# SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 10-Q

| | Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
| | ---------------------------------------------------------------------------------------

|                                    |                                 
|----------------------------------- | --------------------------------
|For the quarter ended July 16, 2006 | Commission file number 333-90817

SBARRO, INC. (Exact
name of registrant as specified in its Charter)

|                                                    |                           
|--------------------------------------------------- | --------------------------
|NEW YORK                                            | 11-2501939                
|(State or other jurisdiction of                     | (I.R.S. Employer I.D. No.)
|incorporation or organization)                     
|401 Broad Hollow Road, Melville, New York           | 11747-4714                
|(Address of principal executive offices)            | (Zip Code)                
|Registrants telephone number, including area code: | (631) 715-4100            

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, and (2) has been subject
to such filing requirements for the past 90 days.

Yes     
      No

Indicate by check mark whether the
registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer

|                       
|-----------------------
|Large Accelerated filer

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

The number of shares of Common Stock
of the registrant outstanding as of August 29, 2006 was 7,064,328.



---

# SBARRO, INC.

# FORM 10-Q INDEX

|PART I.     FINANCIAL INFORMATION                                             | PAGES
|----------------------------------------------------------------------------- | -----
|Consolidated Financial Statements:                                            |      
|Balance Sheets - July 16, 2006 (unaudited) and January 1, 2006                | 3-4  
|                                                                             
|Statements of Operations (unaudited) - Twenty Eight Weeks and                 |      
|Twelve Weeks ended July 16, 2006 and July 17, 2005                            | 5-6  
|                                                                             
|Statements of Cash Flows (unaudited) - Twenty Eight Weeks ended July 16, 2006 |      
|and July 17, 2005                                                             | 7-8  
|                                                                             
|Notes to Unaudited Consolidated Financial Statements                          | 9-25 
|                                                                             
|Management's Discussion and Analysis of Financial Condition and Results      
|of Operations                                                                 | 26-38
|                                                                             
|Qualitative and Quantitative Disclosures of Market Risk                       | 39   
|                                                                             
|Controls and Procedures                                                       | 40   
|PART II.     OTHER INFORMATION                                                | 41-42
|                                                                             

Page 2



---

# Part I  Financial
Information

# Item 1.   Consolidated
Financial Statements

# SBARRO, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS 
ASSETS

|                                                    | July 16, 2006 |  | January 1, 2006
|--------------------------------------------------- | ------------- |  | ---------------
|
|
|Current assets:                                     |               |  |                
|                                                    |               | 
|Cash and cash equivalents                           |               |  | $              
|Receivables, net of allowance for doubtful accounts |               | 
|of $433 in 2006 and $323 in 2005:                   |               | 
|Franchise                                           |               |  |                
|Other                                               |               |  |                
|                                                    |               |  |                
|                                                    |               |  |                
|                                                    |               | 
|Inventories                                         |               |  |                
|Prepaid expenses                                    |               |  |                
|                                                    |               |  |                
|Total current assets                                |               |  |                
|                                                    |               | 
|Property and equipment, net                         |               |  |                
|                                                    |               | 
|Intangible assets:                                  |               | 
|Trademarks                                          |               |  |                
|Goodwill                                            |               |  |                
|Deferred financing costs, net                       |               |  |                
|Loans receivable from shareholders                  |               |  |                
|                                                    |               | 
|Other assets                                        |               |  |                
|                                                    |               |  |                
|                                                    |               |  | $              
|                                                    |               |  |                

See notes to unaudited
consolidated financial statements.

Page 3



---

# SBARRO, INC. AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 
(CONTINUED)
LIABILITIES &
SHAREHOLDERS EQUITY

|                                               | July 16, 2006 |  | January 1, 2006
|---------------------------------------------- | ------------- |  | ---------------
|
|
|Current liabilities:                           |               |  |                
|Accounts payable                               |               |  | $              
|Accrued expenses                               |               |  |                
|Accrued interest payable                       |               |  |                
|Insurance premium financing                    |               |  |                
|Current portion of mortgage payable            |               |  |                
|                                               |               |  |                
|Total current liabilities                      |               |  |                
|                                               |               | 
|Deferred rent                                  |               |  |                
|                                               |               | 
|Long-term debt, net of original issue discount |               |  |                
|                                               |               | 
|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 July 16, 2006 and January 1, 2006           |               |  |                
|Additional paid-in capital                     |               |  |                
|Retained earnings                              |               |  |                
|                                               |               |  |                
|                                               |               |  |                
|                                               |               |  |                
|                                               |               |  | $              
|                                               |               |  |                

See notes to unaudited
consolidated financial statements.

Page 4



---

# SBARRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED)

|                                                         | For the twenty eight weeks ended | 
|-------------------------------------------------------- | -------------------------------- | 
|
|
|Revenues:                                                |                                  | 
|Restaurant sales                                         |                                  | 
|Franchise related income                                 |                                  | 
|Real estate and other                                    |                                  | 
|                                                         |                                  | 
|Total revenues                                           |                                  | 
|                                                         |                                  | 
|Costs and expenses:                                      |                                  | 
|Cost of food and paper products                          |                                  | 
|Payroll and other employee benefits                      |                                  | 
|Other operating costs                                    |                                  | 
|Depreciation and amortization                            |                                  | 
|General and administrative                               |                                  | 
|Asset impairment, restaurant closings/remodels and       |                                  | 
|loss on sale of other concept restaurant                 |                                  | 
|                                                         |                                  | 
|Total costs and expenses                                 |                                  | 
|                                                         |                                  | 
|                                                         |                                  | 
|Operating income                                         |                                  | 
|                                                         |                                  | 
|                                                         |                                  | 
|Other (expense) income:                                  |                                  | 
|Interest expense                                         |                                  | 
|Interest income                                          |                                  | 
|Equity in net income (loss) of unconsolidated affiliates |                                  | 
|                                                         |                                  | 
|Net other expense                                        |                                  | 
|                                                         |                                  | 
|                                                         |                                  | 
|Loss before income taxes                                 |                                  | 
|                                                         |                                  | 
|                                                         |                                  | 
|Income taxes                                             |                                  | 
|                                                         |                                  | 
|                                                         |                                  | 
|Net loss                                                 |                                  | 
|                                                         |                                  | 

See notes to unaudited consolidated financial statements.

Page 5



---

# SBARRO, INC. AND
SUBSIDIARIES

# CONSOLIDATED STATEMENTS OF OPERATIONS 
(UNAUDITED)

|                                                          | For the twelve weeks ended | 
|--------------------------------------------------------- | -------------------------- | 
|
|
|Revenues:                                                 |                            | 
|Restaurant sales                                          |                            | 
|Franchise related income                                  |                            | 
|Real estate and other                                     |                            | 
|                                                          |                            | 
|Total revenues                                            |                            | 
|Costs and expenses:                                       |                            | 
|Cost of food and paper products                           |                            | 
|Payroll and other employee benefits                       |                            | 
|Other operating costs                                     |                            | 
|Depreciation and amortization                             |                            | 
|General and administrative                                |                            | 
|Asset impairment, restaurant closings/remodels and        |                            | 
|loss on sale of other concept restaurant                  |                            | 
|                                                          |                            | 
|Total costs and expenses                                  |                            | 
|                                                          |                            | 
|                                                          |                            | 
|Operating income                                          |                            | 
|                                                          |                            | 
|                                                          |                            | 
|Other (expense) income:                                   |                            | 
|Interest expense                                          |                            | 
|Interest income                                           |                            | 
|Equity in net income (loss) of  unconsolidated affiliates |                            | 
|                                                          |                            | 
|Net other expense                                         |                            | 
|                                                          |                            | 
|                                                          |                            | 
|Loss before income taxes                                  |                            | 
|                                                          |                            | 
|                                                          |                            | 
|Income taxes                                              |                            | 
|                                                          |                            | 
|                                                          |                            | 
|Net loss                                                  |                            | 
|                                                          |                            | 

See notes to unaudited consolidated financial statements.

Page 6



---

# SBARRO, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)

|                                                           | For the twenty eight weeks ended | 
|---------------------------------------------------------- | -------------------------------- | 
|
|
|Operating Activities:                                      |                                  | 
|Net  loss                                                  |                                  | 
|Adjustments to reconcile net loss to net cash              |                                  | 
|used in operating activities:                              |                                  | 
|Depreciation and amortization                              |                                  | 
|Amortization of deferred financing costs                   |                                  | 
|Amortization of bond discount                              |                                  | 
|Provision for doubtful accounts receivable                 |                                  | 
|(Decrease)/increase in deferred rent                       |                                  | 
|Asset impairment, restaurant closings/remodels and loss on |                                  | 
|sale of  other concept restaurant                          |                                  | 
|Gain on sale of restaurant property and equipment          |                                  | 
|Equity in net (income)/loss of unconsolidated affiliates   |                                  | 
|                                                           |                                  | 
|Changes in operating assets and liabilities:               |                                  | 
|Increase in receivables                                    |                                  | 
|(Increase)/decrease  in inventories                        |                                  | 
|Increase in prepaid expenses                               |                                  | 
|Decrease in other assets                                   |                                  | 
|Decrease in accounts payable and accrued expenses          |                                  | 
|Increase in accrued interest payable                       |                                  | 
|                                                           |                                  | 
|                                                           |                                  | 
|Net cash used in operating activities                      |                                  | 
|                                                           |                                  | 

See notes to unaudited consolidated financial statements.

Page 7



---

# SBARRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED) 
(Continued)

|                                                         | For the twenty eight weeks ended | 
|-------------------------------------------------------- | -------------------------------- | 
|
|
|Investing Activities:                                    |                                  | 
|Purchases of property and equipment                      |                                  | 
|Proceeds from sale of joint venture property & equipment |                                  | 
|Proceeds from sale of restaurant property & equipment    |                                  | 
|Contributions from partners to joint ventures            |                                  | 
|Dividend received from unconsolidated affiliate          |                                  | 
|                                                         |                                  | 
|Net cash used in investing activities                    |                                  | 
|                                                         |                                  | 
|Financing Activities:                                    |                                  | 
|Mortgage principal repayments                            |                                  | 
|Repayment of loans by officers                           |                                  | 
|                                                         |                                  | 
|Net cash used in financing activities                    |                                  | 
|                                                         |                                  | 
|Decrease in cash and cash equivalents                    |                                  | 
|Cash and cash equivalents at beginning of year           |                                  | 
|                                                         |                                  | 
|Cash and cash equivalents at end of period               |                                  | 
|                                                         |                                  | 
|Supplemental disclosure of cash flow information:        |                                  | 
|Cash paid during the period for income taxes             |                                  | 
|                                                         |                                  | 
|Cash paid during the period for interest                 |                                  | 
|                                                         |                                  | 

| | Supplemental
disclosure of noncash financing information:In June 2006, we entered into a noncash
insurance premium financing agreement for $3.3 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to unaudited consolidated financial statements.

Page 8



---

# SBARRO, INC. AND SUBSIDIARIESNotes to Unaudited Consolidated Financial Statements (continued)

|1. |  | Basis
of presentation:
|-- |  | ----------------------

| | The
accompanying unaudited consolidated financial statements have been prepared in accordance
with the instructions for Form 10-Q and Regulation S-X related to interim period
financial statements and, therefore, do not include all information and footnotes
required by generally accepted accounting principles. However, in the opinion of our
management, all adjustments (consisting of normal recurring adjustments and accruals)
considered necessary for a fair presentation of the consolidated financial position of
Sbarro and our subsidiaries at July 16, 2006 and our consolidated results of operations
and cash flows for the twenty eight weeks ended July 16, 2006 and July 17, 2005 have been
included. The results of operations for interim periods are not necessarily indicative of
the results that may be expected for the entire year. Reference should be made to our
annual financial statements, including footnotes thereto, included in our Annual Report
on Form 10-K for the year ended January 1, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
items in the financial statements presented have been reclassified to conform to the 2006
presentation.
| | ---------------------------------------------------------------------------------------------------------------

|2. |  | Recent
Accounting Pronouncement:
|-- |  | --------------------------------

| | In
July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. (FIN) 48, Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109", which prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return.  In particular, this
interpretation requires uncertain tax positions to be recognized only if they are more-likely-than-not to
be upheld based on their technical merits. Additionally, the measurement of the tax
position will be based on the largest amount that is determined to have greater than a
50% likelihood of realization upon ultimate settlement. Any resulting cumulative effect
of applying the provisions of FIN 48 upon adoption would be reported as an adjustment to
the beginning balance of retained earnings in the period of adoption. FIN 48 will be
effective beginning fiscal 2007. We have not yet evaluated the impact of this
interpretation on our financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Senior
Notes:
|-- |  | -------------

| | The
$255 million of 11% senior notes we issued in 1999 are due September 15, 2009. Interest
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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 9



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

| | 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 that limit our ability to borrow funds, other than
certain permitted indebtedness, to make restricted payments including, among
other things, dividend payments, and to make investments in, among other things,
unrestricted subsidiaries. The indenture for the senior notes permits us to make
distributions to shareholders pursuant to a tax payment agreement between us and our
shareholders that contains 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Among
other covenants, the indenture requires that, in order for us to borrow, our consolidated
interest ratio coverage (as defined in the indenture), after giving pro forma effect to
the interest on the new borrowing, for the four most recently ended fiscal quarters must
be at least 2.5 to 1. As of July 16, 2006, that ratio was 1.8 to 1. As a result, we are
not presently able to borrow funds except for the specifically permitted indebtedness,
including up to $75 million of revolving credit loans.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
order to make restricted payments, that ratio must be at least 2.0 to 1, after giving pro
forma effect to the restricted payment and, in any event, is limited in dollar amount
pursuant to a formula contained in the indenture. We refer to the amount that is
available for us to make dividends and other restricted payments as the restricted
payment availability. We cannot make restricted payments (other than distributions
pursuant to the tax payment agreement) until we increase the restricted payment
availability by approximately $29.9 million, and then only to the extent of any excess
over that amount.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the
banks LIBOR rate plus 1.5% at the time of any borrowings for interest periods of 1,
2, 3 or 6 months. The credit facility contains various covenants, including a minimum
coverage ratio of at least 1.0 to 1.0 at the end of each quarter on a rolling four
quarter basis. The minimum coverage ratio is primarily a ratio of EBITDA (less unfinanced
capital expenditures) to the current maturity of long term indebtedness and interest
expense. There are currently $1.9 million of letters of credit outstanding under the new
facility.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 10



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

| | Mortgage:
| | ---------

| | In
March 2000, one of our subsidiaries obtained a $16 million, 8.4% loan due in 2010,
secured by a mortgage on our corporate headquarters building. The loan is payable in
monthly installments of principal and interest of $0.1 million. The outstanding principal
balance of the loan as of July 16, 2006 was $14.8 million. The mortgage agreement
contains various covenants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
were in compliance with all covenants in the indenture for the senior notes, our credit
line and our mortgage as of July 16, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | Insurance Premium Financing:
| | ----------------------------

| | In
June 2006, we entered into a short term insurance premium financing agreement for $3.3
million. Under the agreement, we are required to make three quarterly payments beginning
August 1, 2006 of $1.2 million, including interest with the final payment due February 1,
2007. The annual percentage rate is 6.49%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Guarantee Arrangements Pertaining to Other Concepts:
| | ----------------------------------------------------

| | We
are party to separate financial guarantees to a bank for two of our unconsolidated joint
ventures. To varying degrees, our guarantees involve elements of performance and credit
risk. The possibility of our having to honor our guarantee is largely dependent upon the
future operation of the joint ventures. The joint ventures were in compliance with all
covenants as of July 16, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Business Segment Information
|-- |  | ----------------------------

| | We
operate two business segments. Our company owned restaurant segment is comprised of the
operating activities of our company owned Quick Service 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 makers do not
review the assets by segment to assess the segments performance, as the assets are
managed on an entity-wide basis.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 11



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

| | 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
(in thousands):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Company
Owned
Restaurants |  | Franchise
Restaurants |         | Totals
|----------------------------------------- | ------------------------- |  | --------------------- | ------- | ------
|                                          |                           |  |                       |         |       
|Twelve weeks ended July 16, 2006:         |                           |  |                       |         |       
|Total revenue                             |                           |  | $                     | 72,700  |       
|                                          |                           |  |                       |         |       
|Operating income before unallocated costs |                           |  |                       | 9,378   |       
|Unallocated costs and expenses (1)        |                           |  |                       |         |       
|                                          |                           |  |                       |        
|Operating income                          |                           |  |                       |         |       
|                                          |                           |  |                       |        
|                                          |                           | 
|Twelve weeks ended July 17, 2005:         |                           | 
|Total revenue                             |                           |  | $                     | 71,830  |       
|                                          |                           |  |                       |         |       
|Operating income before unallocated costs |                           |  |                       | 7,243   |       
|Unallocated costs and expenses (1)        |                           |  |                       |         |       
|                                          |                           |  |                       |        
|Operating income                          |                           |  |                       |         |       
|                                          |                           |  |                       |        
|
|                                          |                           |  |                       |         |       
|Twenty eight weeks ended July 16, 2006:   |                           | 
|Total revenue                             |                           |  | $                     | 168,476 |       
|                                          |                           |  |                       |         |       
|Operating income before unallocated costs |                           |  |                       | 21,451  |       
|Unallocated costs and expenses (1)        |                           |  |                       |         |       
|                                          |                           |  |                       |        
|Operating income                          |                           |  |                       |         |       
|                                          |                           |  |                       |        
|                                          |                           | 
|Twenty eight weeks ended July 17, 2005:   |                           | 
|Total revenue                             |                           |  | $                     | 164,803 |       
|                                          |                           |  |                       |         |       
|Operating income before unallocated costs |                           |  |                       | 15,391  |       
|Unallocated costs and expenses (1)        |                           |  |                       |         |       
|                                          |                           |  |                       |        
|Operating income                          |                           |  |                       |         |       
|                                          |                           |  |                       |        

---

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

Page 12



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

|5. |  | Guarantor
and non-guarantor financial statements:
|-- |  | -------------------------------------------------

| | Certain
subsidiaries have guaranteed amounts outstanding under our senior notes and 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 and the
credit agreement on a joint and several basis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following condensed consolidating financial information presents:
| | ---------------------------------------------------------------------

| | (1) |  | Condensed
unaudited consolidating balance sheets as of July 16, 2006 and January                1,
2006 and unaudited statements of operations for the twenty eight and twelve
               weeks ended July 16, 2006 and July 17, 2005 and unaudited statements of
cash                flows for twenty eight weeks ended July 16, 2006 and July 17, 2005 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 13



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Balance Sheet
As of July 16, 2006 
(In thousands) 
(Unaudited) 
ASSETS

|                                   | Parent |  | Guarantor
Subsidiaries |         | Nonguarantor
Subsidiaries |   | Eliminations |  | Consolidated
Total
|---------------------------------- | ------ |  | ---------------------- | ------- | ------------------------- | - | ------------ |  | ------------------
|                                   |        |  |                        |         |                           |   |              |  |                   
|Current assets:                    |        |  |                        |         |                           |   |              |  |                   
|                                   |        | 
|Cash and cash equivalents          |        |  | $                      | 57,198  |                           | $ | 3,992        |  | $                 
|Receivables, net of allowance for  |        | 
|doubtful accounts of $433          |        | 
|Franchise                          |        |  |                        | 1,951   |                           |   | -            |  |                   
|Other                              |        |  |                        | 3,783   |                           |   | 618          |  |                   
|                                   |        |  |                        |         |                           |   |              |  |                   
|                                   |        |  |                        | 5,734   |                           |   | 618          |  |                   
|                                   |        | 
|Inventories                        |        |  |                        | 1,357   |                           |   | 1,518        |  |                   
|Prepaid expenses                   |        |  |                        | 7,098   |                           |   | 1,690        |  |                   
|                                   |        |  |                        |         |                           |   |              |  |                   
|Total current assets               |        |  |                        | 71,387  |                           |   | 7,818        |  |                   
|                                   |        | 
|Intercompany receivables           |        |  |                        | 3,553   |                           |   | 460,362      |  |                   
|                                   |        | 
|Investment in subsidiaries         |        |  |                        | 67,450  |                           |   | 1,945        |  |                   
|                                   |        | 
|Property and equipment, net        |        |  |                        | 29,934  |                           |   | 45,736       |  |                   
|Trademarks                         |        |  |                        | 195,916 |                           |   | -            |  |                   
|Goodwill                           |        |  |                        | 9,204   |                           |   | -            |  |                   
|Deferred financing costs, net      |        |  |                        | 2,912   |                           |   | 137          |  |                   
|Loans receivable from shareholders |        |  |                        | 5,588   |                           |   | -            |  |                   
|Other assets                       |        |  |                        | 6,441   |                           |   | 1,154        |  |                   
|                                   |        |  |                        |         |                           |   |              |  |                   
|                                   |        |  | $                      | 392,385 |                           | $ | 517,152      |  | $                 
|                                   |        |  |                        |         |                           |   |              |  |                   

Page 14



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Balance Sheet 
As of July 16, 2006
(In thousands except share data)
(Unaudited)
LIABILITIES & SHAREHOLDERS EQUITY

|                                      | Parent |  | Guarantor
Subsidiaries |          | Nonguarantor
Subsidiaries |   | Eliminations |  | Consolidated
Total
|------------------------------------- | ------ |  | ---------------------- | -------- | ------------------------- | - | ------------ |  | ------------------
|                                      |        |  |                        |          |                           |   |              |  |                   
|Current liabilities:                  |        |  |                        |          |                           |   |              |  |                   
|Accounts payable                      |        |  | $                      | 6,671    |                           | $ | 186          |  | $                 
|Accrued expenses                      |        |  |                        | 16,733   |                           |   | 2,978        |  |                   
|Accrued interest payable              |        |  |                        | 9,453    |                           |   | -            |  |                   
|Insurance premium financing           |        |  |                        | 3,261    |                           |   | -            |  |                   
|Current portion of mortgage payable   |        |  |                        | -        |                           |   | 198          |  |                   
|                                      |        |  |                        |          |                           |   |              |  |                   
|Total current liabilities             |        |  |                        | 36,118   |                           |   | 3,362        |  |                   
|                                     
|Intercompany payables                 |        |  |                        | 458,249  |                           |   | -            |  |                   
|                                     
|Deferred rent                         |        |  |                        | 8,621    |                           |   | -            |  |                   
|                                     
|Long-term debt, net of original issue |        | 
|discount                              |        |  |                        | 253,790  |                           |   | 14,831       |  |                   
|                                     
|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       |                           |   | -            |  |                   
|Additional paid-in capital            |        |  |                        | (65,479  | )                         |   | 133,671      |  |                   
|Retained earnings (deficit)           |        |  |                        | (298,985 | )                         |   | 365,288      |  |                   
|                                      |        |  |                        |          |                           |   |              |  |                   
|                                      |        |  |                        | (364,393 | )                         |   | 498,959      |  |                   
|                                      |        |  |                        |          |                           |   |              |  |                   
|                                      |        |  | $                      | 392,385  |                           | $ | 517,152      |  | $                 
|                                      |        |  |                        |          |                           |   |              |  |                   

Page 15



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Balance Sheet
As of January 1, 2006 
(In thousands) 
(Unaudited)
ASSETS

|                                   | Parent |  | Guarantor
Subsidiaries |         | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total |       
|---------------------------------- | ------ |  | ---------------------- | ------- | ------------------------- | - | ------------ | - | ------------------ | ------
|Current assets:                    |        |  |                        |         |                           |   |              |   |                    |       
|Cash and cash equivalents          |        |  | $                      | 66,377  |                           | $ | 5,303        |   | $                  | 1,409 
|Receivables less allowance for     |        | 
|doubtful accounts of $323          |        | 
|Franchise                          |        |  |                        | 1,865   |                           |   | -            |   |                    | -     
|Other                              |        |  |                        | 3,385   |                           |   | 119          |   |                    | 140   
|                                   |        |  |                        |         |                           |   |              |   |                    |       
|                                   |        |  |                        | 5,250   |                           |   | 119          |   |                    | 140   
|Inventories                        |        |  |                        | 1,312   |                           |   | 1,525        |   |                    | 53    
|Prepaid expenses                   |        |  |                        | 3,517   |                           |   | (301         | ) |                    | (7    
|                                   |        |  |                        |         |                           |   |              |   |                    |       
|Total current assets               |        |  |                        | 76,456  |                           |   | 6,646        |   |                    | 1,595 
|Intercompany receivables           |        |  |                        | 2,578   |                           |   | 458,262      |   |                    | (4,448
|Investment in subsidiaries         |        |  |                        | 67,450  |                           |   | 1,945        |   |                    | -     
|Property and equipment, net        |        |  |                        | 31,820  |                           |   | 46,819       |   |                    | 2,871 
|Trademarks, net                    |        |  |                        | 195,916 |                           |   | -            |   |                    | -     
|Goodwill                           |        |  |                        | 9,204   |                           |   | -            |   |                    | -     
|Deferred financing costs, net      |        |  |                        | 3,420   |                           |   | 157          |   |                    | -     
|Loans receivable from shareholders |        |  |                        | 5,593   |                           |   | -            |   |                    | -     
|Other assets                       |        |  |                        | 6,643   |                           |   | 1,490        |   |                    | 27    
|                                   |        |  |                        |         |                           |   |              |   |                    |       
|                                   |        |  | $                      | 399,080 |                           | $ | 515,319      |   | $                  | 45    
|                                   |        |  |                        |         |                           |   |              |   |                    |       

Page 16



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Balance Sheet
As of January 1, 2006 
(In thousands except share data) 
(Unaudited)
LIABILITIES & SHAREHOLDERS EQUITY

|                                      | Parent |  | Guarantor
Subsidiaries |          | Nonguarantor
Subsidiaries |   | Eliminations |  | Consolidated
Total |       
|------------------------------------- | ------ |  | ---------------------- | -------- | ------------------------- | - | ------------ |  | ------------------ | ------
|Current liabilities:                  |        |  |                        |          |                           |   |              |  |                    |       
|Accounts payable                      |        |  | $                      | 10,866   |                           | $ | 169          |  | $                  | 403   
|Accrued expenses                      |        |  |                        | 19,840   |                           |   | 4,033        |  |                    | 310   
|Accrued interest payable              |        |  |                        | 8,181    |                           |   | -            |  |                    | -     
|Current portion of mortgage payable   |        |  |                        | -        |                           |   | 198          |  |                    | -     
|                                      |        |  |                        |          |                           |   |              |  |                    |       
|Total current liabilities             |        |  |                        | 38,887   |                           |   | 4,400        |  |                    | 713   
|Intercompany payables                 |        |  |                        | 456,392  |                           |   | -            |  |                    | -     
|Deferred rent                         |        |  |                        | 7,802    |                           |   | -            |  |                    | 308   
|Long-term debt, net of original issue |        | 
|discount                              |        |  |                        | 253,586  |                           |   | 14,944       |  |                    | -     
|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       |                           |   | -            |  |                    | -     
|Additional paid-in capital            |        |  |                        | (65,479  | )                         |   | 133,671      |  |                    | 3,018 
|Retained earnings (deficit)           |        |  |                        | (292,179 | )                         |   | 362,304      |  |                    | (3,994
|                                      |        |  |                        |          |                           |   |              |  |                    |       
|                                      |        |  |                        | (357,587 | )                         |   | 495,975      |  |                    | (976  
|                                      |        |  |                        |          |                           |   |              |  |                    |       
|                                      |        |  | $                      | 399,080  |                           | $ | 515,319      |  | $                  | 45    
|                                      |        |  |                        |          |                           |   |              |  |                    |       

Page 17



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Operations 
For the twenty eight weeks ended July 16, 2006 
(In thousands)
(Unaudited)

|                                       | Parent |  | Guarantor
Subsidiaries |         | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|-------------------------------------- | ------ |  | ---------------------- | ------- | ------------------------- | - | ------------ | - | ------------------
|                                       |        |  |                        |         |                           |   |              |   |                   
|Revenues:                              |        |  |                        |         |                           |   |              |   |                   
|Restaurant sales                       |        |  | $                      | 73,720  |                           | $ | 86,692       |   | $                 
|Franchise related income               |        |  |                        | 7,399   |                           |   | -            |   |                   
|Real estate and other                  |        |  |                        | 2,056   |                           |   | 1,457        |   |                   
|Intercompany charges                   |        |  |                        | 35      |                           |   | -            |   |                   
|                                       |        |  |                        |         |                           |   |              |   |                   
|Total revenues                         |        |  |                        | 83,210  |                           |   | 88,149       |   |                   
|                                       |        |  |                        |         |                           |   |              |   |                   
|                                       |        | 
|Costs and expenses:                    |        | 
|Cost of food and paper products        |        |  |                        | 12,334  |                           |   | 18,449       |   |                   
|Payroll and other employee benefits    |        |  |                        | 19,687  |                           |   | 24,303       |   |                   
|Other operating costs                  |        |  |                        | 27,458  |                           |   | 31,813       |   |                   
|Depreciation and amortization          |        |  |                        | 3,843   |                           |   | 4,423        |   |                   
|General and administrative             |        |  |                        | 11,072  |                           |   | 5,382        |   |                   
|Asset impairment and restaurant        |        | 
|closings/remodels                      |        |  |                        | 313     |                           |   | -            |   |                   
|Intercompany charges                   |        |  |                        | -       |                           |   | 35           |   |                   
|                                       |        | 
|Total costs and expenses               |        |  |                        | 74,707  |                           |   | 84,405       |   |                   
|                                       |        | 
|Operating income                       |        |  |                        | 8,503   |                           |   | 3,744        |   |                   
|                                       |        | 
|Other (expense) income:                |        | 
|Interest expense                       |        |  |                        | (16,014 | )                         |   | (761         | ) |                   
|Interest income                        |        |  |                        | 1,268   |                           |   | -            |   |                   
|Equity in net income of unconsolidated |        | 
|affiliates                             |        |  |                        | 151     |                           |   | -            |   |                   
|                                       |        |  |                        |         |                           |   |              |   |                   
|                                       |        | 
|Net other (expense) income             |        |  |                        | (14,595 | )                         |   | (761         | ) |                   
|                                       |        |  |                        |         |                           |   |              |   |                   
|                                       |        | 
|Income (loss) before income taxes      |        |  |                        | (6,092  | )                         |   | 2,983        |   |                   
|                                       |        | 
|Income taxes                           |        |  |                        | 714     |                           |   | -            |   |                   
|                                       |        |  |                        |         |                           |   |              |   |                   
|                                       |        | 
|Net income (loss)                      |        |  | $                      | (6,806  | )                         | $ | 2,983        |   | $                 
|                                       |        |  |                        |         |                           |   |              |   |                   

Page 18



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Operations 
For the twenty eight weeks ended July 17, 2005 
(In thousands) 
(Unaudited)

|                                              | Parent |  | Guarantor
Subsidiaries |         | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|--------------------------------------------- | ------ |  | ---------------------- | ------- | ------------------------- | - | ------------ | - | ------------------
|                                              |        |  |                        |         |                           |   |              |   |                   
|Revenues:                                     |        |  |                        |         |                           |   |              |   |                   
|Restaurant sales                              |        |  | $                      | 71,083  |                           | $ | 85,180       |   | $                 
|Franchise related income                      |        |  |                        | 6,358   |                           |   | -            |   |                   
|Real estate and other                         |        |  |                        | 1,475   |                           |   | 1,527        |   |                   
|Intercompany charges                          |        |  |                        | 35      |                           |   | -            |   |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Total revenues                                |        |  |                        | 78,951  |                           |   | 86,707       |   |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Costs and expenses:                           |        | 
|Cost of food and paper products               |        |  |                        | 13,404  |                           |   | 18,734       |   |                   
|Payroll and other employee benefits           |        |  |                        | 19,408  |                           |   | 23,584       |   |                   
|Other operating costs                         |        |  |                        | 27,942  |                           |   | 32,155       |   |                   
|Depreciation and amortization                 |        |  |                        | 3,945   |                           |   | 4,337        |   |                   
|General and administrative                    |        |  |                        | 8,590   |                           |   | 5,341        |   |                   
|Asset impairment and restaurant               |        | 
|closings/remodels                             |        |  |                        | 200     |                           |   | -            |   |                   
|Intercompany charges                          |        |  |                        | -       |                           |   | 35           |   |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Total costs and expenses                      |        |  |                        | 73,489  |                           |   | 84,186       |   |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Operating income                              |        |  |                        | 5,462   |                           |   | 2,521        |   |                   
|                                              |        | 
|Other (expense) income:                       |        | 
|Interest expense                              |        |  |                        | (15,808 | )                         |   | (769         | ) |                   
|Interest income                               |        |  |                        | 615     |                           |   | -            |   |                   
|Equity in net income (loss) of unconsolidated |        | 
|affiliates                                    |        |  |                        | (24     | )                         |   | -            |   |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Net other (expense) income                    |        |  |                        | (15,217 | )                         |   | (769         | ) |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Income (loss) before income taxes             |        |  |                        | (9,755  | )                         |   | 1,752        |   |                   
|                                              |        | 
|Income taxes                                  |        |  |                        | 564     |                           |   | -            |   |                   
|                                              |        |  |                        |         |                           |   |              |   |                   
|                                              |        | 
|Net income (loss)                             |        |  | $                      | (10,319 | )                         | $ | 1,752        |   | $                 
|                                              |        |  |                        |         |                           |   |              |   |                   

Page 19



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Operations 
For the twelve weeks ended July 16, 2006 
(In thousands) 
(Unaudited)

|                                       | Parent |  | Guarantor
Subsidiaries |        | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|-------------------------------------- | ------ |  | ---------------------- | ------ | ------------------------- | - | ------------ | - | ------------------
|                                       |        |  |                        |        |                           |   |              |   |                   
|Revenues:                              |        |  |                        |        |                           |   |              |   |                   
|Restaurant sales                       |        |  | $                      | 31,911 |                           | $ | 37,227       |   | $                 
|Franchise related income               |        |  |                        | 2,961  |                           |   | -            |   |                   
|Real estate and other                  |        |  |                        | 1,200  |                           |   | 551          |   |                   
|Intercompany charges                   |        |  |                        | 15     |                           |   | -            |   |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|Total revenues                         |        |  |                        | 36,087 |                           |   | 37,778       |   |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|                                       |        | 
|Costs and expenses:                    |        | 
|Cost of food and paper products        |        |  |                        | 3,822  |                           |   | 9,411        |   |                   
|Payroll and other employee benefits    |        |  |                        | 8,449  |                           |   | 10,464       |   |                   
|Other operating costs                  |        |  |                        | 12,067 |                           |   | 13,671       |   |                   
|Depreciation and amortization          |        |  |                        | 1,505  |                           |   | 1,906        |   |                   
|General and administrative             |        |  |                        | 4,595  |                           |   | 2,327        |   |                   
|Asset impairment and restaurant        |        | 
|closings/remodels                      |        |  |                        | 160    |                           |   | -            |   |                   
|Intercompany charges                   |        |  |                        | -      |                           |   | 15           |   |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|                                       |        | 
|Total costs and expenses               |        |  |                        | 30,598 |                           |   | 37,794       |   |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|                                       |        | 
|Operating income                       |        |  |                        | 5,489  |                           |   | (16          | ) |                   
|                                       |        | 
|Other (expense) income:                |        | 
|Interest expense                       |        |  |                        | (6,769 | )                         |   | (325         | ) |                   
|Interest income                        |        |  |                        | 634    |                           |   | -            |   |                   
|Equity in net income of unconsolidated |        | 
|affiliates                             |        |  |                        | 101    |                           |   | -            |   |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|                                       |        | 
|Net other (expense) income             |        |  |                        | (6,034 | )                         |   | (325         | ) |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|                                       |        | 
|Income (loss) before income taxes      |        |  |                        | (545   | )                         |   | (341         | ) |                   
|                                       |        | 
|Income taxes                           |        |  |                        | 300    |                           |   | -            |   |                   
|                                       |        |  |                        |        |                           |   |              |   |                   
|                                       |        | 
|Net income (loss)                      |        |  | $                      | (845   | )                         | $ | (341         | ) | $                 
|                                       |        |  |                        |        |                           |   |              |   |                   

Page 20



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Operations
For the twelve weeks ended July 17, 2005
(In thousands)
(Unaudited)

|                                           | Parent |  | Guarantor
Subsidiaries |        | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|------------------------------------------ | ------ |  | ---------------------- | ------ | ------------------------- | - | ------------ | - | ------------------
|                                           |        |  |                        |        |                           |   |              |   |                   
|Revenues:                                  |        |  |                        |        |                           |   |              |   |                   
|Restaurant sales                           |        |  | $                      | 31,388 |                           | $ | 36,818       |   | $                 
|Franchise related income                   |        |  |                        | 2,814  |                           |   | -            |   |                   
|Real estate and other                      |        |  |                        | 961    |                           |   | 339          |   |                   
|Intercompany charges                       |        |  |                        | 15     |                           |   | -            |   |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Total revenues                             |        |  |                        | 35,178 |                           |   | 37,157       |   |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Costs and expenses:                        |        | 
|Cost of food and paper products            |        |  |                        | 5,956  |                           |   | 8,091        |   |                   
|Payroll and other employee benefits        |        |  |                        | 8,479  |                           |   | 10,160       |   |                   
|Other operating costs                      |        |  |                        | 11,860 |                           |   | 14,072       |   |                   
|Depreciation and amortization              |        |  |                        | 1,643  |                           |   | 1,865        |   |                   
|General and administrative                 |        |  |                        | 3,790  |                           |   | 2,285        |   |                   
|Asset impairment and restaurant            |        | 
|closings/remodels                          |        |  |                        | 98     |                           |   | -            |   |                   
|Intercompany charges                       |        |  |                        | -      |                           |   | 15           |   |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Total costs and expenses                   |        |  |                        | 31,826 |                           |   | 36,488       |   |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Operating income                           |        |  |                        | 3,352  |                           |   | 669          |   |                   
|Other (expense) income:                    |        | 
|Interest expense                           |        |  |                        | (6,776 | )                         |   | (328         | ) |                   
|Interest income                            |        |  |                        | 250    |                           |   | -            |   |                   
|Equity in net loss of unconsolidated       |        | 
|affiliates                                 |        |  |                        | (44    | )                         |   | -            |   |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Net other (expense) income                 |        |  |                        | (6,570 | )                         |   | (328         | ) |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Income (loss) before income taxes (credit) |        |  |                        | (3,218 | )                         |   | 341          |   |                   
|                                           |        | 
|Income taxes  (credit)                     |        |  |                        | 371    |                           |   | (84          | ) |                   
|                                           |        |  |                        |        |                           |   |              |   |                   
|                                           |        | 
|Net income (loss)                          |        |  | $                      | (3,589 | )                         | $ | 425          |   | $                 
|                                           |        |  |                        |        |                           |   |              |   |                   

Page 21



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Cash Flows
For the twenty eight weeks ended July 16, 2006
(In thousands)
(Unaudited)

|                                                             | Parent |  | Guarantor
Subsidiaries |        | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|------------------------------------------------------------ | ------ |  | ---------------------- | ------ | ------------------------- | - | ------------ | - | ------------------
|                                                             |        |  |                        |        |                           |   |              |   |                   
|Operating Activities:                                        |        |  |                        |        |                           |   |              |   |                   
|                                                             |        | 
|Net (loss) income                                            |        |  | $                      | (6,806 | )                         | $ | 2,983        |   | $                 
|Adjustments to reconcile net (loss) income to net cash       |        | 
|(used in) provided by operating activities:                  |        | 
|Depreciation and amortization                                |        |  |                        | 3,843  |                           |   | 4,423        |   |                   
|Amortization of deferred financing costs                     |        |  |                        | 503    |                           |   | 20           |   |                   
|Amortization of bond discount                                |        |  |                        | 204    |                           |   | -            |   |                   
|Provision for doubtful accounts receivables                  |        |  |                        | 131    |                           |   | -            |   |                   
|(Decrease)/increase in deferred rent, net of tenant          |        | 
|allowance                                                    |        |  |                        | (118   | )                         |   | 331          |   |                   
|Asset impairment and restaurant closings/remodels and        |        |  |                        | 313    |                           |   | -            |   |                   
|loss on sale of other concept restaurants                    |        | 
|Gain on sale of restaurant property and equipment            |        |  |                        | -      |                           |   | -            |   |                   
|Equity in net income of unconsolidated affiliates            |        |  |                        | (151   | )                         |   | -            |   |                   
|                                                             |        | 
|Changes in operating assets and liabilities:                 |        | 
|Increase in receivables                                      |        |  |                        | (614   | )                         |   | (499         | ) |                   
|Decrease (increase) in inventories                           |        |  |                        | (45    | )                         |   | 7            |   |                   
|Decrease (increase) in prepaid expenses                      |        |  |                        | (322   | )                         |   | (1,990       | ) |                   
|Decrease (increase) in other assets                          |        |  |                        | 323    |                           |   | 6            |   |                   
|Increase (decrease) in accounts payable and accrued expenses |        |  |                        | (6,242 | )                         |   | (909         | ) |                   
|Increase in accrued interest payable                         |        |  |                        | 1,272  |                           |   | -            |   |                   
|                                                             |        |  |                        |        |                           |   |              |   |                   
|Net cash (used in) provided by operating activities          |        |  |                        | (7,709 | )                         |   | 4,372        |   |                   
|                                                             |        |  |                        |        |                           |   |              |   |                   

Page 22



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Cash Flows
For the twenty eight weeks ended July 16, 2006
(In thousands)
(Unaudited)
(Continued)

|                                                      | Parent |  | Guarantor
Subsidiaries |        | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|----------------------------------------------------- | ------ |  | ---------------------- | ------ | ------------------------- | - | ------------ | - | ------------------
|                                                      |        |  |                        |        |                           |   |              |   |                   
|Investing Activities:                                 |        |  |                        |        |                           |   |              |   |                   
|Purchase of property and equipment                    |        |  |                        | (2,369 | )                         |   | (3,458       | ) |                   
|Proceeds from sale of restaurant property & equipment |        |  |                        | -      |                           |   | -            |   |                   
|Capital contributions from joint venture partners     |        |  |                        | -      |                           |   | -            |   |                   
|                                                      |        |  |                        |        |                           |   |              |   |                   
|Net cash used in investing activities                 |        |  |                        | (2,369 | )                         |   | (3,458       | ) |                   
|                                                      |        |  |                        |        |                           |   |              |   |                   
|                                                      |        | 
|Financing Activities:                                 |        | 
|Mortgage principal repayments                         |        |  |                        | -      |                           |   | (113         | ) |                   
|Repayments of loans by officers                       |        |  |                        | 5      |                           |   | -            |   |                   
|Intercompany balances                                 |        |  |                        | 894    |                           |   | (2,112       | ) |                   
|                                                      |        |  |                        |        |                           |   |              |   |                   
|Net cash (used in) provided by financing activities   |        |  |                        | 899    |                           |   | (2,225       | ) |                   
|                                                      |        |  |                        |        |                           |   |              |   |                   
|                                                      |        | 
|(Decrease) increase in cash and cash equivalents      |        |  |                        | (9,179 | )                         |   | (1,311       | ) |                   
|                                                      |        | 
|Cash and cash equivalents at beginning of year        |        |  |                        | 66,377 |                           |   | 5,303        |   |                   
|                                                      |        |  |                        |        |                           |   |              |   |                   
|                                                      |        | 
|Cash and cash equivalents at end of period            |        |  | $                      | 57,198 |                           | $ | 3,992        |   | $                 
|                                                      |        |  |                        |        |                           |   |              |   |                   
|                                                      |        | 
|Supplemental disclosure of cash flow information:     |        | 
|Cash paid during the period for income taxes          |        |  | $                      | 471    |                           | $ | -            |   | $                 
|                                                      |        |  |                        |        |                           |   |              |   |                   
|Cash paid during the period for interest              |        |  | $                      | 14,025 |                           | $ | 732          |   | $                 
|                                                      |        |  |                        |        |                           |   |              |   |                   

Page 23



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Cash Flows
For the twenty eight weeks ended July 17, 2005
(In thousands)
(Unaudited)

|                                                                                                        | Parent |  | Guarantor
Subsidiaries |         | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|------------------------------------------------------------------------------------------------------- | ------ |  | ---------------------- | ------- | ------------------------- | - | ------------ | - | ------------------
|                                                                                                        |        |  |                        |         |                           |   |              |   |                   
|Operating Activities:                                                                                   |        |  |                        |         |                           |   |              |   |                   
|                                                                                                        |        | 
|Net (loss) income                                                                                       |        |  | $                      | (10,319 | )                         | $ | 1,752        |   | $                 
|Adjustments to reconcile net (loss) income to net cash                                                  |        | 
|(used in) provided by operating activities:                                                             |        | 
|Depreciation and amortization                                                                           |        |  |                        | 3,945   |                           |   | 4,337        |   |                   
|Amortization of deferred financing costs                                                                |        |  |                        | 497     |                           |   | -            |   |                   
|Amortization of bond discount                                                                           |        |  |                        | 204     |                           |   | 21           |   |                   
|(Decrease)/increase in deferred rent, net of tenant  allowance                                          |        |  |                        | (9      | )                         |   | 123          |   |                   
|Asset impairment and restaurant closings/remodels and
        loss on sale of other concept restaurants |        |  |                        | 200     |                           |   | -            |   |                   
|Equity in net income of unconsolidated affiliates                                                       |        |  |                        | 24      |                           |   | -            |   |                   
|                                                                                                        |        | 
|Changes in operating assets and liabilities:                                                            |        | 
|Decrease (increase)  in receivables                                                                     |        |  |                        | (380    | )                         |   | 10           |   |                   
|Decrease in inventories                                                                                 |        |  |                        | 207     |                           |   | 243          |   |                   
|Decrease (increase) in prepaid expenses                                                                 |        |  |                        | (3,322  | )                         |   | (1,690       | ) |                   
|Decrease (increase) in other assets                                                                     |        |  |                        | 87      |                           |   | (3           | ) |                   
|Increase (decrease) in accounts payable and accrued expenses                                            |        |  |                        | (6,355  | )                         |   | 55           |   |                   
|Increase in accrued interest payable                                                                    |        |  |                        | 1,079   |                           |   | -            |   |                   
|                                                                                                        |        |  |                        |         |                           |   |              |   |                   
|Net cash (used in) provided by operating activities                                                     |        |  |                        | (14,142 | )                         |   | 4,848        |   |                   
|                                                                                                        |        |  |                        |         |                           |   |              |   |                   

Page 24



---

# SBARRO, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)

# Consolidating Statement of Cash Flows
For the twenty eight weeks ended July 17, 2005
(In thousands)
(Unaudited)
(Continued)

|                                                           | Parent |  | Guarantor
Subsidiaries |         | Nonguarantor
Subsidiaries |   | Eliminations |   | Consolidated
Total
|---------------------------------------------------------- | ------ |  | ---------------------- | ------- | ------------------------- | - | ------------ | - | ------------------
|                                                           |        |  |                        |         |                           |   |              |   |                   
|Investing Activities:                                      |        |  |                        |         |                           |   |              |   |                   
|Purchase of property and equipment                         |        |  |                        | (2,029  | )                         |   | (1,446       | ) |                   
|Proceeds from sale of joint venture's property & equipment |        |  |                        | 300     |                           |   | -            |   |                   
|Dividends received from unconsolidated affiliate           |        |  |                        | 603     |                           |   | -            |   |                   
|                                                           |        |  |                        |         |                           |   |              |   |                   
|Net cash used in investing activities                      |        |  |                        | (1,126  | )                         |   | (1,446       | ) |                   
|                                                           |        |  |                        |         |                           |   |              |   |                   
|                                                           |        | 
|Financing Activities:                                      |        | 
|Mortgage principal repayments                              |        |  |                        | -       |                           |   | (104         | ) |                   
|Intercompany balances                                      |        |  |                        | 3,299   |                           |   | (3,615       | ) |                   
|                                                           |        |  |                        |         |                           |   |              |   |                   
|Net cash (used in) provided by financing activities        |        |  |                        | 3,299   |                           |   | (3,719       | ) |                   
|                                                           |        |  |                        |         |                           |   |              |   |                   
|Decrease in cash and cash equivalents                      |        |  |                        | (11,969 | )                         |   | (317         | ) |                   
|                                                           |        | 
|Cash and cash equivalents at beginning of year             |        |  |                        | 57,150  |                           |   | 4,680        |   |                   
|                                                           |        |  |                        |         |                           |   |              |   |                   
|                                                           |        | 
|Cash and cash equivalents at end of period                 |        |  | $                      | 45,181  |                           | $ | 4,363        |   | $                 
|                                                           |        |  |                        |         |                           |   |              |   |                   
|                                                           |        | 
|Supplemental disclosure of cash flow information:          |        | 
|Cash paid during the period for income taxes               |        |  | $                      | 885     |                           | $ | -            |   | $                 
|                                                           |        |  |                        |         |                           |   |              |   |                   
|Cash paid during the period for interest                   |        |  | $                      | 14,027  |                           | $ | 749          |   | $                 
|                                                           |        |  |                        |         |                           |   |              |   |                   

Page 25



---

|Item 2. |  | 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

We are a leading owner, operator and
franchisor of quick service restaurants (QSR), serving a wide variety of
Italian specialty foods. We also operate, in certain cases with joint venture partners, a
number of other restaurant concepts.

The following table summarizes the
number of Sbarro owned, franchised and other concept restaurants in operation during each
indicated period:

|                                      | 12 Weeks
Ended
07/16/06 | 12 Weeks
Ended
07/17/05 | 28 Weeks
Ended
07/16/06 | 28 Weeks
Ended
07/17/05
|------------------------------------- | ----------------------- | ----------------------- | ----------------------- | -----------------------
|                                      |                         |                         |                         |                        
|Company-owned Sbarro restaurants:     |                         |                         |                         |                        
|Open at beginning of period           |                         |                         |                         | 482                    
|Opened during period                  |                         |                         |                         | -                      
|Acquired from (sold to) franchisees   |                         |                         |                         | 1                      
|during period                         |                         |                        
|Closed during period                  |                         |                         |                         | (2                     
|                                      |                         |                         |                         |                        
|Open at end of period                 |                         |                         |                         | 481                    
|                                      |                         |                         |                         |                        
|                                      |                         |                        
|Franchised Sbarro restaurants:        |                         |                        
|Open at beginning of period           |                         |                         |                         | 466                    
|Opened during period                  |                         |                         |                         | 18                     
|Acquired from (sold to) Sbarro during |                         |                         |                         | (1                     
|period                                |                         |                        
|Closed or terminated during period    |                         |                         |                         | (8                     
|                                      |                         |                         |                         |                        
|Open at end of period                 |                         |                         |                         | 475                    
|                                      |                         |                         |                         |                        
|                                      |                         |                        
|Other concepts:                       |                         |                        
|Open at beginning of period           |                         |                         |                         | 25                     
|Opened during period                  |                         |                         |                         | 1                      
|Closed during period                  |                         |                         |                         | (2                     
|                                      |                         |                         |                         |                        
|Open at end of period                 |                         |                         |                         | 24                     
|                                      |                         |                         |                         |                        
|                                      |                         |                        
|All restaurants:                      |                         |                        
|Open at beginning of period           |                         |                         |                         | 973                    
|Opened during period                  |                         |                         |                         | 19                     
|Closed or terminated during period    |                         |                         |                         | (12                    
|                                      |                         |                         |                         |                        
|Open at end of period                 |                         |                         |                         | 980                    
|                                      |                         |                         |                         |                        

Page 26



---

# Executive Overview

Sales increased in the first half of
2006 compared to the first half of 2005. Mall traffic has increased as retailers,
particularly high end mall based retailers, are serving more customers. We continue to
benefit from the reengineering of our QSR operations in 2004 while continuing to provide a
quality product coupled with quality service. We believe our strategy resulted in the
significant improvement of our operations, including higher sales and improved
results of operations. Selective price increases, improvements in operational controls and
upgraded store management at all levels produced increased comparable restaurant unit
sales and improved earnings in the first half of 2006.

We have developed a new concept,
Carmelas of Brooklyn, which opened its first restaurant in February 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
revenues and profits.

# Seasonality

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

# Goodwill and Other
Intangible Assets

Due to the seasonality of our
business, until we determine the results of operations for our fourth quarter, we are not
able to perform our annual test for impairment on our goodwill and intangible assets with
indefinite lives 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 become evident
earlier.

Page 27



---

# Relevant Financial
Information

|                                                 | Twelve weeks ended | Twenty eight weeks ended
|------------------------------------------------ | ------------------ | ------------------------
|
|
|Comparable Sbarro-owned QSR sales(1)             |                    |                         
|                                                 |                    |                         
|Comparable Sbarro-owned QSR sales percentage     |                    |                         
|change vs. prior compared period(1)              |                    |                         
|                                                 |                    |                         
|Franchise location sales                         |                    |                         
|                                                 |                    |                         
|Franchise revenues                               |                    |                         
|                                                 |                    |                         
|Cost of food and paper products as a percentage  |                    |                         
|of  restaurant sales                             |                    |                         
|                                                 |                    |                         
|Payroll and other benefits as a percentage of    |                    |                         
|restaurant sales                                 |                    |                         
|                                                 |                    |                         
|Other operating expenses as a percentage of      |                    |                         
|restaurant sales                                 |                    |                         
|                                                 |                    |                         
|General and administrative costs as a percentage |                    |                         
|or revenues                                      |                    |                         
|                                                 |                    |                         
|Asset impairment, and restaurant closings        |                    |                         
|                                                 |                    |                         
|EBITDA (2)                                       |                    |                         

---

| | (1)                            Comparable
Sbarro-owned QSR sales dollar and annual percentage change are based
                    on locations that were in operation on a continuing basis for all of
each period                     presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)                            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 generally accepted                     accounting principles (GAAP) or
as a measure of a companys                     profitability or liquidity. Rather,
we believe that EBITDA provides relevant and                     useful information for
analysts of, and investors in, our senior notes in that                     EBITDA is one
of the factors in the calculations used to determine our                     compliance
with the ratios in the indenture under which our senior notes are
                    issued. We also internally use EBITDA to determine whether to
continue operating                     restaurant units since it provides us with a
measurement of whether we are                     receiving an adequate cash return on
our cash investment. Our calculation of                     EBITDA may not be comparable
to a similarly titled measure reported by other                     companies, since all
companies do not calculate this non-GAAP measure in the                     same manner.
Our EBITDA calculations are not intended to represent cash provided
                    by (used in) operating activities since they do not include interest
and taxes                     and changes in operating assets and liabilities, nor are
they intended to                     represent a net increase in cash since they do not
include cash provided by                     (used in) investing and
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 28



---

| | financing
activities. The following table reconciles EBITDA to our net loss for the periods
presented, which we believe is the most direct comparable GAAP financial measure to
EBITDA (in thousands):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | Twenty Eight Weeks Ended
|----------------------------- | ------------------------
|
|                              |                         
|EBITDA                        |                         
|Interest expense              |                         
|Interest income               |                         
|Income taxes                  |                         
|Depreciation and amortization |                         
|                              |                         
|Net loss                      |                         
|                              |                         
|                              |                         
|                              |                         
|
|
|                              |                         
|EBITDA                        |                         
|Interest expense              |                         
|Interest income               |                         
|Income taxes                  |                         
|Depreciation and amortization |                         
|                              |                         
|Net loss                      |                         
|                              |                         

# Second Quarter 2006
Versus Second Quarter 2005

We operate two business segments. Our
company owned restaurant segment is comprised of the operating activities of our company
owned Quick Service 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 makers do not review the assets by segment to assess
the segments performance, as the assets are managed on an entity-wide basis.

Page 29



---

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 for the twelve weeks ended July 16,
2006 and July 17, 2005 (in thousands):

|                                          | Company 
Owned
Restaurants | Franchise
Restaurants | Totals
|----------------------------------------- | -------------------------- | --------------------- | ------
|                                          |                            |                       |       
|2006                                      |                            |                       |       
|Total revenue                             |                            |                       | $     
|                                          |                            |                       |       
|Operating income before unallocated costs |                            |                       |       
|Unallocated costs and expenses (1)        |                            |                       |       
|                                          |                            |                       |       
|Operating income                          |                            |                       |       
|                                          |                            |                       |       
|                                          |                            |                      
|2005                                      |                            |                       |       
|Total revenue                             |                            |                       | $     
|                                          |                            |                       |       
|Operating income before unallocated costs |                            |                       |       
|Unallocated costs and expenses (1)        |                            |                       |       
|                                          |                            |                       |       
|Operating income                          |                            |                       |       
|                                          |                            |                       |       

---

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

Sales by QSR and consolidated other
concept restaurants increased 0.4% to $70.8 million for the twelve weeks ended July 16,
2006 from $70.5 million for the twelve weeks ended July 17, 2005. The increase in sales
for the second quarter of 2006 includes $.8 million or 1.2% of higher sales in our QSR
restaurants, with comparable restaurant sales increasing by 3.7% offset, in part by fewer
company-owned QSR restaurants in operation during 2006 and slightly lower restaurant sales
of our consolidated other concepts as a result of the sale of a joint venture and three
company owned restaurants. 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 2005
accounted for the improvements in comparable restaurant sales.

Franchise related revenues increased
to $3.0 million for the second quarter of 2006 from $2.8 million in the second quarter of
2005. The increase was attributable to additional locations opened during the last twelve
months (net of closed locations).

Real estate and other revenues
increased by $.6 million in the second quarter of 2006. The increase was primarily
attributable to an increase in certain food rebates we received based on franchisees
level of purchase.

Cost of food and paper products as a
percentage of restaurant sales improved by 1.6 percentage points to 19.3% for the twelve
weeks ended July 16, 2006 from 20.9% for the twelve weeks ended July 17, 2005. The cost
of cheese in the second quarter of 2006 averaged

Page 30



---

approximately $1.37 per pound
compared to an average of approximately $1.72 per pound for the second quarter of 2005.
This $0.35 per pound improvement in cheese cost accounted for $0.6 million or 9 basis
points of the improvement. Improved operational controls, combined with selective price
increases implemented in 2005 were the primary reasons for the remainder of the
improvement in our cost of sales as a percentage of restaurant sales.

Payroll and other employee benefits
as a percentage of restaurant sales was 27.8% in the second quarter of 2006 compared to
27.6% in the second quarter of 2005. Payroll costs increased $.2 million as compared to
the second quarter of 2005 as a result of salary increases offset by improved efficiencies
and improved sales.

Other operating costs decreased by
$.3 million the for twelve weeks ended July 16, 2006 from the second quarter of 2005 and,
as a percentage of restaurant sales, decreased to 37.1% from 37.7%. The decrease was
primarily related to reduced repair and maintenance costs.

General and administrative expenses
were $6.9 million for the second quarter of 2006 compared to $6.2 million the second
quarter of 2005. The increase resulted primarily from upgrades and additions to corporate
and franchise personnel and an increase in a long term executive bonus plan accrual.

Interest expense of $7.1 million for
the second quarters of both 2006 and 2005 relates primarily to the 11%, $255 million
senior notes we issued to finance our going private transaction in 1999 and the 8.4%, $16
million mortgage loan on our corporate headquarters.

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
equity in the overall profits of those concepts increased by $0.2 million in the second
quarter of 2006 from the second quarter of 2005 as a result of a new steakhouse opened in
the beginning of the third quarter of 2005. We do not have any 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 $.3 million for the second quarter of
2006 and 2005, respectively. The expense in each period was for taxes owed by us to
jurisdictions that do not recognize S corporation status or that tax entities based on
factors other than income and for taxes withheld at the source of payment on foreign
franchise income related payments.

Page 31



---

# Year to Date 2006 Versus
2005

We operate two business segments. Our
company owned restaurant segment is comprised of the operating activities of our company
owned Quick Service 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 makers do 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 for the twenty eight weeks ended
July 16, 2006 and July 17, 2005 (in thousands):

|                                          | Company
 Owned
Restaurants | Franchise
Restaurants | Totals
|----------------------------------------- | -------------------------- | --------------------- | ------
|                                          |                            |                       |       
|2006                                      |                            |                       |       
|Total revenue                             |                            |                       | $     
|                                          |                            |                       |       
|Operating income before unallocated costs |                            |                       |       
|Unallocated costs and expenses (1)        |                            |                       |       
|                                          |                            |                       |       
|Operating income                          |                            |                       |       
|                                          |                            |                       |       
|                                          |                            |                      
|2005                                      |                            |                       |       
|Total revenue                             |                            |                       | $     
|                                          |                            |                       |       
|Operating income before unallocated costs |                            |                       |       
|Unallocated costs and expenses (1)        |                            |                       |       
|                                          |                            |                       |       
|Operating income                          |                            |                       |       
|                                          |                            |                       |       

---

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

Page 32



---

Sales by QSR and consolidated other
concept restaurants increased 1.7% to $164.6 million for the twenty eight weeks ended July
16, 2006 from $161.8 million for the twenty eight weeks ended July 17, 2005. The increase
in sales for the first half of 2006 includes $4.0 million or 2.6% of higher restaurant
sales in our QSR restaurants due to an increase of comparable sales of 5.0% offset, in
part by fewer company-owned QSR restaurants in operation during 2006 and slightly lower
restaurant sales of our consolidated other concepts as a result of the sale of a joint
venture and three company owned restaurants. We believe that the improvement in comparable
unit sales was due to improved economic conditions in the United States, improvement in
our operational controls, upgraded field and store management combined with higher check
averages and selective price increases.

Franchise related revenues increased
to $7.4 million for the first half of 2006 from $6.4 million in the first half of 2005.
The increase was attributable to additional locations opened during the last year (net of
closed locations) and a settlement with a franchisee which increased revenues by
approximately $.5 million.

Real estate and other revenues
increased by $.9 million in the first half of 2006. The increase was attributable to the
gain from the sale of restaurant property and equipment of one of our other concept
restaurants.

Cost of food and paper products as a
percentage of restaurant sales improved by 1.5 percentage points to 19.4% for the twenty
eight weeks ended July 16, 2006 from 20.9% for the twenty eight weeks ended July 17, 2005.
The cost of cheese in the first half of 2006 averaged approximately $1.43 per pound
compared to an average of approximately $1.73 per pound in the first half of 2005. This
$.30 per pound improvement in cheese cost accounted for $1.3 million or 8 basis points of
the improvement. Improved operational controls and sales growth also contributed to the
improvement in our cost of sales as a percentage of restaurant sales.

Payroll and other employee benefits,
as a percentage of restaurant sales, improved to 27.8% in the first half of 2006 from
27.9% in the first half of 2005. The improvement was primarily a result of efficiencies
and improved sales.

Other operating costs decreased by
$1.2 million in the first half of 2006 and, as a percentage of restaurant sales, decreased
to 36.8% from 38.2% in the first half of 2005. The decrease resulted primarily from lower
repair and maintenance costs and bonus expense.

General and administrative expenses
were $16.5 million for the first half of 2006 compared to $14.3 million in the first half
of 2005. The increase resulted primarily from upgrades and additions to corporate and
franchise personnel, an increase to the allowance for doubtful accounts relating to
franchise receivables and an increase in a long term executive bonus plan accrual.

Page 33



---

Interest expense of $16.8 million for
the first half of 2006 and $16.6 million for the first half of 2005 relates primarily to
the 11%, $255 million senior notes we issued to finance our going private transaction in
1999 and the $16 million mortgage loan at 8.4% on our corporate headquarters.

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
equity in the overall profits of those concepts in the first half of 2006 increased by $.2
million as a result of a new steakhouse opened in the beginning of the third quarter 2005.
We do not have any expansion plans for these ventures.

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 $.7 million and $.6 million for the
first half of 2006 and 2005, respectively. The expense in each period was for taxes owed
by us to jurisdictions that do not recognize S corporation status or that tax entities
based on factors other than income and for taxes withheld at the source of payment on
foreign franchise income related payments.

# Liquidity and Capital
Resources

# Cash Requirements

Our liquidity requirements relate to
debt service, including to repay any borrowings we may make under our line of credit
agreement, capital expenditures, working capital, investments in other ventures,
distributions to shareholders when permitted under the indenture for the senior notes and
general corporate purposes. We incur annual cash interest expense of approximately $29
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 during the second half of 2006 will approximate $13 million.

We expect our primary source of
liquidity to meet current requirements will be cash flow from operations. In July 2005, we
obtained a three year line of credit from Commerce Bank to replace our former revolving
credit facility. Under this 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 $8 million at July 16, 2006.

Page 34



---

# Contractual Obligations
and Off-Balance Sheet Arrangements

Our contractual obligations and
off-balance sheet arrangements do not materially differ from the information disclosed in
Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 1, 2006.

# Sources and Uses of Cash

The following table summarizes our
cash and cash equivalents and working capital as at the end of the first half of 2006 and
2005, respectively, and the sources and uses of our cash flows during the first half of
each of the respective years:

|                               | Twenty Eight Weeks Ended
|------------------------------ | ------------------------
|                               |                         
|
|                               |                         
|
|                               |                         
|Liquidity at the end of period |                         
|Cash and cash equivalents      |                         
|Working capital                |                         
|                               |                         
|Net cash flows for the period  |                         
|Used in operating activities   |                         
|Used in investing activities   |                         
|Used in financing activities   |                         
|                               |                         
|Net decrease in cash           |                         
|                               |                         
|                               |                         

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 used in operating activities
was $2.6 million for the twenty eight weeks ended July 16, 2006 compared to $9.5 million
used during the twenty eight weeks ended July 17, 2005. The decrease in net cash used in
operating activities was primarily attributable to a lower net loss partially offset by an
increase in prepaid expenses and accounts receivable.

Net cash used in investing activities
has historically been primarily for capital expenditures. Net cash used in investing
activities increased by $3.5 million to $6.2 million for the twenty eight weeks ended July
16, 2006 from $2.7 million for the twenty eight weeks ended July 17, 2005 primarily due to
restaurant remodeling offset by proceeds from the sale of restaurant property and
equipment and capital contributions from partners to consolidated joint ventures.

Page 35



---

# Recent Accounting
Pronouncement:

In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109", which prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. In particular, this interpretation
requires uncertain tax positions to be recognized only if they are
more-likely-than-not to be upheld based on their technical merits.
Additionally, the measurement of the tax position will be based on the largest amount that
is determined to have greater than a 50% likelihood of realization upon ultimate
settlement. Any resulting cumulative effect of applying the provisions of FIN 48 upon
adoption would be reported as an adjustment to the beginning balance of retained earnings
in the period of adoption. FIN 48 will be effective beginning fiscal 2007. We have not yet
evaluated the impact of this interpretation on our financial statements.

# 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 the financial statements. Due to their nature, estimates involve judgments based upon
available information. Therefore, actual results or amounts could differ from estimates
and the difference could have a material impact on our consolidated financial statements.
During the twenty eight weeks ended July 16, 2006, there were no material changes in the
accounting policies whose application may have the most significant effect on our reported
results of operations or financial position and that require judgments, estimates and
assumptions by management that can affect their application and our results of operations
and financial position from those discussed under the heading Critical Accounting
Policies and Judgments in Part II, Item 7 of our Annual Report on Form 10-K for the
fiscal year ended January 1, 2006.

# Certain Relationships
and Transactions

During the first half of 2006, there
were no related party transactions in addition to those discussed under the heading
Certain Relationships and Related Transactions in Part II, Item 13 of our
Annual Report on Form 10-K for the year ended January 1, 2006.

Page 36



---

# 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, seek, believes, in our opinion,
expect, intend, plan, estimate,
project, strategy and similar expressions or the negative of those
words.

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

| |  | general
economic, inflation, national security, weather and business conditions;
|- |  | --------------------------------------------------------------------------------

| |  | the
availability of suitable restaurant sites in appropriate regional shopping malls and
other locations on reasonable rental terms;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

| |  | changes
in consumer tastes;
|- |  | ---------------------------

| |  | changes
in population and traffic patterns, 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;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to continue to attract franchisees;
|- |  | -----------------------------------------------

| |  | the
success of our present, and any future, joint ventures and other expansion opportunities;
|- |  | ---------------------------------------------------------------------------------------------

| |  | the
availability of food (particularly cheese and tomatoes), beverage and paper products at
current prices;
|- |  | -----------------------------------------------------------------------------------------------------------

| |  | our
ability to pass along cost increases to our customers;
|- |  | ----------------------------------------------------------

| |  | increases
in Federal or State minimum wages;
|- |  | --------------------------------------------

| |  | the
continuity of services of members of our senior management team;
|- |  | --------------------------------------------------------------------

| |  | our
ability to attract and retain competent restaurant and executive managerial personnel;
|- |  | ------------------------------------------------------------------------------------------

| |  | competition;
|- |  | ------------

| |  | the
level of, and our ability to comply with, government regulations;
|- |  | ---------------------------------------------------------------------

| |  | our
ability to generate sufficient cash flow to make interest payments and principal under
our senior notes, mortgage loan and line of credit;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to comply with covenants contained in the indenture under which the senior notes
are issued and our mortgage loan and the effects which the restrictions imposed by those
covenants may have on our ability to operate our business; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

Page 37



---

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.

Page 38



---

|Item 3. |  | 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, due to their short term
nature, 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 line of
credit (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.

Page 39



---

|Item 4. |  | Controls
and Procedures
|------- |  | -----------------------

# Disclosure Controls and
Procedures:

Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of l934, as amended (the
Exchange Act) as of the end of the period covered by this report. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that the disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed in our periodic filings under the Exchange Act
is accumulated and communicated to our management, including those officers, to allow
timely decisions regarding required disclosure. It should be noted that a control system,
no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that it will detect or uncover failures within our company to disclose material
information otherwise required to be set forth in our periodic reports.

# Internal Control Over
Financial Reporting:

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) during the twenty eight weeks ended
July 16, 2006 that have materially affected, or are reasonable likely to materially
affect, the Companys internal control over financial reporting.

Page 40



---

|PART II. |  | OTHER INFORMATION
|-------- |  | -----------------

|Item 1A. |  | Risk Factors
|-------- |  | ------------

There have been no changes in our
risk factors from those disclosed in our 2005 Annual Report on Form 10-K.

|Item 6. |  | Exhibits
|------- |  | --------

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 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  Financial and 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  Financial and Accounting
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 41



---

# 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.

|                          |     |                                             
|------------------------- | --- | --------------------------------------------
|                          |     | SBARRO, INC.                                
|                          |     | Registrant                                  
|                         
|                         
|Date:     August 29, 2006 | By: | /s/ Peter Beaudrault                        
|                          |     | Peter Beaudrault                            
|                          |     | President and                               
|                          |     | Chief Executive Officer                     
|                          |     | (Principal Executive Officer)               
|                         
|Date:     August 29, 2006 | By: | /s/ Anthony J. Puglisi                      
|                          |     | Anthony J. Puglisi                          
|                          |     | Vice President and                          
|                          |     | Chief Financial Officer                     
|                          |     | (Principal Financial and Accounting Officer)

Page 42



---

# EXHIBIT INDEX

| | ExhibitNumber |  | Description
| | ------------- |  | -----------

| | 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  Financial and 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  Financial and Accounting
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------