATING TO OUR SENIOR NOTES

WE LIKELY  WILL BE REQUIRED TO  REFINANCE  A  SIGNIFICANT  PORTION OF OUR SENIOR
NOTES WHEN THEY MATURE IN 2009.

As of January 1, 2006,  we had  outstanding  $255  million 11% senior  notes due
September 15, 2009. The indenture does not require us to make, except in certain
circumstances,   principal  payments  until  September  2009,  when  the  entire
outstanding principal balance is due.

It is unlikely that our existing cash and future cash flows to be generated from
operations  will be sufficient to enable us to repay in full our senior notes at
maturity. The amount that will be available to repay our obligations,  including
the senior notes,  not only will depend upon our ability to manage our business,
but also upon other factors,  such as general economic and financial  conditions
in the restaurant industry and the economy at large, as well as other conditions
beyond our control.

If we are unable to generate sufficient cash flows to repay our senior notes and
other  obligations  in full  when  due,  we  will  have  to  pursue  one or more
alternatives, such as reducing or delaying capital expenditures, selling assets,
raising  equity  capital or pursuing a refinancing of our debt. We cannot assure
you that any of these  alternatives  could be accomplished on satisfactory terms
or that they will yield  sufficient  funds to retire  the  senior  notes and our
other debt.

THE INDENTURE IMPOSES RESTRICTIONS ON OUR ABILITY TO OPERATE OUR BUSINESS.

The  indenture  contains  covenants  that  restrict  our ability to take various
actions,  including,  with certain  exceptions,  incurring  additional  debt and
making investments. At present:

         o        Except under specifically permitted  arrangements,  such as up
                  to $75 million of revolving  credit loans,  we are not able to
                  borrow funds; and

         o        Except for a limited amount of investments, we are not able to
                  invest in or acquire businesses.




                                     - 11 -
<PAGE>



These  restrictions  may  prevent  us from  taking  advantage  of  business  and
financing  opportunities  that may arise. In addition,  a breach of any of these
provisions  could result in a default under the indenture  which would allow the
holders  of the  senior  notes  issued  under  the  indenture  to  declare  them
immediately due and payable.

INDEPENDENT OF THE RESTRICTIVE COVENANTS IN THE INDENTURE,  OUR SUBSTANTIAL DEBT
MAY RESTRICT OUR ACTIVITIES.

The existence of our debt could:

         o        limit our ability to obtain  financing  for  working  capital,
                  capital  expenditures,   acquisitions  and  general  corporate
                  purposes;

         o        increase our vulnerability to downturns in our business or the
                  economy generally;

         o        limit our ability to withstand  competitive pressures from our
                  less leveraged competitors;

         o        hinder our ability to plan for changes in our business and the
                  industry in which we operate;

         o        require  us to  manage  our  business  in a manner  so that we
                  remain in compliance with the debt instrument's  financial and
                  other covenants; and

         o        have a material adverse effect on us if we fail to comply with
                  the covenants in the indenture,  or our subsidiary's  mortgage
                  loan,  because a failure  could  result in an event of default
                  that,  if not cured or waived,  could result in both  becoming
                  immediately due and payable.

A DEFAULT  UNDER OUR  SUBSIDIARY'S  MORTGAGE LOAN COULD ALSO RESULT IN A DEFAULT
UNDER THE INDENTURE.

One of our subsidiaries  obtained a $16 million,  8.4% loan due in 2010, secured
by a mortgage on our corporate  headquarters building. The outstanding principal
balance  of the loan as of  January  1, 2006 was  $15.1  million.  The  mortgage
agreement  contains various covenants,  including certain financial  maintenance
covenants.  At  January 1,  2006,  our  subsidiary  was in  compliance  with the
covenants contained in its mortgage agreement.  However,  should that subsidiary
default  under  the  mortgage   agreement  in  a  manner  that  results  in  the
acceleration of that  indebtedness,  it would also result in a default under the
indenture which would allow all amounts outstanding under the indenture, as well
as the mortgage loan, to be declared immediately due and payable.













                                     - 12 -
<PAGE>


THE CLAIMS OF HOLDERS OF ANY SECURED DEBT WILL HAVE EFFECTIVE  PRIORITY OVER THE
CLAIMS OF HOLDERS  OF OUR  SENIOR  NOTES,  WHICH  COULD  IMPAIR THE CLAIM OF THE
HOLDERS  OF SENIOR  NOTES TO OUR  ASSETS IF WE WERE TO BECOME  INSOLVENT  OR ARE
LIQUIDATED.

The senior notes rank pari passu in right of payment with all of our present and
future senior debt and rank senior in right of payment to all of our present and
future debt that is expressly  subordinated  to the notes.  The senior notes are
not secured by any of our assets or any of the assets of our  subsidiaries  that
have guaranteed  payment of the senior notes.  Currently,  neither we nor any of
our  subsidiaries  that have  guaranteed  payment of the  senior  notes have any
material  indebtedness that is secured by any of our or their respective assets,
other than the $15.1 million mortgage loan of the guarantor  subsidiary which is
secured by the building in which our corporate headquarters is located. If we or
our  subsidiaries  that have  guaranteed  payment  of the  senior  notes  become
insolvent at a time when they have secured debt, the secured lenders will have a
claim on the assets securing that  indebtedness that will have priority over any
claim holders of our senior notes may have for payment under the senior notes or
the  guarantees.  Accordingly,  it is possible the assets  remaining  from which
claims of the holders of the senior notes could be satisfied  would be less than
they are today.

THE SBARRO  FAMILY  CONTROLS US AND THEIR  INTERESTS  MAY BE DIFFERENT  FROM THE
INTERESTS OF THE HOLDERS OF THE SENIOR NOTES.

The Sbarro  family owns 100% of our stock and have the power to designate all of
our directors and exercise control over our business,  policies and affairs. The
interests of those  shareholders may differ from the interests of the holders of
our senior notes

WE MAY NOT BE ABLE TO REPURCHASE OUR SENIOR NOTES UPON A CHANGE OF CONTROL, EVEN
THOUGH WE ARE REQUIRED TO DO SO.

If a change of control  occurs,  we must  offer to  repurchase  all  outstanding
senior notes at a purchase price equal to 101% of their principal  amount,  plus
accrued and unpaid  interest  and  liquidated  damages,  if any, to the purchase
date.

Certain  transfers  of more than 35% of our  common  stock by our  shareholders,
including  transfers to third parties to provide cash needed to pay estate taxes
upon the death of those persons or their  transferees,  could trigger the change
of control  provisions  under the indenture.  In order to pay estate taxes,  the
estate of a  shareholder  could  seek to sell the  estate's  stock to us or to a
third party.  However,  the repurchase of those shares by us would be subject to
limitations under the indenture which currently  prohibit such repurchases,  and
the sale of those  shares to a third party  could  trigger the change of control
provisions under the indenture.

If a change of  control  were to occur and a  significant  amount of our  senior
notes are tendered,  we would  probably  require third party  financing,  but we
cannot  be sure  that we  would  be able to  obtain  third  party  financing  on
acceptable  terms,  if at all.  Furthermore,  we are presently  prohibited  from
borrowing under the indenture.




                                     - 13 -
<PAGE>




THERE IS A LIMITED PUBLIC MARKET FOR THE SENIOR NOTES.

We have not listed,  and do not intend to list, our senior notes on any national
securities exchange or to seek their admission to trading on NASDAQ.  Quotations
for the senior  notes are not  available  in a newspaper  or  otherwise  readily
available.  There are currently  only a limited  number of market makers for our
senior notes. Any  market-making may be discontinued at any time.  Further,  the
liquidity of, and trading market for, the senior notes may be adversely affected
by declines and volatility in the market for high yield securities generally, as
well as changes in our financial performance or prospects.

                         RISKS RELATING TO OUR BUSINESS

THE SUCCESS OF OUR  BUSINESS IS  DEPENDENT  ON A NUMBER OF FACTORS  THAT ARE NOT
WITHIN OUR CONTROL.

The  success  of our  franchisees'  and  our  new  restaurant  concept  business
operations  is, and will continue to be, subject to a number of factors that are
not within our control, including:

         o        changes in consumer tastes;

         o        national, regional and local economic conditions;

         o        traffic patterns;

         o        discretionary spending priorities;

         o        demographic trends;

         o        consumer  confidence  in  food  wholesomeness,   handling  and
                  safety;

         o        consumer   confidence  in  the  security  of  shopping  malls,
                  airports,  sports  arenas,   hospitals,   convention  centers,
                  casinos  and  other  venues  in which  we and our  franchisees
                  operate;

         o        weather conditions; and

         o        the type, number and location of competing restaurants.

THE SUCCESS OF OUR GROWTH  STRATEGY  WILL DEPEND,  IN PART,  UPON OUR ABILITY TO
EXPAND OUR FRANCHISE OPERATIONS.


The success of our franchise operations is dependent upon our ability to:

         o        Locate and attract new franchisees and area developers;

         o        Maintain and enhance the "Sbarro" brand;




                                     - 14 -
<PAGE>

         o        Maintain satisfactory  relations with our franchisees who may,
                  in certain instances, have interests adverse to our interests;

         o        Monitor  and audit the  reports  and  payments  received  from
                  franchisees; and

         o        Comply   with   applicable   franchising   laws,   rules   and
                  regulations,  as  well  as  applicable  laws  in  the  foreign
                  countries  in which we seek,  and  have,  franchisee  and area
                  development arrangements.

With respect to foreign franchisees, we are also at risk with respect to:

         o        Restrictions  that may be imposed  upon the  transfer of funds
                  from those countries;

         o        The political and economic stability of the country; and

o The country's relationship with the United States.

OUR GROWTH  STRATEGY  ALSO  REQUIRES US TO EXTEND THE SBARRO  CONCEPT INTO OTHER
QUICK SERVICE VENUES AND DEVELOP NEW RESTAURANT CONCEPTS.

Traditionally,  Sbarro has operated in the quick service market featuring pizza,
pasta and other hot and cold Italian entries,  principally in shopping malls. As
the  development  of new  shopping  malls in the United  States has slowed,  the
growth of our quick service  business has been in other high pedestrian  traffic
venues,  such  as  airports,  travel  plazas,  train  stations,  sports  arenas,
hospitals, convention centers, university campuses and casinos

To  increase  our  growth,  in  addition  to  further  expanding  our  franchise
operations,  we have been seeking to expand our business into new settings, such
as strip shopping centers, casinos, airports and military bases. In addition, we
are  developing  new casual  dining eat-in and take-out  restaurants,  featuring
Italian foods similar to those with which we have extensive experience.  We also
have  developed,   casual  dining,   principally  with  joint  venture  partners
experienced  in  other  food  cuisines.  Further,  we have  recently  introduced
"Sbarro"  pasta  sauces  which we  intend  to sell,  both in  company-owned  and
franchisee quick service restaurants and to wholesale clubs and supermarkets.

Our expansion requires us to:

         o        make significant capital investments;

         o        devote significant management time and effort;

         o        develop and operate these concepts;

         o        properly judge consumer  preferences when determining  whether
                  to develop a concept;

         o        create menu products acceptable to potential customers;

         o        develop  budgets  for,  and monitor,  food,  beverage,  labor,
                  occupancy   and  other  costs  at  levels  that  will  produce
                  profitable operations; and

         o        budget and monitor the cost of construction of the restaurant.





                                     - 15 -
<PAGE>

Further,  due to the current  limitations  under the  indenture on the amount of
investment we may make in unrestricted subsidiaries, such as the joint ventures,
at times, we may have to restrict certain of our growth efforts.

We cannot  assure you that we will be able to  successfully  expand our existing
quick service operations or develop any new concepts on a profitable basis.

WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT AGAINST STRONG COMPETITION.

The restaurant business is highly competitive. We believe that we compete on the
basis of  price,  service,  location  and  food  quality.  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.

Although  we believe we are well  positioned  to compete  because of our leading
market position, focus and expertise in the quick-service Italian specialty food
business  and  strong  national  brand  name  recognition,  we could  experience
increased competition from existing or new companies and lose market share that,
in turn,  could  have a  material  adverse  effect  on our  business,  financial
condition,  results of  operations,  prospects  and  ability to service our debt
obligations.

THE AVAILABILITY,  QUALITY AND COST OF OUR INGREDIENTS FLUCTUATES, WHICH AFFECTS
OUR FINANCIAL RESULTS.

Significant  increases in food and paper product costs, which we may not be able
to pass on to our  customers,  could affect our financial  results.  Many of the
factors in determining  food and paper product prices,  such as increases in the
prices of the ingredients we use to prepare our foods,  especially  cheese,  and
inflation  are  beyond  our  control.  Furthermore,  adverse  weather  and other
conditions can cause  shortages and  interruptions  in, and also could adversely
effect the availability,  quality and cost of, the ingredients we use to prepare
our foods.  These events could adversely affect our financial results because we
need to provide our customers with fresh products.

INCREASES IN LABOR AND OCCUPANCY COSTS COULD EFFECT OUR PROFITABILITY.

We have a substantial  number of hourly  employees  whose wages are based on the
federal or state  minimum  wage.  Any  increases in the federal or state minimum
wage,  as well as strong labor  markets,  can result in upward  pressures on the
wages and salaries we pay and could increase our labor costs.

In addition,  we have been  experiencing  higher  occupancy  related  costs with
respect to leases for new restaurants and renewal leases for existing restaurant
space.

Increases in our labor and occupancy costs would decrease our  profitability  if
we are unable to recover these  increases by increasing the prices we charge our
customers or if we are unable to attract new customers.




                                     - 16 -
<PAGE>

WE ARE  DEPENDENT ON OBTAINING AND RETAINING  ATTRACTIVE  HIGH CUSTOMER  TRAFFIC
LOCATIONS.

We are  dependent  on our  ability to enter  into new leases and renew  existing
leases on favorable  terms.  We find it more expensive to enter into such leases
during  periods when market rents are, as they have been,  increasing.  There is
also active competition for attractive commercial shopping mall, center city and
other  locations  suitable  for  restaurants.  As a result,  as existing  leases
expire,  we have not  renewed  some leases and have found it more  expensive  to
continue to operate other existing locations.

WE RELY ON ONE NATIONAL INDEPENDENT WHOLESALE DISTRIBUTOR AND REPLACING IT COULD
DISRUPT THE FLOW OF OUR FOOD PRODUCTS AND SUPPLIES.

We use one national  independent  wholesale  food  distributor,  to purchase and
deliver most of the food ingredients  used to prepare the foods we serve,  other
than breads, pastries,  produce, fresh dairy and certain meat products which are
purchased  locally for each  restaurant.  The  distributor  also  purchases  and
delivers to us, on a national basis, restaurant supplies and certain other items
that  we  use.  The  majority  of  the  products  used  in our  restaurants  are
proprietary and we are involved in negotiating their cost to the wholesaler. The
agreement expires in January 2008. While we are dependent upon this one national
independent distributor,  we believe that there are other distributors who would
be able to service our needs. However, there can be no assurance that we will be
able to replace  our  distributor  with  others on  comparable  terms or without
disruptions to the flow of our food products and other supplies to our systems.

OUR BUSINESS IS SUBJECT TO GOVERNMENTAL REGULATION.

We are subject to various federal,  state and local laws affecting our business,
as are  our  franchisees.  Each  of  our  restaurants  and  those  owned  by our
franchisees  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.  Furthermore,
there can be no assurance that we will remain in compliance with applicable laws
or licenses  that we have or will  obtain,  the failure of which by a restaurant
could result in our loss of the restaurant's license and even the closing of the
restaurant.

Regulations of the Federal Trade  Commission  (the "FTC") and various state laws
regulating the offer and sale of franchises require us to furnish to prospective
franchisees a franchise offering circular containing prescribed information.  We
are  currently  registered  to offer and sell  franchises in nine states and are
currently  exempt from the franchise  registration  requirements  in nine states
based upon "large franchisor" exemptions. 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.  State franchise
examiners  have  discretion to disapprove  franchise  registration  applications
based on a number of factors.  There can be no assurance that we will be able to
continue to comply with these regulations.

WE DEPEND ON OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES.

Our success is dependent upon our senior  management team. Since September 2003,
we have added a significant  number of independent  executives to our management
team. Our continued  success is dependent upon our ability to attract and retain
key  employees.  As a  privately-held  company,  we may





                                     - 17 -
<PAGE>

be unable to offer key executives  liquid  stock-based  compensation of the type
that  our  publicly-held  competitors  can  offer.  We do  not  have  employment
agreements with any key employee other than Peter Beaudrault,  our President and
Chief  Executive  Officer.  There is no assurance that we will be able to retain
our existing senior management or attract other key employees.

OUR RESULTS OF OPERATIONS FLUCTUATE DUE TO THE SEASONALITY OF OUR BUSINESS.

Our revenues and earnings are highest in our fourth fiscal quarter primarily due
to increased volume in shopping malls during the holiday  shopping season.  As a
result,  our annual revenues and earnings are  substantially  dependent upon the
amount of traffic in shopping malls during the holiday shopping period.  Changes
in  the  level  of  traffic  in  shopping   malls  during  this  period  have  a
disproportionate  effect on our annual  results of  operations.  A weak  holiday
shopping  season,  which could be caused by, among other factors,  a downturn in
the economy,  as expansion of on-line  shopping or adverse  weather  conditions,
could adversely affect our profitability.

WE MAY, IN THE FUTURE,  INCUR  GOODWILL,  TRADEMARK  AND OTHER ASSET  IMPAIRMENT
CHARGES.

At January 1, 2006,  the carrying  values of our  trademarks  and goodwill  were
$195.9 million and $9.2 million, respectively.  There have been no reductions in
the carrying values of those assets since their creation.  We test, based on our
estimates about the future cash flows from those assets, for impairment of these
assets  annually or earlier if  impairment  indicators  exist.  We also test for
impairment  of our  long-lived  assets.  While  we  believe  our  estimates  and
judgments about future cash flows are reasonable,  future impairment charges may
be required if the expected cash flow estimates,  as projected,  do not occur or
if events change  requiring us to revise our  estimates,  and result in non-cash
charges to our earnings in the period in which we make the adjustment.

IF WE ELECT TO IMPLEMENT  INTERNAL CONTROL  PROCEDURES  NECESSARY TO COMPLY WITH
THE  SARBANES-OXLEY  ACT OF  2002,  WE WOULD  INCUR  SIGNIFICANT  COSTS  WITHOUT
ASSURANCE THAT THE PROCEDURES AND CONTROLS WE IMPLEMENT WILL BE EFFECTIVE.

In order to comply with a covenant in the indenture, we are a voluntary filer of
periodic  reports with the Securities and Exchange  Commission.  As such, we are
not  required  to  implement  the  internal  control  over  financial  reporting
procedures  required by Section 404 of the Sarbanes-Oxley Act of 2002.  However,
we have begun to implement the processes and procedures  that would be necessary
to enable our management to furnish an internal control report to our registered
public  accounting  firm,  which would then be required to attest to, and report
on,  our  management's  assessment.  It is our  present  intention  to  complete
development of these processes and procedures  before the end of our 2007 fiscal
year when non-accelerated  filers of periodic reports with the SEC are presently
required to have them in place.  There can be no assurance  that we will be able
to complete the work  necessary for our  management to evaluate our controls and
prepare its management  report in a timely manner,  that our management  will be
able to report that our internal  control over financial  reporting is effective
or that our  registered  public  accounting  firm  will be able to attest to our
report.

If we elect not to proceed with this  project,  or if we are not able to develop
effective controls, our ability to refinance the senior notes could be adversely
affected.  In addition, we estimate that, over the next two years, we will incur
significant  expenses to implement  these  procedures  and controls,  which will
directly impact our results of operations.



                                     - 18 -
<PAGE>


ITEM 1B.      UNRESOLVED STAFF COMMENTS
--------      -------------------------
None



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

All Sbarro  restaurants are typically leased under ten-year leases that often do
not include an option to renew the lease.  We have  historically  generally been
able to renew or extend leases on existing  sites  although rents have increased
and, at times,  we have  determined not to renew a lease. As of January 1, 2006,
we leased 529 restaurants, of which 25 were subleased to franchisees under terms
which cover all of our obligations under the leases.  The remaining  franchisees
directly lease their restaurant  spaces.  Most of our restaurant  leases provide
for the  payment of base rents plus real  estate  taxes,  utilities,  insurance,
common area charges and certain  other  expenses.  Some leases  provide,  either
exclusively or in combination base rent, percentage rents generally ranging from
8% to 10% of net restaurant sales, in excess of stipulated amounts.

Leases to which we were a party at January 1, 2006 have initial  terms  expiring
as follows (excludes unconsolidated joint ventures):

YEARS INITIAL LEASE               NUMBER OF SBARRO-        NUMBER OF FRANCHISED/
TERMS EXPIRE                      OWNED RESTAURANTS          OTHER RESTAURANTS
------------                      -----------------          -----------------
2006........................                54(1)                    4
2007........................                65                       5
2008 .......................                62                       2
2009........................                73                       3
2010........................                59                       4
Thereafter..................               191                       7


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

(1)Includes 13 restaurants under  month-to-month  arrangements and 5 restaurants
as to which we pay only  percentage  rent  based on the level of net  restaurant
sales, the leases for which are generally for a one year period.

We own a four-story office building in Melville,  New York having  approximately
100,000  square  feet  and  a  cafeteria  style   restaurant   operated  by  us.
Approximately  74% of the  rentable  square  feet is  currently  under  lease to
unaffiliated third parties. The remaining 26%, consisting primarily of one floor
of the building, is occupied by our corporate and principal executive offices.

In addition, our other joint venture concepts lease 17 restaurants.





                                     - 19 -
<PAGE>





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

In  December  1999,  fourteen  current  and former  general  managers  of Sbarro
restaurants in California  amended a complaint  against us filed in the Superior
Court of California for Orange County. The complaint alleges that the plaintiffs
were  improperly  classified as exempt  employees  under the California wage and
hour law. The plaintiffs were seeking actual damages, punitive damages and costs
of the  lawsuit,  including  reasonable  attorneys'  fees,  each in  unspecified
amounts. Plaintiffs filed a motion to certify the lawsuit as a class action, but
the motion was denied by the court. The court issued a ruling  unfavorable to us
in December  2003 which we appealed  to the circuit  court as we believe  errors
were made by the trial judge.  On appeal,  the Circuit Court  affirmed the lower
court's  decision in part and reversed it in part,  finding  that their  damages
should only be  computed  from  October  1996  through May 9, 1999,  the date we
converted the  compensation of general  managers to an hourly rate,  rather than
through their later employment termination dates. The Circuit Court remanded the
matter to the lower  court with  instructions  on how to compute  damages and to
redetermine  the amount of  attorney's  fees  awarded  since such fees are to be
based, to some extent, on the result obtained.

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

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





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

Not applicable.





                                     - 20 -
<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.")

We are not presently  permitted under the indenture to pay dividends (other than
distributions pursuant to the tax payment agreement to which we are a party with
our shareholders) or make stock repurchases.  No dividends were declared in 2005
or 2004.





                                     - 21 -
<PAGE>


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

The  following  selected  financial  data  should  be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  included  in Item 7 of this report and our  consolidated  financial
statements  and the related notes  included in Item 8 of this report.  Our 2005,
2004,  2003 and 2002  consolidated  financial  statements  have been audited and
reported on by BDO Seidman,  LLP, an independent  registered  public  accounting
firm,  and our  consolidated  financial  statements  for 2001 were  audited  and
reported on by Arthur Andersen LLP, independent public accountants.


<TABLE>
<CAPTION>
                                                                               FISCAL YEAR (1)
                                                                               ---------------
                                                                            (DOLLARS IN THOUSANDS)
                                                        2005          2004          2003           2002          2001
                                                        ----          ----          ----           ----          ----


<S>                                                   <C>           <C>           <C>           <C>           <C>
INCOME STATEMENT DATA:
Revenues:
  Restaurant sales (1)                                $ 329,187     $ 331,313     $ 314,708     $ 345,206     $ 372,673
  Franchise related income                               12,410        12,093        10,868        10,070        10,286
  Real estate and other                                   7,097         5,488         6,748         5,104         5,756
                                                     -------------------------------------------------------------------
       Total revenues                                   348,694       348,894       332,324       360,380       388,715
                                                     -------------------------------------------------------------------

Costs and expenses:
  Cost of food and paper products                        66,519        72,073        67,446        67,593        74,614
  Payroll and other employee benefits                    89,351        90,857        89,614        96,288       103,828
  Other operating costs                                 115,209       114,571       110,494       114,944       116,582
  Depreciation and amortization (2)                      16,635        16,400        19,712        20,683        30,375
  General and administrative                             27,438        28,576        25,451        23,960        29,472
  Asset impairment, restaurant closings/remodels and
    loss on sale of other concept restaurant (3)            859         2,202         6,073         9,196        18,224
                                                     -------------------------------------------------------------------
        Total costs and expenses                        316,011       324,679       318,790       332,664       373,095
                                                     -------------------------------------------------------------------

Operating income                                         32,683        24,215        13,534        27,716        15,620

Other (expense) income:
  Interest expense                                      (30,680)      (30,694)      (31,039)      (30,959)      (30,950)
  Interest income                                         1,277           654           694           528           756
  Equity in net (loss) income of unconsolidated
      affiliates                                           (236)          855           425           668           310
  Other Income (4)                                            -         1,181             -         7,162             -
                                                     -------------------------------------------------------------------
  Net other expense                                     (29,639)      (28,004)      (29,920)      (22,601)       29,884
                                                     -------------------------------------------------------------------

Income (loss) before income taxes (1)                     3,044        (3,789)      (16,836)        5,115       (14,264)

Income taxes                                              1,693           534           844           334           325
                                                     -------------------------------------------------------------------

Net income (loss)                                     $   1,351     $  (4,323)    $ (17,230)    $   4,781     $ (14,589)
                                                     ====================================================================

</TABLE>



                                     - 22 -
<PAGE>
<TABLE>
<CAPTION>
                                                                             FISCAL YEAR (1)
                                                                             ---------------
                                                                         (DOLLARS IN THOUSANDS)
                                                    2005           2004           2003           2002           2001
                                                    ----           ----           ----           ----           ----


<S>                                               <C>            <C>            <C>            <C>            <C>
OTHER FINANCIAL AND RESTAURANT DATA:
Net cash provided by operating activities (5)     $  21,581      $  15,816      $  11,034      $  32,453      $  34,812
Net cash used in investing activities (5)         $ (10,805)     $  (8,906)     $  (8,521)     $ (10,988)     $ (22,453)
Net cash used in financing activities (5)         $    (687)     $    (340)     $  (1,254)     $  (3,267)     $ (17,726)

EBITDA (6)                                        $  49,082      $  42,651      $  33,671      $  56,229      $  46,305

Capital expenditures                              $  11,708      $   8,906      $   8,521      $  10,988      $  22,528

Number of restaurants at end of period:
   Company-owned                                        494            511            533            563            607
   Franchised                                           458            428            376            361            334
   Other concepts                                        25             22             27             27             31
                                                  ---------      ---------      ---------      ---------      ---------
     Total number of restaurants                        977            961            936            951            972

Franchised Sales (7)                              $ 272,190      $ 253,410      $ 221,508      $ 205,073      $ 197,936


<CAPTION>
                                                 2005            2004           2003             2002            2001
                                                 ----            ----           ----             ----            ----

Balance Sheet Data (at end of period):
<S>                                            <C>             <C>             <C>             <C>             <C>
Total assets                                   $388,538        $384,613        $386,830        $404,291        $404,228
Working capital                                $ 40,697        $ 32,554        $ 28,352        $ 27,095        $  4,614
Total long-term obligation                     $268,530        $268,349        $268,152        $267,941        $267,718
Shareholders' equity (as restated)  (8)        $ 67,898        $ 66,547        $ 70,870        $ 89,882        $ 87,013

</TABLE>
---------------------
(1)      Our fiscal year ends on the Sunday nearest  December 31. Our 2005 year,
         which ended  January 1, 2006,  contained 52 weeks.  Our 2004 year which
         ended January 2, 2005,  contained 53 weeks.  All other years  presented
         contained  52  weeks.  The 53rd  week of  operations  in 2004  produced
         revenues of  approximately  $9 million and  approximate  income  before
         taxes of $2.5 million.

(2)      Includes  amortization of the excess purchase price over the book value
         of assets  acquired  as a result of our going  private  transaction  on
         September 28, 1999 of $5.4 million in 2001. In July 2001, the Financial
         Accounting  Standards  Board issued  Statement of Financial  Accounting
         Standards  ("SFAS") No. 142,  "Goodwill and Other  Intangible  Assets,"
         which became  effective for us with the  beginning of 2002.  Under SFAS
         No. 142,  goodwill and intangible  assets with indefinite  lives are no
         longer  amortized  but are reviewed  annually for  impairment  (or more
         frequently if impairment indicators arise). Accordingly, we incurred no
         amortization of goodwill or of intangible  assets with indefinite lives
         for years after 2001.  Separable  intangible assets that are not deemed
         to have  indefinite  lives  continue to be amortized  over their useful
         lives. Our goodwill and intangible assets with indefinite lives,  which
         aggregated $205.1 million, net of accumulated amortization,  at January
         1, 2006, are




                                     - 23 -
<PAGE>

         tested  annually for impairment.  Our testing for impairment  concluded
         that there was no impairment  of our goodwill or intangible  assets for
         any periods presented.

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


<TABLE>
<CAPTION>
                                              2005           2004            2003             2002            2001
                                              ----           ----            ----             ----            ----

<S>                                            <C>           <C>             <C>               <C>            <C>
         Impairment of assets                  $.3           $1.1            $4.1              $.4            $5.5
         Restaurant
            closings/remodels                   .6             .8             2.0              8.8            12.7
         Loss on sale of other
            concept restaurant                   -             .3               -                -               -
                                              ----           ----            ----             ----            ----
                                               $.9           $2.2            $6.1             $9.2           $18.2
                                               ===           ====            ====             ====           =====
</TABLE>


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

 (5)     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.

 (6)     EBITDA  represents  earnings before interest income,  interest expense,
         taxes,  depreciation and amortization.  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 United States generally accepted accounting principle "GAAP" or as
         a measure of a company's profitability or liquidity. Rather, we believe
         that EBITDA provides  relevant and useful  information for analysts and
         investors  in our senior  notes in that EBITDA is one of the factors in
         the  calculation  of our  compliance  with the ratios in the  indenture
         under which our senior notes are issued.  We also internally use EBITDA
         to  determine  whether or not to continue  operating  restaurant  units
         since it provides us with a measurement  of whether we are receiving an
         adequate cash return on our  investment.  Our calculation of EBITDA may
         not be  comparable  to a  similarly  titled  measure  reported by other
         companies,  since all companies do not calculate this non-GAAP  measure
         in the  same  manner.  Our  EBITDA  calculations  are not  intended  to
         represent cash provided by (used in) operating activities since they do
         not  include  interest  and taxes and changes in  operating  assets and
         liabilities,  nor are they intended to represent a net increase in cash
         since they do not  include  cash  provided by (used in)  investing  and
         financing activities.





                                     - 24 -
<PAGE>


The following table  reconciles  EBITDA to our net income (loss) for each of the
periods which we believe is the most direct comparable GAAP financial measure to
EBITDA, presented (in thousands):


<TABLE>
<CAPTION>
                                 2005         2004        2003        2002         2001
                                 ----         ----        ----        ----         ----

<S>                           <C>          <C>         <C>          <C>         <C>
EBITDA                        $ 49,082     $ 42,651    $ 33,671     $ 56,229    $ 46,305
Interest expense               (30,680)     (30,694)    (31,039)     (30,959)    (30,950)
Interest income                  1,277          654         694          528         756
Income taxes                    (1,693)        (534)       (844)        (334)       (325)
Depreciation and amortization  (16,635)     (16,400)    (19,712)     (20,683)    (30,375)

                            -----------  ----------- ----------- ------------ -----------
Net income (loss)              $ 1,351     $ (4,323)  $ (17,230)     $ 4,781   $ (14,589)
                            ===========  =========== =========== ============ ===========
</TABLE>

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

 (7)     While we do not record  franchised  sales as revenues,  we believe they
         are important in understanding our financial  performance because these
         sales  are the  basis on  which  the  company  calculates  and  records
         franchised  royalties and are indicative of the financial health of the
         franchisee base.

(8)      In 2005, we noted an error in our  straight-line  rent  calculation and
         recorded  $1.2 million to correct  this error.  The  correction  was to
         reduce  the  deferred  rent  balance  and  adjust to  opening  retained
         earnings.  The  effect  was  not  individually  material  to  any  year
         presented and did not warrant a restatement in those years. In 2004, we
         noted an error in the minority  interest account and accrued  expenses.
         We  recorded  $569,000  to correct  this  error,  which  related to the
         recording of income and minority interest of a consolidated  subsidiary
         in years prior to December 31,  2001.  The  correction  was adjusted to
         opening    retained    earnings.    The   error   resulted   from   the
         misinterpretation  of certain  Partnership  Agreements  concerning  the
         sharing of the losses of two of the locations within this  consolidated
         subsidiary.







                                     - 25 -
<PAGE>





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

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

RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

We are a leading  owner,  operator and  franchisor of Quick Service  Restaurants
("QSR") restaurants,  serving a wide variety of Italian specialty foods with 952
company owned and franchise locations as of January 1, 2006. We also operate, in
certain cases with joint venture partners, a number of other restaurant concepts
with 25 locations as of January 1, 2006.

While we have  been  faced  with  numerous  pressures  that  have  affected  our
business,  including  the events of  September  11, 2001,  the general  economic
downturn  in recent  years in the United  States,  and the March  2003  military
action in Iraq, we saw increased  sales in all areas of our business as we moved
through 2004 and 2005.  Mall traffic has  increased as  retailers,  particularly
high end mall based retailers,  are serving more customers. In addition,  during
2004, we re-energized our quick-service  restaurant  operations while continuing
to provide a quality  product  coupled  with  quality  service.  We believe  our
strategy  resulted in the  significant  improvement  of our  operating  results,
including higher sales and earnings. The increase in mall traffic, combined with
selective price  increases,  improvements  in operational  controls and upgraded
store management at all levels produced increased sales.

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

Commencing in 2003, we restructured our corporate staff. Peter Beaudrault joined
us as our Corporate Vice President and President of our Quick Service  Division,
and Anthony J. Missano, formerly President of our Quick Service Division, became
our President of Business  Development,  with  responsibilities for real estate,
construction,  purchasing and other business  development  matters.  In February
2004,  Anthony J. Puglisi was hired as our Chief Financial  Officer,  a position
that had remained  vacant since June 2002.  In March 2005,  Mr.  Beaudrault  was
appointed President and Chief Executive Officer.











                                     - 26 -
<PAGE>


SEASONALITY

Our  business is subject to seasonal  fluctuations,  and the effects of weather,
national security, economic and business conditions.  Revenues have been highest
in our fourth quarter due primarily to increased volume in shopping malls during
the holiday shopping season.  Our annual revenues and earnings can fluctuate due
to the length of the holiday shopping period between Thanksgiving and New Year's
Day and the number of weeks in our fourth quarter.  In recent years,  our fourth
quarter  income  has also  fluctuated  significantly  due to a  number  of other
factors,  including the status of the economy and year end adjustments  relating
to asset impairment and store closing costs.

GOODWILL, OTHER INTANGIBLE ASSETS AND OTHER LONG LIVED ASSETS

 Due to the  seasonality  of our  business,  until we  determine  the results of
operations  for our fourth  quarter,  we are not able to perform the annual test
for  impairment  on our goodwill and  intangible  assets with  indefinite  lives
acquired prior to July 1, 2001 as required by SFAS No. 142,  "Goodwill and Other
Intangible  Assets," and fully evaluate the  impairment of long-lived  assets as
required  by SFAS No.  144,  "Accounting  for the  Impairment  and  Disposal  of
Long-Lived  Assets." Any required  adjustments  are recorded at that time unless
impairment  factors are present earlier.  Our annual test for impairment charges
of our goodwill and intangible  assets with indefinite  lives at the end of each
year  since  SFAS No.  142  became  effective  concluded  that there has been no
impairment  related to these  assets.  However,  during  2005,  2004 and 2003 we
recorded  impairment under SFAS No. 144 of our long-lived assets of $.3 million,
$1.1  million  and  $4.1  million  respectively,  as a  result  of our  periodic
evaluation of impairment  indicators of the property and equipment  that is part
of our long lived assets.

ACCOUNTING PERIOD

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

PRIMARY FACTORS CONSIDERED BY MANAGEMENT IN EVALUATING OPERATING PERFORMANCE

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

         o        comparable Sbarro owned QSR location sales;
         o        franchise   location  sales  and  their  relationship  to  our
                  franchise revenues;
         o        decisions  to  continue to operate or close  Sbarro  owned QSR
                  locations;
         o        percentage relationship of the cost of food and paper products
                  and payroll and other benefit costs to our restaurant sales;
         o        level of other operating expenses (primarily  occupancy costs)
                  and their relationship to restaurant sales;
         o        relationship of general and administrative costs to revenues;
         o        provision    for    asset     impairment     and    restaurant
                  closings/remodels and
         o        EBITDA.






                                     - 27 -
<PAGE>

RELEVANT FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
                                                                        FISCAL YEAR
                                                                        -----------
                                                           2005             2004             2003
                                                           ----             ----             ----
                                                                      (DOLLARS IN MILLIONS)
<S>                                                       <C>              <C>              <C>
Comparable QSR owned sales (1)                            $  312           $  309           $  288
Comparable QSR owned sales
     - percentage change vs. prior year (1)                  2.8%             8.2%            -3.4%
Franchise location sales                                  $  272           $  253           $  222
Franchise revenues                                        $   12           $   12           $   11
Cost of food and paper products as a
    percentage of restaurant sales                          20.2%            21.8%            21.4%
Payroll and other benefits as a percentage
    of restaurant sales                                     27.1%            27.4%            28.5%
Other operating expenses as a percentage
    of restaurant sales                                     35.0%            34.6%            35.1%
General and administrative costs as a
    percentage of revenues                                   7.9%             8.2%             7.7%
Provision for asset impairment and
    restaurant closings/remodels loss on sale of
   other concept restaurants                              $  0.9           $  2.2           $  6.1
EBITDA (2)                                                $   49           $   43           $   34
</TABLE>

         (1)      Comparable  QSR owned  sales  dollars  and  annual  percentage
                  changes  are based on  locations  that were  open  during  the
                  entire period within the years compared.  Comparable QSR sales
                  in 2004 include the 53rd week of approximately $8.5 million in
                  sales.  The 53rd week in 2004  accounted for  approximately  3
                  basis points of the 8.2% comparable  increase in 2004. In 2005
                  comparable QSR sales increased 5.7% after excluding the effect
                  of the 53rd week in 2004 of approximately 3 basis points.

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

IMPACT OF INFLATION AND OTHER FACTORS

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





                                     - 28 -
<PAGE>


FISCAL 2005 COMPARED TO FISCAL 2004

We operate two  business  segments.  Our  company  owned  restaurant  segment is
comprised of the operating  activities of our company owned QSR  restaurants and
other concept restaurants (owned and joint ventures).  Our franchise  restaurant
segment  offers  franchise  opportunities  worldwide for qualified  operators to
conduct  business under the Sbarro name.  Revenue from  franchise  operations is
generated from initial  franchise fees,  ongoing royalties and other franchising
revenue.

We do  not  allocate  indirect  corporate  charges  to the  franchise  operating
segment.  Such costs are managed on an entity wide basis, and the information to
reasonably allocate such costs is not readily available.

We do not allocate assets by segment because our chief operating  decision maker
does not review the assets by segment to assess the  segments'  performance,  as
the assets are managed on an entity wide basis.

The  following  table sets forth the  information  concerning  the  revenue  and
operating  income  before  unallocated  costs of each of our  company  owned and
franchise restaurant segments:

<TABLE>
<CAPTION>

                                                          COMPANY OWNED           FRANCHISE
                                                            RESTAURANTS          RESTAURANTS                TOTALS
                                                            -----------          -----------                ------
         2005                                                                   (IN THOUSANDS)
<S>                                                                <C>                   <C>               <C>
         Total revenue                                             $336,284              $12,410           $ 348,694
                                                                                                           ---------
         Operating income before unallocated
             costs                                                   47,713                9,496              57,209
         Unallocated costs and expenses (1)                                                                   24,526
                                                                                                              ------
         Operating income                                                                                   $ 32,683
                                                                                                            ========

         2004

         Total revenue                                             $336,801              $12,093           $ 348,894
                                                                                                           ---------
         Operating income before unallocated
             costs                                                   40,698                9,260              49,958

         Unallocated costs and expenses (1)                                                                   25,743
                                                                                                              ------
         Operating income                                                                                   $ 24,215
                                                                                                            ========
</TABLE>

(1)  Represents  certain  general  and  administrative  expenses  that  are  not
allocated to a segment.

Sales by QSR restaurants and consolidated other concept  restaurants were $329.2
million  for 2005 and  $331.3  million  for 2004  including  approximately  $9.0
million of revenue  relating to the 53rd week in 2004.  Sales in 2005  increased
$6.8  million or 2.1%  compared to sales for the 52 weeks in 2004.  The increase
was  attributable  to an  increase  in  comparable  location  QSR sales of $16.9
million or 5.7%.  Comparable  restaurant sales represent sales at locations that
were open  during the entire  current  and prior year.  Our  consolidated  other
concept  restaurants  declined $3.0 million which is attributable to the sale of
our Salute  restaurant in 2005  partially  offset by sales from our Carmela's of
Brooklyn  Restaurant  which opened in February  2005.  We believe that  improved
economic  conditions  in the  United  States,  improvement  in  our  operational
controls and upgraded  field and store  management,  combined  with higher check
averages and selective  price  increases  implemented  in 2004 accounted for the
improvements.  This was offset  somewhat by fewer  transactions  during




                                     - 29 -
<PAGE>

2005 as,  notwithstanding  the increased traffic in the mall, the time customers
spend in a mall appears to be less.

Franchise related revenues  increased 2.6% to $12.4 million for 2005 compared to
$12.1 for 2004.  The  increase in  revenues  was  primarily  from  increases  in
comparable  unit  sales  of 3.7% for  domestic  locations  and 2.2% for  foreign
locations and increased  number of  restaurants  in 2005 offset  somewhat by the
53rd week in 2004.

Real  estate  and other  revenue  increased  to $7.1  million  in 2005 from $5.5
million in 2004.  The  increase was  primarily  due to $1.6 million of increased
marketing  rebates and certain  food rebates we received  based on  franchisees'
level of purchases.

Cost of food and paper products as a percentage of restaurant  sales improved by
1.6% to  20.2%  in 2005  from  21.8% in  2004.  Improved  operational  controls,
combined with selective  price  increases  implemented in 2004, were the primary
reasons for the majority of the improvement in our cost of sales as a percentage
of restaurant sales. The cost of cheese in 2005 averaged approximately $1.71 per
pound  compared to an average of  approximately  $1.82 per pound for 2004.  This
$.11 per pound  reduction in cheese costs  accounted for $.9 million or .3 basis
points of the improvement.

Payroll and other  employee  benefits,  as a  percentage  of  restaurant  sales,
decreased by .3 basis points to 27.1% in 2005 from 27.4% of restaurant  sales in
2004. The decrease as a percentage of restaurant sales was primarily a result of
improved  sales  resulting  from  increased  mall  traffic and  selective  price
increases.

Other  operating  costs  increased by $.6 million to 35% of restaurant  sales in
2005 from  34.6% in 2004.  The  increase  primarily  related to an  increase  in
restaurant  management  bonuses of $1.9 million  resulting from improved profits
offset by occupancy and other costs in 2004 of approximately  $1.6 million which
related to the 53rd week.

Depreciation and amortization  expense increased by $.2 million to $16.6 million
for 2005 from  $16.4  million  for  2004.  The  increase  was  primarily  due to
depreciation  related  to our new Point Of Sales  system and store  remodels  in
2005.

 General and  administrative  expenses were $27.4 million in 2005 as compared to
$28.6 million in 2004. The decline in expenses is  attributable to reductions in
salaries  and travel and  entertainment  due to the 2004 staff  reductions,  the
absence of severance costs related to the 2004 staff reductions,  offset in part
by higher bonus payments  resulting from improved  profitability and a provision
for long term special incentive award to our Chief Executive Officer.

During 2005 and 2004, we recorded a provision for asset  impairment,  restaurant
closing and remodel charges and loss on sale of other concept  restaurant of $.9
million and $2.2  million,  respectively.  In 2005,  $.3 million  related to the
impairment  of assets as compared to $1.1 million in 2004.  Restaurant  closings
and  remodels  accounted  for $.6  million  and $0.8  million  in 2005 and 2004,
respectively.  In 2004, there was a charge of $0.3 million to record the loss on
sale of another concept  restaurant.  The charge for asset  impairment  resulted
from our evaluation of impairment  indicators which determined that the carrying
amount  of  certain  store  assets  may not be  recoverable  from the  estimated
undiscounted future cash flows resulting from the use of those assets.





                                     - 30 -
<PAGE>

Interest expense of $31 million for both 2005 and 2004 relates  primarily to the
11%,  $255  million  senior  notes  we  issued  to  finance  our  going  private
transaction   and  the  8.4%,  $16  million   mortgage  loan  on  our  corporate
headquarters,  which has current outstanding  principal balance of $15.1 million
as of January 1, 2006.

Interest  income was $1.3 million in 2005  compared to $.7 million in 2004.  The
increase was due to higher  average  interest  rates coupled with higher average
cash balances in 2005.

Equity in the net income  (loss) of  unconsolidated  affiliates  represents  our
proportionate share of earnings and losses in those other concept restaurants in
which we have a 50% or less ownership  interest.  Our share in the net income or
loss of those  concepts  decreased by $1.1 million in 2005 from 2004 as a result
of a decline in traffic in our  steakhouse  joint  venture.  This concept opened
three new  steakhouses in 2005.  There are no further  expansion  plans for this
venture.

We have elected to be taxed under the provisions of Subchapter S of the Internal
Revenue Code and, where applicable and permitted,  under similar state and local
income  tax  provisions  beginning  January  3, 2000.  Under the  provisions  of
Subchapter S, substantially all taxes on our income are paid by our shareholders
rather than us. Our tax expense was $1.7  million and $0.5  million for 2005 and
2004,  respectively.  The expense was for taxes owed by us to jurisdictions that
do not  recognize S corporation  status or that tax entities  based on net worth
and for taxes  withheld  at the source of payment  on foreign  franchise  income
related  payments.  The tax expense for these  jurisdictions  increased  in 2005
because of our  increase  in net  income.  In 2004 we reduced our tax expense by
approximately $.4 million to reflect our estimated tax exposure.

FISCAL 2004 COMPARED TO FISCAL 2003

We operate two  business  segments.  Our  company  owned  restaurant  segment is
comprised of the operating  activities of our company owned QSR  restaurants and
other concept restaurants (owned and joint ventures).  Our franchise  restaurant
segment  offers  franchise  opportunities  worldwide for qualified  operators to
conduct  business under the Sbarro name.  Revenue from  franchise  operations is
generated from initial  franchise fees,  ongoing royalties and other franchising
revenue.

We do  not  allocate  indirect  corporate  charges  to the  franchise  operating
segment.  Such costs are managed on an entity wide basis, and the information to
reasonably allocate such costs is not readily available.

We do not allocate assets by segment because our chief operating  decision maker
does not review the assets by segment to assess the  segments'  performance,  as
the assets are managed on an entity wide basis.





                                     - 31 -
<PAGE>


The  following  table sets forth the  information  concerning  the  revenue  and
operating  income  before  unallocated  costs of each of our  company  owned and
franchise restaurant segments:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED
                                                                         ----------
                                                                       (IN THOUSANDS)
                                                          Company owned             Franchise                 Total
                                                          -------------             ---------                 -----
         2004                                               restaurants            restaurants
                                                            -----------            -----------

<S>                                                          <C>                       <C>                <C>
         Total revenue                                       $336,801                  $12,093            $ 348,894
                                                                                                          ---------
         Operating income before
         unallocated costs                                     40,698                    9,260               49,958

         Unallocated costs and expenses (1)                                                                  25,743
                                                                                                             ------
         Operating income                                                                                  $ 24,215
                                                                                                           ========

         2003
         Total revenue                                       $321,456                  $10,868            $ 332,324
                                                                                                          ---------
         Operating income before
         unallocated costs                                     28,117                    7,546               35,663

         Unallocated costs and expenses (1)                                                                  22,129
                                                                                                             ------
         Operating income                                                                                $   13,534
                                                                                                         ==========
</TABLE>

(1)  Represents  certain  general  and  administrative  expenses  that  are  not
allocated to a segment.

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

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

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

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

Payroll and other employee benefits  increased $1.2 million but, as a percentage
of restaurant  sales,  decreased to 27.4% in 2004 from 28.5% of restaurant sales
in 2003.  The dollar  increase was




                                     - 32 -
<PAGE>

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

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

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

General and  administrative  expenses  were $28.6  million for 2004  compared to
$25.5 million for 2003. The principal factors  contributing to the increase were
increased  bonuses  of $1.5  million,  additional  litigation  reserves  of $1.2
million and costs associated with additions and changes to senior  management of
$1.2  million.  These  increases  were offset by a reduction  in work force that
reduced our 2004 costs by  approximately  $2.5 million.  In connection with this
reduction in work force in early 2004,  we recorded  severance and other related
costs of approximately $1.2 million.

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

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

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

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

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






                                     - 33 -
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

PRINCIPAL CASH REQUIREMENTS AND SOURCES

Our liquidity requirements relate to debt service, capital expenditures, working
capital,  investments in other  ventures,  distributions  to  shareholders  when
permitted  under the indenture for the senior notes and to repay any  borrowings
we may make under our line of credit agreement and general  corporate  purposes.
We incur annual cash interest expense of  approximately  $29.4 million under the
senior notes and mortgage  loan and may incur  additional  interest  expense for
borrowings  under our line of  credit.  We are not  required  to make  principal
payments,  absent the  occurrence of certain  events,  on our senior notes until
they mature in September  2009.  We believe that  aggregate  restaurant  capital
expenditures  and our  investments  in  joint  ventures  for  all of  2006  will
approximate $10 million.

We expect our primary source of liquidity to meet current  requirements  will be
cash flow from operations and if needed,  our $10 million line of credit.  Under
our line of credit,  we  currently  have the ability to borrow up to $10 million
with a sub-limit for letters of credit of $5 million. We do not presently expect
to borrow under our line of credit  except for required  letters of credit.  The
maximum  amount  available  under our line of  credit,  after  giving  effect to
outstanding letters of credit, was $7.9 million at January 1, 2006.


CONTRACTUAL OBLIGATIONS

Our  contractual  obligations  with  respect to both our and the other  concepts
(both those in which we have a majority and minority  interest)  were as follows
as of January 1, 2006 (in millions):

<TABLE>
<CAPTION>
                                                               LESS THAN                                      MORE THAN
                                                   TOTAL          1 YEAR      1-3 YEARS       4-5 YEARS         5 YEARS
                                           -----------------------------------------------------------------------------
<S>                                              <C>             <C>             <C>            <C>             <C>
Long-Term Debt Obligations:
   Senior Notes (1)                              $ 255.0         $     -         $    -         $ 255.0         $     -
   Mortgage Loan (2)                                15.1             0.2            0.4             0.5            14.0
   Credit Line (3)                                     -               -              -               -               -
Estimated interest expense
   on long-term debt (11%)                         132.7            29.3           87.8             2.4            13.2
Letters of Credit (4)                                2.1             2.1              -               -               -
Guaranteed Indebtedness (5)                          7.8             1.0            2.4             2.6             1.8
Capital Lease Obligations                              -               -              -               -               -
Operating Leases (6)                               291.4            52.7           92.5            64.5            81.7
Purchase obligations (7)                             1.7             1.7              -               -               -
                                           -----------------------------------------------------------------------------
   Total                                         $ 705.8          $ 87.0        $ 183.1         $ 325.0         $ 110.7
                                           =============================================================================
</TABLE>


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

(1)      There are no  principal  repayment  obligations  under the senior notes
         until  September  2009,  when  the  entire  principal  balance  becomes
         payable.



                                     - 34 -
<PAGE>

(2)      Payable  in monthly  installments  of  principal  and  interest  of $.1
         million  until  2019  when  the  remaining  principal  balance  becomes
         payable.  Table includes only the principal  portion of the installment
         payments.
(3)      Our line of credit enables us to borrow,  subject to bank approval,  up
         to $10 million,  less outstanding  letters of credit through July 2008.
         There are  currently no  borrowings  outstanding  under the new line of
         credit.  The $2.1  million of letters of credit  reflected in the table
         above  reduces our borrowing  availability  under the line of credit to
         $7.9 million.
(4)      Represents our maximum  reimbursement  obligations to the issuer of the
         letters of credit in the event the  letters  of credit are drawn  upon.
         The letters of credit  generally  are issued  instead of cash  security
         deposits under operating leases or to guarantee  construction costs for
         Sbarro or other concept locations.  Of the outstanding  standby letters
         of  credit,  approximately  $50,000  is for  locations  that  have been
         subleased to the buyers of two of our other concept locations.  All the
         standby  letters of credit  supporting  leases are  annually  renewable
         through the expiration of the related lease terms. If not renewed,  the
         beneficiary  may  draw  upon  the  letters  of  credit  as  long as the
         underlying obligation remains outstanding.
(5)      Represents our maximum reimbursement obligations relating to guarantees
         of  our  nonconsolidated   subsidiaries'  debt  and  letter  of  credit
         obligations.   Although   we  do  not  expect  to  have  to  pay  these
         obligations, the amount disclosed represents the full exposure.
(6)      Represents  base rent under operating  leases  including those which we
         either  sublease to, or guarantee the  obligations  of,  franchisees or
         certain of our other concepts.  Excludes real estate taxes,  utilities,
         insurance,  common area charges and other  expenses  that are not fixed
         and  contingent  rent  obligations  which  vary  with the  level of net
         restaurant  sales.  Also excludes leases that are under  month-to-month
         tenancies.
(7)      Represents  commitments  for capital  expenditures,  including  for the
         construction of restaurants for which we are  contractually  committed.
         Excludes potential purchases under our contractual arrangement with our
         national independent  wholesale  distributor that commenced in February
         2003 and that  requires  us,  until  January  2008,  subject to various
         causes  for  termination,   to  purchase  95%  of  most  all  our  food
         ingredients  and related  restaurant  supplies from them. The agreement
         does not, however, require us to purchase any specific fixed or minimum
         quantities.  Among the factors  that will  affect the dollar  amount of
         purchases we make under the agreement are:

             o    number  of  Sbarro  locations  open  during  the  term  of the
                  contract;

             o    level of sales made at Sbarro locations;

             o    market price of mozzarella cheese and other commodity items;

             o    price of diesel fuel; and

             o    mix of products sold by Sbarro locations.

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





                                     - 35 -
<PAGE>




SOURCES AND USES OF CASH

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

                                                          YEAR ENDED
                                               2005                       2004
                                               ----                       ----
                                                         (In millions)

Liquidity at year end
---------------------
Cash and cash equivalents                    $73.1                       $63.0
Working capital                              $40.7                       $32.6

Net cash flows for each year
----------------------------
Provided by operating activities            $ 21.6                       $15.8
Used in investing activities                $(10.8)                      $(8.9)
Used in financing activities                   (.7)                        (.3)
                                            -------                      ------
Net increase in cash                        $ 10.1                       $ 6.6
                                            =======                      ======


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

Net cash provided by operating  activities was $21.6 million in 2005 compared to
$15.8 million in 2004 year. This $5.8 million  increase was primarily due to the
improvements  in net income of $5.7 million  offset,  in part, by a $1.3 million
lower charge for asset  impairment,  restaurant  closings/  remodels and loss on
sale of other concept restaurants.

Net cash used in  investing  activities  has  historically  been  primarily  for
capital  expenditures.  Net cash used in investing activities increased to $10.8
million in 2005 from $8.9 million in 2004.  Capital  expenditures  were utilized
for our new Point Of Sales Computer System, QSR restaurant openings,  renovation
activity and for expenditures for our other concept locations.

Net cash used in  financing  activities  increased  $.4 million  primarily  as a
result of mortgage principal repayments offset by a loan to an affiliate.

SENIOR NOTES AND MORTGAGE LOANS

As part of our going  private  transaction,  we sold $255  million of 11% senior
notes (at a price of 98.514% of par to yield 11.25% per annum), the net proceeds
of which, together with substantially all of our then existing cash, was used to
finance the  transaction.  The indenture under which our senior notes are issued
does not  require us to make,  except  under  certain  circumstances,  principal
payments until September 2009,  when the outstanding  principal  balance is due.
The indenture  contains various covenants that limit our ability to borrow funds
to make "restricted payments" including,  among other things,  dividend payments
(other than as distributions pursuant to the tax payment agreement), and to make
investments  in,  among other  things,  unrestricted  subsidiaries.  Among other
covenants,  the indenture requires that, in order for us to borrow (except under
specifically  permitted  arrangements) our consolidated  interest coverage ratio
(as defined in the




                                     - 36 -
<PAGE>

Indenture), after giving pro forma effect to the interest on the new borrowings,
for the four  most  recently  ended  quarters  must be at least  2.5 to 1. As of
January 1, 2006, that ratio was 1.6 to 1. As a result, we are not presently able
to borrow funds except for the specifically permitted  indebtedness,  such as up
to $75 million of revolving credit loans. In order to make restricted  payments,
that  ratio  must be at least 2 to 1,  after  giving  pro  forma  effect  to the
restricted  payment and, in any event, is limited in dollar amount pursuant to a
formula contained in the indenture. We refer to the amount that is available for
us to make dividends and other  restricted  payments as the "restricted  payment
availability."  We  cannot  make  restricted  payments  until  we  increase  the
restricted payment  availability by approximately $26 million,  and then only to
the extent of any excess over that amount.  We are taxed under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly,  substantially all taxes
on our  income  are  paid  by our  shareholders.  Therefore,  regardless  of the
restricted payment availability,  the indenture permits us to make distributions
to our  shareholders  under a formula that is designed to approximate the income
taxes,  including  estimated taxes, that would be payable by our shareholders if
their only  income  were their  pro-rata  share of our  taxable  income and such
income were taxed at the highest  applicable federal and New York State marginal
income tax rates.

In March 2000, one of our restricted  subsidiaries  obtained a $16 million, 8.4%
loan due in 2010, secured by a mortgage on our corporate  headquarters building.
The loan is payable in monthly  installments  of  principal  and interest of $.1
million.  The  outstanding  principal  balance  as of  January 1, 2006 was $15.1
million.  The  mortgage  agreement  contains  various  covenants,   including  a
requirement that the subsidiary maintain a minimum ratio of EBITDA to annual and
quarterly debt service of at least 1.2 to 1.0.

As of January 1, 2006, we were in compliance with all covenants in the indenture
for the senior notes and our  subsidiary  was in  compliance  with the covenants
contained in its mortgage.

OFF-BALANCE SHEET ARRANGEMENTS

We are a party to various  financial  guarantees  to a bank for two of our other
concepts.  We are jointly and  severally  liable,  along with our joint  venture
partner,  for a loan  owed our  quick  service  Mexican-style  restaurant  joint
venture by one of the other concepts.  Our liabilities under the line of credit,
mortgage  loan and $.1  million of letters of credit to the second  concept  are
limited to our minority ownership percentage. The remaining letter of credit for
our steakhouse joint venture of $.6 million is jointly and severally  guaranteed
by  each of the  partners  in the  joint  venture.  To  varying  degrees,  these
guarantees  involve  elements of performance and credit risk. The possibility of
our  having  to  honor  our  contingencies  is  largely  dependent  upon  future
operations  of the other  concepts.  We record a liability  if events occur that
make payment under the guarantees  probable.  No events occurred in 2005 or 2004
which would make payments under the guarantees probable.





                                     - 37 -
<PAGE>


The  details of our  guarantees  as of  January  1, 2006 and their  terms are as
follows:


         Type of guaranteed obligation             Amount (1)      Term
         -----------------------------             ----------      ----

              Term loan                         $5.8 million       July 2012
              Loan                               1.0 million       November 2007
              Letters of credit                   .7 million       July 2012
              Mortgage loan                       .3 million       August 2019
---------
(1)      Represents our current maximum  exposure under existing  borrowings and
         letters of credit.  In 2003, the loan  expiration date for all new term
         loans was extended from December 31, 2008 to December 31, 2010.

Our obligation under the bank loan to our quick service Mexican-style restaurant
joint venture is joint and several with our partner's guarantee and is therefore
up to 100% of the outstanding  amount of the loan. Our guarantee was established
at the inception of the borrowing by the venture to  facilitate  its  borrowings
and is required to be in place until the loan is repaid.  As of January 1, 2006,
the amount subject to our loan guarantee for this joint venture was $1 million.

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

RELATED PARTY TRANSACTIONS

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

On April 5,  2001,  we loaned  $3.2  million  to  certain  of our  shareholders,
including:  Mario Sbarro, $1.1 million,  Joseph Sbarro, $1.2 million and Anthony
Sbarro,  $.9 million.  The due dates of the related  notes have been extended to
April 6, 2007.  The notes bear interest at the rate of 4.63% per annum,  payable
annually. As of January 1, 2006, the balance of these loans was $2.9 million and
are classified as long term.

On December 28, 2001,  we loaned $2.8  million to our  shareholders,  including:
Mario Sbarro,  $0.6 million,  Joseph Sbarro,  $.7 million,  Anthony Sbarro,  $.5
million,  and the Trust of  Carmela  Sbarro,  $1  million.  The due dates of the
related notes have been  extended to December 28, 2007.  The notes bear interest
at the rate of 2.48% per annum,  payable  annually.  As of January 1, 2006,  the
balance of these loans was $2.6 million.




                                     - 38 -
<PAGE>

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

In June 2003, Anna Missano,  the daughter of Joseph Sbarro,  issued to us a note
for  approximately  $90,000 for royalties due us for 2001 and 2000.  The note is
repayable at  approximately  $10,000 per year,  including  interest at 2.96% per
annum, with a balloon payment due on June 30, 2010. The principal balance of the
notes at January 1, 2006 was approximately $71,000.

The interest rates charged on the foregoing  related party loans approximate the
Applicable  Federal Rate (AFR) published by the Internal  Revenue Service at the
time  of  the  loan.  We  recorded  interest  income  from  related  parties  of
approximately   $227,000,   $211,000  and  $223,000  in  2005,  2004  and  2003,
respectively.

Bernard  Zimmerman & Company,  Inc., of which Bernard  Zimmerman,  a director of
Sbarro,  is  President  and  a  majority  shareholder,   renders  financial  and
consulting  assistance  to us,  for  which  it  received  fees of  approximately
$32,000,  $26,000,  $300,000 for services  rendered during 2005,  2004, and 2003
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  $430,000,  $480,000  and  $340,000  in 2005,  2004 and  2003,
respectively.

Companies  owned by a son of Anthony Sbarro are parties to franchise  agreements
with us containing terms similar to those in agreements  entered into by us with
unrelated  franchises.  Royalties  under these  agreements in 2004 and 2003 were
approximately $89,000 and $90,000 respectively. There were no royalties recorded
in 2005.

As of July 2002, we sold the assets of a restaurant  to a  corporation  owned by
the  brother-in-law  of Mario Sbarro for $88,900.  That corporation also entered
into a franchise agreement with us. We received promissory notes for each of the
purchase price and initial  franchise fee that were payable over seven years and
bore interest on the unpaid  principal  balances at 7% per annum. In addition in
2002, we subleased this location to that franchisee. Payments under the sublease
were being made directly to the landlord by the  franchisee.  Interest  payments
received relating to the promissory notes was  approximately  $4,000 in 2003. No
interest  payments  were  received in 2005 and 2004.  Royalties  paid under this
arrangement were approximately $1,800 and $3,300 in 2004 and 2003, respectively.
No royalty payments were made in 2005. In March 2005, we re-purchased the assets
of this restaurant for $88,900.  The remaining unpaid  principal  balance of the
promissory  notes were offset against the purchase price of the assets.  No gain
or loss on the sale was recorded.

In 2002, a company in which Gennaro J. Sbarro, then our Corporate Vice President
and  President  of our Casual  and Fine  Dining  Division  and the son of Joseph
Sbarro,  has a 50%  interest  (the other 50% is owned by an  unaffiliated  third
party)  subleased a restaurant  from us to operate a non-Sbarro  restaurant  for
$50,000  greater than rent or other charges due under the lease.  Rent and other
charges  due  under  the lease are paid  directly  to the  landlord.  Additional
payments  under the  sublease are due to us. Rent of  approximately  $25,000 and
$23,000 was included in the 2005 and 2004 results of  operations,  respectively.
To reimburse us for equipment costs,  the company owned by Mr. Sbarro,  issued a
$55,000  non-interest  bearing  note that was repaid in eighteen  equal  monthly
installments of




                                     - 39 -
<PAGE>

approximately  $3,000  commencing in November  2002. As of October 31, 2003, Mr.
Sbarro resigned from his positions with us and a corporation owned by Mr. Sbarro
entered into an eighteen month agreement with us to provide consulting  services
to our quick service and casual dining  division for  approximately  $23,000 per
month and the  reimbursement  for customary and usual expenses  incurred by that
corporation in the performance of its services.

In  October  2003,  we sold the  assets  of three  underperforming  Sbarro-owned
restaurants  that we proposed to close to entities  owned  separately by each of
three other of Anthony  Sbarro's  sons,  each of which  entered into a franchise
agreement with us. Two of the locations, which had no remaining book value, were
transferred for no  consideration  while the third was sold for $.3 million that
was paid in full, and resulted in a gain to Sbarro of approximately $.1 million.
In  connection  with  the  sale  of  the  locations,  the  employment  of  these
individuals  with Sbarro was terminated and we included a charge for their total
severance pay of  approximately  $60,000 in our results of operations  for 2003.
The franchise  agreements  provide for the payment of 5% of the location's sales
as a continuing franchise fee but did not provide for any initial franchise fee.
We have waived continuing franchise fees through 2006. In addition, we subleased
two of the locations to two of the franchisees. Payments under the subleases are
being made directly to the landlord by the franchisees.

In January 2004, one of Mario Sbarro's daughters,  resigned from her position as
Manager of  Administration  - Construction.  A corporation  owned by her entered
into a one year agreement to provide consulting services related to construction
matters to us for a series of monthly payments totaling  $100,000.  In addition,
that corporation  provided consulting  services related to construction  matters
for our steakhouse joint venture of  approximately  $126,000 and $19,000 in 2005
and 2004, respectively.

In February  2005,  a joint  venture in which we have a 70%  interest,  sold the
assets of one of its  restaurants  to a company owned by Gennaro A. Sbarro,  our
then  Corporate Vice  President and President of our  Franchising  and Licensing
Division  and  the  son of  Mario  Sbarro,  for  approximately  $900,000  (which
approximated  fair value)  resulting in a loss of  approximately  $284,000.  The
Company received $300,000 in cash and promissory notes of aggregating  $600,000.
The promissory  notes are payable  monthly in 72 equal monthly  installments  of
$8,333 including  interest at 5% per annum with a balloon payment of $111,375 at
maturity.  The joint  venture  also sold the  inventory  of the  restaurant  for
approximately  $67,000. The company owned by Mr. Sbarro entered into a sublease,
and a Security  Agreement to secure the obligations  under the promissory notes.
The sublease and Security  Agreement  are intended to enable Sbarro to recapture
the  business  in the event of an  uncured  default.  As of  January 1, 2006 the
balance of the promissory note was $546,000.

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

         o Mario  Sbarro  was our  Chairman  of the  Board  in 2005 and 2004 and
         Chairman of the Board,  President and Chief Executive  Officer in 2003.
         His compensation was approximately  $926,000,  $884,000 and $700,000 in
         2005, 2004 and 2003, respectively.

         o Anthony  Sbarro was our Vice  Chairman of the Board and  Treasurer in
         2005,  2004 and 2003.  His  compensation  was  approximately  $634,000,
         $582,000 and $400,000 in 2005, 2004 and 2003, respectively.




                                     - 40 -
<PAGE>

         o Joseph Sbarro was our Senior  Executive  Vice President and Secretary
         in 2005, 2004 and 2003. His  compensation was  approximately  $637,000,
         $585,000 and $400,000 in 2005, 2004 and 2003 respectively.

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

         o Carmela Sbarro,  the mother of Mario,  Anthony and Joseph Sbarro, who
         was a  co-founder  of Sbarro and serves as a Vice  President,  received
         $100,000 from us for services rendered in 2005, 2004 and 2003.

         o Other members of the immediate families of Mario, Anthony, Joseph and
         Carmela  Sbarro  who are  our  employees  were  paid  an  aggregate  of
         approximately  $517,000,  $860,000 and $1,344,000 during 2005, 2004 and
         2003, respectively.

In 2005 the members LLC's received their  proportioned  share of a dividend from
Boulder Creek Steakhouse. Our share of the distribution was $.6 million. In 2005
Boulder Creek Steakhouse entered into a subordinate  interest bearing (at prime)
note  payable  with its  partners.  The  amounts  loaned by each  partner was in
proportion to their  respective  equity position in Boulder Creek. The loans may
be repaid  after  the  second  quarter  of fiscal  year  2006 if  Boulder  Creek
Steakhouse is in compliance with the covenants  before and after such repayment.
Our  share of this  note is $.6  million,  and is  included  in other  assets at
January 1, 2006.


RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 123R:

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

FASB STAFF POSITION ("FSP"):

Effective  October 6, 2005, the FASB issued FASB FSP FAS 13-1,  "Accounting  for
Rental Costs Incurred during a Construction  Period." The FASB concluded in this
FSP that rental costs  associated with ground or building  operating leases that
are incurred during a construction  period be expensed.  FASB Technical Bulletin
(FTB) No. 88-1, "Issues Relating to Accounting for Leases," requires that rental
costs  associated  with ground or building  operating  leases be  allocated on a
straight-line  basis in accordance  with FASB  Statement No. 13,  Accounting for
Leases,  and FTB 85-3,  Accounting  for  Operating  Leases with  Scheduled  Rent
Increases,  starting  with the  beginning of the lease term.  The FASB  believes
there is no  distinction  between  the right to use a leased  asset  during  the
construction  period  and the right to use that  asset  after  the  construction
period.  As  concluded,  companies  are  required to apply the  guidance for new
leases  entered  into from this point on. We had a policy of




                                     - 41 -
<PAGE>

capitalizing rent during the construction  period and as of the adoption of this
FSP have changed that policy for future leases. Our current policy is to expense
rent during the  construction  period.  This  statement  is  effective as of the
beginning  of the first  reporting  period after  December  15, 2005.  We do not
believe  that the  adoption  of this  FSP will  have a  material  effect  on our
consolidated financial statements.

SFAS 154:

In May 2005, FASB issued SFAS No. 154 "Accounting Changes and Error Corrections"
a replacement  of APB Opinion No. 20 and FASB  Statement  No. 3. This  statement
changes  the  requirements  for the  accounting  and  reporting  of a change  in
accounting  principle  and  applies  to  all  voluntary  changes  in  accounting
principles.  It also applies to changes required by an accounting  pronouncement
in  the  usual  instance  that  the  pronouncement  does  not  include  specific
transition  provisions.  This statement  requires  retrospective  application to
prior periods' financial statements of changes in accounting  principle,  unless
it is  impracticable  to  determine  either the  period-specific  effects or the
cumulative  effect of the change.  When it is  impracticable  to  determine  the
period-specific  effects of an accounting change on one or more individual prior
periods presented,  this Statement requires that the new accounting principle be
applied to the  balances of assets and  liabilities  as of the  beginning of the
earliest  period for which  retrospective  application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings for
that  period  rather  than being  reported  in an income  statement.  When it is
impracticable  to  determine  the  cumulative  effect  of  applying  a change in
accounting principle to all prior periods,  this Statement requires that the new
accounting  principle  be applied as if it were adopted  prospectively  from the
earliest date  practicable.  We do not anticipate  that SFAS No. 154 will have a
material impact on our financial position or results of operations. SFAS No. 154
is effective for fiscal years beginning after December 15, 2005.


CRITICAL ACCOUNTING POLICIES AND JUDGMENTS

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

SFAS No. 5, "Accounting for Contingencies."  Pursuant to SFAS No. 5, in the past
we have  made,  and we intend in the  future to make,  decisions  regarding  the
accounting  for legal  matters  based on the  status of the  matter and our best
estimate of the outcome (we expense  defense costs as  incurred).  This requires
management to make judgments  regarding the probability and estimated  amount of
possible future contingent liabilities,  especially, in our case, legal matters.
However,  especially if a matter goes to a jury trial, our estimate could be off
since our  estimates  are based,  in large part,  on our  experience in settling
matters.  In our  judgment,  we believe that our reserve of  approximately  $1.4
million for outstanding legal actions is adequate.




                                     - 42 -
<PAGE>

SFAS No.  142,  "Goodwill  and Other  Intangible  Assets,"  requires  us to test
annually  and  periodically  assess  whether  there  has been an  impairment  of
goodwill and indefinite lived intangible  assets acquired prior to July 1, 2001.
As discussed under "Results of Operations"  above,  based on the discounted cash
flow method and the guideline  company valuation methods used in determining the
fair value of our goodwill under our two reporting units and the discounted cash
flow  and  company  guideline  methods  in  determining  the  fair  value of our
trademark,  it was concluded  that there was no impairment in the carrying value
of these assets as of January 1, 2006.  However,  future  estimates could change
and cause us to take an impairment charge with respect to those assets. Further,
after taking such a charge,  should  future  estimates  determine  that the fair
value has risen,  SFAS No. 142 does not allow us to  increase  the then  current
value.

SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 requires judgments  regarding future operating or disposition plans
for marginally  performing  assets.  The application of this policy has affected
the amount and timing of charges to operating results that have been significant
in recent years ($.3  million,  $1.1 million and $4.1 million in 2005,  2004 and
2003,  respectively).  We evaluate our long-lived assets for impairment by asset
group,  where  appropriate  or on an  individual  restaurant  level on an annual
basis, or whenever events and circumstances indicate that the carrying amount of
a restaurant may not be recoverable,  including our business judgment of when to
close underperforming  units. Certain assets at restaurants where we have leases
with common mall  landlord/owner  relations,  are evaluated as an asset group as
cash flows from these  assets are not  individually  independent  enabling us to
better estimate projected cash flows in a manner more consistent with the way we
view our mall relationships.  These impairment evaluations require an estimation
of cash flows over the remaining life of the related  restaurant lease, which is
generally  up to 10 years.  Our  estimates  are based on cash flows from  recent
operations of the asset group or restaurants unless specific circumstances about
the  location  warrant,  do not include  unsupportable  sales  growth and margin
improvement  assumptions.  Should  the  carrying  amount  not  be  deemed  to be
recoverable,  we write the assets down to their fair value. After the impairment
has been  identified and the related asset written down, in accordance with SFAS
No. 144, the effect cannot be reversed. As a result, the result of evaluation is
not subject to future review and change.

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

FIN No. 45, "Guarantor's  Accounting and Disclosure Requirements for Guarantees,
Including  Indirect  Guarantees of  Indebtedness  of Others,"  elaborates on the
disclosures to be made by a guarantor in its financial statements concerning its
obligations under certain  guarantees that it has issued. It also clarifies (for
guarantees  issued or  modified  after  January 1, 2003),  that a  guarantor  is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligations undertaken in issuing the guarantee. We have guarantees
that  would  require   recognition  upon  issuance  or  modification  under  the
provisions  of FIN No. 45. The nature of our business  will likely result in the
issuance of certain  guarantees  in the future and, as such, we will be required
to evaluate the fair value of the obligation at the inception of such guarantee.
We recognized a liability under FIN No. 45 of approximately  $65,000 in 2005 and
$120,000 in 2004. No charge was incurred in




                                     - 43 -
<PAGE>

2003.  The amount we may be required to  recognize in future years may be higher
than this amount depending on the number and magnitude of guarantees we issue.

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

SFAS 13, "Accounting for Leases" establishes  standards of financial  accounting
for leases.  Certain of the Company's  operating  leases  contain  predetermined
fixed  escalations of the minimum rentals during the original term of the lease.
For these  leases,  the  Company  recognizes  the  related  rental  expense on a
straight-line  basis  over the life of the  lease  and  records  the  difference
between the amounts charged to operations and amounts paid as deferred rent. Any
lease  incentives  received by the Company are deferred  over the same period as
the lease and amortized over a straight-line basis over the life of the lease as
a reduction of rent expense.  We calculate deferred rent based on the lease term
from when we obtain  access or control  over the leased  property.  Rent expense
accrued during the  construction  period was  capitalized as part of the cost of
leasehold  improvements  until October 2005. As a result of FASB Staff  Position
FAS 13-1, "Accounting for Rental Costs Incurred during a Construction Period" we
now expense rent during the construction  phase. The length of time from when we
take  possession  of property for our QSR  restaurants  and when our  restaurant
opens is normally 90 days as compared to our normal lease terms of ten years. In
2005 we noted an error in our  straight-line  rent calculation and recorded $1.2
million to correct this error.  The  correction  was to reduce the deferred rent
balance and adjust to opening retained earnings. The effect was not individually
material to any year presented and did not warrant a restatement in those years.








                                     - 44 -
<PAGE>



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

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

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

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

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






                                     - 45 -
<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Report of Independent Registered Public Accounting Firm                      47


Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005        48


Consolidated Statements of Operations for the years                          50
ended January 1, 2006, January 2, 2005 and December 28, 2003


Consolidated  Statements of Shareholders'  Equity (as restated)              51
for the years ended January 1, 2006, January 2, 2005 and
December 28, 2003


Consolidated Statements of Cash Flows for  the years                         52
ended January 1, 2006, January 2, 2005 and December 28, 2003


Notes to Consolidated Financial Statements                                   54







                                     - 46 -
<PAGE>


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


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



We have audited the accompanying consolidated balance sheets of Sbarro, Inc. and
subsidiaries  as of  January  1,  2006 and  January  2,  2005,  and the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
the years ended  January 1, 2006,  January 2, 2005 and December 28, 2003.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Sbarro,  Inc. and
subsidiaries  at January 1, 2006,  January 2, 2005 and December 28, 2003 and the
results of their  operations and their cash flows for the years ended January 1,
2006,  January 2, 2005 and  December  28,  2003 in  conformity  with  accounting
principles generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, the Company has
restated its financial statements to reflect a correction of an error related to
the  calculation of deferred rent in prior years.  The impact of this adjustment
is to deferred rent and retained  earnings as of the beginning of the year ended
December 28, 2003.

/s/ BDO Seidman, LLP

Melville, New York
March 31, 2006





                                     - 47 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                          January 1, 2006              January 2, 2005
                                                                          ---------------              ---------------
                                                                                         (In thousands)

Current assets:
<S>                                                                          <C>                           <C>
   Cash and cash equivalents                                              $    73,089                  $     63,000
   Receivables, net of allowance for doubtful accounts
      of $323 in 2005 and $431 in 2004:
          Franchise                                                             1,865                         1,846
          Other                                                                 3,644                         1,680
                                                                          -----------                  ------------
                                                                                5,509                         3,526

    Inventories                                                                 2,890                         2,809
    Prepaid expenses                                                            3,209                         3,877
    Current portion of loans receivable from shareholders                          -                             46
                                                                          -----------                  ------------
       Total current assets                                                    84,697                        73,258


Property and equipment, net                                                    81,510                        88,465


Intangible assets:
     Trademarks                                                               195,916                       195,916
     Goodwill                                                                   9,204                         9,204
     Deferred financing costs, net                                              3,577                         4,521

     Loans receivable from shareholders, less current portion                   5,593                         5,602

Other assets                                                                    8,041                         7,647
                                                                          -----------                  ------------
                                                                          $   388,538                  $    384,613
                                                                          ===========                  ============
</TABLE>


                 See notes to consolidated financial statements.




                                     - 48 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                      January 1, 2006                 January 2, 2005
                                                                      ---------------                 ---------------
                                                                             (In thousands except share data)

Current liabilities:
<S>                                                                         <C>                               <C>
   Accounts payable                                                         $11,438                           $11,593
   Accrued expenses                                                          24,183                            20,748
   Accrued interest payable                                                   8,181                             8,181
   Current portion of mortgage payable                                          198                               182
                                                                      -------------                    --------------
       Total current liabilities                                             44,000                            40,704


Deferred rent                                                                 8,110                             9,013

Long-term debt, net of original issue discount                              268,530                           268,349

Commitments and contingencies

Shareholders' equity:
   Preferred stock, $1 par value;
     authorized 1,000,000 shares;
     none issued                                                                  -                                 -
   Common stock, $.01 par value;
     authorized 40,000,000 shares;
     issued and outstanding 7,064,328 shares
     at January 1, 2006 and January 2, 2005                                      71                                71
Additional paid-in capital                                                       10                                10
Retained earnings                                                            67,817                            66,466
                                                                      -------------                    --------------
                                                                             67,898                            66,547
                                                                      -------------                    --------------
                                                                           $388,538                         $ 384,613
                                                                      =============                    ==============
</TABLE>

                 See notes to consolidated financial statements.






                                     - 49 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                For the Fiscal Years Ended
                                                                --------------------------
                                                    Jan. 1, 2006     Jan. 2, 2005    Dec. 28, 2003
                                                    ------------     ------------    -------------
                                                                      (In thousands)
Revenues:
<S>                                                     <C>             <C>                <C>
   Restaurant sales                                 $    329,187     $   331,313      $     314,708
   Franchise related income                               12,410          12,093             10,868
   Real estate and other                                   7,097           5,488              6,748
                                                    ------------     -----------      -------------
   Total revenues                                        348,694         348,894            332,324
                                                    ------------     -----------      -------------

Costs and expenses:
   Cost of food and paper products                        66,519          72,073             67,446
   Payroll and other employee benefits                    89,351          90,857             89,614
   Other operating costs                                 115,209         114,571            110,494
   Depreciation and amortization                          16,635          16,400             19,712
   General and administrative                             27,438          28,576             25,451
   Asset impairment, restaurant closings and
     loss on sale of other concept restaurant                859           2,202              6,073
                                                    ------------     -----------      -------------
   Total costs and expenses                              316,011         324,679            318,790
                                                    ------------     -----------      -------------

Operating income                                          32,683          24,215             13,534
                                                    ------------     -----------      -------------

Other (expense) income:
   Interest expense                                      (30,680)        (30,694)           (31,039)
   Interest income                                         1,277             654                694
   Equity in net income (loss) of unconsolidated                             855                425
       affiliates                                           (236)
   Other Income                                                -           1,181                  -
                                                    ------------     -----------      -------------
          Net other expense                              (29,639)        (28,004)           (29,920)
                                                    ------------     -----------      -------------

Income (loss) before income taxes                          3,044          (3,789)           (16,386)

Income taxes                                               1,693             534                844
                                                    ------------     -----------      -------------

Net income (loss)                                   $      1,351     $    (4,323)     $     (17,230)
                                                    ============     ===========      =============
</TABLE>


                 See notes to consolidated financial statements.






                                     - 50 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                  (AS RESTATED)


<TABLE>
<CAPTION>
                                           Common Stock
                                           ------------
                                                                     Additional
                                      Number of                       paid-in    Retained
                                       shares        Amount           capital    earnings         Total
                                       ------        ------           -------    --------         -----
                                                     (In thousands, except share data)

<S>                                   <C>               <C>            <C>      <C>          <C>
Balance at December 29, 2002
  as previously reported              7,064,328         $71            $10      $  88,588      $  88,669

Correction of error in
deferred rent liability                       -           -              -          1,213          1,213
                                      ---------     -------      ---------      ---------      ---------
Balance at December 29, 2002
   as restated                        7,064,328          71             10         89,801         89,882


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

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

Balance at December 28, 2003          7,064,328          71             10         70,789         70,870

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


Balance at January 2, 2005            7,064,328          71             10         66,466         66,547

Net income                                    -           -              -          1,351          1,351
                                      ---------     -------      ---------      ---------      ---------


Balance at January 1, 2006            7,064,328     $    71            $10      $  67,817      $  67,898
                                      =========     =======      =========      =========      =========


</TABLE>








                 See notes to consolidated financial statements.



                                     - 51 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                              January 1, 2006     January 2, 2005    December 28, 2003
                                                              ---------------     ---------------    -----------------

                                                                                  (In thousands)

<S>                                                                 <C>                <C>               <C>
OPERATING ACTIVITIES:
---------------------
Net income (loss)                                                   $1,351             ($4,323)          ($17,230)
 Adjustments to reconcile net  income (loss) to net cash
   (used in) provided by operating activities:
     Depreciation and amortization                                  16,635              16,400             19,712
     Amortization of deferred financing costs                          962                 962              1,148
     Amortization of bond discount                                     379                 379                379
     Allowance for doubtful accounts receivable                         14                 222                435
     (Decrease)/increase in deferred rent, net
        of tenant allowance                                           (452)                273                242
     Asset impairment, restaurant closings/remodel and loss on
        sale of  other concept restaurant                              859               2,202              6,073
     Equity in net loss (income) of unconsolidated affiliates          236                (855)              (384)
     Other                                                               -                 155                 44

 Changes in operating assets and liabilities:
     Decrease (increase) in receivables                             (1,997)               (877)               191
     Decrease (increase) in inventories                                (81)               (102)               578
     Decrease (increase) in prepaid expenses                           668                 (33)              (253)
     Decrease (increase) in other assets                              (328)                458               (366)
     Increase in accounts payable and accrued expenses               3,335                 955                465
                                                                 ---------           ---------          ---------
Net cash provided by operating activities                           21,581              15,816             11,034
                                                                 ---------           ---------          ---------

</TABLE>














                 See notes to consolidated financial statements



                                     - 52 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


<TABLE>
<CAPTION>
                                                              January 1, 2006     January 2, 2005    December 28, 2003
                                                              ---------------     ---------------    -----------------
                                                                                   (In thousands)
<S>                                                               <C>                  <C>                <C>
INVESTING ACTIVITIES:
---------------------
Purchase of property plant and equipment                            (11,708)             (8,906)             (8,521)
Proceeds from sale of joint venture property & equipment                300                   -                   -
Dividend received from unconsolidated affiliates                        603                   -                   -
                                                                   --------            --------            --------
Net cash used in investing activities                               (10,805)             (8,906)             (8,521)
                                                                   --------            --------            --------

FINANCING ACTIVITIES:
---------------------
Mortgage principal repayments                                          (181)               (167)               (154)
Tax distributions                                                         -                (682)             (1,100)
Loan to affiliate                                                      (560)                  -                   -
Reduction in loans receivable from officers                              54                 509                   -
                                                                   --------            --------            --------
Net cash (used in) provided by financing activities                    (687)               (340)             (1,254)
                                                                   --------            --------            --------

Increase in cash and cash equivalents                                10,089               6,570               1,259

Cash and cash equivalents at beginning of year                       63,000              56,430              55,171
                                                                   --------            --------            --------

Cash and cash equivalents at end of year                           $ 73,089            $ 63,000            $ 56,430
                                                                   ========            ========            ========


Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes                       $    954            $    417            $    388
                                                                   ========            ========            ========
Cash paid during the period for interest                           $ 29,331            $ 29,352            $ 29,400
                                                                   ========            ========            ========
</TABLE>









                                     - 53 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         BASIS OF FINANCIAL STATEMENT PRESENTATION:

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

         BUSINESS SEGMENTS:

         We operate two reportable  business segments.  One segment is comprised
         of the operating  activities of the company owned QSR  restaurants  and
         other  concept  restaurants  (owned  and  joint  ventures).  The  other
         segment,   the  Franchise   Operated   Restaurants   offers   franchise
         opportunities  worldwide  for qualified  operators to conduct  business
         under the Sbarro name.

         ESTIMATES:

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

         CASH EQUIVALENTS:

         Cash equivalents  represent funds invested  overnight and highly liquid
         money  market  accounts  with a maturity of three months or less at the
         time of purchase. Cash equivalents at the end of 2005 and 2004 were $54
         million  and $51  million,  respectively.  We have  restricted  cash of
         $21,000 which is included in cash in 2005 and 2004.

         INVENTORIES:

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

         PROPERTY AND EQUIPMENT:

         Property  and  equipment  is stated at cost.  Depreciation  is provided
         using a half year convention  method for the year of purchase and using
         the straight-line method over the estimated useful lives for furniture,
         fixtures and equipment - three to ten years; and leasehold improvements
         - the lesser of the useful lives of the assets or lease terms.






                                     - 54 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         TRADEMARKS AND GOODWILL:

         Intangible  assets consist of our  trademarks  and goodwill.  Trademark
         values,  as well as  goodwill,  were  determined  based on a fair value
         allocation  of the purchase  price from our going  private  transaction
         (see Note 2) and were deemed to be indefinite lived intangible  assets.
         At the  beginning of 2005 it was  determined  that we had two reporting
         units.  One reporting unit is comprised of the operating  activities of
         the company owned QSR restaurants and other concept  restaurants (owned
         and joint ventures).  The other reporting unit, the Franchise  Operated
         Restaurants  offers  franchise  opportunities  worldwide  for qualified
         operators to conduct  business  under the Sbarro name. The goodwill was
         allocated to each of these two  reporting  units based on fair value of
         the reporting units as of the beginning of the year.

         There were no  changes  in the  carrying  amount of the  trademarks  or
         goodwill  for the years ended  January 1, 2006 and January 2, 2005.  We
         test for impairment annually or earlier if impairment indicators exist.
         We follow a two-step  process for impairment  testing of goodwill.  The
         first step of this test, used to identify impairment, compares the fair
         value of a  reporting  unit,  including  goodwill,  with  its  carrying
         amount.  The  second  step (if  necessary)  measures  the amount of the
         impairment.  In 2004 we had one  reporting  unit that was valued and in
         2005  consistent  methodology  was applied and the two reporting  units
         were individually valued. Our annual impairment test indicated that the
         fair  value of each  reporting  unit  exceeded  each  reporting  unit's
         carrying  amount.   Accordingly,   the  second  step  of  the  goodwill
         impairment test was not necessary.  We performed a separate  impairment
         test on our trademarks  based on the  discounted  cash flows method and
         company guideline method. The fair value of the trademarks exceeded the
         carrying value.

         DEFERRED FINANCING COSTS:

         Deferred financing costs were incurred as a result of the going private
         transaction  (see  Notes 2 and 7) and  the  mortgage  on our  corporate
         headquarters  building (see Note 10). The costs are being  amortized as
         additional interest expense over the respective  remaining lives of the
         related debt instruments, which range from 1 1/2 years to 4 years.

         LONG-LIVED ASSETS:

         Long-lived  assets are evaluated for impairment  when events or changes
         in  circumstances  indicate  that the carrying  amount of the assets or
         asset groups may not be recoverable through the estimated  undiscounted
         future  cash  flows  resulting  from the use of these  assets  or asset
         groups.  Assets  are  evaluated  in  groups  where  we  have  a  strong
         relationship  with a mall  landlord/owner.  We  consider  these  assets
         collectively  when  evaluating the future cash flows of the asset group
         since the cash flows of the individual  assets within the group are not
         individually independent.  When any such impairment exists, the related
         assets will be written down to their fair value.






                                     - 55 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         PRE-OPENING COSTS:

         Pre-opening  costs  incurred  in  connection  with the  opening  of new
         restaurants  are  expensed as incurred  and are included in general and
         administrative expenses in the accompanying  consolidated statements of
         operations.

         EXIT OR DISPOSAL ACTIVITIES:

         The liability for costs associated with an exit or disposal activity is
         recognized when a liability is incurred in accordance with Statement of
         Financial Accounting  Standards ("SFAS") No.146,  "Accounting for Costs
         Associated with Exit or Disposal  Activities",  and is measured at fair
         value.

         GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES:

         At the  inception  of a guarantee  for the  indebtedness  of others,  a
         liability for the fair value of the  obligation  undertaken is recorded
         for all these  guarantees  entered  into or modified  after  January 1,
         2003. As described in Note 11, there are certain arrangements that were
         entered  into after  January 1, 2003 with  respect  to  guarantees  for
         franchised  locations and restaurants sold to related parties. The fair
         value of these  guarantees of $65,000 has been recorded as a liability.
         While the nature of our business  will likely result in the issuance of
         certain  guarantees in the future,  we do not anticipate that they will
         have a material impact on our financial position or operating results.

         GIFT CARD LIABILITY:

         We record a liability  in the period in which a gift card is issued and
         proceeds are received.  As gift cards are redeemed,  this  liability is
         reduced and revenue is  recognized.  The gift card program is currently
         only available in our company owned segment.

         VARIABLE INTEREST ENTITIES:

         Financial  Accounting Standards Board ("FASB")  Interpretation  ("FIN")
         No. 46,  "Consolidation of Variable  Interest  Entities," was effective
         immediately  upon its issuance  during fiscal 2003 for all  enterprises
         with interests in variable  interest entities created after January 31,
         2003.  In December  2003,  FASB issued FIN No. 46 (R) which changed the
         effective  dates for the  recording of  interests in variable  interest
         entities  created  before  February  1, 2003  beginning  with the first
         interim  reporting  period ending after March 15, 2004. If an entity is
         determined to be a variable interest entity, it must be consolidated by
         the  enterprise  that  absorbs the  majority of the  entity's  expected
         losses if they occur,  or receives a majority of the entity's  expected
         residual  returns  if they  occur,  or  both.  Where  it is  reasonably
         possible that the enterprise will  consolidate or disclose  information
         about a variable  interest  entity,  the  enterprise  must disclose the
         nature,  purpose, size and activity of the variable interest entity and
         the  enterprise's   maximum  exposure  to  loss  as  a





                                     - 56 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         result of its  involvement  with the  variable  interest  entity in all
         financial  statements  issued  after  January  31,  2003.  The FASB has
         specifically  exempted  traditional  franchise  arrangements  from  the
         evaluations  required  under  FIN No.  46. We have  reviewed  our joint
         ventures,  equity investments and corporate  relationships for possible
         coverage under FIN No. 46. The application of FIN No. 46 did not have a
         material  effect on our  disclosures,  financial  position or operating
         results.  We have  several  variable  interest  entities,  for which we
         provide  disclosures.  However,  we are not the primary beneficiary and
         therefore do not need to consolidate these entities.

         ACCOUNTING FOR VENDOR REBATES:

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

         EQUITY INVESTMENTS:

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

         CONCENTRATION OF CREDIT RISK:

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

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

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





                                     - 57 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         REVENUE RECOGNITION:

         Our revenues consist of sales by company operated  restaurants and fees
         from  restaurants  operated by franchisees.  Sales by company  operated
         restaurants are recognized as earned. Fees from franchised  restaurants
         include  development  fees,  franchise  fees  and  royalties.  Fees and
         royalties are  recognized in the period  earned.  Development  fees are
         recognized  upon  opening of a  restaurant,  which is when we performed
         substantially   all  initial   services   required  by  the   franchise
         arrangement.

         FRANCHISE RELATED INCOME AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:

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

         We  monitor  the  financial  condition  of our  franchisees  and record
         provisions for estimated losses on receivables when we believe that our
         franchisees  are unable to make their required  payments.  While we use
         the  best  information  available  in  making  our  determination,  the
         ultimate recovery of recorded receivables is also dependent upon future
         economic  events and other  conditions  that may be beyond our control.
         Included in general and  administrative  expenses  are  provisions  for
         uncollectible franchise receivables of $14,000,  $222,000, and $435,000
         in 2005, 2004 and 2003, respectively.

         LEASES:

         Certain of the Company's  operating leases contain  predetermined fixed
         escalations  of the minimum  rentals  during the  original  term of the
         lease.  For these leases,  the Company  recognizes  the related  rental
         expense on a straight-line basis over the life of the lease and records
         the  difference  between the amounts  charged to operations and amounts
         paid as deferred rent. Any lease incentives received by the Company are
         deferred  over  the same  period  as the  lease  and  amortized  over a
         straight-line  basis over the life of the lease as a reduction  of rent
         expense.  We calculate  deferred rent based on the lease term from when
         we obtain access or control over the leased  property.  Until  November
         2005, we  capitalized  rent expense  incurred  during the  construction
         period  as part of the cost of  leasehold  improvements.  Due to recent
         interpretive  guidance  related to lease  accounting,  we reviewed  our
         accounting policies for leases.  Starting in the first reporting period
         after September 15, 2005, we have expensed rental costs associated with
         the  construction  period in  conjunction  with FASB Staff Position FAS
         13-1,  "Accounting  for Rental  Costs  Incurred  during a  Construction
         Period."





                                     - 58 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         INCOME TAXES:

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

         ACCOUNTING PERIOD:

         Our fiscal  year ends on the Sunday  nearest to  December  31. Our 2004
         fiscal  year  contained  53 weeks.  All  other  reported  fiscal  years
         contained 52 weeks.

         FAIR VALUE OF FINANCIAL INSTRUMENTS:

         The  carrying  amounts  of  cash,   receivables  and  accounts  payable
         approximate fair value because of the short-term nature of these items.
         Based on the current  quoted market price,  the estimated fair value of
         our senior notes at January 1, 2006 approximated the face value of $255
         million.  The carrying  amount of the mortgage loan  approximates  fair
         value  because the interest  rate this  instrument  bears is reasonably
         equivalent to the current  rates  offered for debt of a similar  nature
         and maturity.

         DEFINED CONTRIBUTION PLAN:

         We have a 401(k) Plan  ("Plan") for all qualified  employees.  The Plan
         provides for a 25% matching  employer  contribution  of up to 4% of the
         employees'   deferred  savings  (maximum   contribution  of  1%  of  an
         employee's  salary).  The employer  contributions vest over five years.
         The  employee's  deferred  savings  cannot  exceed 15% of an individual
         participant's  compensation  in any calendar year. Our  contribution to
         the Plan was $75,000,  $90,000,  and  $105,000 in 2005,  2004 and 2003,
         respectively.





                                     - 59 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         NEW ACCOUNTING PRONOUNCEMENTS:

         SFAS 123R:

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

         FASB STAFF POSITION ("FSP"):

         Effective  October  6,  2005,  the  FASB  issued  FASB  FSP  FAS  13-1,
         "Accounting  for Rental Costs Incurred  during a Construction  Period."
         The FASB concluded in this FSP that rental costs associated with ground
         or building  operating  leases that are incurred  during a construction
         period be expensed.  FASB Technical  Bulletin  (FTB) No. 88-1,  "Issues
         Relating  to  Accounting  for  Leases,"   requires  that  rental  costs
         associated with ground or building  operating  leases be allocated on a
         straight-line   basis  in  accordance   with  FASB  Statement  No.  13,
         Accounting for Leases,  and FTB 85-3,  Accounting for Operating  Leases
         with Scheduled Rent Increases, starting with the beginning of the lease
         term. The FASB believes  there is no  distinction  between the right to
         use a leased asset during the construction  period and the right to use
         that asset after the construction  period. As concluded,  companies are
         required to apply the  guidance  for new leases  entered into from this
         point on. We had a policy of capitalizing  rent during the construction
         period and as of the  adoption of this FSP have changed that policy for
         future  leases.  Our  current  policy is to  expense  rent  during  the
         construction period. This statement is effective as of the beginning of
         the first  reporting  period after December 15, 2005. We do not believe
         that the  adoption  of this  FSP will  have a  material  effect  on our
         consolidated financial statements.

         SFAS 154:

         In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
         Corrections" a replacement of APB Opinion No. 20 and FASB Statement No.
         3. This  statement  changes the  requirements  for the  accounting  and
         reporting  of a change  in  accounting  principle  and  applies  to all
         voluntary changes in accounting principles.  It also applies to changes
         required by an accounting  pronouncement in the usual instance that the
         pronouncement  does not include specific  transition  provisions.  This
         statement   requires   retrospective   application  to  prior  periods'
         financial statements of changes in accounting  principle,  unless it is
         impracticable  to determine either the  period-specific  effects or the
         cumulative effect of the change.  When it is impracticable to determine
         the  period-specific  effects  of an  accounting  change on one or more
         individual prior periods  presented,  this Statement  requires that the
         new  accounting  principle  be  applied to the





                                     - 60 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         balances of assets and  liabilities as of the beginning of the earliest
         period for which  retrospective  application is practicable  and that a
         corresponding  adjustment  be made to the  opening  balance of retained
         earnings  for that  period  rather  than  being  reported  in an income
         statement.  When it is impracticable to determine the cumulative effect
         of applying a change in accounting principle to all prior periods, this
         Statement  requires that the new accounting  principle be applied as if
         it were adopted prospectively from the earliest date practicable. We do
         not  anticipate  that SFAS No. 154 will have a  material  impact on our
         financial position or results of operations.  SFAS No. 154 is effective
         for fiscal years beginning after December 15, 2005.

         RECLASSIFICATIONS:

         Certain  items  in  the  financial   statements   presented  have  been
         reclassified to conform to the 2005 presentation.

         RESTATEMENT:

         In 2005,  we noted an error in our straight line rent  calculation  and
         recorded $1.2 million to correct this error as an adjustment to opening
         retained earnings at December 29, 2002 and a decrease to deferred rent.
         It was determined that the effect to the individual years presented was
         not material and therefore did not warrant a restatement  of the fiscal
         2003 and 2004 financial statements.

2.       GOING PRIVATE TRANSACTION:

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

         During the second quarter of 2001,  the funds  remaining for untendered
         shares that had been held by a third party paying  agent were  returned
         to us. We will hold such funds until the related shares are tendered or
         escheated to the appropriate  jurisdiction.  At January 1, 2006,  there
         was $21,000  being held by us for such  untendered  shares  included in
         cash and cash equivalents.

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

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




                                     - 61 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.       DESCRIPTION OF BUSINESS:

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

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

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

<TABLE>
<CAPTION>
                                                   JANUARY 1,             JANUARY 2,            DECEMBER 28,
                                                      2006                   2005                   2003
                                                      ----                   ----                   ----
                  <S>                                  <C>                    <C>                    <C>
                  Sbarro owned                         494                    511                    533
                  Franchised                           458                    428                    376
                  Other concepts                        25                     22                     27
                                                        --                     --                     --
                      All restaurants                  977                    961                    936
                                                       ===                    ===                    ===
</TABLE>


4.       OTHER INCOME:

         FORMER DISTRIBUTOR'S BANKRUPTCY SETTLEMENT:
         In  2003,   we  replaced  our  then  national   independent   wholesale
         distributor  which had declared  bankruptcy.  The trustee in bankruptcy
         alleged  that we were  indebted  to that  distributor  in the amount of
         approximately  $2.1 million which had been fully reserved.  In December
         2004,  we  entered  into a  settlement  agreement  with the  bankruptcy
         trustee  to  settle  the  alleged  amount  due  for  $.9  million.  The
         difference between the alleged amount due and the settlement  agreement
         of  approximately  $1.2  million has been  reported as other  income in
         2004.






                                     - 62 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.       PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                     JANUARY 1,                 JANUARY 2,
                                                                      2006 (A)                    2005 (B)
                                                                      ----                        ----

<S>                                                                 <C>                        <C>
                  Land                                              $     3,785                $    3,781
                  Leasehold improvements                                140,262                   146,362
                  Furniture, fixtures and equipment                      65,592                    64,096
                                                                        -------                   -------
                                                                        209,639                   214,239

                  Less accumulated depreciation and                     128,129                   125,774
                                                                        -------                   -------
                     amortization (c)
                                                                     $   81,510                 $  88,465
                                                                     ==========                 =========
</TABLE>
-----------------

         (a)      During 2005, we recorded a charge of $0.3 million  relating to
                  impairment losses on property and equipment.  In addition,  we
                  recorded a provision for  restaurant  closings and remodels of
                  approximately $0.6 million.

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

         (c)      Depreciation  and  amortization  of property and equipment was
                  $16.6 million,  $16.4 million and $19.7 million in 2005,  2004
                  and 2003, respectively.

6.       GOODWILL (IN MILLIONS):

         We have identified two reporting units for purposes evaluating goodwill
         for impairment. The carrying value of goodwill was allocated to each of
         our reporting  units based on the fair value of goodwill  attributed to
         each at the beginning of 2005 as follows:

                  REPORTING UNIT:
                  Company owned                       $8.5
                  Franchise                             .7
                                                      ----
                                                      $9.2
                                                      ====

         Although  we now  operate  in two  reporting  units,  there has been no
         change in the carrying value.









                                     - 63 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.       DEFERRED FINANCING COSTS (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                   JANUARY 1,                JANUARY 2,
                                                                      2006                      2005
                                                                      ----                      ----
<S>                                                               <C>                         <C>
              Deferred financing costs                            $   9,591                   $  9,573
              Less accumulated amortization                          (6,014)                    (5,052)
                                                                    -------                    -------
                                                                  $   3,577                   $  4,521
                                                                  =========                   ========

</TABLE>
         Amortization  expense of the  deferred  financing  costs  (included  in
         interest  expense)  was $962 for each of 2005 and 2004 and  $1,148  for
         2003.

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

                       2006                   $    968
                       2007                        968
                       2008                        968
                       2009                        673
                                                ------
                                                $3,577
                                                ======



8.       ACCRUED EXPENSES (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                                 JANUARY 1,             JANUARY 2,
                                                                    2006                   2005
                                                                    ----                   ----

<S>                                                               <C>                   <C>
                  Accrued payroll                                 $    3,672            $   2,325
                  Accrued bonus                                        4,482                2,561
                  Payroll, sales and other taxes                       4,307                3,730
                  Rent and related costs                               3,238                2,971
                  Litigation and legal costs                           1,441                2,552
                  Rebates and other advances                           1,904                2,270
                  Other                                                5,139                4,339
                                                                  ----------            ---------
                                                                  $   24,183            $  20,748
                                                                  ==========            =========

</TABLE>








                                     - 64 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.       INCOME TAXES:

         In  connection  with the  going  private  transaction  and the  related
         financing  (see Note 2), we entered into a tax payment  agreement  with
         our shareholders. The tax payment agreement permits us to make periodic
         tax  distributions  to our  shareholders in amounts  determined under a
         formula designed to approximate the income taxes,  including  estimated
         taxes,  that would be payable by our  shareholders if their only income
         were their  pro-rata  share of our  taxable  income and that income was
         taxed at the highest  applicable  federal  and New York State  marginal
         income tax rates. We may only make the tax  distributions  with respect
         to periods in which we are treated as an S  corporation  for income tax
         purposes.  We made no  distribution  to our  shareholders in accordance
         with the tax payment agreement in 2005 and 2004.

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


<TABLE>
<CAPTION>
                                                      JANUARY 1,        JANUARY 2,      DECEMBER 28,
                                                         2006              2005             2003
                                                         ----              ----             ----
                                                                     (IN THOUSANDS)
<S>                                                  <C>                <C>                 <C>
                 Current state and local             $   993            $(133)              $500
                 Foreign                                 700              667                344
                                                        ----            -----               ----
                                                      $1,693             $534               $844
                                                      ======            =====               ====
</TABLE>


10.      LONG-TERM DEBT:

         INDENTURE:

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

         Interest on the senior notes is payable  semi-annually  on March 15 and
         September  15 of each year.  Our payment  obligations  under the senior
         notes  are  jointly,   severally,   unconditionally   and   irrevocably
         guaranteed  by all of  Sbarro's  current  Restricted  Subsidiaries  (as
         defined in the  indenture)  and is to be  similarly  guaranteed  by our
         future  Restricted  Subsidiaries.  The senior notes and the  subsidiary
         guarantees  are  senior   unsecured   obligations  of  Sbarro  and  the
         guaranteeing  subsidiaries,  respectively,  ranking equally in right of
         payment to all of our and their  respective  present and future  senior
         debt,  including  amounts  outstanding  under  the bank  line of credit
         agreement  discussed  below.  The indenture  permits  redemption of the
         senior notes at our option at varying redemption prices and requires us
         to offer to purchase  senior  notes in the event of a Change of Control
         and in  connection  with  certain  Asset Sales (each as  defined).  The
         indenture  contains various covenants,  including,  but not limited to,
         restrictions on the payment of




                                     - 65 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         dividends, stock repurchases,  certain investments and other restricted
         payments,  the  incurrence  of  indebtedness  and liens on our  assets,
         affiliate  transactions,   asset  sales  and  mergers  by  us  and  the
         guaranteeing subsidiaries.

         As part of our going private  transaction,  we sold $255 million of 11%
         senior  notes (at a price of 98.514% of par to yield 11.25% per annum),
         the net proceeds of which,  together with substantially all of our then
         existing cash, was used to finance the transaction. The indenture under
         which our senior  notes are issued does not require us to make,  except
         under certain  circumstances,  principal payments until September 2009,
         when the outstanding  principal balance is due. The indenture  contains
         various  covenants  that  limit our  ability  to  borrow  funds to make
         "restricted payments" including,  among other things, dividend payments
         (other than as  distributions  pursuant to the tax payment  agreement),
         and  to  make   investments   in,  among  other  things,   unrestricted
         subsidiaries.  Among other covenants,  the indenture  requires that, in
         order  for  us  to  borrow   (except   under   specifically   permitted
         arrangements)  our consolidated  interest coverage ratio (as defined in
         the  Indenture),  after  giving pro forma effect to the interest on the
         new  borrowings,  for the four most recently  ended quarters must be at
         least 2.5 to 1. As of January  1,  2006,  that ratio was 1.6 to 1. As a
         result,  we are not  presently  able to  borrow  funds  except  for the
         specifically  permitted  indebtedness,  such  as up to $75  million  of
         revolving  credit loans.  In order to make  restricted  payments,  that
         ratio  must be at least 2 to 1, after  giving  pro forma  effect to the
         restricted  payment  and,  in any event,  is  limited in dollar  amount
         pursuant  to a  formula  contained  in the  indenture.  We refer to the
         amount that is available for us to make dividends and other  restricted
         payments  as the  "restricted  payment  availability."  We cannot  make
         restricted   payments   until  we  increase  the   restricted   payment
         availability by approximately $26 million,  and then only to the extent
         of any excess over that amount.  We are taxed under the  provisions  of
         Subchapter S of the Internal Revenue Code.  Accordingly,  substantially
         all  taxes  on our  income  are  paid by our  shareholders.  Therefore,
         regardless  of  the  restricted  payment  availability,  the  indenture
         permits us to make  distributions to our  shareholders  under a formula
         that is designed to approximate the income taxes,  including  estimated
         taxes,  that would be payable by our  shareholders if their only income
         were their  pro-rata  share of our taxable  income and such income were
         taxed at the highest  applicable  federal  and New York State  marginal
         income tax rates.

         We were in  compliance  with the  various  covenants  contained  in the
         indenture  as of  January  1,  2006;  however,  we  are  not  presently
         permitted under the indenture to pay dividends,  make stock repurchases
         or, with certain exceptions, incur indebtedness.

         The senior notes were issued, at an aggregate discount of approximately
         $3.8  million,  which  is  being  accreted  to the  senior  notes  on a
         straight-line  basis  over the  original  ten year  life of the  senior
         notes.  Accretion of the discount was $.4 million in each of 2005, 2004
         and 2003.





                                     - 66 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         LINE OF CREDIT:

         In July 2005,  we  obtained a three year line of credit  from  Commerce
         Bank to replace our former uncommitted revolving credit facility. Under
         the  Commerce  Bank line of credit,  we  currently  have the ability to
         borrow up to $10 million,  with a sub-limit for letters of credit of $5
         million.  Interest  applicable to the loans under the line of credit is
         at either  the bank's  prime or the bank's  LIBOR rate plus 1.5% at the
         time of any borrowings for interest periods of 1, 2, 3 or 6 months,  as
         selected  by the  company,  the line  expires in July  2008.  There are
         currently $2.0 million of letters of credit  outstanding  under the new
         facility.

         MORTGAGE:

         In  March  2000,  one of our  Restricted  Subsidiaries  obtained  a $16
         million,  8.4% loan due in 2010, secured by a mortgage on our corporate
         headquarters  building.  The loan is payable in monthly installments of
         principal  and  interest  of $.1  million.  The  outstanding  principal
         balance as of January 1, 2006 was $15.1 million. The mortgage agreement
         contains various covenants, including a requirement that the subsidiary
         maintain a minimum ratio of EBITDA to annual and quarterly debt service
         of at least 1.2 to 1.0.

         GUARANTEE ARRANGEMENTS PERTAINING TO OTHER CONCEPTS:

         We are party to separate financial  guarantees to a bank for two of our
         other joint venture  concepts.  One of these joint venture concepts was
         not in compliance  with its covenants with respect to the twelve months
         ended  January  1,  2006.  A  waiver  of this  noncompliance  has  been
         obtained.  There can be no assurance  that this joint  venture  concept
         will not need to obtain  amendments or additional  waivers of covenants
         under its debt agreement.  To varying degrees,  our guarantee  involves
         elements of performance  and credit risk. The possibility of our having
         to honor our guarantee is largely  dependent upon the future  operation
         of the other  concepts.  Our guarantee is limited to the percent of our
         investment in this concept.




                                     - 67 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         MATURITIES OF LONG-TERM DEBT:

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


          2006                                             $      198
          2007                                                    215
          2008                                                    235
          2009                                                255,255
          2010                                                    275
          Thereafter                                           13,964
                                                           -----------
                                                              270,142
          Current maturities                                     (198)
          Unaccreted original issue discount                   (1,414)
                                                           -----------
                                                           $  268,530
                                                           ===========

         We were in  compliance  with the  various  covenants  contained  in the
         indenture, line of credit and mortgage agreement as of January 1, 2006.

11.      COMMITMENTS AND CONTINGENCIES:

         EMPLOYMENT AGREEMENT:

         On July 26, 2005,  we entered into an employment  agreement  with Peter
         Beaudrault,  our  President  and Chief  Executive  Officer,  for a term
         ending on March 4, 2008,  subject to earlier  termination  by us or Mr.
         Beaudrault  following specified notice. The agreement  provides,  among
         other things, for an annual salary of $450,000,  subject to increase at
         the discretion of our board of directors;  an annual  performance bonus
         beginning  in 2005 to be based upon the  achievement  of  increases  in
         EBITDA,  as defined,  and other  objectives to be set forth in business
         plans and budgets  approved from time to time by our board;  $1,000,000
         of life  insurance;  the  reimbursement  for certain travel and housing
         expenses incurred; and a special incentive award. The special incentive
         award which is designed to reward Mr.  Beaudrault for  improvements  in
         our adjusted EBITDA, cash position and long term debt position over the
         term of the  agreement,  vests  upon  termination  of Mr.  Beaudrault's
         employment  and is  reduced  in  the  event  of  early  termination  of
         employment and, when earned, is payable, with interest, in twelve equal
         quarterly  installments.  Alternatively,  in  the  event  of  a  public
         offering  of our common  stock,  a change in control  (as  defined)  of
         Sbarro,  including  by merger,  sale of stock or sale of  assets,  or a
         liquidation or dissolution of Sbarro,  the special incentive award will
         be based on the per share  proceeds  received  in excess of a threshold
         amount. Since the ultimate amount of the special incentive award is not
         known until  termination of agreement;  the special  incentive award is
         subject  to  variable  plan  accounting.  Although  no




                                     - 68 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         amount is as yet payable  with  respect  thereto  compensation  expense
         relating to the  special  incentive  award of  $689,000  was accrued in
         2005.

         SPECIAL EVENT BONUSES:

         We entered into special  event bonus  agreements  with three  executive
         officers, three directors and five Vice Presidents of Operations, which
         provide  for each to receive a bonus in the event of a public  offering
         of our  common  stock,  a change in control  of  Sbarro,  including  by
         merger,  sale  of  stock  or  sale  of  assets,  or  a  liquidation  or
         dissolution of Sbarro. The special event bonus will be based on the per
         share  proceeds  (as defined in the  agreements)  received if a special
         event  occurs  in  excess  of a  certain  threshold  amount.  A similar
         agreement  was entered  into with a member of the law firm we retain as
         general  counsel.  This  agreement  is in  addition  to the payment for
         services.

         When the special events referenced in the agreements become probable, a
         fair value model will be used to determine the value of such award.  As
         of January 1, 2006 no amounts have been accrued.

         LEASES:

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

         Rental expense under operating leases was as follows (In millions):


                                             2005          2004            2003
                                             ----          ----            ----


         Minimum rentals                     $50            $52             $51
         Common area charges                  15             15              15
         Percentage rent                       5              4               4
                                             ---            ---             ---
                                             $70            $71             $70
                                             ===            ===             ===






                                     - 69 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         Future minimum rental and other payments required under  non-cancelable
         operating  leases  for our  Sbarro  restaurants  and our other  concept
         locations as of January 1, 2006 are as follows (in millions):

               FISCAL YEARS ENDING:
               --------------------
               2006                                       $     71
               2007                                             68
               2008                                             62
               2009                                             55
               2010                                             49
               Thereafter                                      140
                                                               ---
                                                          $    445
                                                               ===


         We are the  principal  lessee under  certain  operating  leases for two
         other concept  locations that have been sold and sublet to unaffiliated
         third parties for which we are contingently responsible. Future minimum
         rental payments required under these non-cancelable operating leases as
         of January 1, 2006 are as follows (in thousands):

                FISCAL YEARS ENDING:
                --------------------
                2006                                      $    164
                2007                                           164
                2008                                           164
                2009                                           167
                2010                                           183
                Thereafter                                   1,280
                                                             -----
                                                          $  2,122
                                                             =====

         We  are  the  principal  lessee  under  operating  leases  for  certain
         franchised restaurants which are subleased to franchisees.  Franchisees
         pay rent and related expenses directly to the landlord.  Future minimum
         rental payments  required under these  non-cancelable  operating leases
         for franchised  restaurants that were open as of January 1, 2006 are as
         follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               2006                                       $  1,769
               2007                                          1,368
               2008                                          1,066
               2009                                            966
               2010                                            528
               Thereafter                                      685
                                                               ---
                                                          $  6,382
                                                             =====






                                     - 70 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         We are the principal lessee under operating leases for three franchised
         restaurants  and  one  other  concept  restaurant  that  was  sold  and
         franchised to related  parties (see Note 12) and are subleased by us to
         the franchisees. The franchisees pay rent and related expenses directly
         to the landlord.  Future minimum rental  payments  required under these
         non-cancelable operating leases are as follows (in thousands):

               FISCAL YEARS ENDING:
               --------------------
               2006                                       $    672
               2007                                            687
               2008                                            695
               2009                                            325
               2010                                            250
               Thereafter                                    1,811
                                                             -----
                                                          $  4,440
                                                             =====

         Future minimum rental payments required under non-cancelable  operating
         leases for restaurants that had not as yet opened as of January 1, 2006
         are as follows (in thousands):

               FISCAL YEARS ENDING:
               2006                                       $     99
               2007                                             99
               2008                                             99
               2009                                             99
               2010                                             99
               Thereafter                                      545
                                                               ---
                                                          $  1,040
                                                             =====

         In  accordance  with  FIN No.  45,  we have  recorded  a  liability  of
         approximately $65,000 in 2005 and $120,000 in 2004 which represents the
         fair  value of the  guarantees  related  to our  guarantee  of  certain
         leases.

         CONSTRUCTION CONTRACTS AND OTHER:

         As of January 1, 2006,  were party to contracts  for  approximately  $2
         million with respect to the new construction  and restaurant  remodels.
         Payments of  approximately  $.3 million were made on those contracts in
         2005. The balance of the contracts are expected to be paid in 2006.

         PRODUCT PURCHASE DISTRIBUTION ARRANGEMENT:

         We have a contractual arrangement with a national independent wholesale
         distributor that commenced in February 2003 and that requires us, until
         January  2008,  subject  to early  termination  for  certain  specified
         causes,  to purchase  95% of most of our food  ingredients  and related
         restaurant  supplies from it. The agreement does not, however,  require
         us to purchase any





                                     - 71 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         specific  fixed  quantities.  Among the  factors  that will  affect the
         dollar amount of purchases we make under the contract are:

                  o        number of Sbarro  locations  open  during the term of
                           the contract;

                  o        level of sales made at Sbarro locations;

                  o        market price of mozzarella cheese and other commodity
                           items;

                  o        price of diesel fuel; and

                  o        mix of products sold by Sbarro locations.

         LETTERS OF CREDIT:

         As of January 1, 2006, there are $2.1 million of bank letters of credit
         issued under our line of credit to support potential  obligations.  The
         letters of credit have been issued  instead of cash  security  deposits
         under operating leases.  Of the outstanding  standby letters of credit,
         approximately $.1 million are for locations that have been subleased to
         the buyers of two of our other concept locations.

         GUARANTEE ARRANGEMENTS PERTAINING TO THE OTHER CONCEPTS:

         We are a party to various financial guarantees to a bank for two of our
         other concept joint ventures. With respect to our joint venture, we are
         jointly and severally liable, along with our joint venture partner, for
         a $1 million loan. Our liabilities  under a $5.8 million term loan, $.3
         million  mortgage  loan and $.1  million  of  letters  of credit to the
         second  concept are limited to our 40 % minority  ownership  percentage
         while the  remaining  letter of credit of $.6  million is  jointly  and
         severally guaranteed by each of the partners in the concept. To varying
         degrees,  these  guarantees  involve elements of performance and credit
         risk.  The  possibility  of our  having to honor our  contingencies  is
         largely  dependent  upon future  operations of the other  concepts.  We
         record a  liability  if events  occurred  that make  payment  under the
         guarantees  probable.  Under FIN No.  45, we are  required  to record a
         liability for the fair value of any  obligation  undertaken or modified
         after  December  31, 2002.  In 2005,  one of the loan  guarantees  were
         modified. We believe the fair value of our portion of this guarantee is
         minimal.





                                     - 72 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The details of our guarantees as of January 1, 2006 and their terms are
         as follows:


         Type of guaranteed obligation         Amount (a)         Term
         -----------------------------         ----------         ----

              Term loan                      $5.8 million         July 2012
              Loan                            1.0 million         November 2007
              Letters of credit                .7 million         July 2012
              Mortgage loan                    .3 million         August 2019

         -------------
         (a) Represents our current maximum  exposure under existing  borrowings
         and letters of credit.

         LITIGATION:

         We  have  reserved  $1.4  million  in  our  financial   statements  for
         contingent litigation liabilities.

         In  December  1999,  fourteen  current and former  general  managers of
         Sbarro  restaurants in California  amended a complaint against us filed
         in the Superior Court of California  for Orange  County.  The complaint
         alleges  that the  plaintiffs  were  improperly  classified  as  exempt
         employees  under the California  wage and hour law. The plaintiffs were
         seeking  actual  damages,  punitive  damages and costs of the  lawsuit,
         including  reasonable  attorneys  fees,  each in  unspecified  amounts.
         Plaintiffs filed a motion to certify the lawsuit as a class action, but
         the  motion  was  denied by the  court.  The  court  issued a ruling in
         December  2003  which was  unfavorable  to us which we  appealed  as we
         believe  errors were made by the trial judge and  appealed the decision
         to the circuit court.  On appeal,  the Circuit Court affirmed the lower
         court's  decision in part and  reversed it in part,  finding that their
         damages  should only be computed from October 1996 through May 9, 1999,
         the date we converted the compensation of general managers to an hourly
         rate rather than their later employment  termination dates. The Circuit
         Court remanded the matter to the lower court with  instructions  on how
         to compute  damages and to  redetermine  the amount of attorney's  fees
         awarded since such fees are to be based, to some extent,  on the result
         obtained.

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




                                     - 73 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

         In May 2002, the landlord of the joint venture  described above filed a
         complaint  against  Sbarro  in  the  Supreme  Court  of  New  York  for
         Westchester County alleging that we were obligated to it, pursuant to a
         Guaranty Agreement we executed, for all rent during the remaining lease
         based on an alleged breach of the lease by the tenant,  a subsidiary of
         the Company. We believed that our guarantee was limited in amount while
         the landlord alleged that the guarantee  covered all amounts that would
         become due during the remaining  lease term.  The court issued a ruling
         in November  2003 which  limited our  liability,  which we estimated at
         $650,000. The landlord appealed this decision. Given the uncertainty of
         the  results  of an appeal and  liability  we would have by reason of a
         reversal,  we settled the matter for $800,000 in 2005.  The  settlement
         was paid in 2005.

         In November  2004, a contractor,  pursuant to a  construction  contract
         entered into to build a QSR  location,  instituted an action for unpaid
         amounts  under the  construction  contract.  We settled  the matter for
         $72,000 in 2005. The settlement amount was paid in 2005.

         In May  2004,  a suit  was  filed  by the  landlord  of one of our  QSR
         locations  as a result of  premature  termination  of the lease on that
         location  by one of our  subsidiaries.  The  landlord  has  obtained  a
         consent judgment against the subsidiary for approximately  $75,000. The
         landlord now seeks to enforce the judgment  against the company.  While
         we do not believe the judgment  can be enforced  against us, we believe
         that our ultimate  liability  will not exceed $75,000 and have reserved
         for this amount in 2005.

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






                                     - 74 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12.      TRANSACTIONS WITH RELATED PARTIES:

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

         On  April  5,  2001,   we  loaned  $3.2   million  to  certain  of  our
         shareholders,  including:  Mario Sbarro,  $1.1 million,  Joseph Sbarro,
         $1.2  million and Anthony  Sbarro,  $.9  million.  The due dates of the
         related  notes  have been  extended  to April 6,  2007.  The notes bear
         interest  at the rate of  4.63%  per  annum,  payable  annually.  As of
         January 1, 2006,  the balance of these  loans was $2.9  million and are
         classified as long term.

         On  December  28,  2001,  we loaned $2.8  million to our  shareholders,
         including:  Mario Sbarro,  $0.6 million,  Joseph  Sbarro,  $.7 million,
         Anthony  Sbarro,  $.5  million,  and the Trust of  Carmela  Sbarro,  $1
         million.  The due dates of the  related  notes  have been  extended  to
         December  28,  2007.  The notes bear  interest at the rate of 2.48% per
         annum,  payable  annually.  As of January 1, 2006, the balance of these
         loans was $2.6 million and are classified as long term.

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

         In June 2003, Anna Missano, the daughter of Joseph Sbarro, issued to us
         a note for  approximately  $90,000  for  royalties  due us for 2001 and
         2000.  The  note  is  repayable  at  approximately  $10,000  per  year,
         including  interest at 2.96% per annum,  with a balloon  payment due on
         June 30, 2010.  The  principal  balance of the notes at January 1, 2006
         was approximately $71,000.

         The  interest  rates  charged  on the  foregoing  related  party  loans
         approximate the Applicable Federal Rate (AFR) published by the Internal
         Revenue  Service at the time of the loan. We recorded  interest  income
         from related parties of approximately  $227,000,  $211,000 and $223,000
         in 2005, 2004 and 2003, respectively.

         Bernard  Zimmerman  & Company,  Inc.,  of which  Bernard  Zimmerman,  a
         director of Sbarro,  is President and a majority  shareholder,  renders
         financial and  consulting  assistance to us, for which it received fees
         of  approximately  $32,000,  $26,000,  $300,000 for  services  rendered
         during 2005, 2004, and 2003 respectively.





                                     - 75 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         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  $430,000,  $480,000 and $340,000
         in 2005, 2004 and 2003, respectively.

         Companies  owned by a son of Anthony  Sbarro are  parties to  franchise
         agreements  with us  containing  terms  similar to those in  agreements
         entered into by us with  unrelated  franchises.  Royalties  under these
         agreements  in 2004 and 2003 were  approximately  $89,000  and  $90,000
         respectively. There were no royalties recorded in 2005.

         As of July 2002,  we sold the assets of a restaurant  to a  corporation
         owned  by  the  brother-in-law  of  Mario  Sbarro  for  $88,900.   That
         corporation  also  entered  into a  franchise  agreement  with  us.  We
         received  promissory  notes for each of the purchase  price and initial
         franchise  fee that were payable over seven years and bore  interest on
         the unpaid principal  balances at 7% per annum. In addition in 2002, we
         subleased this location to that franchisee. Payments under the sublease
         were being made  directly to the landlord by the  franchisee.  Interest
         payments  received  relating to the promissory notes was  approximately
         $4,000 in 2003.  No interest  payments  were received in 2005 and 2004.
         Royalties paid under this  arrangement  were  approximately  $1,800 and
         $3,300 in 2004 and 2003, respectively. No royalty payments were made in
         2005. In March 2005, we re-purchased  the assets of this restaurant for
         $88,900. The remaining unpaid principal balance of the promissory notes
         were offset against the purchase  price of the assets.  No gain or loss
         on the sale was recorded.

         In 2002, a company in which Gennaro J. Sbarro,  then our Corporate Vice
         President and President of our Casual and Fine Dining  Division and the
         son of Joseph Sbarro,  has a 50% interest (the other 50% is owned by an
         unaffiliated  third party)  subleased a restaurant from us to operate a
         non-Sbarro  restaurant  for $50,000  greater than rent or other charges
         due under the  lease.  Rent and other  charges  due under the lease are
         paid directly to the landlord.  Additional  payments under the sublease
         are due to us. Rent of  approximately  $25,000 and $23,000 was included
         in the 2005 and 2004 results of operations,  respectively. To reimburse
         us for  equipment  costs,  the company  owned by Mr.  Sbarro,  issued a
         $55,000  non-interest  bearing  note that was repaid in eighteen  equal
         monthly  installments of  approximately  $3,000  commencing in November
         2002. As of October 31, 2003,  Mr.  Sbarro  resigned from his positions
         with us and a corporation  owned by Mr. Sbarro entered into an eighteen
         month  agreement  with us to provide  consulting  services to our quick
         service and casual dining division for approximately  $23,000 per month
         and the reimbursement for customary and usual expenses incurred by that
         corporation in the performance of its services.

         In  October  2003,   we  sold  the  assets  of  three   underperforming
         Sbarro-owned  restaurants  that we proposed to close to entities  owned
         separately  by each of three other of Anthony  Sbarro's  sons,  each of
         which entered into a franchise agreement with us. Two of the locations,
         which  had  no  remaining   book  value,   were   transferred   for  no
         consideration while the third was sold for $.3 million that was paid in
         full, and resulted in a gain to Sbarro of approximately $.1 million. In
         connection  with the sale of the  locations,  the  employment  of these
         individuals with Sbarro was





                                     - 76 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         terminated  and we included a charge for their total  severance  pay of
         approximately  $60,000  in our  results  of  operations  for 2003.  The
         franchise  agreements  provide for the payment of 5% of the  location's
         sales as a continuing franchise fee but did not provide for any initial
         franchise fee. We have waived  continuing  franchise fees through 2006.
         In  addition,  we  subleased  two  of  the  locations  to  two  of  the
         franchisees.  Payments  under the  subleases are being made directly to
         the landlord by the franchisees.

         In January 2004,  one of Mario  Sbarro's  daughters,  resigned from her
         position as Manager of  Administration  -  Construction.  A corporation
         owned by her entered into a one year  agreement  to provide  consulting
         services related to construction  matters to us for a series of monthly
         payments  totaling  $100,000.  In addition,  that corporation  provided
         consulting services related to construction  matters for our steakhouse
         joint venture of  approximately  $126,000 and $19,000 in 2005 and 2004,
         respectively.

         In February 2005, a joint venture in which we have a 70% interest, sold
         the assets of one of its  restaurants  to a company owned by Gennaro A.
         Sbarro,  our  then  Corporate  Vice  President  and  President  of  our
         Franchising  and Licensing  Division and the son of Mario  Sbarro,  for
         approximately  $900,000 (which  approximated fair value) resulting in a
         loss of approximately  $284,000 which was recorded at the end of fiscal
         2004.  The  Company  received  $300,000  in cash and  promissory  notes
         aggregating  $600,000.  The promissory  notes are payable monthly in 72
         equal monthly installments of $8,333 including interest at 5% per annum
         with a balloon payment of $111,375 at maturity.  The joint venture also
         sold the inventory of the restaurant  for  approximately  $67,000.  The
         company  owned by Mr.  Sbarro  entered into a sublease,  and a Security
         Agreement to secure the  obligations  under the promissory  notes.  The
         sublease  and  Security  Agreement  are  intended  to enable  Sbarro to
         recapture  the  business  in the  event of an  uncured  default.  As of
         January 1, 2006 the balance of the promissory note was $546,000.

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

         o Mario  Sbarro  was our  Chairman  of the  Board  in 2005 and 2004 and
         Chairman of the Board,  President and Chief Executive  Officer in 2003.
         His compensation was approximately  $926,000,  $884,000 and $700,000 in
         2005, 2004 and 2003, respectively.

         o Anthony  Sbarro was our Vice  Chairman of the Board and  Treasurer in
         2005,  2004 and 2003.  His  compensation  was  approximately  $634,000,
         $582,000 and $400,000 in 2005, 2004 and 2003, respectively.

         o Joseph Sbarro was our Senior  Executive  Vice President and Secretary
         in 2005, 2004 and 2003. His  compensation was  approximately  $637,000,
         $585,000 and $400,000 in 2005, 2004 and 2003 respectively.





                                     - 77 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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

         o Carmela Sbarro,  the mother of Mario,  Anthony and Joseph Sbarro, who
         was a  co-founder  of Sbarro and serves as a Vice  President,  received
         $100,000 from us for services rendered in 2005, 2004 and 2003.

         o Other members of the immediate families of Mario, Anthony, Joseph and
         Carmela  Sbarro  who are  our  employees  were  paid  an  aggregate  of
         approximately  $517,000,  $860,000 and $1,344,000 during 2005, 2004 and
         2003, respectively.

         In 2005  the  members  LLC's  received  their  proportioned  share of a
         dividend from Boulder Creek  Steakhouse.  Our share of the distribution
         was $.6  million.  In 2005  Boulder  Creek  Steakhouse  entered  into a
         subordinate interest bearing (at prime) note payable with its partners.
         The  amounts  loaned  by  each  partner  was  in  proportion  to  their
         respective  equity  position in Boulder Creek.  The loans may be repaid
         after  the  second  quarter  of  fiscal  year  2006  if  Boulder  Creek
         Steakhouse  is in compliance  with the covenants  before and after such
         repayment.  Our share of this note is $.6  million,  and is included in
         other assets at January 1, 2006.

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

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

<TABLE>
<CAPTION>
                                                        2005            2004             2003
                                                        ----            ----             ----
<S>                                                     <C>            <C>             <C>
         Impairment of assets                           $328           $1,103          $4,048
         Restaurant closings/remodels                    531              815           2,025
         Loss on sale of other
             concept restaurant (Note 12)                  -              284               -
                                                        ----            -----          ------
                                                        $859           $2,202          $6,073
                                                        ====           ======          ======
</TABLE>


14.      DIVIDENDS:

         We  declared  distributions  to our  shareholders  pursuant  to the tax
         payment  agreement of $1.8  million with respect to our taxable  income
         for 2002,  of which $1.1  million  was paid in 2003 and $.7 million was
         paid in March 2004. No dividends were declared or paid in 2005.




                                     - 78 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

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

         2005
         ----
<S>                                                <C>                <C>               <C>               <C>
         Revenues                                 $ 96,517           $ 74,644          $ 79,326          $ 98,207
         Gross profit (a)                         $ 77,487           $ 59,928          $ 64,046          $ 80,714
         Net (loss) income (b)                    $ (5,741)          $ (3,311)         $   (323)         $ 10,726


         2004
         ----
         Revenues                                 $ 96,211           $ 72,717          $ 78,306          $101,660
         Gross profit (a)                         $ 76,202           $ 56,780          $ 62,237          $ 81,602
         Net (loss) income (c)                    $ (6,161)          $ (4,556)         $ (1,029)         $  7,423
</TABLE>


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

         (b)      In the fourth  quarter of 2005,  we recorded a  provision  for
                  asset  impairment  of $.3  million,  recorded an accrual for a
                  long term  executive  bonus of $.7,  recorded a receivable and
                  income of $.5 million for an  expected  insurance  recovery on
                  our business interruption policy related to Hurricane Katrina.

         (c)      In the fourth  quarter of 2004,  we recorded a  provision  for
                  asset impairment of $1.1 million,  litigation  expense of $1.2
                  million and reversed an accrual for a rebate receivable of $.3
                  million.  These were  partially  offset by a reduction in, our
                  tax liability  reserve by approximately $.4 million to reflect
                  our current  estimated  tax exposure  and  reported  income of
                  approximately $1.2 million for a settlement agreement with the
                  bankruptcy trustee of our former distributor.

16.      EQUITY INVESTMENT IN BOULDER CREEK STEAKHOUSE:

         We have a 40% equity  interest  in a  steakhouse  joint  venture  which
         operates  both  casual  and fine  dining  steakhouse  restaurants.  The
         following combined condensed financial  statements include the accounts
         of Boulder  Creek  Holding LLC  ("Holding"),  Boulder Creek Venture LLC
         ("Venture") and Boulder Creek Properties LLC  ("Properties")  and their
         wholly owned subsidiaries  (collectively  "Boulder Creek").  Properties
         holds  the  trademark  used  by  Holding  and  Venture.   All  material
         intercompany   accounts  and  transactions   have  been  eliminated  in




                                     - 79 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         combination. We provided administrative services for $187,000, $165,000
         and $172,000 in 2005, 2004 and 2003, respectively.

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

         In 2005,  the members  LLC's  received  their  proportioned  share of a
         dividend from the joint venture.  Our share of the distribution was $.6
         million. In 2005, the joint venture entered into a subordinate interest
         bearing (at prime) note payable with its partners.  The amounts  loaned
         by each partner was in proportion to their  respective  equity position
         in Boulder  Creek.  The loans may be repaid after the second quarter of
         fiscal  year  2006 if the  joint  venture  is in  compliance  with  the
         covenants  contained  in its line of credit  facility  before and after
         such repayment.  Our share of this note is $.6 million, and is included
         in other assets at January 1, 2006.

         INCOME STATEMENT DATA (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                        2005                     2004                    2003
                                                        ----                     ----                    ----
<S>                                                     <C>                     <C>                     <C>
         Net sales                                      $57,753                 $49,697                 $50,141
         Costs and expenses                              57,577                  47,149                  46,960
         Interest expense, net                              783                     477                     531
         Loss from discontinued
              operations                                      -                      47                     901
                                                          -----                  ------                  ------
                     Net income (loss)                    ($607)                 $2,024                  $1,749
                                                          =====                  ======                  ======
</TABLE>



         BALANCE SHEET DATA (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                           2005                  2004                   2003
                                                           ----                  ----                   ----

<S>                                                    <C>                       <C>                   <C>
         Current assets                                  $5,946                  $3,126                $3,002
         Long term assets                                28,852                  26,905                24,288
                                                         ------                  ------                ------
         Total assets                                    34,798                  30,031                27,290
                                                         ======                  ======                ======

         Current liabilities                             10,314                   7,484                 7,019
         Long term liabilities                           18,195                  14,144                13,128
                                                         ------                  ------                ------
         Total liabilities                               28,509                  21,628                20,147
                                                         ======                  ======                ======

         Members' equity                                 $6,289                  $8,403                $7,143
                                                         ======                  ======                ======
</TABLE>





                                     - 80 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17.      BUSINESS SEGMENT INFORMATION

         We operate two business segments.  Our company owned restaurant segment
         is  comprised  of the  operating  activities  of our company  owned QSR
         restaurants and other concept  restaurants  (owned and joint ventures).
         Our  franchise   restaurant  segment  offers  franchise   opportunities
         worldwide for qualified  operators to conduct business under the Sbarro
         name.  Revenue from  franchise  operations  is  generated  from initial
         franchise fees, ongoing royalties and other franchising revenue.

         We  do  not  allocate  indirect  corporate  charges  to  the  franchise
         operating segment.  Such costs are managed on an entity wide basis, and
         the  information  to  reasonably  allocate  such  costs is not  readily
         available.

         We do not  allocate  assets by  segment  because  our  chief  operating
         decision  maker  does not  review  the  assets by segment to assess the
         segments'  performance,  as the  assets are  managed on an  entity-wide
         basis.

<TABLE>
<CAPTION>


                                                                COMPANY OWNED          FRANCHISE
                                                                -------------          ---------
                                                                 RESTAURANTS          RESTAURANTS         TOTALS
                                                                 -----------          -----------         ------
         2005                                                                       (IN THOUSANDS)
<S>                                                                <C>                  <C>                <C>
         Total revenue                                             $336,284             $12,410            $ 348,694
                                                                                                           ---------
         Operating income before
         unallocated costs                                           47,713               9,496               57,209
         Unallocated costs and expenses (1)                                                                   24,526
                                                                                                              ------
         Operating income                                                                                  $  32,683
                                                                                                           =========

         2004

         Total revenue                                             $336,801             $12,093            $ 348,894
                                                                                                           ---------
         Operating income before
         unallocated costs                                           40,698               9,260               49,958

         Unallocated costs and expenses (1)                                                                   25,743
                                                                                                              ------
         Operating income                                                                                  $  24,215
                                                                                                           =========

         2003
         Total revenue                                            $321,456              $10,868            $ 332,324
                                                                                                           ---------
         Operating income before
         unallocated costs                                          28,117                7,546               35,663

         Unallocated costs and expenses (1)                                                                   22,129
                                                                                                              ------
         Operating income                                                                                  $  13,534
                                                                                                           =========
</TABLE>
         ----------------
         (1) Represents certain general and administrative expenses that are not
         allocated to a segment.




                                     - 81 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18.      GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS:

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

         The following condensed consolidating financial information presents:

         (1)      Condensed  consolidating  balance sheets as of January 1, 2006
                  and January 2, 2005 and related  statements of operations  and
                  cash flows for the fiscal years ended January 1, 2006, January
                  2, 2005 and December 28, 2003 of (a) Sbarro, Inc., the parent,
                  (b)  the   guarantor   subsidiaries   as  a  group,   (c)  the
                  nonguarantor  subsidiaries  as a  group  and (d)  Sbarro  on a
                  consolidated basis.

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

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





                                     - 82 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                              AS OF JANUARY 1, 2006

                                 (IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>

                                                             GUARANTOR        NONGUARANTOR                       CONSOLIDATED
                                                  PARENT    SUBSIDIARIES      SUBSIDIARIES      ELIMINATIONS        TOTAL
                                                  ------    ------------      ------------      ------------        -----

Current assets:

<S>                                               <C>           <C>                 <C>                  <C>        <C>
Cash and cash equivalents                      $   66,377    $   5,303         $    1,409        $       -       $  73,089
Receivables less allowance for
     doubtful accounts of $323
     Franchise                                      1,865            -                  -                -           1,865
     Other                                          3,385          119                140                -           3,644
                                               ----------    ---------         ----------        ---------       ---------
                                                    5,250          119                140                -           5,509

Inventories                                         1,312        1,525                 53                -           2,890
Prepaid expenses                                    3,517        (301)                (7)                -           3,209
                                               ----------    ---------         ----------        ---------       ---------
     Total current assets                          76,456        6,646              1,595                -          84,697

Intercompany receivables                            2,578      458,262            (4,448)        (456,392)               -

Investment in subsidiaries                         67,450        1,945                  -         (69,395)               -

Property and equipment, net                        31,820       46,819              2,871                -          81,510
Trademarks, net                                   195,916            -                  -                -         195,916
Goodwill                                            9,204            -                  -                -           9,204
Deferred financing costs, net                       3,420          157                  -                -           3,577
Loans receivable from shareholders and              5,593            -                  -                -           5,593
     officers
Other assets                                        6,643        1,490                 27            (119)           8,041
                                               ----------    ---------         ----------        ---------       ---------
                                                 $399,080     $515,319                $45       $(525,906)       $ 388,538
                                               ==========    =========         ==========       ==========       =========
</TABLE>









                                     - 83 -
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                              AS OF JANUARY 1, 2006

                                 (IN THOUSANDS)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



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

<S>                                             <C>               <C>                  <C>                           <C>
Current liabilities:
     Accounts payable                       $    10,866           $169                 $403               -            11,438
     Accrued expenses                            19,840          4,033                  310               -            24,183
     Accrued interest payable                     8,181              -                    -               -             8,181
     Current portion of mortgage                                                                                          198
     payable                                          -            198                    -               -
                                            -----------    -----------          -----------      -----------      -----------
       Total current liabilities                 38,887          4,400                  713               -            44,000
Intercompany payables                           456,392              -                    -        (456,392)                -
Deferred rent                                     7,802              -                  308               -             8,110
Long-term debt, net of original issue
    discount                                    253,586         14,944                    -               -           268,530
Shareholders' equity (deficit):
     Preferred stock, $1 par value;
        authorized 1,000,000 shares;
        none issued                                   -              -                    -               -                 -
Common stock, $.01 par value;
        authorized 40,000,000 shares;
        issued and outstanding 7,064,328
        shares                                       71              -                    -               -                71
Additional paid-in capital                     (65,479)        133,671                3,018         (71,200)               10
Retained earnings (deficit)                   (292,179)        362,304              (3,994)           1,686            67,817
                                            -----------    -----------          -----------      -----------      -----------
                                              (357,587)        495,975                (976)         (69,514)           67,898
                                            -----------    -----------          -----------      -----------      -----------
                                            $  399,080     $   515,319          $       45       $ (525,906)      $   388,538
                                            ==========     ===========          ===========      ===========      ===========


</TABLE>












                                     - 84 -
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                              AS OF JANUARY 2, 2005

                                 (IN THOUSANDS)

                                     ASSETS



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

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

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

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

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

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


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

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

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

</TABLE>









                                     - 85 -
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           CONSOLIDATING BALANCE SHEET

                              AS OF JANUARY 2, 2005

                                 (IN THOUSANDS)

                      LIABILITIES AND SHAREHOLDERS' EQUITY



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

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

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

Deferred rent                                   8,598               -            415                -           9,013
                                               ------           -----          -----           ------          ------
Long-term debt, net of
   original issue discount                    253,207          15,142              -                -         268,349
                                              -------          ------      ---------           ------         -------


Shareholders' equity (deficit):
   Preferred stock, $1 par value;
     authorized 1,000,000 shares; none
     issued
   Common stock, $.01 par value:
     authorized 40,000,000 shares;
     issued and outstanding 7,064,328
     shares                                        71               -              -                -              71
   Additional paid-in capital                 (65,479)        133,671          3,018          (71,200)             10
   Retained earnings (deficit)               (283,596)        349,362           (986)           1,686          66,466
                                             ---------        -------           -----           -----          ------
                                             (349,004)        483,033          2,032          (69,514)         66,547
                                             ---------        -------          -----         --------          ------
                                             $386,556        $501,021         $4,445        $(507,409)       $384,613
                                             =========       ========         ======        ==========       ========


</TABLE>











                                     - 86 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                    FOR THE FISCAL YEAR ENDED JANUARY 1, 2006

                                 (IN THOUSANDS)


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

<S>                                            <C>             <C>                <C>                   <C>       <C>
Revenues:
    Restaurant sales                        $   146,780     $   172,685      $     9,722         $       -      $   329,187
    Franchise related income                     12,410               -                -                 -           12,410
    Real estate and other                         3,540           3,490               67                 -            7,097
    Intercompany charges                             65               -                -              (65)                -
                                            -----------     -----------      -----------         ---------      -----------

Total revenues                                  162,795         176,175            9,789              (65)          348,694
                                            -----------     -----------      -----------         ---------      -----------

Costs and expenses:
    Cost of food and paper products              27,194          36,586            2,739                 -           66,519
    Payroll and other employee benefits          38,900          46,759            3,692                 -           89,351
    Other operating costs                        52,352          60,187            2,670                 -          115,209
    Depreciation and amortization                 7,376           8,615              644                 -           16,635
    General and administrative                   17,222           9,701              515                 -           27,438
    Asset impairment and restaurant
     closings                                       357             502                -                 -              859
    Intercompany charges                              -              65                -              (65)                -
                                            -----------     -----------      -----------         ---------      -----------
Total costs and expenses                        143,401         162,415           10,260              (65)          316,011
                                            -----------     -----------      -----------         ---------      -----------
Operating income (loss)                          19,394          13,760            (471)                 -           32,683
Other (expense) income:
    Interest expense                           (29,362)         (1,318)                -                 -         (30,680)
    Interest income                               1,270               -                7                 -            1,277
Equity in net income of unconsolidated
    affiliates                                    (236)               -                -                 -            (236)
                                            -----------     -----------      -----------         ---------      -----------
    Net other expense                          (28,328)         (1,318)                7                 -         (29,639)
                                            -----------     -----------      -----------         ---------      -----------
Income (loss) before income taxes               (8,934)          12,442            (464)                 -            3,044
Income taxes                                     1,693               -                -                  -            1,693
                                            -----------     -----------      -----------         ---------      -----------
Net income (loss)                           $  (10,627)     $    12,442      $     (464)         $       -      $     1,351
                                            ===========     ===========      ===========         =========      ============

</TABLE>







                                     - 87 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2005

                                 (IN THOUSANDS)


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

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

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

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

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

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

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

</TABLE>






                                     - 88 -
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF OPERATIONS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)


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

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

Costs and expenses:
   Restaurant operating expenses:
     Cost of food and paper products           27,402         36,116            3,928               -          67,446
     Payroll and other employee
       benefits                                36,474         48,155            4,985               -          89,614
     Other operating costs                     49,196         57,282            4,016               -         110,494
     Depreciation and amortization              8,801          9,899            1,012               -          19,712
     General and administrative                15,212         10,418             (179)              -          25,451
     Asset impairment, restaurant
       closings and loss on sale
        of other concept restaurant             5,647              -              426               -           6,073
     Intercompany charges                           -         10,728                -         (10,728)              -
                                              -------         ------           ------         --------        -------
       Total costs and expenses               142,732        172,598           14,188         (10,728)        318,790
                                              -------        -------           ------         --------        -------

Operating income (loss)                        18,236         (5,477)             775               -          13,534
                                               ------         -------             ---         -------          ------

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

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

Loss before income taxes (credit)             (10,338)        (6,823)             775               -         (16,386)
Income taxes (credit)                             536            348              (40)              -             844
                                                  ---            ---              ----        -------             ---

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






                                     - 89 -
<PAGE>


                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      CONSOLIDATING STATEMENT OF CASH FLOWS

                    FOR THE FISCAL YEAR ENDED JANUARY 1, 2006

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                           GUARANTOR      NONGUARANTOR                  CONSOLIDATED
                                                              PARENT      SUBSIDIARIES    SUBSIDIARIES   ELIMINATIONS      TOTAL
                                                              ------      ------------    ------------   ------------      -----
<S>                                                           <C>           <C>           <C>             <C>           <C>
OPERATING ACTIVITIES:
---------------------

Net (loss) income                                             $(10,627)     $ 12,442      $   (464)       $    -        $  1,351
  Adjustments to reconcile net (loss) income to net cash
    (used in) provided by operating activities:
      Depreciation and amortization                              7,376         8,615           644             -          16,635
      Amortization of deferred financing costs                     924            38             -             -             962
      Amortization of bond discount                                379             -             -             -             379
      Allowance for doubtful accounts receivable                     -            14             -             -              14
      (Decrease)/increase in deferred rent, net of                (575)          230          (107)            -            (452)
      tenenat allowance
  Asset impairment, restaurant closings and loss on sale           357           502             -             -             859
      of  other concept restaurant
  Equity in net loss of unconsolidated affiliates                  236             -             -             -             236
  Other                                                              0             0             -             -               -

Changes in operating assets and liabilities:
 Decrease (increase) in receivables                             (3,351)          920           434             -          (1,997)
 Decrease (increase) in inventories                               (109)          (59)           87             -             (81)
 Decrease in prepaid expenses                                      504           102            62             -             668
 Increase in other assets                                         (324)           (1)           (3)            -            (328)
 Increase (decrease) in accounts payable and accrued
 expenses                                                        3,042         1,577        (1,284)            -           3,335
                                                              --------      --------      ---------       ------        --------
Net cash provided by operating activities                       (2,168)       24,380          (631)            -          21,581
                                                              --------      --------      ---------       ------        --------

INVESTING ACTIVITIES:
---------------------
 Purchase of property plant and equipment                       (6,451)       (4,945)         (312)            -         (11,708)
 Proceeds from sale of joint venture property & equipment          300             -             -             -             300
 Dividend received from unconsolidated affiliates                  603             -             -             -             603
                                                              --------      --------      ---------       ------        --------
Net cash used in investing activities                           (5,548)       (4,945)         (312)            -         (10,805)
                                                              --------      --------      ---------       ------        --------
</TABLE>




                                     - 90 -
<PAGE>



                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)

                    FOR THE FISCAL YEAR ENDED JANUARY 1, 2006

                                 (IN THOUSANDS)


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

<S>                                                           <C>           <C>           <C>             <C>           <C>
FINANCING ACTIVITIES:
---------------------
    Mortgage principal repayments                                    -          (181)            -             -            (181)
    Loan to affiliate                                             (560)            -             -             -            (560)
    Reduction in loans receivable from officers                     54             -             -             -              54
    Intercompany balances                                       17,448       (18,630)        1,182             -               -
                                                              --------      --------      ---------       ------        --------

Net cash (used in) provided by financing activities             16,942       (18,811)        1,182             -            (687)
                                                              --------      --------      ---------       ------        --------
Increase in cash and cash equivalents                            9,226           624           239             -          10,089
Cash and cash equivalents at beginning of year                  57,150         4,680         1,170             -          63,000
                                                              --------      --------      ---------       ------        --------
Cash and cash equivalents at end of period                    $ 66,376      $  5,304      $  1,409        $    -        $ 73,089
                                                              ========      ========      ========        ======        ========



Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes                  $    954      $      -      $      -      $      -      $      954
                                                              ========      ========      =========     ========      ==========
Cash paid during the period for interest                      $ 28,050      $  1,281      $      -      $      -      $   29,331
                                                              ========      ========      =========     ========      ==========

</TABLE>








                                     - 91 -
<PAGE>







                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2005

                                 (IN THOUSANDS)


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

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

Investing activities:

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

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







                                     - 92 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 2005

                                 (IN THOUSANDS)



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

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

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

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

Supplemental disclosure of cash flow
   information:

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

</TABLE>


















                                     - 93 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                      CONSOLIDATING STATEMENT OF CASH FLOWS

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)


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

Net (loss) income                                             $(10,874)     $ (7,171)     $    815      $      -      $  (17,230)
  Adjustments to reconcile net (loss) income to net cash
  (used in) provided by operating activities:
      Depreciation and amortization                              8,674        10,029         1,009             -          19,712
      Amortization of deferred financing costs                   1,148             -             -             -           1,148
      Amortization of bond discount                                379             -             -             -             379
      Allowance for doubtful accounts receivable                   435             -             -             -             435
      Increase in deferred rent, net                               200             -            42             -             242
      Asset impairment, restaurant closings and loss on
         sale of  other concept restaurant                       4,199         1,452           422             -           6,073
      Equity in net (income) loss of unconsolidated
         affiliates                                               (425)            -            41             -            (384)
      Other                                                         44             -             -             -              44


Changes in operating assets and liabilities:
      Decrease in receivables                                       15           121            55             -             191
      Decrease in inventories                                      239           339             -             -             578
      Increase in prepaid expenses                                (185)          (41)          (27)            -            (253)
      Decrease (increase) in other assets                          816           (49)          194        (1,327)           (366)
      Increase (decrease) in accounts payable and accrued
         expenses                                                  849        (1,108)         (603)        1,327             465
                                                              ---------     ----------    --------      --------      -----------
Net cash provided by operating activities                        5,514         3,572         1,948             -          11,034
                                                              ---------     ----------    --------      --------      -----------


INVESTING ACTIVITIES:
---------------------
   Purchase of property plant and equipment                     (5,849)       (2,485)         (187)            -          (8,521)
                                                              ---------     ----------    --------      --------      -----------
Net cash used in investing activities                           (5,849)       (2,485)         (187)            -          (8,521)
                                                              ---------     ----------    --------      --------      -----------

</TABLE>














                                     - 94 -
<PAGE>

                          SBARRO, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                CONSOLIDATING STATEMENT OF CASH FLOWS (CONTINUED)

                   FOR THE FISCAL YEAR ENDED DECEMBER 28, 2003

                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                             GUARANTOR   NONGUARANTOR                 CONSOLIDATED
                                                                PARENT     SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS       TOTAL
                                                                ------     ------------  ------------  ------------       -----
<S>                                                                <C>        <C>             <C>          <C>               <C>
FINANCING ACTIVITIES:
---------------------
   Mortgage principal repayments                                     -          (154)            -             -            (154)
   Tax distributions                                            (1,100)            -             -             -          (1,100)
   Intercompany balances                                         3,314        (1,876)       (1,438)            -               -
                                                              ---------     ----------    --------      --------      -----------

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

Increase in cash and cash equivalents                            1,879          (943)          323             -           1,259

Cash and cash equivalents at beginning of year                  47,657         6,539           975             -          55,171
                                                              ---------     ----------    --------      --------      -----------
Cash and cash equivalents at end of period                    $ 49,536      $  5,596      $  1,298      $      -        $ 56,430
                                                              =========     ==========    =========     ========      ===========

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

</TABLE>






                                     - 95 -
<PAGE>



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

NONE


ITEM 9A. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

The  Company's  management,  with  the  participation  of  the  Company's  Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of the Company's  disclosure controls and procedures (as such term is defined in
Rules 13a-15 (e) and 15d-15 (e) under the  Securities  Exchange Act of 1934,  as
amended  (the  "Exchange  Act"))  as of the end of the  period  covered  by this
report.  Based on such  evaluation,  the Company's Chief  Executive  Officer and
Chief  Financial  Officer,  have  concluded  that the  disclosure  controls  and
procedures are effective.

INTERNAL CONTROL OVER FINANCIAL REPORTING.

Expected as described  above,  there have not been any changes in the  Company's
internal  control  over  financial  reporting  (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) since the fourth quarter of 2005
that have materially  affected,  or are reasonable likely to materially  affect,
the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None























                                     - 96 -
<PAGE>

                                    PART III


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

         Our directors  and executive  officers and their ages at March 31, 2006
are:

<TABLE>
<CAPTION>
        Name                           Age                     Position
        ----                           ---                     --------
<S>                                     <C>
        Mario Sbarro                    64      Chairman of the Board and Director
        Anthony Sbarro                  59      Vice Chairman of the Board, Treasurer and
                                                Director
        Joseph Sbarro                   65      Senior Executive Vice President, Secretary
                                                and Director
        Peter  Beaudrault               51      President - Chief Executive Officer and Director
        Anthony J. Missano              47      President,  Business Development and Corporate Vice
                                                President
        Carmela N. Merendino            41      Vice President - Administration
        Anthony J. Puglisi              56      Vice President and Chief Financial Officer
        Richard A. Mandell              63      Director
        Michael O'Donnell               50      Director
        Bernard Zimmerman               73      Director
</TABLE>

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

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

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

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

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






                                     - 97 -
<PAGE>

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

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

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

MICHAEL  O'DONNELL has been Chairman of the Board of Directors,  Chief Executive
Officer  and  President  of Champps  Entertainment,  Inc.,  a  restaurant  chain
operator and franchisor,  since March 2005. He served as our President and Chief
Executive  Officer from September 2003 until he joined Champps  Entertainment in
March  2005.  Prior  to his  joining  Sbarro,  Mr.  O'Donnell  was  an  industry
consultant  from January  2003 and, for more than five years prior to that,  was
the President and Chief Executive Officer of New Concepts at Outback  Steakhouse
Inc., a restaurant chain. Mr. O'Donnell became a director of Sbarro in September
2003. Mr. O'Donnell is also a director of Champps Entertainment.

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

Our certificate of  incorporation  provides that our board of directors shall be
divided  into three  classes with the classes to be as nearly equal in number as
the then total number of directors  constituting the entire board permits.  Each
class is elected for a term of three years.

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

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





                                     - 98 -
<PAGE>

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

During 2005, our officers,  directors and shareholders were not required to file
reports under Section 16(a) of the Securities Exchange Act of 1934.

We have adopted a Code of Ethics that applies to, among  others,  our  principal
executive  officer,   principal  financial  officer,  and  principal  accounting
officer, controller and other persons performing similar functions. We undertake
to provide to any person,  without charge,  upon request,  a copy of our Code of
Ethics.  If you wish a copy of our Code of  Ethics,  please  write to our  Chief
Financial  Officer,  Sbarro,  Inc., 401  Broadhollow  Road,  Melville,  New York
11747-4714.








                                     - 99 -
<PAGE>



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

SUMMARY COMPENSATION TABLE

The following table sets forth  information  concerning the  compensation of our
five most highly  compensated  persons who were serving as executive officers at
the  end  of  our  2005  year  for  services  in all  capacities  to us and  our
subsidiaries during our 2005, 2004 and 2003 years:

<TABLE>
<CAPTION>
                                                                                Annual                  All Other
Name and                                                                     Compensation             Compensation
                                                                             ------------             ------------
Principal Position                                          Year        Salary        Bonus (1)
------------------                                          ----        ------        ---------

<S>                                                         <C>      <C>              <C>
Mario Sbarro..........................................      2005     $700,935         $225,000             --
Chairman of the Board, President and                        2004     $726,321         $157,500             --
      Chief Executive Officer                               2003     $700,000             --               --

Anthony Sbarro........................................      2005     $409,100         $225,000             --
Vice Chairman of the Board and Treasurer                    2004     $424,631         $157,500             --
                                                            2003     $400,000             --               --

Joseph Sbarro.........................................      2005     $412,303         $225,000             --
Senior Executive Vice President and                         2004     $427,792         $157,500             --
     Secretary                                              2003     $400,000             --               --

Peter Beaudrault (2)..................................      2005     $418,095         $202,500             --
President and Chief Executive Officer                       2004     $303,808          $94,500             --

Anthony Missano.................................            2005     $292,525         $132,750             --
President of Business Development                           2004     $230,527          $73,600             --
                                                            2003     $225,988             --               --

Michael O'Donnell (3).................................      2005     $ 96,804             --               --
Former President and Chief Executive Officer                2004     $465,418         $141,750             --
                                                            2003     $133,816             --               --
</TABLE>

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

(2)      Mr. Beaudrault was elected our President and Chief Executive Officer on
         March 4, 2005.

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





                                    - 100 -
<PAGE>



COMPENSATION OF DIRECTORS

Our non-employee  directors receive a retainer at the rate of $20,000 per annum,
a fee of $1,500 for each  meeting of the Board  attended and a fee of $1,000 for
each meeting of a committee of the Board  attended on which the director  serves
if the  meeting  is not held on the  same day as a  meeting  of the  Board.  The
Chairman of the Audit Committee receives a $2,500 per annum retainer in addition
to regular committee  compensation and non-employee directors are reimbursed for
their  reasonable  travel and other  expenses  incurred in  attending  Board and
committee meetings.

In February 2006, our board granted  special event bonuses to each of Richard A.
Mandell,  Michael O'Donnell and Bernard Zimmerman,  our non-employee  directors,
which  provide for each to receive a bonus in the event of a public  offering of
our common stock,  a change in control of Sbarro,  including by merger,  sale of
stock or sale of assets, or a liquidation or dissolution of Sbarro.  The special
event bonus will be based on the per share  proceeds  (as defined in the special
event bonus agreements we have entered into with these three directors) received
in such transaction in excess of a certain threshold amount.

EMPLOYMENT AGREEMENTS

On July 26, 2005, we entered into an employment agreement with Peter Beaudrault,
our President and Chief Executive  Officer,  for a term ending on March 4, 2008,
subject to  earlier  termination  by us or Mr.  Beaudrault  following  specified
notice.  The agreement  provides,  among other  things,  for an annual salary of
$450,000,  subject to  increase  at the  discretion  of our board of  directors;
annual  performance  bonus beginning in 2005 to be based upon the achievement of
increases  in  EBITDA,  as  defined,  and  other  objectives  to be set forth in
business plans and budgets  approved from time to time by our board;  $1,000,000
of life insurance;  the  reimbursement  for certain travel and housing  expenses
incurred;  and a special  incentive award. The special  incentive award which is
designed to reward Mr. Beaudrault for improvements in our adjusted EBITDA,  cash
position and long term debt position over the term of the agreement,  vests upon
termination of Mr. Beaudrault's  employment and is reduced in the event of early
termination of employment and, when earned, is payable, with interest, in twelve
equal quarterly installments.  Alternatively,  in the event of a public offering
of our common  stock,  a change in control (as defined) of Sbarro,  including by
merger,  sale of stock or sale of assets,  or a liquidation  or  dissolution  of
Sbarro,  the  special  incentive  award will be based on the per share  proceeds
received  in excess of a  threshold  amount.  Since the  ultimate  amount of the
special incentive award is not known until termination of agreement; the special
incentive award is subject to variable plan accounting.  There will be no charge
to our earnings until our EBITDA,  cash position and/or  long-term debt position
improves or a special  event  occurs.  Although no amount is as yet payable with
respect thereto  compensation expense relating to the special incentive award of
$689,000  was accrued in 2005 as a result of  improvement  in our  EBITDA,  cash
position or long term debt position.





                                    - 101 -
<PAGE>



EXECUTIVE OFFICER SPECIAL EVENT BONUSES:

We have entered into special  event bonus  agreements  with Anthony J.  Puglisi,
Vice President and our Chief  Financial  Officer,  Carmela  Merendino,  our Vice
President-Administration,   and  Anthony  Missano,  President  of  our  Business
Development Division,  which provide for them to receive a bonus in the event of
a public offering of our common stock, a change in control of Sbarro,  including
by merger,  sale of stock or sale of assets,  or a liquidation or dissolution of
Sbarro.  The  special  event bonus will be based on the per share  proceeds  (as
defined in the agreements)  received in such  transaction in excess of a certain
threshold amount.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

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

Bernard  Zimmerman & Company,  Inc., of which Bernard  Zimmerman,  a director of
Sbarro,  is  President  and  a  majority  shareholder,   renders  financial  and
consulting assistance to us, for which it received fees of approximately $32,000
for services rendered during our 2005 year.

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





                                    - 102 -
<PAGE>





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

The following  table sets forth certain  information  regarding the ownership of
shares of our common  stock as of March 31, 2006 by (1)  holders  known to us to
beneficially  own more than five percent of our  outstanding  common stock,  (2)
each of our directors,  (3) the persons named in the summary  compensation table
in Item 11 of this report and (4) all of our directors and executive officers as
a group. We understand  that,  except as noted below,  each beneficial owner has
sole voting and investment power with respect to all shares attributable to such
owner.

<TABLE>
<CAPTION>
                                                                     Shares Beneficially Owned
Beneficial Owner                                                   Number(1)             Percent
----------------                                                   ---------             -------
<S>                                                                <C>                   <C>
Mario Sbarro (2).........................................          4,022,614(3)          56.9%
Anthony Sbarro (2).......................................          3,731,684(3)          52.8%
Joseph Sbarro (2) .......................................          2,497,884(3)          35.4%
Franklin Montgomery .....................................          4,253,906(4)          60.2%
All directors and executive officers as a group
    (13 persons)  .......................................          7,038,382(5)          99.6%
</TABLE>


(1)      Under the rules of the SEC, for purposes of determining  the beneficial
         ownership of shares in this table, a person is the beneficial  owner of
         all shares as to which the person has or shares  voting or  dispositive
         power.  Therefore,  persons sharing voting or dispositive  power of the
         same shares are each deemed the beneficial owner of those shares.

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

(3)      Includes  2,497,884  shares owned by the Trust of Carmela  Sbarro.  The
         trust was created by Carmela Sbarro for her benefit and for the benefit
         of her  descendants,  including Mario,  Joseph and Anthony Sbarro.  The
         trustees of the trust are Franklin  Montgomery,  whose business address
         is 1270 Avenue of the Americas,  New York,  New York 10020,  and Mario,
         Anthony  and  Joseph  Sbarro.  Each  trustee  may be  deemed  to be the
         beneficial owner of all these shares with shared voting and dispositive
         power.

(4)      As trustee  of the Trust of Joseph  Sbarro,  a trust  created by Joseph
         Sbarro  for  his  benefit  and  the  benefit  of his  descendants,  Mr.
         Montgomery  has sole voting and  dispositive  power as to the 1,756,022
         shares owned by that trust and, as  co-trustee  of the Trust of Carmela
         Sbarro (see Note 3), Mr.  Montgomery has shared voting and  dispositive
         power as to the 2,497,884 shares owned by that trust. As a result,  Mr.
         Montgomery,  whose address is 1270 Avenue of the  Americas,  Suite 610,
         New York, New York 10020,  may be deemed to be the beneficial  owner of
         an aggregate  of 4,253,906  shares  (60.2%) of our  outstanding  common
         stock.






                                    - 103 -
<PAGE>

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

We do not have any compensation  plans,  contracts or arrangements for employees
under which any of our equity  securities are authorized for issuance.  See Item
11,   "Executive   Compensation"  for  information   concerning   special  bonus
arrangements  we have with certain  directors  and executive  officers.  Certain
employees  also  have  similar  arrangements.  See  also  Note  11 of  Notes  to
Consolidated Financial Statements in Item 11 of this report.





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On April 5,  2001,  we loaned  $3.2  million  to  certain  of our  shareholders,
including:  Mario Sbarro, $1.1 million,  Joseph Sbarro, $1.2 million and Anthony
Sbarro,  $.9 million.  The due dates of the related  notes have been extended to
April 6, 2007.  The notes bear interest at the rate of 4.63% per annum,  payable
annually. As of January 1, 2006, the balance of these loans was $2.9 million.

On December 28, 2001,  we loaned $2.8  million to our  shareholders,  including:
Mario Sbarro,  $0.6 million,  Joseph Sbarro,  $.7 million,  Anthony Sbarro,  $.5
million,  and the Trust of  Carmela  Sbarro,  $1  million.  The due dates of the
related notes have been  extended to December 28, 2007.  The notes bear interest
at the rate of 2.48% per annum,  payable  annually.  As of January 1, 2006,  the
balance of these loans was $2.6 million.

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

In June 2003, Anna Missano,  the daughter of Joseph Sbarro,  issued to us a note
for  approximately  $90,000 for royalties due us for 2001 and 2000.  The note is
repayable at  approximately  $10,000 per year,  including  interest at 2.96% per
annum, with a balloon payment due on June 30, 2010. The principal balance of the
notes at January 1, 2006 was approximately $71,000.

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

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 $430,000 in 2005.

Companies  owned by a son of Anthony Sbarro are parties to franchise  agreements
with us containing terms similar to those in agreements  entered into by us with
unrelated  franchises.





                                    - 104 -
<PAGE>

Royalties under these agreements in 2004 and 2003 were approximately $89,000 and
$90,000 respectively. There were no royalties recorded in 2005.

As of July 2002, we sold the assets of a restaurant  to a  corporation  owned by
the  brother-in-law  of Mario Sbarro for $88,900.  That corporation also entered
into a franchise agreement with us. We received promissory notes for each of the
purchase price and initial  franchise fee that were payable over seven years and
bore interest on the unpaid  principal  balances at 7% per annum. In addition in
2002,  we  subleased  this  location  to that  franchisee.  In  March  2005,  we
re-purchased  the assets of this  restaurant for $88,900.  The remaining  unpaid
principal balance of the promissory notes were offset against the purchase price
of the assets.

In  October  2003,  we sold the  assets  of three  underperforming  Sbarro-owned
restaurants  that we proposed to close to entities  owned  separately by each of
three other of Anthony  Sbarro's  sons,  each of which  entered into a franchise
agreement with us. The franchise agreements provide for the payment of 5% of the
location's  sales as a  continuing  franchise  fee but did not  provide  for any
initial franchise fee. We have waived continuing franchise fees through 2006. In
addition, we subleased two of the locations to two of the franchisees.  Payments
under the subleases  are being made directly to the landlord by the  franchisees
and are not in default.

In January 2004, one of Mario Sbarro's daughters,  resigned from her position as
Manager of  Administration  - Construction.  A corporation  owned by her entered
into a one year agreement to provide consulting services related to construction
matters to us for a series of monthly payments totaling  $100,000.  In addition,
that corporation  provided consulting  services related to construction  matters
for our steakhouse joint venture of approximately $126,000 in 2005.

In February  2005,  a joint  venture in which we have a 70%  interest,  sold the
assets of one of its  restaurants  to a company owned by Gennaro A. Sbarro,  our
then  Corporate Vice  President and President of our  Franchising  and Licensing
Division  and  the  son of  Mario  Sbarro,  for  approximately  $900,000  (which
approximated  fair value)  resulting in a loss of  approximately  $284,000.  The
Company received $300,000 in cash and promissory notes of aggregating  $600,000.
The promissory  notes are payable  monthly in 72 equal monthly  installments  of
$8,333 including  interest at 5% per annum with a balloon payment of $111,375 at
maturity.  The joint  venture  also sold the  inventory  of the  restaurant  for
approximately  $67,000. The company owned by Mr. Sbarro entered into a sublease,
aggregating  and a  Security  Agreement  to  secure  the  obligations  under the
promissory  notes.  The sublease and Security  Agreement  are intended to enable
Sbarro to  recapture  the  business  in the event of an uncured  default.  As of
January 1, 2006 the balance of the promissory note was $546,000.

The mother of Mario,  Anthony and Joseph Sbarro,  who was a co-founder of Sbarro
and serves as a Vice President,  received $100,000 from us for services rendered
in 2005.

Other members of the immediate  families of Mario,  Anthony,  Joseph and Carmela
Sbarro who are our employees received an aggregate of approximately $517,000 for
services rendered in 2005.






                                    - 105 -
<PAGE>

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

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

AUDIT FEES:

The  aggregate  audit fees  billed for  professional  services  rendered  by our
principal  accountants for the audit of our annual financial statements included
in our  report on Form 10-K and  review of our  quarterly  financial  statements
included  in our  Reports on Form 10-Q were  $200,000  and  $225,000 in 2005 and
2004, respectively.

AUDIT-RELATED FEES:

The aggregate  fees billed for  assurance and related  services by our principal
accountants  that are  reasonably  related  to the  performance  of the audit or
review of our  financial  statements  not included in Audit Fees were $18,000 in
2005 and $13,500 in 2004. The services  included the audit of our 401(k) savings
plan in 2004, an individual  store  location  audit in each of 2005 and 2004 and
consultation on various new accounting  pronouncements and their impact on us in
2005 and 2004.

TAX FEES:

The aggregate fees billed for  professional  services  rendered by our principal
accountants  for tax  compliance,  tax advice and tax planning  were $45,000 and
$61,000 in 2005 and 2004, respectively. These services included, in each year, a
review of our corporate  income and franchise tax returns,  tax planning  advice
related to our tax returns and those of our shareholders and tax advice relating
to contemplated corporate transactions.

ALL OTHER FEES:

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

PRE-APPROVAL POLICIES AND PROCEDURES:

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









                                    - 106 -
<PAGE>






                                     PART IV
                                     -------


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

(A)      CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                            PAGE

Report of Independent Registered Public Accounting Firm                      47

Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005        48

Consolidated Statements of Operations for the years
         ended January 1, 2006, January 2, 2005 and December 28, 2003        50


Consolidated Statements of Shareholders' Equity (as restated) for the
         years ended January 1, 2006, January 2, 2005 and December 28, 2003  51


Consolidated Statements of Cash Flows for the years
         ended January 1, 2006, January 2, 2005 and December 28, 2003        52


Notes to Consolidated Financial Statements                                   54




                                    - 107 -
<PAGE>




(b)      Exhibits:

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

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

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

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

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

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

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

         *+10.01      Form of Indemnification Agreement between Sbarro, Inc. and
                      each of its directors and officers.  (Exhibit 10.04 to our
                      Annual Report on Form 10-K for the year ended December 31,
                      1989, File No. 1-8881)





                                    - 108 -
<PAGE>

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

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

         *10.03(b)    Letter Agreement dated June 20, 2003 between Sbarro,  Inc.
                      and Vistar  Corporation  (confidential  treatment has been
                      granted  with  respect to certain  portions of this letter
                      agreement).  (Exhibit  10.05 (b) to our  Annual  Report on
                      Form 10-K for the year ended  December 28, 2003,  File No.
                      333-90817).

         *+10.04      Employment  agreement  dated as of July 26,  2005  between
                      Sbarro,  Inc. and Peter  Beaudrault.  (Exhibit 99.1 to our
                      Current  Report on Form 8-K dated (date of earliest  event
                      reported) July 26, 2005, File No. 333-90817).

         *+10.05      Letter  agreement  dated December 29, 2003 between Sbarro,
                      Inc.  and  Anthony  J.  Puglisi  regarding  Mr.  Puglisi's
                      employment  with  Sbarro.  (Exhibit  10.08  to our  Annual
                      Report on Form 10-K for the year  ended  January  2, 2005,
                      File No. 333-90817).

         *+10.06      Letter  dated  December  10,  2004 from  Sbarro,  Inc.  to
                      Anthony Missano regarding potential "Special Event Bonus."
                      (Exhibit  10.09 to our Annual  Report on Form 10-K for the
                      year ended January 2, 2005, File No. 333-90817).

         *+10.07      Letter  dated  December  10,  2004 from  Sbarro,  Inc.  to
                      Carmela  Merendino   regarding  potential  "Special  Event
                      Bonus."  (Exhibit  10.10 to our Annual Report on Form 10-K
                      for the year ended January 2, 2005, File No. 333-90817).

         *+10.08(a)   Corporate  Office  Employee  Bonus Plan for 2005  (Exhibit
                      99.1 to our  Current  Report  on Form 8-K  dated  (date of
                      earliest  event   reported)   April  7,  2005,   File  No.
                      333-90817).

         *+10.08(b)   Corporate  Office  Employee  Bonus Plan for 2006  (Exhibit
                      99.1 to our  current  report  on Form 8-K  dated  (date of
                      earliest  event  reported)  December  8,  2005,  File  No.
                      333-90817).





                                    - 109 -
<PAGE>

         *+10.9(a)    Resolution regarding  non-employee  director  compensation
                      (Exhibit  99.2 to our  Current  Report  on Form 8-K  dated
                      (date of earliest event  reported) April 7, 2005, File No.
                      333-90817)

         *+10.9(b)    Form  of  Special  Event   Incentive  Bonus  Letter  dated
                      February  17, 2006  issued to each of Richard A.  Mandell,
                      Michael O'Donnell and Bernard  Zimmerman,  together with a
                      Schedule, pursuant to Instruction 2 of the instructions to
                      Item 601 of Regulation S-K,  setting forth the differences
                      among the three Special  Event  Incentive  Bonus  Letters.
                      (Exhibit  99.1 to our  Current  Report  on Form 8-K  dated
                      (date of earliest event reported)  February 17, 2006, File
                      No. 333-90817).

         12.01        Computation of ratio of earnings to fixed charges

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

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

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

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

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

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

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





                                    - 110 -
<PAGE>

     (c)  Financial Statement Schedules
          -----------------------------

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

                                                                            Page

           Report of Independent Registered Public Accounting Firm           S-1

           Valuation and Qualifying Accounts for 2005, 2004 and 2003         S-2



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





                                    - 111 -
<PAGE>




                                   UNDERTAKING

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







                                    - 112 -
<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized on April 3, 2006.

                             SBARRO, INC.

                             By:  /s/ Peter Beaudrault
                                  ------------------------------------------
                                  Peter Beaudrault, President and Chief
                                  Executive Officer


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

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

/s/  Peter Beaudrault             President and Chief            April 3, 2006
---------------------------       Executive Officer
Peter Beaudrault                  Principal Executive Officer
                                  and Director


/s/  Anthony J. Puglisi           Vice President,                April 3, 2006
---------------------------       Chief Financial Officer
Anthony J. Puglisi                and Principal Accounting
                                  Officer


/s/  Mario Sbarro                 Director                       April 3, 2006
---------------------------
Mario Sbarro

/s/  Joseph Sbarro                Director                       April 3, 2006
---------------------------
Joseph Sbarro

/s/  Anthony Sbarro               Director                       April 3, 2006
---------------------------
Anthony Sbarro

/s/  Richard A. Mandell           Director                       April 3, 2006
---------------------------
Richard A. Mandell

/s/  Michael O'Donnell            Director                       April 3, 2006
---------------------------
Michael O'Donnell

/s/  Bernard Zimmerman            Director                       April 3, 2006
---------------------------
Bernard Zimmerman



<PAGE>

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


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



The audits  referred  to in our report  dated  March 31,  2006  relating  to the
consolidated  financial  statements of Sbarro,  Inc. and subsidiaries,  which is
contained in Item 8 of this Form 10-K  included  the audits of the  accompanying
financial  statement  schedule for the years ended  January 1, 2006,  January 2,
2005  and  December  28,  2003.  This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.

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



/s/ BDO Seidman, LLP

Melville, New York
March 31, 2006




                                       S-1



<PAGE>


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

                    FOR THE THREE YEARS ENDED JANUARY 1, 2006



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

January 1, 2006
---------------

Allowance for doubtful
accounts receivable                          $431               $14                           $122(1)            $323
                                             ====               ===                           =======            ====

Provision for store
closings/remodels                           $  62              $531          $   51           $644(2)            $  -
                                            =====              ====          ======           =======            ====

January 2, 2005

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

Provision for store
closings/remodels                            $987              $815          $(889)           $851(3)            $ 62
                                             ====              ====          ======           =======            ====

December 28, 2003

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

Provision for store
closings/remodels                          $1,452            $2,025          $(106)         $2,384(4)            $987
                                           ======            ======          ======         =========            ====
</TABLE>




(1) Includes write off of uncollected accounts.

(2)  Includes  write off of  property  and  equipment  of $684 and  payments  to
landlord and others for closed locations of $65 offset by proceeds received upon
sale of equipment of $105

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

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

(5) Represents reclassifications to other accounts.




                                      S-2
<PAGE>



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


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

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

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

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

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

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

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

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

         *+10.01      Form of Indemnification Agreement between Sbarro, Inc. and
                      each of its directors and officers.  (Exhibit 10.04 to our
                      Annual Report on Form 10-K for the year ended December 31,
                      1989, File No. 1-8881)

         *10.02       Tax Payment Agreement dated as of September 28, 1999 among
                      Sbarro, Inc., Mario Sbarro,  Joseph Sbarro,  Joseph Sbarro
                      (1994) Family Limited  Partnership,  Anthony  Sbarro,  and
                      Mario Sbarro and Franklin Montgomery,



<PAGE>

                      not  individually but as Trustees under that certain Trust
                      Agreement  dated April 28, 1984 for the benefit of Carmela
                      Sbarro   and  her   descendants   (Exhibit   10.6  to  our
                      Registration Statement on Form S-4, File No. 333-90817)

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

         *10.03(b)    Letter Agreement dated June 20, 2003 between Sbarro,  Inc.
                      and Vistar  Corporation  (confidential  treatment has been
                      granted  with  respect to certain  portions of this letter
                      agreement).  (Exhibit  10.05 (b) to our  Annual  Report on
                      Form 10-K for the year ended  December 28, 2003,  File No.
                      333-90817).

         *+10.04      Employment  agreement  dated as of July 26,  2005  between
                      Sbarro,  Inc. and Peter  Beaudrault.  (Exhibit 99.1 to our
                      Current  Report on Form 8-K dated (date of earliest  event
                      reported) July 26, 2005, File No. 333-90817).

         *+10.05      Letter  agreement  dated December 29, 2003 between Sbarro,
                      Inc.  and  Anthony  J.  Puglisi  regarding  Mr.  Puglisi's
                      employment  with  Sbarro.  (Exhibit  10.08  to our  Annual
                      Report on Form 10-K for the year  ended  January  2, 2005,
                      File No. 333-90817).

         *+10.06      Letter  dated  December  10,  2004 from  Sbarro,  Inc.  to
                      Anthony Missano regarding potential "Special Event Bonus."
                      (Exhibit  10.09 to our Annual  Report on Form 10-K for the
                      year ended January 2, 2005, File No. 333-90817).

         *+10.07      Letter  dated  December  10,  2004 from  Sbarro,  Inc.  to
                      Carmela  Merendino   regarding  potential  "Special  Event
                      Bonus."  (Exhibit  10.10 to our Annual Report on Form 10-K
                      for the year ended January 2, 2005, File No. 333-90817).

         *+10.08(a)   Corporate  Office  Employee  Bonus Plan for 2005  (Exhibit
                      99.1 to our  Current  Report  on Form 8-K  dated  (date of
                      earliest  event   reported)   April  7,  2005,   File  No.
                      333-90817).

         *+10.08(b)   Corporate  Office  Employee  Bonus Plan for 2006  (Exhibit
                      99.1 to our  current  report  on Form 8-K  dated  (date of
                      earliest  event  reported)  December  8,  2005,  File  No.
                      333-90817).

         *+10.9(a)    Resolution regarding  non-employee  director  compensation
                      (Exhibit  99.2 to our  Current  Report  on Form 8-K  dated
                      (date of earliest event  reported) April 7, 2005, File No.
                      333-90817)

         *+10.9(b)    Form  of  Special  Event   Incentive  Bonus  Letter  dated
                      February  17, 2006  issued to each of Richard A.  Mandell,
                      Michael O'Donnell and Bernard  Zimmerman,  together with a
                      Schedule, pursuant to Instruction 2 of the instructions to
                      Item 601 of Regulation S-K,  setting forth the differences
                      among the three Special  Event  Incentive  Bonus  Letters.
                      (Exhibit  99.1 to our  Current  Report  on Form


<PAGE>
                      8-K dated (date of earliest event  reported)  February 17,
                      2006, File No. 333-90817).

         12.01        Computation of ratio of earnings to fixed charges

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

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

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

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

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

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

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