SBARRO INC - FORM 10-K - March 26, 2010

Attached files

file	filename
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - SBARRO INC	dex121.htm
EX-21.1 - LIST OF SUBSIDIARIES - SBARRO INC	dex211.htm
EX-10.21 - CORPORATE OFFICE EMPLOYEE BONUS PLAN FOR 2010 - SBARRO INC	dex1021.htm
EX-31.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - SBARRO INC	dex3101.htm
EX-31.02 - CERTIFICATION OF VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND ACCOUNTING OFFICER - SBARRO INC	dex3102.htm
EX-32.02 - CERTIFICATION OF C.F.O AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - SBARRO INC	dex3202.htm
EX-32.01 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUAT TO SECTION 906 - SBARRO INC	dex3201.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

x	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 27, 2009.

¨	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 333-142081

SBARRO, INC.

(Exact name of Registrant as specified in its charter)


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

401 Broadhollow Road, Melville, New York		11747 - 4714
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Non-accelerated filer x Accelerated filer ¨ Smaller reporting company ¨

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

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

The number of shares of Common Stock of the registrant outstanding as of March 26, 2010 was 100.

DOCUMENTS INCORPORATED BY REFERENCE

None

TABLE OF CONTENTS


Form 10-K Item No.	Name of Item	Page
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	7
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	15
Item 4.	(Removed and Reserved)	15
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	76
Item 9A(T).	Controls and Procedures	76
Item 9B.	Other Information	76
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	77
Item 11.	Executive Compensation	79
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	86
Item 13.	Certain Relationships and Related Transactions and Director Independence	87
Item 14.	Principal Accounting Fees and Services	90
PART IV
Item 15.	Exhibits and Financial Statement Schedules	92
Signatures		95
Index to Exhibits

Forward-Looking Statements

We make forward-looking statements in this Annual Report on Form 10-K (this “Report”). Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in Item 1A, “Risk Factors” and the “Executive Overview” section and other portions of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are not historical facts, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. These factors include, among others, those discussed in Item 1A of this Report under the heading “Risk Factors,” as well as elsewhere in this Report as set forth below and in the other documents that we file with the SEC. There also are other factors that we may not describe, generally because we currently do not perceive them to be material, which could cause actual results to differ materially from our expectations.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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PART I

Item 1.

Business

Unless otherwise noted, references to “Sbarro,” “the Company,” “we,” “our” or “us” refer to Sbarro, Inc. and its direct and indirect subsidiaries. Unless otherwise noted, all restaurant data are as of and for the year ended December 27, 2009. As a result of the Merger, which we discuss below, we are required to present our results for 2007 as two separate periods. Our Predecessor financial period refers to the period from January 1, 2007 through January 30, 2007 which was prior to consummation of the Merger. Our Successor financial period refers to the period from January 31, 2007 through December 27, 2009 following consummation of the Merger.

Our Company

We are the world’s leading Italian quick service restaurant (“QSR”) concept and the largest shopping mall-focused restaurant concept in the world. We have a global base of 1,056 restaurants in 41 countries, with 484 company-owned units, 555 franchised units and 17 joint venture units. Sbarro restaurants feature a menu of popular Italian food, including pizza, a selection of pasta dishes and other hot and cold Italian entrees, salads, sandwiches, drinks and desserts.

Sbarro, Inc., was organized in 1977 and until January 2007 was developed and operated by the Sbarro family.

On January 31, 2007, entities controlled by MidOcean Partners III, LP, a private equity firm, and certain of its affiliates (“MidOcean”) acquired the Company, pursuant to an agreement and plan of merger (“Merger Agreement”). MidOcean SBR Acquisition Corp., a wholly-owned subsidiary of Sbarro Holdings, LLC, merged with and into the Company (the “Merger”), with the Company surviving the Merger. Sbarro Holdings, LLC is a wholly-owned subsidiary of MidOcean SBR Holdings, LLC (“Holdings”). Sbarro Holdings, LLC owns 100% of our outstanding common stock and Holdings owns 100% of the limited liability company interests of Sbarro Holdings, LLC.

MidOcean owns approximately 76% of Holdings and thus acquired control of the Company in the Merger. Certain of our senior managers acquired approximately 5% of the outstanding equity of Holdings in connection with the Merger, with the balance of the equity of Holdings being owned by other investors.

Our Restaurants

Our family-oriented restaurants offer cafeteria and buffet-style quick service designed to minimize customer waiting time. Sbarro’s diverse menu of authentic Italian food offers our customers a compelling alternative to traditional fast food. All of our entrees are prepared fresh daily according to special recipes developed by the Company. We serve generous portions of quality Italian food at attractive prices. Our average check price is approximately $8.09 and entree selections generally range in price from $4.99 to $7.99. Pizza, which is sold predominantly by the slice and accounts for approximately 60% of restaurant sales, is sold for approximately $3.20 a slice.

Our restaurants are generally open seven days a week serving lunch, dinner and, in a limited number of locations, breakfast, with hours conforming to those of the major department stores or other large retailers in the mall or trade area in which they are located. Typically, our mall restaurants are open to serve customers 10 to 12 hours a day, except on Sunday, when mall hours may be more limited. Our sales are highest in the fourth quarter due to increased traffic in shopping malls during the holiday shopping season.

Our site selection philosophy is to locate restaurants in high-pedestrian-traffic locations such as shopping malls, downtown areas, airports, casinos, universities and travel plazas. These highly visible locations have helped create a valuable brand with strong recognition, evidenced by the concept’s estimated 50% unaided brand awareness. The Sbarro brand is respected not only by consumers, but also by franchisees and real estate developers, who view Sbarro as a preferred component of their development plans.

Our company-owned restaurants are all located in North America in 46 states in the United States, the District of Columbia and Canada and are comprised of 408 “food court” restaurants, 69 “in-line” restaurants and 7 “full service” restaurants. Food court restaurants are primarily located in areas designated by the location’s landlord exclusively for restaurant use and share a common dining area provided by the landlord. These restaurants generally occupy between 500 and 1,000 square feet, contain only kitchen and service areas, have a more limited menu and employ 6 to 30 persons, including part-time personnel. In-line restaurants, which are self-contained restaurants, usually occupy between 1,500 and 3,000 square feet, seat approximately 60 to 120 people and employ 10 to 40 persons, including part-time personnel. Our franchisees operate 555 restaurants, of which 280 are in 9 countries in North America and 275 are located in 30 countries outside North America. Our franchisees’ restaurants are located primarily in shopping malls and other high-pedestrian-traffic areas.

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We operate in two segments, our company-owned restaurant segment and our franchised restaurant segment. Our company-owned restaurant segment is comprised of the operating activities of our company-owned QSR’s and other concept restaurants (owned and joint ventures). Our franchised restaurant segment is comprised of our franchised restaurant operations which offer opportunities worldwide for qualified operators to conduct business under the Sbarro name and other trade names owned by Sbarro. Our operating segments are discussed in Note 1 - Summary of Significant Accounting Policies and Note 13 - Business Segment and Geographic Information to our Consolidated Financial Statements included in this Report. For information regarding revenues from our operations in the United States and foreign countries, see Note 13 - Business Segment and Geographic Information to our Consolidated Financial Statements included in this Report.

Our Restaurant Expansion

The following table summarizes the number of company-owned, franchised and joint venture restaurants in operation during each of the years from 2005 through 2009:


	2009		2008		2007		2006		2005
	(Successor)		(Successor)		(Combined)		(Predecessor)		(Predecessor)
Company-owned Sbarro restaurants:
Open at beginning of period	509		506		485		502		518
Opened during period	10		16		20		6		7
Acquired from (transferred to) franchisees	1		2		13		5		(1	)
Closed during period	(36	)	(15	)	(12	)	(28	)	(22	)

Open at end of period	484		509		506		485		502

Franchised Sbarro restaurants:
Open at beginning of period	566		524		478		437		407
Opened during period	67		92		81		79		48
(Transferred to) acquired from Sbarro during period	(1	)	(2	)	(13	)	(5	)	1
Closed during period	(77	)	(48	)	(22	)	(33	)	(19	)

Open at end of period	555		566		524		478		437

Joint venture Sbarro restaurants:
Open at beginning of period	16		7		—		—		—
Opened during period	1		9		7		—		—
Closed during period	—		—		—		—		—

Open at end of period	17		16		7		—		—

All restaurants:
Open at beginning of period	1,091		1,037		963		939		925
Opened during period	78		117		108		85		55
Closed during period	(113	)	(63	)	(34	)	(61	)	(41	)

Open at end of period	1,056		1,091		1,037		963		939

Our Restaurant Management

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

As of December 27, 2009, we employed 36 Directors of Operations, each of whom is typically responsible for the operations of 10 to 20 company-owned restaurants. Directors of Operations recruit and supervise the managerial staff of all company-owned restaurants and report to one of the six Vice Presidents of Operations. The Vice Presidents of Operations coordinate the activities of the Directors of Operations and report to our President and Chief Executive Officer.

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Our Franchised Restaurants

Growth in franchised restaurants occurs through the opening of new QSR restaurants by new and existing franchisees. Over the last few years, we have significantly reorganized and refocused our franchise operations. We currently employ a team of 9 experienced franchise professionals, who oversee both franchise development and franchise operations.

As of December 27, 2009, we have 280 franchised restaurants in 38 states in the United States, Puerto Rico and the District of Columbia and in 8 other countries in North America. The majority of our domestic franchised units are operated by food service companies who manage food courts in high-pedestrian-traffic areas such as airports, universities and travel plazas. Our strategy is to continue to partner with these institutional food service companies to drive our growth in such locations.

As of December 27, 2009, we have 275 international franchised restaurants in 30 countries outside of North America. We intend to significantly increase our international presence in a targeted number of countries by entering into significant development agreements with experienced restaurant operators. We currently have commitments for approximately 3,100 new restaurants with experienced restaurant operators in countries such as Brazil, Japan, Turkey and Russia.

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

Seasonality

Revenues are highest in our fourth quarter due primarily to increased traffic in shopping malls during the holiday shopping season. Our annual revenues, earnings and cash flow can fluctuate due to the length of the holiday shopping period between Thanksgiving and New Year’s Day.

Employees

As of December 27, 2009, we employed approximately 5,300 persons, of whom approximately 3,500 were full-time field and restaurant personnel, approximately 1,600 were part-time restaurant personnel, 73 were corporate personnel, 9 were franchise field management, and 44 were QSR field senior management. None of our employees are covered by collective bargaining agreements. We believe our employee relations are satisfactory.

Suppliers

Substantially all of the food ingredients, beverages and related restaurant supplies used by our domestic restaurants are purchased from a national independent wholesale food distributor which is required to adhere to established product specifications for all food products sold to our restaurants. Breads, pastries, produce, fresh dairy and certain meat products are purchased locally by each restaurant. Soft drink mixes are purchased from major beverage producers under national contracts and distributed by our national independent distributor. Our current contractual arrangement, which expires in 2013, requires our company-owned restaurants to purchase 95% of all of their food ingredients that are not purchased locally through the distributor. The majority of spending on the products used in our restaurants is for proprietary products and we are involved in negotiating their cost with the manufacturers. We believe that there are other distributors who would be able to service our needs and that satisfactory alternative sources of supply are generally available for all items regularly used in our restaurants.

Competition

The restaurant business is highly competitive. We compete in the local and regional pizza restaurant category and with other concept QSRs primarily located in shopping malls on a local, regional and national basis. We believe we compete on the basis of menu selection, price, service, location and food quality. Factors that affect our business operations include changes in consumer tastes, inflation, national, regional and local economic conditions, population, traffic patterns, changes in discretionary spending priorities, restaurant demographic trends, national security, military action, terrorism, consumer confidence in food quality, handling and safety, weather conditions, the type, number and location of competing restaurants and other factors. There is also active competition for management personnel and attractive commercial shopping mall, city centers and other locations suitable for restaurants. Increased food, beverage, labor, occupancy and other costs could also adversely affect us.

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Trademarks

Sbarro restaurants are operated under the following names: “Sbarro,” “Sbarro The Italian Eatery,” “Sbarro Fresh Italian Cooking,” “Cafe Sbarro,” “Umberto’s,” “Carmela’s,” “Mama Sbarro,” “Sbarro The Best Italian Choice,” “La Cucina Di Capri” and “Tony and Bruno’s”. Of these names, all but “Sbarro Fresh Italian Cooking” and “Umberto’s” are registered trademarks of the Company. In addition, we have also trademarked certain associated logos and styles and we have a license to use the trademarked name “Umberto’s” at limited locations. We have also registered or filed applications to register “Sbarro” and “Sbarro The Italian Eatery” in several other countries. We believe that the Sbarro name is materially important to our business.

Governmental Regulation

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

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

Although alcoholic beverage sales are not emphasized in our restaurants, some of our restaurants serve beer and wine. Sales of beer and wine have historically contributed less than 1% of total revenues of our QSR restaurants. We believe that we are in compliance in all material respects with the laws to which we are subject.

Available information

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

The address of our Internet site is http://www.sbarro.com. Information posted on our website is not part of this Annual Report on Form 10-K. We will provide to those who request them, as soon as reasonably practical after we deliver them to the trustee of our Senior Notes, (defined below), free of charge, a reasonable number of copies of our periodic reports, upon written request to our Chief Financial Officer at our corporate headquarters, 401 Broadhollow Road, Melville, New York 11747-4714.

Item 1A.

Risk Factors

You should carefully consider the following risks along with the other information contained in this Report. All of the following risks could materially or adversely affect our business, financial condition or results of operations. In addition to the risks below, other risks and uncertainties not known to us or that we currently consider immaterial may also materially or adversely affect our business operations, financial condition and financial results.

Risks Relating to Our Business

The success of our business is dependent on a number of factors that are not within our control.

The success of our franchisees’ and our company-owned restaurant operations is, and will continue to be, subject to a number of factors that are not within our control, including:

•

changes in consumer tastes;

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•

national, regional and local economic conditions;

•

traffic patterns in the venues in which we operate;

•

discretionary spending priorities;

•

demographic trends;

•

consumer confidence in food quality, handling and safety;

•

consumer confidence in the security of shopping malls, downtown areas, airports, casinos, universities, travel plazas, sports arenas and other venues in which we and our franchisees operate;

•

weather conditions; and

•

the type, number and location of competing restaurants.

Deterioration in general economic conditions and declines in consumer spending can negatively affect our business.

Our business is susceptible to adverse changes in domestic and global economic conditions, which could make it difficult and uncertain for us to forecast operating results. In particular, our business is sensitive to consumer spending patterns and preferences. Market and general economic conditions including general business conditions, interest rates, taxation, the availability of consumer credit and consumer confidence in future economic conditions affect the level of discretionary spending on the products we and our franchisees offer. Any unfavorable occurrences in these economic conditions may adversely affect our growth, sales and profitability. For instance, many of our company-owned stores and our franchisees’ stores are located in shopping malls, particularly in the United States. Our stores derive revenue, in part, from the high volume of traffic in these malls. As a result of deteriorating economic conditions, the inability of mall “anchor” tenants and other area attractions to generate consumer traffic around our stores or the decline in popularity of malls as shopping destinations could reduce our revenue depending on sales volume. Additionally, continuing weakness in the residential real estate and mortgage markets, volatility in commodity and fuel costs, difficulties in the financial sector and credit markets, and other factors affecting consumer spending could cause reduced sales of our products and make it more difficult for us to execute our growth strategy. Our 2010 projections assume an improvement in general economic conditions and include the achievement of a 1% increase in year over year comparative same store sales. Failure to achieve positive year over year comparative same store sales could increase the risk of noncompliance with our bank EBITDA covenant. See Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.

The success of our growth strategy will depend, in part, upon our ability to expand our franchise operations and joint ventures.

The success of our franchise operations and joint ventures are dependent upon our ability to:

•

locate and attract new franchisees, joint venture opportunities and area developers;

•

maintain and enhance the “Sbarro” brand;

•

maintain satisfactory relations with our franchisees and partners who may, in certain instances, have interests adverse to our interests;

•

monitor and audit the reports and payments received from franchisees and/or partners; and

•

comply with applicable rules and regulations, as well as applicable laws in the foreign countries in which we seek and have, franchises, joint ventures and area development arrangements.

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

•

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

•

the political and economic stability of the country; and

•

the country’s relationship with the United States.

Credit market effect on our franchise operations.

Credit markets may adversely impact the ability of our franchisees to obtain financing to remodel or construct and open new restaurants, which may hinder our ability to achieve our franchise revenues and growth strategy. The credit markets continue to experience instability, resulting in declining real estate values, credit and liquidity concerns and increased loan default rates. Many lenders have subsequently reduced their willingness to make new loans and have tightened their credit requirements.

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Our growth strategy requires us to extend the Sbarro concept into other high-pedestrian-traffic venues.

Traditionally, Sbarro has operated in the quick service market featuring pizza, pasta and other hot and cold Italian entrees, principally in shopping malls. As the construction of new shopping malls in the United States has slowed, we have been seeking to expand our business into new settings, such as downtown areas, airports, casinos, universities and travel plazas.

Our expansion requires us to:

•

make significant capital investments;

•

devote significant management time and effort;

•

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

•

budget and monitor the cost of construction of the restaurant.

Further, limitations under the indenture governing the Senior Notes, our Senior Credit Facilities (defined below) and our Second Lien Facility (defined below) restrict the amount of investment we may make, which may limit certain of our growth efforts.

We cannot be assured that we will be able to successfully expand our existing operations on a profitable basis.

We operate in a highly competitive environment against strong competition.

The restaurant business is highly competitive. We believe that we compete on the basis of price, service, location and food quality. There is also active competition for management personnel and attractive shopping mall, downtown and other commercial locations suitable for restaurants. We compete in each market in which we operate with locally-owned restaurants, and in certain cases, national and regional restaurant chains.

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

The availability, quality and cost of our ingredients fluctuate, which affects our financial results.

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

Increases in labor and occupancy costs could impact our profitability.

We have a substantial number of hourly employees whose wages are based on the federal or state minimum wage. Any increases in the federal or state minimum wage, as well as strong labor markets, can result in upward pressures on the wages and salaries we pay and could increase our labor costs. In addition, we have been experiencing higher occupancy related costs with respect to leases for new restaurants and renewal leases for existing restaurant space. Increases in our labor and occupancy costs could adversely affect our profitability if we are unable to recover these increases by increasing the prices we charge our customers or if we are unable to attract new customers.

We are dependent on obtaining and retaining attractive high-pedestrian-traffic locations.

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

Although we believe that we will be able to renew the existing leases that we wish to extend, there is no assurance that we will succeed in obtaining extensions in the future at rental rates that we believe to be reasonable or at all. Moreover, if some locations should prove to be unprofitable, we could remain obligated for lease payments even if we decide to withdraw from those locations.

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We will incur charges relating to the closing of such restaurants, consisting of lease termination costs. Impairment charges and other special charges will reduce our profits.

Negative publicity relating to one of our restaurants, including our franchised restaurants, could reduce sales at some or all of our other restaurants.

We are, from time to time, faced with negative publicity relating to food quality, restaurants facilities, health inspection scores, employee relationships or other matters at our restaurants or those of our franchisees. Adverse publicity may negatively affect us, regardless of whether the allegations are valid or whether we incur any liability. In addition, the negative impact of adverse publicity relating to one restaurant may extend beyond the restaurants involved to affect some or all of our other restaurants. If a franchised restaurant fails to meet our franchise operating standards, our own restaurants could be adversely affected due to customer confusion or negative publicity.

Food-borne illness incidents could result in liability to us and could reduce our restaurant sales.

We cannot guarantee that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food processors makes it difficult to monitor food safety compliance and increases the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, such as bovine spongiform encephalopathy (“BSE”), sometimes referred to as “mad cow disease,” that could give rise to claims or allegations on a retroactive basis. In addition, the levels of chemicals or other contaminants that are currently considered safe in certain foods may be regulated more restrictively in the future or become the subject of public concern.

The reach of food-related public health concerns can be considerable due to the level of attention given to these matters by the media. Local public health developments and concerns over diseases, including those caused by E. coli bacteria, could have an adverse impact on our sales. Similarly, concerns related to particular food constituents or the byproducts of cooking processes could also have an adverse impact. This could occur whether or not the developments are specifically attributable to our restaurants or those of our franchisees or competitors.

We rely on one national independent wholesale distributor and replacing it could disrupt the flow of our food products and supplies.

We use one national independent wholesale food distributor, under an agreement expiring in 2013, to purchase and deliver most of the food ingredients used to prepare the foods we serve, other than breads, pastries, produce, fresh dairy and certain meat products which are purchased locally for each restaurant. The distributor also purchases and delivers to us, on a national basis, restaurant supplies and certain other items that we use. The majority of spending on the products used in our restaurants is for proprietary products and we are involved in negotiating their cost with the manufacturers. While we are dependent upon this one national independent distributor, we believe that there are other distributors who would be able to service our needs. However, there can be no assurance that we will be able to replace our distributor with others on comparable terms or without disruptions to the flow of our food products and other supplies to our systems.

Our business is subject to governmental regulation.

We are subject to various federal, state and local laws affecting our business, as are our franchisees. Each of our restaurants and those owned by our franchisees are subject to a variety of licensing and governmental regulatory provisions relating to wholesomeness of food, sanitation, health, safety and, in certain cases, licensing of the sale of alcoholic beverages. Difficulties in obtaining, or the failure to obtain, required licenses or approvals can delay or prevent the opening of a new restaurant in any particular area. Furthermore, there can be no assurance that we will remain in compliance with applicable laws or licenses that we have or will obtain, the failure of which by a restaurant could result in our loss of the restaurant’s license and even the closing of the restaurant.

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

-10-

We depend on our senior management and other key employees.

Our success is dependent upon our senior management team. In recent years, we have added a significant number of independent executives to our management team. Our continued success is dependent upon our ability to attract and retain key employees. As a privately-held company, we may be unable to offer key executives liquid stock-based compensation of the type that our publicly-held competitors can offer. There is no assurance that we will be able to retain our existing senior management or attract other key employees. We have employment agreements with several members of our Senior Management.

Our results of operations fluctuate due to the seasonality of our business.

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

Declines in our financial performance could result in additional intangible asset impairment charges in future periods.

U.S. generally accepted accounting principles require annual (or more frequently if events or changes in circumstances warrant) impairment tests of goodwill, certain intangible assets and other long-lived assets. Generally speaking, if the carrying value of the asset is in excess of the estimated fair value of the asset, the carrying value will be adjusted to fair value through an impairment charge. Fair value estimates are based primarily on discounted cash flows based on five-year forecasts of financial results that incorporate assumptions as to same-store sales trends, future development plans and brand-enhancing initiatives, among other things. During 2009, we recorded impairment charges of $6.7 million, $21.9 million and $2.9 million to reduce the carrying value of goodwill, trademarks and franchise relationships, respectively, to their estimated fair value at December 27, 2009. Significant underachievement of forecasted results could further reduce the estimated fair value of these assets, requiring non-cash impairment charges to further reduce the carrying value of these assets. See Note 11 - Provision for asset impairment and restaurant closings/remodels for non-intangible asset impairment charges.

We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could adversely affect our financial condition and results of operations.

Our ability to make interest and principal payments on and to refinance our indebtedness will depend on our ability to generate cash from operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

If our business does not generate sufficient cash flow from operations, or currently anticipated cost savings and operating improvements are not realized on schedule, in the amounts anticipated or at all, or if future borrowings are not available to us in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, our financial condition and results of operations may be adversely affected. If we cannot generate sufficient cash flow from operations to make scheduled interest and principal payments on our debt obligations in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. If we are unable to refinance any of our indebtedness on commercially reasonable terms or at all, or to effect any other action relating to our indebtedness on satisfactory terms or at all, our business may be harmed.

We may not be successful in implementing our strategy of reducing operating costs and our cost reduction initiatives may have other adverse consequences.

We are implementing initiatives to reduce our operating expenses. These initiatives include closing unprofitable stores, renegotiating store lease terms, reducing headcount, revising our recipes without affecting our customers, as well as other expense controls. We cannot assure you that we will be able to implement all our cost reduction initiatives successfully. Even if we are successful in our cost reduction initiatives, we may face other risks associated with our plans, including declines in employee morale or the level of customer service we provide, the efficiency of our operations or the effectiveness of our internal controls. Any of these risks could have a material adverse impact on our results of operations, financial condition and cash flows.

We may not be able to protect our trademarks and other proprietary rights.

We believe that our trademarks and other proprietary rights are important to our success and our competitive position. Accordingly, we devote substantial resources to the development and protection of our trademarks and proprietary rights. However, the actions taken by us may be inadequate to prevent infringement or other unauthorized use of our trademarks and other proprietary rights by others, which may thereby dilute our trademarks in the marketplace and/or diminish the value of such proprietary rights. We may also

-11-

be unable to prevent others from claiming infringement or other unauthorized use of their trademarks and proprietary rights by us. In addition, others may assert rights in our trademarks and other proprietary rights. Our rights to our trademarks may in some cases be subject to the common law rights of any other person who began using the trademark (or a confusingly similar mark) prior to both the date of our registration and our first use of such trademarks in the relevant territory. We cannot assure you that third parties will not assert claims against our trademarks and other proprietary rights or that we will be able to successfully resolve such claims which could result in our inability to use certain trademarks or other proprietary rights in certain jurisdictions or in connection with certain goods or services. Future actions by third parties may diminish the strength of our trademarks or other proprietary rights, injure the goodwill associated with our business and decrease our competitive strength and performance. We could also incur substantial costs to defend or pursue legal actions relating to the use of our trademarks and other proprietary rights, which could have a material adverse impact on our business, results of operation or financial condition.

Employment and workplace-related complaints or litigation may hurt us.

We are from time to time subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment and similar matters. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our financial performance. A significant judgment for any claim(s) could have a material adverse effect on our financial condition or results of operations.

We are controlled by MidOcean and its interests as an equity holder may conflict with our interests.

As a result of the Merger, MidOcean, our equity sponsor, indirectly owns a majority of our common stock. Through its ownership, our equity sponsor will be able to, among other things, elect a majority of the members of our board of directors, appoint new management, amend our certificate of incorporation and approve mergers or sales of substantially all of our assets. The interests of our equity sponsor might conflict with or differ from our interests. For example, the concentration of ownership held by MidOcean could delay, defer or prevent a change of control of the Company or impede a merger, takeover or other business combination, which the Company may otherwise view favorably. MidOcean is also free to pursue acquisition opportunities independent of us that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the Senior Notes and our other financial obligations.

We have a significant amount of indebtedness. As of December 27, 2009 and March 26, 2010, we had total indebtedness of $342.8 million. See Note 7 – Long-term debt to our Consolidated Financial Statements. Our substantial indebtedness could have important consequences to holders of our Senior Notes. For example, it could:

•

make it more difficult for us to satisfy our obligations with respect to the notes;

•

make it more difficult to satisfy our other financial obligations;

•

increase our vulnerability to adverse economic and industry conditions;

•

require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund acquisitions, working capital, capital expenditures, and other general corporate purposes;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

place us at a competitive disadvantage compared to our competitors that have less debt;

•

limit our ability to borrow additional funds; and

•

limit our ability to make future acquisitions.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional debt. This could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur additional indebtedness in the future. The terms of the indenture governing the Senior Notes, the Senior Credit Facilities and the Second Lien Facility do not fully prohibit us or our subsidiaries from doing so. See Note 7 – Long-term debt to our Consolidated Financial Statements. As of March 26, 2010, we have $5.4 million of availability under the Senior Credit Facilities. Any borrowings under the Senior Credit Facilities and Second Lien Facility are effectively senior to the Senior Notes to the extent of the value of the assets securing the Senior Credit Facilities and Second Lien Facility. If new debt is added to our and/or our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

-12-

Item 1B.

Unresolved Staff Comments

Not applicable.

Item 2.

Properties

Our restaurants are located in both urban and suburban areas and are either food court or in-line (self-contained) restaurants. Food court restaurants are primarily located in areas designated by the location’s landlord exclusively for restaurant use and share a common dining area provided by the landlord. These restaurants generally occupy between 500 and 1,000 square feet and contain only kitchen and service areas. Our in-line locations usually occupy between 1,500 and 3,000 square feet, seat approximately 60 to 120 people and employ 10 to 40 persons, including part-time personnel. We have 408 food court restaurants, 69 in-line restaurants and 7 full service restaurants. All of our restaurants are in leased facilities. Most of our restaurant leases provide for the payment of base rents plus real estate taxes, utilities, insurance, common area charges and certain other expenses. In addition, some of our restaurant leases have percentage rents generally ranging from 8% to 10% of net restaurant sales in excess of stipulated amounts. Our leases generally have terms of ten years. Leases to which we were a party at December 27, 2009 have initial terms expiring as follows:


Years Initial Lease Terms Expire	Number of Company- owned Restaurants(1)	Number of Franchise/ Joint Venture/ Other Restaurants
2010	45	3
2011	58	0
2012	48	1
2013	55	4
2014	41	2
Thereafter	237	20

	484	30

(1)

Includes 10 restaurants under month-to-month arrangements and 13 restaurants as to which we pay only percentage rent based on the level of net restaurant sales, the leases for which are generally for a one year period.

We lease space for our corporate headquarters in Melville, New York. The lease expires in January 2017.

-13-

The following table summarizes the number and locations of our company-owned and franchised restaurants in North America as of December 27, 2009:


Location	Number of Company- Owned Restaurants	Number of Franchised Restaurants	Total Number of Restaurants
Alabama	7	0	7
Arizona	8	3	11
Arkansas	5	1	6
California	53	19	72
Colorado	6	1	7
Connecticut	9	5	14
Delaware	2	1	3
District of Columbia	2	4	6
Florida	45	16	61
Georgia	15	4	19
Hawaii	3	0	3
Illinois	16	17	33
Indiana	2	4	6
Iowa	5	1	6
Kansas	4	0	4
Kentucky	7	6	13
Louisiana	7	0	7
Maine	2	1	3
Maryland	14	5	19
Massachusetts	8	10	18
Michigan	19	3	22
Minnesota	9	10	19
Mississippi	3	1	4
Missouri	7	5	12
Nebraska	3	2	5
Nevada	15	4	19
New Hampshire	2	0	2
New Jersey	10	14	24
New Mexico	4	0	4
New York	43	26	69
North Carolina	13	5	18
North Dakota	0	1	1
Ohio	22	13	35
Oklahoma	4	3	7
Oregon	6	1	7
Pennsylvania	18	14	32
Rhode Island	2	1	3
South Carolina	6	2	8
Tennesee	8	4	12
Texas	16	7	23
Utah	6	2	8
Vermont	2	0	2
Virginia	18	10	28
Washington	13	2	15
West Virginia	2	2	4
Wisconsin	10	0	10
Wyoming	1	0	1
Bahamas	0	3	3
Canada	2	10	12
Dominican Republic	0	4	4
El Salvador	0	2	2
Guatemala	0	3	3
Mexico	0	15	15
Nicaragua	0	2	2
Panama	0	1	1
Puerto Rico	0	10	10

Total	484	280	764

-14-

Item 3.

Legal Proceedings

In September 2008, an action was commenced against the Company and other non-related parties for an undisclosed amount, in the United States District Court in Nevada, by a franchisee in connection with a franchise location he purchased in Las Vegas, NV from a prior franchisee. The franchisee claims the Company representatives misled him by overstating sales and projected sales and understating expenses. This action is in the process of being settled with no liability due from the Company. No accruals have been recorded in the Company’s financial statements at December 27, 2009.

In November 2008, an action was commenced by partners in a joint venture against the Company for an undisclosed amount, in the Supreme Court of New York in Suffolk County. The joint venture operated two locations. Sbarro, as a result of the joint venture partners failure to meet a capital call, diluted their interest in the partnership so that they no longer had any rights, entitlement or interest therein. The Company intends to defend its rights under this action and the outcome is uncertain. No accruals have been recorded in the Company’s financial statements at December 27, 2009.

In March 2008, the Company became a party to a purported class action lawsuit, in the Superior Court of the State of California for the County of Los Angeles, alleging that the Company violated regulations related to meal breaks, rest breaks and payroll related matters. The Company has reached a settlement agreement, pending final court approval, in an amount we believe will be approximately $550,000, which was accrued for in the Company’s financial statements at December 27, 2009.

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

Item 4.

(Removed and Reserved)

PART II

Item 5.

Market For Registrant’s Common Equity And Related Shareholder Matters and Issuer Purchases of Equity Securities

We did not pay any dividends in 2009 or 2008.

The Senior Credit Facilities, the Second Lien Facility and the indenture governing our Senior Notes impose restrictions on our ability to pay dividends, and thus our ability to pay dividends on our common stock will depend upon, among other things, our level of indebtedness at the time of the proposed dividend and whether we are in default under any of our debt instruments. Our future dividend policy will also depend on the requirements of any future financing agreements to which we may be a party and other factors considered relevant by our board of directors. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, business opportunities, provision of applicable law and other factors that our board of directors may deem relevant. For a discussion of our cash resources and needs, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

We have no compensation plans that authorize the issuance of our stock to employees or non-employees. There have been no sales or repurchases of our equity securities during the past fiscal year.

There is no established public trading market for our common stock. As of March 26, 2010, all of our outstanding common stock was held by our parent, Sbarro Holdings, LLC.

-15-

Item 6.

Selected Financial Data

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Report and our Consolidated Financial Statements and the related notes included in Item 8 of this Report. As a result of the Merger, we are required to present our results under U.S. generally accepted accounting principles: (“GAAP”) for 2007 as two separate periods. Our Predecessor financial period refers to the period from January 1, 2007 through January 30, 2007 prior to consummation of the Merger. Our Successor financial period refers to the period from January 31, 2007 through December 27, 2009 following consummation of the Merger. The combined results of our Predecessor and Successor financial periods for the year ended December 30, 2007 does not comply with GAAP; however, we believe that this provides useful information to assess the relative performance of the business in all periods presented in the financial statements on an ongoing basis.

Fiscal Year (1)

(in thousands)


	2009			2008			1/31/07-12/30/07			1/1/07-1/30/07			2007			2006			2005
	(Successor)			(Successor)			(Successor)			(Predecessor)			(Combined)			(Predecessor)			(Predecessor)
Income Statement Data:
Revenues:
Restaurant sales	$	324,401		$	343,323		$	319,342		$	23,594		$	342,936		$	333,538		$	329,187
Franchise related income		14,884			15,841			14,543			993			15,536			14,193			12,410
Real estate		—			—			—			323			323			2,072			2,546

Total revenues		339,285			359,164			333,885			24,910			358,795			349,803			344,143
Costs and expenses:
Cost of food and paper products		66,305			77,675			66,036			4,308			70,344			64,331			66,519
Payroll and other employee benefits		89,310			95,540			85,563			6,762			92,325			88,611			89,351
Other operating costs		120,815			124,404			107,332			8,770			116,102			111,818			113,063
Other income, net (2)		(3,903	)		(4,498	)		(2,860	)		(497	)		(3,357	)		(4,553	)		(4,551	)
Depreciation and amortization		16,616			17,094			17,349			1,272			18,621			16,561			16,635
General and administrative		31,100			29,449			23,842			2,843			26,685			32,296			27,438
Special event bonuses (3)		—			—			—			31,395			31,395			—			—
Goodwill & other intangible asset impairment (4)		31,474			68,475			—			—			—			—			—
Asset impairment, restaurant closings/remodels		5,415			3,814			1,358			74			1,432			883			859

Total costs and expenses, net		357,132			411,953			298,620			54,927			353,547			309,947			309,314

Operating (loss) income		(17,847	)		(52,789	)		35,265			(30,017	)		5,248			39,856			34,829

Other (expense) income:
Interest expense		(28,240	)		(28,408	)		(28,879	)		(2,570	)		(31,449	)		(30,783	)		(30,680	)
Write-off of deferred financing costs		(423	)		—			—			—			—			—			—
Interest income		34			171			485			108			593			2,733			1,277

Net other expense		(28,629	)		(28,237	)		(28,394	)		(2,462	)		(30,856	)		(28,050	)		(29,403	)

(Loss) income before income taxes and equity investments		(46,476	)		(81,026	)		6,871			(32,479	)		(25,608	)		11,806			5,426
Income tax (benefit) expense		(9,349	)		9,353			2,048			44			2,092			644			1,693

(Loss) income before equity investments		(37,127	)		(90,379	)		4,823			(32,523	)		(27,700	)		11,162			3,733

(Loss) income from equity investments		(213	)		(243	)		—			12			12			573			(236	)

Net (loss) income		(37,340	)		(90,622	)		4,823			(32,511	)		(27,688	)		11,735			3,497
Less: net loss (income) attributable to non controlling interests		141			(646	)		(2,194	)		(69	)		(2,263	)		(1,877	)		(2,146	)

Net (loss) income attributable to Sbarro, Inc.	$	(37,199	)	$	(91,268	)	$	2,629		$	(32,580	)	$	(29,951	)	$	9,858		$	1,351

-16-

Fiscal Year (1)

(in thousands)


	2009			2008		1/31/07-12/30/07			1/1/07-1/30/07		2007			2006		2005
	(Successor)			(Successor)		(Successor)			(Predecessor)		(Combined)			(Predecessor)		(Predecessor)
Other Financial and Restaurant Data:
Franchised Sales (5)	$	312,701		$	371,998	$	317,542		$	22,799	$	340,341		$	294,920	$	272,190
Capital Expenditures	$	8,808		$	17,632	$	16,327		$	1,691	$	18,018		$	16,350	$	11,708
Number of restaurants at end of period:
Company-owned		484			509		506					506			485		502
Joint venture		17			16		7					7			—		—
Franchised		555			566		524					524			478		437

Total number of restaurants		1,056			1,091		1,037					1,037			963		939

Bank credit agreement EBITDA (6)	$	44,740		$	43,704	$	55,381		$	2,776	$	58,157
Balance Sheet Data (at end of period):
Total Assets	$	490,423		$	547,768	$	636,478				$	636,478		$	405,086	$	390,969
Working Capital	$	(2,904	)	$	2,193	$	(4,615	)			$	(4,615	)	$	60,460	$	40,649
Total long-term obligation	$	336,095		$	346,297	$	330,255				$	330,255		$	268,694	$	268,530

(1)	Our fiscal year ends on a Sunday in December, which for 2009 occurred on December 27. All years presented contain 52 weeks. Fiscal year 2010 will contain 53 weeks.

(2)	Other income, net includes rebates we received based on franchisees’ levels of purchases.

(3)	In connection with the Merger, special event bonuses were paid to certain members of management and non-employee directors on the closing date.

(4)

In 2009, we recognized goodwill and intangible asset impairment charges of $6.7 million and $24.8 million, respectively. This transaction is discussed in further detail under Note 3 – Intangible Assets included in this Report. In 2008, we recognized goodwill and intangible asset impairment charges of $8.5 million and $60.0 million, respectively.

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

(6)

Bank credit agreement EBITDA includes certain adjustments to EBITDA as disclosed in our Senior Credit Facility Amendment. 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 GAAP or as a measure of a company’s profitability or liquidity. Rather, we believe that EBITDA provides relevant and useful information for analysts and investors in our Senior Notes in that the Senior Credit Facilities and the Second Lien Facility each contain a minimum EBITDA covenant. We also internally use EBITDA to determine whether or not to continue operating restaurant units since it provides us with a measurement of whether we are receiving an adequate cash return on our investment. Our calculation of EBITDA may not be comparable to a similarly titled measure reported by other companies, since all companies do not calculate this non-GAAP measure in the same manner. Our EBITDA calculations are not intended to represent cash provided by (used in) operating activities since they do not include interest and taxes and changes in operating assets and liabilities, nor are they intended to represent a net increase in cash since they do not include cash provided by (used in) investing and financing activities.

-17-

For each of the periods shown, the following table reconciles our net (loss) income to EBITDA and bank credit agreement EBITDA for each of the period. We believe net (loss) income is the most direct comparable GAAP financial measure to EBITDA and bank credit agreement EBITDA, (dollars in thousands):


	2009			2008			1/31/07-12/30/07			1/1/07-1/30/07			2007			2006			2005
	(Successor)			(Successor)			(Successor)			(Predecessor)			(Combined)			(Predecessor)			(Predecessor)
Net (loss) income attributable to Sbarro, Inc.	$	(37,199	)	$	(91,268	)	$	2,629		$	(32,580	)	$	(29,951	)	$	9,858		$	1,351
Interest Expense		28,240			28,408			28,879			2,570			31,449			30,783			30,680
Interest Income		(34	)		(171	)		(485	)		(108	)		(593	)		(2,733	)		(1,277	)
Income Tax (Benefit) Expense		(9,349	)		9,353			2,048			44			2,092			644			1,693
Depreciation and Amortization		16,616			17,094			17,349			1,272			18,621			16,561			16,635

EBITDA attributable to Sbarro, Inc.	$	(1,726	)	$	(36,584	)	$	50,420		$	(28,802	)	$	21,618		$	55,113		$	49,082

Goodwill & other intangible asset impairment (4)		31,474			68,475			—			—			—

EBITDA attributable to Sbarro, Inc. exclusive of goodwill & other intangible asset impairment	$	29,748		$	31,891		$	50,420		$	(28,802	)	$	21,618

Adjustments:
Special event bonuses (3)		—			—			—			31,395			31,395
Non-cash charges, litigation charges and non-recurring income, net		6,002			5,358			3,012			(22	)		2,990
Professional fees expensed for credit amendment, management fees and related expenses		1,596			1,502			928						928
Restructuring related expenses, store closing costs and severance		5,605			3,214			379			183			562
Preopening ,joint venture operations and taxes in lieu of income tax		1,789			1,739			642			22			664

Bank Credit Agreement EBITDA	$	44,740		$	43,704		$	55,381		$	2,776		$	58,157

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our consolidated financial condition, liquidity and capital resources and results of operations should be read in conjunction with the Consolidated Financial Statements and notes included in Item 8 “Financial Statements and Supplementary Data.” Historical results and any discussion of prospective results may not indicate our future performance. This section contains certain “forward-looking statements” within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth in, Item 1A “Risk Factors” and elsewhere in this report.

Executive Overview

We believe we are the world’s leading Italian Quick Service Restaurant (“QSR”) concept and the largest shopping mall-focused restaurant concept in the world. We have a global base of 1,056 units in 41 countries, with 484 company-owned units, 555 franchised units and 17 joint venture units. Sbarro restaurants feature a menu of popular Italian food, including pizza, a selection of pasta dishes and other hot and cold Italian entrees, salads, sandwiches, drinks and desserts.

We operate our business through two segments. Our company-owned restaurant segment is comprised of the operating activities of our company-owned QSR’s and other concept restaurants (owned and joint venture). Our franchise restaurant segment is comprised of our franchised restaurants which offer opportunities worldwide for qualified operators to conduct business under the Sbarro name and other trade names owned by Sbarro. Our operating segments are discussed in Note 1 - Summary of Significant Accounting Policies and Note 13 - Business Segment Information to our Consolidated Financial Statements included in this Report.

There were several significant charges affecting the comparisons with previously reported results. In 2009, we recognized goodwill and intangible asset impairment charges of $6.7 million and $24.8 million, respectively. The 2009 tax benefit of $9.3 million was primarily the result of a $10.3 million reduction in our deferred tax liability related to these impairment charges. In 2009 we also recorded income tax expense for a valuation allowance of $4.7 million against our deferred tax

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asset. These transactions are discussed in further detail under Note 3 – Intangible Assets and Note 6 – Income Taxes to our Consolidated Financial Statements included in this Report. In 2008, we recognized goodwill and intangible asset impairment charges of $8.5 million and $60.0 million, respectively. In 2008 we also recorded income tax expense for a valuation allowance of $35.0 million against our deferred tax asset. Given the uncertainty as to the length of the current economic condition and the timing and degree of recovery, it is reasonably possible that impairment charges may occur in future periods. See further discussion of liquidity and bank covenants in Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.

Seasonality

Revenues are highest in our fourth quarter due primarily to increased traffic in shopping malls during the holiday shopping season. Our annual revenues, earnings and cash flow from operations can fluctuate due to the length of the holiday shopping period between Thanksgiving and New Year’s Day.

Accounting Period

Our fiscal year ends on a Sunday, which for 2009 occurred on December 27. Fiscal year 2007, 2008 and 2009 had 52 weeks. Fiscal year 2010 will contain 53 weeks.

Primary Factors Considered by Management in Evaluating Operating Performance

We focus on the following factors when evaluating our operating performance:

•

comparable company-owned QSR unit sales;

•

franchise location sales and their relationship to our franchise revenues;

•

decisions to continue to operate or close company-owned QSR locations;

•

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

•

level of other operating expenses (primarily occupancy costs) and their relationship to restaurant sales;

•

relationship of general and administrative costs to revenues;

•

provision for asset impairment and restaurant closings/remodels; and

•

EBITDA.

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Summary Financial Information (Dollars in Millions)


	2009			2008			2007
	(Successor)			(Successor)			(Combined) (2)
Comparable sales-percentage change vs. prior comparable period (1):
QSR-owned locations		-4.9	%		-2.2	%		1.5	%
Franchise locations:
Domestic Franchise		-5.6	%		-2.7	%		4.3	%
International Franchise:
Local currency		-7.8	%		6.0	%		0.7	%
Foreign currency impact		-13.7	%		4.6	%		6.0	%

International Franchise, net		-21.5	%		10.6	%		6.7	%
Cost of food and paper products as a percentage of restaurant sales		20.4	%		22.6	%		20.5	%
Payroll and other benefits as a percentage of restaurant sales		27.5	%		27.8	%		26.9	%
Other operating costs as a percentage of restaurant sales		37.2	%		36.2	%		33.9	%
General and administrative costs as a percentage of revenues		9.2	%		8.2	%		7.4	%
Bank credit agreement EBITDA (3)	$	44.7		$	43.7		$	58.2

(1)	Comparable annual percentage changes are based on locations that were open during the entire period within the years presented.

(2)	The combined results of the Successor and Predecessor for the year ended December 31, 2007 do not comply with GAAP; however, we believe that this provides useful information to assess the relative performance of the business in all periods presented in the financial statements on an ongoing basis.

(3)

Bank credit agreement EBITDA includes certain adjustments to EBITDA disclosed in our Senior Credit Facility Amendment. 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 GAAP or as a measure of a company’s profitability or liquidity. Rather, we believe that EBITDA provides relevant and useful information for analysts and investors in our Senior Notes in that the Senior Credit Facilities and the Second Lien Facility each contain a minimum bank credit agreement EBITDA covenant. We also internally use EBITDA to determine whether or not to continue operating restaurant units since it provides us with a measurement of whether we are receiving an adequate cash return on our investment. Our calculation of EBITDA may not be comparable to a similarly titled measure reported by other companies, since all companies do not calculate this non-GAAP measure in the same manner. Our EBITDA calculations are not intended to represent cash provided by (used in) operating activities since they do not include interest and taxes and changes in operating assets and liabilities, nor are they intended to represent a net increase in cash since they do not include cash provided by (used in) investing and financing activities. See Item 6 Selected Financial Data Other Financial and Restaurant Data.

Impact of Inflation and Other Factors

Food, labor, rent, construction and energy costs and equipment costs are the items most affected by inflation in the restaurant business. In 2009 the Company benefited from commodity price declines, particularly cheese and flour. However, this trend showed volatility in the fourth quarter as commodity prices began to rise. In 2007 and 2008, commodity prices rose significantly as compared to 2006. In addition, food and paper product costs may be temporarily or permanently affected by the weather, economic and other factors beyond our control that may reduce the availability and increase the cost of these items. Beginning in the fourth quarter of 2007 and throughout 2009 we experienced declining sales as consumers responded to the existing recessionary market conditions.

Related parties

On March 26, 2009, we entered into a new Second Lien Facility. The Second Lien Facility provides for a $25.5 million secured term loan facility. The loan under the Second Lien Facility was made by Column Investments S.a.r.l., an affiliate of MidOcean. In connection with closing the Second Lien Facility, we borrowed the entire $25.5 million available under the facility which provided for cash proceeds of $25.0 million (representing a 1.96% discount). The Second Lien Facility matures in 2014. See Note 7 – Long Term Debt for additional information.

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reasonably incurred by it for providing management and other similar services to the Company each year, as well as a closing fee for services provided to the Company in connection with the Merger in the amount of $2.0 million, which was paid on January 31, 2007. In both 2009 and 2008, a management fee of $1.0 million plus expenses was incurred.

During 2008, Sbarro loaned Holdings $.3 million to purchase shares of Holdings from two former senior managers in connection with their termination from the Company. The loan does not bear interest and has been classified as a reduction of shareholder’s equity. Sbarro recorded management fee expenses of approximately $1.0 million in 2009 and 2008 related to MidOcean’s management fee.

Results of Operations

We operate two business segments. Our company-owned restaurant segment is comprised of the operating activities of our Company-Owned QSR, joint venture restaurants, Carmela’s and Mama Sbarro restaurants. 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.

2009 compared to 2008

The following table sets forth the information concerning revenue and operating (loss) income before unallocated costs of each of our company-owned and franchised restaurant segments.


	Company Owned Restaurants			Franchise Restaurants		Totals
				(In thousands)
2009 (Successor)
Total revenue	$	324,401		$	14,884	$	339,285

Operating (loss) income before unallocated costs ⁽¹⁾	$	(1,385	)	$	8,878	$	7,493

Unallocated costs and expenses ⁽²⁾							25,340

Operating loss ⁽¹⁾						$	(17,847	)


2008 (Successor)
Total revenue	$	343,323		$	15,841	$	359,164

Operating (loss) income before unallocated costs ⁽¹⁾	$	(39,197	)	$	11,216	$	(27,981	)

Unallocated costs and expenses ⁽²⁾							24,808

Operating loss ⁽¹⁾						$	(52,789	)

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(1)

In 2009, we recognized goodwill and intangible asset impairment charges of $6.7 million and $24.8 million, respectively. This transaction is discussed in further detail under Note 3 – Intangible Assets to our Consolidated Financial Statements included in this report. In 2008, we recognized goodwill and intangible asset impairment charges of $8.5 million and $60.0 million, respectively.

(2)	Represents certain general and administrative expenses that are not allocated by segment

Sales by QSR and consolidated other concept restaurants were $324.4 million for 2009 compared to $343.3 million for 2008. The decrease in sales is due to a decrease in comparable unit sales of 4.9% in our QSR restaurants and lost sales from stores strategically closed of $11.0 million, partially offset by sales generated by new stores opened in 2009 and 2008 of $7.3 million. The decrease in comparable unit sales primarily reflects reduced mall traffic throughout the United States as a result of the current economic environment.

Franchise related revenues were $14.9 million for 2009 compared to $15.8 million for 2008. The decrease is due to a decline in royalties on international and domestic comparable unit sales of which more than half of the decline is related to the strengthening of the U.S. dollar, partially offset by deferred revenues recognized for territories repurchased.

Cost of food and paper products as a percentage of restaurant sales decreased to 20.4% for 2009 as compared to 22.6% for 2008. The cost of cheese in 2009 averaged $1.48 per pound compared to an average of $2.12 per pound for 2008. This $.64 per pound decrease in cheese costs accounted for $3.9 million or 1.2% of restaurant sales. The cost of flour in 2009 averaged $.30 per pound compared to $.40 per pound for 2008. This $.10 per pound decrease accounted for $1.2 million or .4% of restaurant sales.

Payroll and other employee benefits as a percentage of restaurant sales decreased to 27.5% in 2009 from 27.8% in 2008. The decrease is due to cost control initiatives implemented in 2009.

Other operating costs were $120.8 million in 2009 compared to $124.4 million in 2008 primarily a result of the cost savings initiatives implemented in 2009. As a percentage of restaurant sales, other operating costs increased to 37.2% in 2009 as compared to 36.2% in 2008 due to lower sales in 2009.

Other income, net decreased to $3.9 million in 2009 from $4.5 million in 2008.

Depreciation and amortization decreased to $16.6 million in 2009 compared to $17.1 million in 2008 due to underperforming stores closed in the beginning of 2009.

General and administrative expenses were $31.1 million in 2009 as compared to $29.5 million in 2008. The increase was primarily related to severance costs, an increase to the provision for doubtful accounts and fees related to the amendment to the Senior Credit Facilities, partially offset by cost control initiatives implemented in 2009.

Goodwill and other intangible asset impairment totaled $31.5 million in 2009, which includes an impairment for goodwill for our franchise segment of $6.7 million, an impairment for our trademark of $21.9 million and an impairment of $2.9 million on our franchise relationships. In 2008, goodwill and other intangible asset impairment totaled $68.5 million and included an impairment for goodwill for our franchise segment of $8.5 million, an impairment for our trademark of $53.0 million and an impairment of $7.0 million on our franchise relationships. See Note 3 – Intangible Assets to our Consolidated Financial Statements included in this Report.

Asset impairment, restaurant closing and remodeling costs were $5.4 million in 2009 compared to $3.8 million in 2008. The $1.6 million increase is primarily due to $.8 million of fixed assets impairments related to our joint venture in India, stores strategically closed and an increase in non-cash asset impairment charges.

Interest expense of $28.2 million for 2009 and $28.4 million for 2008 relates primarily to the Senior Notes, the Term Loans (defined below) and Revolver under our Senior Credit Facilities and our Second Lien Facility. Included in interest expense in 2009 and 2008 was the amortization of deferred financing costs for the Senior Notes, Term Loan and Second Lien Facility of $1.4 million and $1.1 million, respectively. Interest expense was relatively flat in 2009 to 2008. Interest on the Second Lien Facility was partially offset by lower principal outstanding and lower interest rates on the Senior Credit Facility in 2009 as compared to 2008.

Write-off of deferred financing costs of $0.4 million in 2009 related to prepayment of the Senior Credit Facility.

The income tax benefit was $9.3 million for 2009 was primarily the result of a $10.3 million decrease in our deferred tax liability related to intangible asset impairment charges and our effective tax rate was 20.1%. During 2009, we recorded a $4.7 million increase to the valuation allowance on our deferred tax assets increasing the valuation allowance to $39.7 million. The income tax expense was $9.4 million in 2008 and our effective tax rate was negative 11.5%. During 2008, we recorded a $35.0 million valuation allowance on our deferred tax assets

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Loss from equity investments relates to our joint venture in Beirut, an unconsolidated affiliate.

Net loss attributable to noncontrolling interests relates to our joint ventures in India, Japan and certain partnerships.

Net loss attributable to Sbarro, Inc. was $37.2 million for 2009 as compared to a net loss attributable to Sbarro, Inc. of $91.3 million for 2008. Included in the 2009 net loss were goodwill and other intangible asset impairment of $31.5 million offset by an income tax benefit of $9.3 million with $4.7 million relating to our deferred tax asset valuation allowance. Included in the 2008 net loss were goodwill and other intangible asset impairment of $68.5 million and income tax expense for a valuation allowance of $35.0 million related to our deferred tax assets. Without goodwill and intangible asset impairment charges and taxes, the net loss would have been $15.1 million in 2009 and $13.4 million in 2008. This increase in net loss was primarily the result of a decrease in comparable unit sales and royalties on franchise sales, partially offset by the reduction in commodity costs and cost savings initiatives.

2008 compared to 2007

The following table sets forth the information concerning revenue and operating (loss) income before unallocated costs of each of our company-owned and franchised restaurant segments.


	Company Owned Restaurants⁽¹⁾			Franchise Restaurants		Totals
				(In thousands)
2008 (Successor)
Total revenue.	$	343,323		$	15,841	$	359,164

Operating (loss) income before unallocated costs ⁽⁴⁾	$	(39,197	)	$	11,216	$	(27,981	)

Unallocated costs and expenses ⁽²⁾							24,808

Operating (loss) ⁽⁴⁾						$	(52,789	)


1/1/07 – 1/30/07 (Predecessor)
Total revenue	$	23,917		$	993	$	24,910

Operating (loss) income before unallocated costs ⁽³⁾	$	(28,166	)	$	594	$	(27,572	)

Unallocated costs and expenses ⁽²⁾							2,445

Operating (loss) ⁽³⁾						$	(30,017	)


1/31/07-12/30/07 (Successor)
Total revenue	$	319,342		$	14,543	$	333,885

Operating income before unallocated costs	$	44,504		$	10,168	$	54,672

Unallocated costs and expenses ⁽²⁾							19,407

Operating income						$	35,265


2007 (Combined)
Total revenue	$	343,259		$	15,536	$	358,795

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	Company Owned Restaurants⁽¹⁾		Franchise Restaurants		Totals
			(In thousands)
Operating income before unallocated costs ⁽³⁾	$	16,338	$	10,762	$	27,100

Unallocated costs and expenses ⁽²⁾						21,852

Operating income ⁽³⁾					$	5,248

(1)	Total revenue includes restaurant sales in the Successor period and restaurant sales and real estate revenues in the Predecessor periods.

(2)	Represents certain general and administrative expenses that are not allocated by segment.

(3)	2007 combined and predecessor includes $31.4 million related to the special event bonuses.

(4)	In 2008, we recognized goodwill and intangible asset impairment charges of $8.5 million and $60.0 million, respectively.

Sales by QSR and consolidated other concept restaurants were $343.3 million for 2008 as compared to $342.9 million for combined 2007. The increase in sales is due to sales generated by new stores opened in 2007 and 2008 of $12.5 million offset by sales lost from stores closed of $6.1 million and a decrease in comparable unit sales of 2.2% in our QSR restaurants. The decrease in comparable unit sales primarily reflects reduced mall traffic throughout the United States, especially in the fourth quarter of 2008, as a result of the economic environment in 2008.

Franchise related revenues were $15.8 million for 2008 as compared to $15.5 million for combined 2007. The increase is due to royalties on new international stores opened in 2007 and 2008 of $0.9 million and increased international comparable unit sales of $0.3 million, partially offset by the loss of royalties on closed international and domestic locations of $0.6 million. Royalties on new domestic franchises were $0.2 million offset by a decline in domestic comparable unit sales of $0.2 million. International fees were $0.3 million less than in combined 2007.

Cost of food and paper products as a percentage of restaurant sales increased to 22.6% for 2008 as compared to 20.5% in combined 2007. The cost of cheese in 2008 averaged $2.12 per pound compared to an average of $1.95 per pound in combined 2007. This $.17 per pound increase in cheese costs accounted for $1.3 million or .4% of restaurant sales. The cost of flour in 2008 averaged $.40 compared to $.20 in combined 2007. The $.20 per pound increase accounted for $2.8 million or .8% of restaurant sales. The remaining .9% increase as a percentage of restaurant sales relates to fuel surcharges and cost increases on other products including pasta, oil, sausage and pepperoni.

Payroll and other employee benefits as a percentage of restaurant sales increased to 27.8% for 2008 as compared to 26.9% in combined 2007. The increase is primarily related to higher wages, including minimum wage increases, and increased staffing levels at some stores, while sales remained relatively flat.

Other operating costs as a percentage of restaurant sales increased to 36.2% for 2008 as compared to 33.9% in combined 2007. The increase is primarily due to expected increases in occupancy related charges offset by reductions in operating costs in response to sales remaining relatively flat.

Other income, net increased by $1.1 million in 2008 to $4.5 million compared to $3.4 million in combined 2007. The increase is primarily due to an increase in certain rebates we received based on our franchisees’ level of purchases and certain settlements and refunds.

Depreciation and amortization expense decreased to $17.1 million for 2008 compared to $18.6 million in combined 2007. The $1.5 million decrease is due to assets fully depreciated offset by depreciation on new stores opened.

General and administrative expenses were $29.5 million in 2008 as compared to $26.7 million in combined 2007. The $2.8 million increase is primarily due to $1.4 million of expenses related to field infrastructure, including manpower, training and enhancements, and $.9 million for professional fees relating to Sarbanes-Oxley, other compliance requirements and other restructuring related fees.

Goodwill and other intangible asset impairment of $68.5 million includes an impairment for goodwill for our franchise segment of $8.5 million, an impairment for our trademark of $53.0 million and an impairment of $7.0 million on our franchise relationships all related to the global economic downturn.

Asset impairment, restaurant closings/remodels was $3.8 million in 2008 compared to $1.4 million in combined 2007. The increase is related to an increase in store impairments where expected future cash flows may not cover the carrying amount of the assets and additional asset write offs for closed stores.

Interest expense of $28.4 million in 2008 and $31.4 million in combined 2007 is primarily related to the Senior Notes and the Term Loan under our Senior Credit Facilities. The decrease in interest expense in 2008 is primarily related to lower

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interest rates. Included in interest expense in 2008 and 2007 was the amortization of deferred financing costs for the Senior Notes and the Term Loan of $1.1 million and $1.0 million, respectively.

In our Successor period after January 31, 2007, we are taxed as a C Corporation. Income tax expense was $9.4 million in 2008. In the fourth quarter of 2008, we recorded a valuation allowance of $35.0 million as we believe that it is more likely than not that our net operating loss carry forward, foreign tax credit carry forward and other deferred tax assets will not be realized. Our effective tax rate was negative 11.5% for the period. Income tax expense was $2.0 million in Successor 2007 and our effective tax rate was 29.8% for the period. Prior to January 31, 2007, we were 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. Under the provisions of Subchapter S, substantially all taxes on our income were paid by our former shareholders rather than by the Company.

Loss from equity investments relates to our joint venture in Beirut, an unconsolidated affiliate.

Net income attributable to noncontrolling interests relates to our joint ventures in India and certain partnerships.

Net loss attributable to Sbarro, Inc. was $91.3 million for 2008 as compared to a net loss attributable to Sbarro, Inc. of $30.0 million in combined 2007. Included in the 2008 net loss were goodwill and other intangible asset impairment of $68.5 million and income tax expense for a valuation allowance of $35.0 million related to our deferred tax assets. Included in the combined 2007 net loss was $31.4 million attributable to special event bonuses.

Liquidity and Capital Resources

Principal Cash Requirements and Sources

We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on indebtedness incurred in connection with the Merger, and from funding our costs of operations, working capital and capital expenditures. Cash flow generated during our fourth quarter is critical to achieving positive annual operating cash flow. Adverse macroeconomic factors, including reduced mall traffic during the holiday shopping season and a decline in consumer spending among other factors, negatively impacted achieving our projected operating cash flow. Additionally, we experience pressures relating to increased commodity costs, particularly cheese and flour.

Our ability to borrow funds under our revolver is subject to compliance with our debt covenant requirements. Prior to the amendment to our Senior Credit Facilities, such covenants included an interest coverage ratio and a total leverage ratio. On March 26, 2009, we entered into an amendment to the Senior Credit Facilities. The amendment permitted the Company to refinance a portion of our Term Loan by entering into the new Second Lien Facility (discussed below), permanently waived a breach of our total net leverage ratio covenant for the fiscal quarter ended December 28, 2008, and replaced our total net leverage ratio covenant and interest coverage ratio covenant with a minimum EBITDA covenant and a maximum capital expenditure covenant (see Senior Credit Facilities), increased the margin on our Term Loan and Revolving Facility (defined below) by 200 basis points, required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility, required prepayment of $3.5 million of the Revolving Facility from cash on hand and simultaneously reduced the Revolving Facility’s amount outstanding and commitment to $21.5 million and restricted payment of MidOcean’s annual management fee so that such fee will accrue but not be paid until the Company’s EBITDA is at least $55.0 million and after such goal is obtained, a maximum of $2.0 million of such fees may be paid each year.

In response to the economic downturn in 2008, we began to implement aggressive strategic initiatives to reduce costs and improve our liquidity. These initiatives, which are on-going, include closing unprofitable stores, renegotiating store lease terms, reducing headcount and revisions to our recipes without affecting our customers, as well as other expense controls. We believe these actions enhance our liquidity going forward and will enable us to be in compliance with our debt covenants under the amendment and that cash generated from operations, together with cash on hand and amounts available under the Senior Credit Facilities will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs and capital expenditure requirements for the next twelve months. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

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commencing in the second half of the year, with the largest increase in our fourth quarter, and include the achievement of a 1% increase year over year same store sales in 2010. Considering related costs, each 1% decrease in comparable sales for the year may result in a net bank credit agreement EBITDA decrease of approximately $1.5 million assuming our payroll as a percentage of sales adjusts accordingly as was the case in 2009. Failing to achieve our budgeted 1% increase in comparable sales percentage, or experiencing a decrease in comparable sales percentage that differs for our business plan by more than 2% for the year, or by approximately 6% of same store sales in the fourth quarter, could cause a bank credit agreement EBITDA shortfall that increases the risk of non-compliance with our minimum EBITDA covenants.

Commodity costs can also fluctuate with the economy with cheese currently being the most volatile. A $.20 variance in the price of block cheese to our projections can produce a variance to our business plan by approximately $1 million as a benefit or a risk depending on the market.

In 2009 and in 2010, we have implemented savings initiatives throughout our operations including, but not limited to, store payroll, strategic closings of underperforming stores, recipe revisions, contract renegotiations, rent reductions, insurance and overhead reductions. We continue to evaluate other cost control measures to help mitigate any risk in achieving our 2010 business plan.

If the expected economic recovery and same store sales increases do not occur in a manner consistent with our business plan, or if we are unable to manage costs, each as discussed above, we may not be able to achieve our 2010 operating plan and meet our minimum EBITDA covenants.

Our bank credit agreements provide for certain cures in the event of non-compliance with our minimum EBITDA covenants.

Based upon our cash balance of $26.9 million at December 27, 2009 and our 2010 business plan, we believe that cash flows generated from operations during 2010 along with our cash on hand and borrowings available under our revolver ($5.4 million) will be sufficient for us to meet our debt service requirements and fund working capital and capital expenditures for the next twelve months.

We estimate that our annual cash interest expense under the Senior Notes and the Senior Credit Facilities will be approximately $24.7 million under the amended Senior Credit Facilities, assuming a 2% LIBOR rate. Borrowings under the Second Lien Facility bear interest at 15% per annum payable quarterly in arrears. The Second Lien Facility provides for no amortization of principal. Interest is payable quarterly as follows: (i) prior to the third anniversary, interest is only payable in kind and (ii) after the third anniversary, interest is payable in cash so long as the Senior Credit Facilities leverage ratio is less than or equal to 2.75:1.00. Please see our discussion below regarding our Senior Credit Facilities and our Second Lien Facility.

The amended Senior Credit Facilities require us to prepay outstanding borrowings, subject to certain exceptions, with (a) 75% of our annual excess cash flow; (b) 100% of the net cash proceeds of certain asset sales or other dispositions of property (including casualty insurance and condemnations) if we do not commit to reinvest such proceeds in accordance with the terms of the Senior Credit Facilities within 365 days of the event giving rise thereto (or, to the extent we have entered into a commitment to reinvest such proceeds within such time period to the extent such amounts are actually reinvested, within six months of the expiration of such 365 days); and (c) 100% of the net cash proceeds of any incurrence of debt, other than debt permitted under the Senior Credit Facilities. The prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility satisfied our quarterly obligation for further principal amortization payments on our Senior Credit Facilities. We are not required to make principal payments, absent the occurrence of certain events, on our Senior Notes until they mature in 2015. In 2008, we purchased four QSR locations for approximately $1.3 million and we repaid $1.8 million in principal per the terms of our Term Loan. On October 17, 2008 and November 18, 2008, we borrowed $8.0 million and $12.0 million respectively under our senior secured revolving facility. As of March 26, 2010, the remaining borrowing availability was $5.4 million. We believe that aggregate capital expenditures for 2010 will approximate $8.2 million which we expect will be funded with operating cash. Based upon our projected cash requirements for operations, we believe we have adequate resources to fund operations, working capital needs, capital expenditures, debt servicing requirements and other cash needs for the next twelve months based upon current cash balances and the availability under the revolving credit facility. If necessary, we may adjust the rate of capital expenditures, acquisitions, or the timing and magnitude of other controllable expenditures to meet such requirements. Refer below to information regarding our Senior Credit Facilities.

As of March 26, 2010 the credit ratings are as follows:


Credit Rating Agency	Senior Credit Facility	10.375% Senior Notes	Corporate
Standard and Poors	CCC+	CCC-	CCC+
Moody’s	Caa1	C	Ca

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Contractual Obligations

The following table presents our contractual obligations as of December 27, 2009 (in millions):


Dollars in millions	2010		2011		2012		2013		2014		Thereafter		Total
10.375% senior notes ⁽¹⁾	$	—	$	—	$	—	$	—	$	—	$	150.0	$	150.0
Senior credit facility		—		—		—		12.5		154.8		—		167.3
Second lien Facility		—		—		—		—		25.5		—		25.5
Estimated interest on long-term debt ⁽²⁾		25.3		26.2		43.8		31.2		18.9		1.2		146.6
Letters of credit ⁽³⁾		3.6		—		—		—		—		—		3.6
Operating leases ⁽⁴⁾		79.0		74.5		69.9		65.4		60.3		169.0		518.1
Due to former shareholders⁽⁵⁾		—		0.4		2.2		4.1		5.1		—		11.8

	$	107.9	$	101.1	$	115.9	$	113.2	$	264.6	$	320.2	$	1,022.9

(1)	There are no principal repayment obligations under the Senior Notes until 2015.

(2)

The Revolving Facility is due in 2013 and the Term Loan and the Second Lien is due in 2014. The estimated interest on long-term debt reflects the March 26, 2009 amendment to the Senior Credit Facilities. The amendment permitted the Company to enter into the new Second Lien Facility, increased the margin on our Term Loan and Revolving Facility by 200 basis points, required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility and required prepayment of $3.5 million of the Revolving Facility from cash on hand. Interest on the Second Lien Facility is payable quarterly as follows: (i) prior to the third anniversary, interest is only payable in kind; and (ii) after the third anniversary, interest is payable in cash so long as the Senior Credit Facilities leverage ratio is less than or equal to 2.75:1.00. Included in the above table is interest on the Second Lien Facility of: (in millions) 2012 - $17.1, 2013 - $3.8, thereafter - $2.3.

(3)

Represents our maximum reimbursement obligations to the issuer of the letters of credit in the event the letters of credit are drawn upon. The letters of credit generally are issued instead of cash security deposits under operating leases or to guarantee construction costs for our locations and for run out claims under our medical plan. All the standby letters of credit supporting leases are renewable annually through the expiration of the related lease terms. If not renewed, the beneficiary may draw upon the letters of credit as long as the underlying obligation remains outstanding.

(4)

Includes rent and the related CAM charges, the lease on our corporate headquarters and future minimum rental payments under non-cancelable operating leases for restaurants that had not opened as of year-end. Does not reflect the impact of renewals of operating leases that are scheduled to expire during the periods indicated.

(5)

Primarily represents the remaining amount we agreed to pay the former shareholders for any incremental tax benefit of deductions generated by the repurchase of our 11% Notes or payment of the special event bonuses. The payment is due within 15 days of the filing of the U.S. tax return that claims these additional deductions.

Historically, we have not purchased or entered into interest rate swaps or other instruments designed to hedge against changes in interest rates, the price of commodities we purchase or the value of foreign currencies. We have, and sometimes will, enter into short term fixed rate contracts for some products we purchase. Subsequent to the Merger, we entered into an Interest Rate Cap Letter Agreement with a bank for a portion of our Senior Credit Facility. This agreement capped our LIBOR rate at 6.00% through February 2009 and at 6.50% through February 2010.

Off-Balance Sheet Arrangements

We are party to letters of credit and, to a lesser extent, financial guarantees with off-balance sheet risk and enter into operating leases in the normal course of business. Our exposure to credit loss for letters of credit and financial guarantees is represented by the contractual amounts of these instruments. Total conditional commitments under letters of credit as of December 27, 2009 were $3.6 million and represents our maximum reimbursement obligations to the issuer of the letters of credit in the event the letters of credit are drawn upon. The letters of credit generally are issued instead of cash security deposits under operating leases or to guarantee construction costs for our locations and for run-out claims under our medical plan. All the standby letters of credit supporting leases are renewable annually through the expiration of the related lease terms. If not renewed, the beneficiary may draw upon the letters of credit as long as the underlying obligation remains outstanding. Additionally, the Company has guaranteed lease payments related to certain franchisees’ lease arrangements. The maximum amount of potential future payments under these guarantees is $4.6 million as of December 27, 2009. We believe that none of these arrangements have or are likely to have a material effect on our results of operations, financial condition or liquidity.

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Senior Credit Facilities

In connection with the Merger, we entered into senior secured credit facilities. The senior secured credit facilities originally provided for loans of $208.0 million under a $183.0 million senior secured term loan facility (the “Term Loan”) and a $25.0 million senior secured revolving facility (the “Revolving Facility,” and collectively with the Term Loan, the “Senior Credit Facilities”). The Revolving Facility also provides for the issuance of letters of credit not to exceed $10.0 million at any one time outstanding and swing line loans not to exceed $5.0 million at any one time outstanding.

On March 26, 2009, we entered into an amendment to the Senior Credit Facilities. The amendment permitted the Company to refinance a portion of the Term Loan by entering into new Second Lien Facility (defined and discussed below), waived a breach of our total net leverage ratio covenant for the fiscal quarter ending December 28, 2008, permanently replaced our total net leverage ratio covenant and interest coverage ratio covenant with a minimum EBITDA covenant and a maximum capital expenditure covenant, increased the margin on our Term Loan and Revolving Facility by 200 basis points, required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility, required prepayment of $3.5 million of the Revolving Facility from cash on hand and simultaneously reduced the Revolving Facility’s amount outstanding and commitment to $21.5 million, and restricted payment of MidOcean’s annual management fee so that such fee will accrue but not be paid until the Company’s EBITDA is at least $55.0 million and after such goal is obtained, a maximum of $2.0 million of such fees may be paid each year.

As of December 27, 2009, there were $3.6 million in letters of credit outstanding. The letters of credit were issued instead of cash security deposits under our operating leases or to guarantee construction costs of our locations, and for run-out claims under our medical plan. As of December 27, 2009, our remaining borrowing availability under the Senior Credit Facilities was $5.4 million.

EBITDA, as calculated under our bank credit agreement, includes certain additional adjustments as disclosed in our Senior Credit Facility amendment. Our EBITDA in accordance with our bank credit agreement for the year ended December 27, 2009 was $44.7 million. Our minimum last twelve months EBITDA covenant pursuant to our amended bank credit agreement is as follows:


Fourth quarter 2009 – Third quarter 2010	$	40 million
Fourth quarter 2010 – Third quarter 2011	$	43 million
Fourth quarter 2011 – Third quarter 2012	$	48 million
Fourth quarter 2012 – Third quarter 2013	$	53 million
December 29, 2013 until maturity	$	60 million

The maximum capital expenditure covenant limits our capital spend on a last twelve month basis to an annual spend of $12 million in 2009 and 2010, and an annual spend of $14 million, in 2011 and 2012 and $15 million thereafter before giving effect to any carryover. A shortfall in any given last twelve month period may be carried over to the immediately succeeding four fiscal quarters.

The Term Loan matures in 2014 and the Revolving Facility is scheduled to terminate and come due in 2013.

In general, borrowings under the Senior Credit Facilities bear interest based, at our option, at either a LIBOR rate or an alternate base rate (“ABR”), in each case plus a margin. Our rate of interest for borrowings under the Senior Credit Facilities, as amended, is LIBOR plus 4.50% or ABR plus 3.50%. In addition to paying interest on outstanding principal under the Senior Credit Facilities, we are also required to pay an unused line fee to the lenders with respect to the unutilized revolving commitments at a rate that shall not exceed 50 basis points per annum.

Our obligations under the Senior Credit Facilities are unconditionally and irrevocably guaranteed by our domestic subsidiaries. In addition, the Senior Credit Facilities are secured by first priority perfected security interests in substantially all of our and our domestic subsidiaries’ capital stock, and up to 65% of the outstanding capital stock of our foreign subsidiaries.

The credit agreement governing the Senior Credit Facilities contains certain events of default and restrictive covenants which are customary with respect to facilities of this type, including limitations on the incurrence of additional indebtedness, dividends, investments, repayment of certain indebtedness, sales of assets, liens, mergers and transactions with affiliates. In addition, the credit agreement, as amended, requires compliance with certain financial and operating covenants, including a minimum EBITDA covenant and a maximum capital expenditure covenant.

See Note 7 – Long Term Debt to our Consolidated Financial Statements for additional information regarding the March 26, 2009 amendment to the Senior Credit Facilities.

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Second Lien Facility

Borrowings under the Second Lien Facility bear interest at 15% per annum payable quarterly in arrears. The Second Lien Facility provides for no amortization of principal. Interest is payable quarterly as follows: (i) prior to the third anniversary, interest is only payable in kind and (ii) after the third anniversary, interest is payable in cash so long as the Senior Credit Facilities leverage ratio is less than or equal to 2.75:1.00.

Our obligations under the Second Lien Facility are unconditionally and irrevocably guaranteed by our domestic subsidiaries. In addition, the Second Lien Facility is secured by a second priority perfected security interest in substantially all of our and our domestic subsidiaries’ capital stock, and up to 65% of the outstanding capital stock of our foreign subsidiaries.

The credit agreement governing the Second Lien Facility contains certain events of default and restrictive covenants which are customary with respect to facilities of this type, including limitations on the incurrence of indebtedness, dividends, investments, prepayment of certain indebtedness, sales of assets, liens, mergers and transactions with affiliates. In addition, the credit agreement contains (i) cross-acceleration provisions tied to the Senior Credit Facilities and cross-default provisions tied to the Senior Notes and (ii) compliance with certain financial and operating covenants, including a minimum EBITDA covenant and a maximum capital expenditure covenant, which are based on the covenants contained in the Senior Credit Facilities with less restrictive thresholds by approximately 15%. The credit agreement also contains a make-whole provision for any prepayment prior to the scheduled maturity date.

See Note 7 – Long Term Debt to our Consolidated Financial Statements for additional information regarding the new Second Lien Facility.

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Indenture:

In connection with the Merger, we issued $150.0 million of senior notes at 10.375% due 2015 (“Senior Notes”). The interest is payable on February 1 and August 1 of each year.

The Senior Notes are senior unsecured obligations of ours and are guaranteed by all of our current and future domestic subsidiaries and rank equally in right of payment with all existing and future senior indebtedness of ours. The Senior Notes are effectively subordinated to all secured indebtedness of ours to the extent of the collateral securing such indebtedness, including the Senior Credit Facilities and Second Lien Facility. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have prior claim to those of our assets that constitute their collateral. The Senior Notes are structurally subordinated to all existing and future indebtedness, claims of holders of preferred stock and other liabilities of our subsidiaries that do not guarantee the Senior Notes. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims in full from the assets of those subsidiaries before any assets are made available for distribution to us. The Senior Notes are senior in right of payment to any future subordinated obligations of ours.

The indenture governing the notes contains certain events of default and restrictive covenants which are customary with respect to non-investment grade debt securities, including limitations on the incurrence of additional indebtedness, dividends, repurchases of capital stock, sales of assets, liens, mergers and transactions with affiliates. The indenture has an acceleration provision if we are in default of our debt covenants for our Senior Credit Facilities or Second Lien Facility.

Sources and Uses of Cash

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


	Year Ended 2009			Year Ended 2008
	(Successor)			(Successor)
Liquidity at year end
Cash and cash equivalents	$	26.9		$	38.3
Working capital	$	(2.9	)	$	2.2

Net cash flows
Provided by operating activities	$	8.5		$	10.7
Used in investing activities	$	(8.9	)	$	(19.2	)
(Used in) provided by financing activities	$	(11.0	)	$	17.9

Net (decrease) increase in cash	$	(11.4	)	$	9.4

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. Based upon our cash balance of $26.9 million at December 27, 2009 and our 2010 business plan, we believe that cash flows generated from operations during 2010 along with our cash on hand and borrowings available under our revolver ($5.4 million) will be sufficient for us to meet our debt service requirements and fund working capital and planned capital expenditures for the next twelve months.

Net cash provided by operating activities was $8.5 million in 2009 as compared to $10.7 million provided by operating activities in 2008. The decrease in net cash provided in 2009 is mainly due to a decrease in Accounts Payable in 2009 offset by an increase in Accrued Interest Payable for our Second Lien Facility.

Net cash used in investing activities was $8.9 million in 2009 and was $19.2 million for 2008. Net cash used in 2009 and 2008 was mostly related to capital expenditures utilized primarily for restaurant openings and renovation activity. In 2009, 10 company-owned stores were opened as compared to 16 in 2008.

Net cash used in financing activities was $11.0 million in 2009. This net cash used primarily represents repayment of the Term Loan and Revolving Facility, debt issuance costs and the payment of fees related to the amendment to the Senior Credit Facilities, net of the proceeds of the Second Lien Facility. Net cash provided by financing activities was $17.9 million for 2008. This primarily represents $20 million of revolver borrowings offset by $1.8 million repayment of the Term Loan.

In 2009, cash flow from operations funded our investments in capital expenditures. Our overall decrease in cash in 2009 was due to our net debt repayment of $8.0 million and fees relating to our bank amendment of $2.4 million.

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In 2008 cash flow from operations funded approximately half of our investments in capital expenditures. We received $20 million of proceeds from our revolver of which half funded the balance of our investments in capital expenditures and the balance remained as cash on hand at the end of the year.

Recent Accounting Pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued “Fair Value Measurements.” This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The statement applies whenever other statements require or permit assets or liabilities to be measured at fair value. It is effective for fiscal years beginning after November 15, 2007. This statement does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The FASB issued this statement to exclude a prior FASB statement and its related interpretive accounting pronouncements that address leasing transactions. In October 2008, the FASB issued an additional clarification of the application of “Fair Value Measurements” in an inactive market that illustrates how an entity would determine fair value when the market for a financial asset is not active. We adopted this statement which did not have a material effect on our consolidated financial statements.

In December 2007, the FASB issued “Business Combinations,” which is effective for annual periods beginning on or after December 15, 2008. The FASB retained the fundamental requirements to account for all business combinations using the acquisition method (formerly the purchase method) and for an acquiring entity to be identified in all business combinations. However, the new standard requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition date for value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. The Company will apply the provisions of this statement prospectively to business combinations for which the acquisition date is on or after December 29, 2008. We evaluated this statement but we have not had any business combinations; therefore, the adoption had no impact on our consolidated financial statements.

In December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statements,” which is effective for fiscal years beginning on or after December 15, 2008. This requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements, but separate from the equity of the parent company. The statement further requires that consolidated net income be reported at amounts attributable to the parent and the noncontrolling interest rather than expensing the income attributable to the minority interest holder. This statement also requires that companies provide sufficient disclosures to clearly identify and distinguish between the interest of the parent company and the interest of the noncontrolling interest holder. On December 29, 2008, we adopted this statement and presented noncontrolling interests as a component of equity, a separate net income attributable to/from noncontrolling interests and a classification of distributions to/from noncontrolling interests in the consolidated financial statements. Prior period amounts have been reclassified to conform with the current presentation. The adoption of this statement did not have any other material impacts on our consolidated financial statements.

In May 2009, the FASB issued guidance regarding subsequent events, which was subsequently updated in February 2010. This guidance established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009, and was therefore adopted by the Company for the second quarter 2009 reporting. The adoption did not have a significant impact on the subsequent events that the Company reports, either through recognition or disclosure, in the consolidated financial statements. In February 2010, the FASB amended its guidance on subsequent events to remove the requirement to disclose the date through which an entity has evaluated subsequent events, alleviating conflicts with current SEC guidance. This amendment was effective immediately and the Company therefore removed the disclosure in this Annual Report.

In June 2009, the FASB issued “Amendments to FASB Interpretation No. 46(R).” This statement amends the consolidation guidance applicable to variable interest entities and is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. We are required to adopt the new guidance specified in the Consolidation topic of the ASC for our first quarter of 2010. We do not expect any changes in our consolidated entities pursuant to the updated guidance.

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In June 2009, FASB issued “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This standard replaces “The Hierarchy of Generally Accepted Accounting Principles,” and establishes only two levels of GAAP: authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on our consolidated financial statements.

Critical Accounting Policies and Judgments

Our accounting policies are discussed in Note 1 – Summary of Significant Accounting Policies to our Consolidated Financial Statements included in this report. Accounting policies are an integral part of the preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America. Understanding these policies, therefore, is a key factor in understanding our reported results of operations and financial position. Accounting policies often require us to make estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in our financial statements. Due to their nature, estimates involve judgments based upon available information. Therefore, actual results or amounts could differ from estimates and the difference could have a material impact on our consolidated financial statements. Accounting policies whose application may have the most significant effect on our reported results of operations and financial position and that require judgments, estimates and assumptions by management that can affect their application and our results of operations and financial position are listed below:

Pursuant to “Accounting for Contingencies”, in the past we have made, and we intend in the future to make, decisions regarding the accounting for legal matters based on the status of the matter and our best estimate of the outcome (we expense defense costs as incurred). This requires management to make judgments regarding the probability and estimated amount of possible future contingent liabilities, especially, in our case, legal matters. However, especially if a matter goes to a jury trial, our estimate could be inaccurate since our estimates are based, in large part, on our experience in settling matters.

“Goodwill and Other Intangible Assets,” requires us to test annually and periodically assess whether there has been an impairment of goodwill or other indefinite lived intangible assets. Goodwill impairment testing is a two-step process. Step 1 involves comparing the fair value of the Company’s reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

As a result of the global economic downturn, reductions to our revenue, operating income, cash flow forecasts, and a significant reduction in our estimated fair market value, we determined that the goodwill related to our franchise reporting unit was impaired during the quarter ended September 27, 2009. As a result, the Company recorded an impairment charge of $6.7 million for the franchise segment, which reduced our goodwill carrying value of the segment to zero. The fair value of the company-owned segment was greater than its carrying value, and therefore no impairment was recorded. The Company performed its annual testing in the fourth quarter of 2009 with no further impairment.

Fair value was determined by using the market approach (based on option pricing principles) which was deemed to be the most indicative of the Company’s fair value. The fair value based upon the market approach was analyzed for reasonableness and compared to the fair value based upon the income approach. The Company considered each alternative in determining fair value of the reporting units, and in doing so, concluded that given the current environment, the market-based equity pricing model (market approach) was most appropriate. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including expected volatility, risk free rate, current debt and future expected interest payments over the term, among others.

We perform an annual impairment test on our trademarks and other indefinite lived intangible assets annually or earlier if impairment indicators exist. In connection with the impairment testing of the Company’s goodwill as of September 27, 2009, impairment testing was also performed on our trademarks and other indefinite lived intangible assets. We completed this test to determine any impairment value in trademarks, franchise relationships and franchise rights acquired by using the income approach which projects the present value of future cash flows attributable to these assets using the Relief from Royalty method.

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We impaired $21.9 million of trademark and $2.9 million for franchise relationships during the quarter ended September 27, 2009. The fair value of the franchise rights acquired exceeded their carrying value, and therefore no impairment was recorded. The Company then performed its annual testing in the fourth quarter of 2009 with no further impairment.

Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of our goodwill impairment testing during the period ended December 27, 2009 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved, we may be required to record additional impairment charges in future periods, whether in connection with our next annual impairment testing in the fourth quarter 2010 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

“Accounting for the Impairment or Disposal of Long-Lived Assets,” requires judgments regarding future operating or disposition plans for marginally performing assets. We evaluate our long-lived assets for impairment by asset group, where appropriate or on an individual restaurant level on an annual basis, or whenever events and circumstances indicate that the carrying amount of a restaurant may not be recoverable, including our business judgment of when to close underperforming units. Certain assets at restaurants where we have leases with common mall landlord/owner relations, are evaluated as an asset group as cash flows from these assets are not individually independent, enabling us to better estimate projected cash flows in a manner more consistent with the way we view our mall relationships. When any such impairment exists, the related assets are written down to their fair value.

“Consolidation of Variable Interest Entities,” currently states that if an enterprise is determined to be a variable interest entity, it must be consolidated by the enterprise that absorbs the majority of the entity’s expected losses if they occur, or receives a majority of the entity’s expected residual returns if they occur, or both. Where it is reasonably possible that the enterprise will consolidate or disclose information about a variable interest entity, the enterprise must disclose the nature, purpose, size and activity of the variable interest entity and the enterprise’s maximum exposure to loss as a result of its involvement with the variable interest entity. We have reviewed our joint ventures, equity investments and corporate relationships for possible coverage under this guidance. As a result we consolidated our joint ventures in Japan and India.

“Noncontrolling Interests in Consolidated Financial Statements” requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements, but separate from the equity of the parent company. The Consolidation topic further requires that consolidated net income be reported at amounts attributable to the parent and the noncontrolling interest, rather than expensing the income attributable to the minority interest holder. Additionally, sufficient disclosures are required to clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners, including a disclosure on the face of the consolidated statements for income attributable to the noncontrolling interest holder. The presentation and disclosure requirements that became effective in 2009 were applied retrospectively for all periods presented, and thus, the prior year financial statements have been modified to incorporate the new requirements.

“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” elaborates on the disclosures to be made by a guarantor in its financial statements concerning its obligations under certain guarantees that it has issued. It also clarifies (for guarantees issued or modified after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. We have guarantees that would require recognition upon issuance or modification under the provisions of “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The nature of our business will likely result in the issuance of certain guarantees in the future and, as such, we will be required to evaluate the fair value of the obligation at the inception of such guarantee. Most of our guarantees are due to us guaranteeing leases on behalf of certain franchisees. The amount we may be required to recognize in future years may be higher than this amount depending on the number and magnitude of guarantees we issue.

“Accounting for Leases” establishes standards of financial accounting for leases. Certain of the Company’s operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent. Any lease incentives received by the Company are deferred over the same period as the lease and amortized on straight-line basis over the life of the lease as a reduction of rent expense. We calculate deferred rent based on the lease term from when we obtain access or control over the leased property. Rent expense accrued during the construction period was capitalized as part of the cost of leasehold improvements until October 2005. As a result of FASB Staff Position, “Accounting for Rental Costs Incurred During a Construction Period”, we now expense rent during the construction phase. The length of time from when we take possession of property for our QSR restaurants and when our restaurant opens is normally 90 days as compared to our normal lease terms that often span multiple years.

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“Accounting for Income Taxes” requires us to record valuation allowances against our deferred tax assets, when necessary. Realization of deferred tax assets is dependent on future taxable earnings and therefore requires judgment. We assess the likelihood that our deferred tax assets in each of the jurisdictions in which we operate will be recovered from future taxable income. Deferred tax assets do not include future tax benefits that we deem likely not to be realized. In 2009, we recorded an increase to our valuation allowance of $4.7 million as we believe it is more likely than not that our net operating loss carry forward, foreign tax credit carry forward and other deferred tax assets will not be realized.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain risks, which exist as part of our ongoing business operation.

We have not purchased future, forward, option or other instruments to hedge against fluctuations in the prices of commodities. As a result, our future commodities purchases are subject to changes in the prices of such commodities. We have entered and sometimes will enter into short term, fixed rate contracts for some products we purchase.

Interest Rate Risk

We currently invest our cash on hand in FDIC insured overnight cash management savings accounts earning interest based on the 91 day Treasury bill rates or FDIC insured overnight money market savings accounts. The indenture governing the Senior Notes limits the nature of our investments to those of lower risk. Although our existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events.

The interest rate on borrowings under the Senior Credit Facilities is floating and, therefore, is subject to fluctuations. In general, borrowings under the Senior Credit Facilities bear interest based, at our option, at either a LIBOR rate or an alternative base rate (“ABR”), in each case plus a margin. Currently, our rate of interest for borrowings under the Senior Credit Facilities, as amended, is LIBOR plus 4.50% or ABR plus 3.50%. A 1% change in our current rate would have an annual effect of approximately $1.9 million. Subsequent to the Merger, we entered into an Interest Rate Cap Letter Agreement with a bank for a portion of the Senior Credit Facilities. This agreement capped our LIBOR rate at 6.00% through February 2009 and at 6.50% through February 2010.

Foreign Exchange Rate Risk

All of our transactions with foreign franchisees have been denominated in, and all payments have been made in, United States dollars, thereby 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.

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Item 8.

Financial Statements And Supplementary Data

Index


		Page
Report of Independent Registered Public Accounting Firm		36
Consolidated Balance Sheets as of December 27, 2009 (Successor) and December 28, 2008 (Successor)		38
Consolidated Statements of Operations for the year ended December 27, 2009 (Successor) and December 28, 2008, (Successor) and for the period January 31, 2007 through December 30, 2007 (Successor) and the period January 1, 2007 through January 30, 2007 (Predecessor)		40
Consolidated Statements of Shareholders’ Equity for the year ended December 27, 2009 (Successor) and December 28, 2008 (Successor) and for the period January 31, 2007 through December 30, 2007 (Successor), and the period January 1, 2007 through January 30, 2007 (Predecessor)		41
Consolidated Statements of Cash Flows for the year ended December 27, 2009 (Successor) and December 28, 2008 (Successor) and for the period January 31, 2007 through December 30, 2007 (Successor) and the period January 1, 2007 through January 30, 2007 (Predecessor)		43
Notes to Consolidated Financial Statements		45

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Sbarro, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Sbarro, Inc. and its subsidiaries at December 27, 2009 and December 28, 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 27, 2009 and the eleven months ended December 30, 2007, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules as of and for the years ended December 27, 2009 and December 28, 2008 and the eleven month period ended December 30, 2007 listed in the index appearing under item 15(a)(2), present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests in 2009.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 26, 2010

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Sbarro, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the results of operations of Sbarro, Inc and its subsidiaries and their cash flows for the one month period ended January 30, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule as of and for the one month period ended January 30, 2007 listed in the index appearing under item 15(a) (2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 31, 2008

-37-

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

(In thousands)


	December 27, 2009		December 28, 2008
Current assets:
Cash and cash equivalents	$	26,863	$	38,286
Receivables, net of allowance for doubtful accounts of $1,805 and $446 at December 27, 2009 and December 28, 2008, respectively:
Franchise		2,237		3,845
Other		2,916		3,948

		5,153		7,793

Inventories		2,907		3,083
Prepaid expenses		1,771		2,953

Total current assets		36,694		52,115

Property and equipment, net		56,148		65,640

Intangible assets:
Goodwill		194,786		201,460
Trademarks		173,100		195,000
Other intangible assets		19,650		23,539

Deferred financing costs, net		8,977		8,934
Other assets		1,068		1,080

Total assets	$	490,423	$	547,768

See notes to Consolidated Financial Statements.

-38-

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

(In thousands, except share data)

(CONTINUED)


	December 27, 2009			December 28, 2008
Current liabilities:
Accounts payable	$	9,032		$	11,621
Accrued expenses		22,631			22,972
Accrued interest payable		7,935			7,291
Due to former shareholders		—			2,993
Insurance premium financing		—			1,087
Current portion of debt		—			3,958

Total current liabilities		39,598			49,922

Deferred rent		6,482			5,189
Deferred tax liability		76,941			87,238
Due to former shareholders and other liabilities		12,508			11,043
Accrued interest payable		3,048			—

Long-term debt		336,095			346,297

Commitments and contingencies
Shareholders’ equity:
Common stock
Authorized 1,000 shares; $.01 par value issued and outstanding 100 shares at December 27, 2009 and December 28, 2008		—			—
Additional paid-in capital		139,340			133,000
Currency translation adjustments		200			135
Advances to MidOcean SBR Holdings		(305	)		(305	)
Accumulated deficit		(125,838	)		(88,639	)

Total shareholders’ equity		13,397			44,191
Noncontrolling interests		2,354			3,888

Total shareholders’ equity, including noncontrolling interests		15,751			48,079

Total liabilities and shareholders’ equity	$	490,423		$	547,768

See notes to Consolidated Financial Statements.

-39-

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)


	For the Fiscal Year Ended December 27, 2009			For the Fiscal Year Ended December 28, 2008			For the period January 31 through December 30, 2007			For the period January 1 through January 30, 2007
	SUCCESSOR			SUCCESSOR			SUCCESSOR			PREDECESSOR
Revenues:
Restaurant sales	$	324,401		$	343,323		$	319,342		$	23,594
Franchise related income		14,884			15,841			14,543			993
Real estate		—			—			—			323

Total revenues		339,285			359,164			333,885			24,910
Costs and expenses:
Cost of food and paper products		66,305			77,675			66,036			4,308
Payroll and other employee benefits		89,310			95,540			85,563			6,762
Other operating costs		120,815			124,404			107,332			8,770
Other income, net		(3,903	)		(4,498	)		(2,860	)		(497	)
Depreciation and amortization		16,616			17,094			17,349			1,272
General and administrative		31,100			29,449			23,842			2,843
Special event bonuses		—			—			—			31,395
Goodwill & other intangible asset impairment		31,474			68,475			—			—
Asset impairment, restaurant closings/remodels		5,415			3,814			1,358			74

Total costs and expenses, net		357,132			411,953			298,620			54,927

Operating (loss) income		(17,847	)		(52,789	)		35,265			(30,017	)

Other (expense) income:
Interest expense		(28,240	)		(28,408	)		(28,879	)		(2,570	)
Write-off of deferred financing costs		(423	)		—			—			—
Interest income		34			171			485			108

Net other expense		(28,629	)		(28,237	)		(28,394	)		(2,462	)

(Loss) income before income taxes and equity investments		(46,476	)		(81,026	)		6,871			(32,479	)
Income tax (benefit) expense		(9,349	)		9,353			2,048			44

(Loss) income before equity investments		(37,127	)		(90,379	)		4,823			(32,523	)
(Loss) income from equity investments		(213	)		(243	)		—			12

Net (loss) income		(37,340	)		(90,622	)		4,823			(32,511	)
Less: net loss (income) attributable to noncontrolling interests		141			(646	)		(2,194	)		(69	)

Net (loss) income attributable to Sbarro, Inc.	$	(37,199	)	$	(91,268	)	$	2,629		$	(32,580	)

See notes to Consolidated Financial Statements.

-40-

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share data)


	Common Stock			Additional Paid-in Capital		Advances to MidOcean SBR Holdings			Accumulated Defecit			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total
	Number of Shares	Amount		Additional Paid-in Capital		Advances to MidOcean SBR Holdings			Accumulated Defecit			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total
Predecessor
Balance at December 31, 2006	7,064,328	$	71	$	10	$	—		$	77,675			—	$	2,643		$	80,399
Capital contribution from noncontrolling interest	—		—		—		—			—			—		13			13
Components of comprehensive loss:
Net (loss) income	—		—		—		—			(32,580	)		—		69			(32,511	)

Comprehensive loss																		(32,511	)
Distribution of earnings and return of capital	—		—		—		—			—			—		(493	)		(493	)

Balance at January 30, 2007	7,064,328		71		10		—			45,095			—		2,232			47,408


Successor
Components of comprehensive income:
Net income	—		—		—		—			2,629			—		2,194			4,823

Comprehensive income																		4,823
Equity contribution	100		—		133,000		—			—			—		—			133,000
Capital contribution from noncontrolling interest	—		—		—		—			—			—		601			601
Distribution of earnings and return of capital	—		—		—		—			—			—		(1,621	)		(1,621	)


Balance at December 30, 2007	100		—		133,000		—			2,629			—		3,406			139,035
Components of comprehensive loss:
Net (loss) income	—		—		—		—			(91,268	)		—		646			(90,622	)
Currency translation adjustments	—		—		—		—			—			135		40			175

Comprehensive loss (a)																		(90,447	)
Capital contribution from noncontrolling interest	—		—		—		—			—			—		1,076			1,076
Distribution of earnings and return of capital	—		—		—		—			—			—		(1,676	)		(1,676	)
Short-term loan payment - noncontrolling interest	—		—		—		—			—			—		396			396
Advance to MidOcean SBR Holdings	—		—		—		(305	)		—			—		—			(305	)

Balance at December 28, 2008	100		—		133,000		(305	)		(88,639	)		135		3,888			48,079
Components of comprehensive loss:
Net loss	—		—		—		—			(37,199	)		—		(141	)		(37,340	)
Currency translation adjustments	—		—		—		—			—			65		(55	)		10

Comprehensive loss (a)																		(37,330	)
Additional paid-in capital warrants	—		—		6,340		—			—			—		—			6,340
Capital contribution from noncontrolling interest	—		—		—		—			—			—		510			510
Distribution of earnings and return of capital	—		—		—		—			—			—		(1,480	)		(1,480	)
Short-term loan repayment - noncontrolling interest	—		—		—		—			—			—		(368	)		(368	)


Balance at December 27, 2009	100	$	—	$	139,340	$	(305	)	$	(125,838	)	$	200	$	2,354		$	15,751

-41-

(a)	The components of comprehensive loss are as follows:


	Year Ended Dec 27, 2009			Year Ended Dec 28, 2008
Net loss (including noncontrolling interests)	$	(37,340	)	$	(90,622	)
Currency translation adjustments		10			175

		(37,330	)		(90,447	)
Less: comprehensive (loss) income attributable to noncontrolling interests		(196	)		686

Comprehensive loss - Sbarro, Inc.	$	(37,134	)	$	(91,133	)

(b)	The components of accumulated other comprehensive income are as follows:


	Year Ended Dec 27, 2009			Year Ended Dec 28, 2008
Currency translation adjustments	$	185		$	175
Less: noncontrolling interests - currency translation adjustments		(15	)		40

Accumulated other comprehensive income - Sbarro, Inc.	$	200		$	135

See notes to Consolidated Financial Statements.

-42-

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For the year ended December 27, 2009			For the year ended December 28, 2008			For the period January 31 through December 30, 2007			For the period January 1 through January 30, 2007
	SUCCESSOR			SUCCESSOR			SUCCESSOR			PREDECESSOR
Operating Activities:
Net (loss) income	$	(37,340	)	$	(90,622	)	$	4,823		$	(32,511	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Goodwill and other intangible asset impairment charges		31,474			68,475			—			—
Depreciation and amortization		16,616			17,094			17,349			1,272
Amortization of deferred financing costs		1,518			1,133			960			112
Provision for doubtful accounts receivable		2,422			486			—			—
Increase (decrease) in deferred rent, net of tenant allowance		1,779			2,094			1,603			(117	)
Asset impairment and restaurant closings/remodels		4,191			3,814			1,358			74
Write-off of deferred financing costs		423			—			—			—
Change in deferred income taxes, net		(10,297	)		8,944			885			—
Equity in net loss (income) of unconsolidated affiliates		213			243			—			(12	)
Changes in operating assets and liabilities, net of effects of merger:
(Increase) decrease in receivables		(117	)		(1,572	)		1,488			394
Decrease (increase) in inventories		175			105			(142	)		319
Decrease (increase) in prepaid expenses		95			304			940			(1,434	)
(Increase) decrease in other assets		(126	)		(303	)		2,767			871
(Decrease) increase in accounts payable, accrued expenses and other liabilities		(6,208	)		912			1,699			23,898
Increase (decrease) in accrued interest payable		3,693			(455	)		7,745			2,337

Net cash provided by (used in) operating activities		8,511			10,652			41,475			(4,797	)

-43-

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Continued


	For the year ended December 27, 2009			For the year ended December 28, 2008			For the period January 31 through December 30, 2007			For the period January 1 through January 30, 2007
	SUCCESSOR			SUCCESSOR			SUCCESSOR			PREDECESSOR
Investing Activities:
Purchases of property and equipment		(8,808	)		(17,632	)		(16,327	)		(1,691	)
Purchases of franchises and other locations		—			(1,261	)		(5,090	)		—
Investment in joint ventures		(130	)		(269	)		(380	)		—
Contributions from partners to joint ventures		—			—			200			—
Cash paid for merger, net of cash acquired		—			—			(188,000	)		—

Net cash used in investing activities		(8,938	)		(19,162	)		(209,597	)		(1,691	)

Financing Activities:
Proceeds from shareholders for issuance of common stock		—			—			133,000			—
Proceeds from second lien		25,000			—			—			—
Proceeds from secured term loan		—			20,000			183,000			—
Proceeds from senior notes		—			—			150,000			—
Paydown of Predecessor’s notes		—			—			(267,000	)		—
Repayment of secured term loan and revolver		(32,958	)		(1,830	)		(915	)		—
Debt issue and credit agreement costs		(1,849	)		—			—			—
Advances to MidOcean SBR Holdings		—			(305	)		—			—
Mortgage principal repayments		—			—			—			(17	)
Capital contribution from noncontrolling interests		510			1,076			525			—
(Repayment) proceeds of short-term loan to/from noncontrolling interests		(368	)		396			—			—
Distribution of earnings to noncontrolling interests		(1,331	)		(1,408	)		(1,621	)		(493	)
Dividends to sellers		—			—			—			(76,159	)
Repayment of loans by officers		—			—			—			5,530

Net cash (used in) provided by financing activities		(10,996	)		17,929			196,989			(71,139	)

(Decrease) increase in cash and cash equivalents		(11,423	)		9,419			28,867			(77,627	)
Cash and cash equivalents at beginning of period		38,286			28,867			—			88,627

Cash and cash equivalents at end of period	$	26,863		$	38,286		$	28,867		$	11,000


Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes	$	210		$	214		$	232		$	—
Cash paid during the period for interest	$	22,922		$	27,572		$	20,072		$	10,793

Supplemental non-cash financing activities:

We entered into a non-cash insurance premium financing agreement for $3.5 million and $3.3 million in June 2008 and 2007, respectively.

See notes to Consolidated Financial Statements.

-44-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

1. Description of business and summary of significant accounting policies:

Basis of financial statement presentations:

The Consolidated Financial Statements include the accounts of Sbarro, Inc., its wholly-owned subsidiaries and the accounts of those joint ventures of which we are the primary beneficiary (together, “we,” “our,” “us,” or “Sbarro”). All significant intercompany accounts and transactions have been eliminated. The results of our international joint venture are consolidated one quarter in arrears. As a result of the Merger, (see below), we are required to present our results for 2007 as two separate periods. Our Predecessor financial period refers to the period from January 1, 2007 through January 30, 2007 which was prior to consummation of the Merger. Our Successor financial period refers to the period from January 31, 2007 through December 27, 2009 following consummation of the Merger.

Overview

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


	December 27, 2009	December 28, 2008	December 30, 2007
Company-owned	484	509	506
Franchised	555	566	524
Joint venture	17	16	7

All restaurants	1,056	1,091	1,037

Liquidity

We are influenced by general economic conditions. In 2008, particularly in the fourth quarter, we experienced operating cash flow declines resulting in operating cash flow significantly less than fiscal 2007. In 2009 operating cash flow declines continued as the worldwide economic downturn lingered and further weakened consumer spending. Cash flow generated during our fourth quarter is critical to achieving positive annual operating cash flow. Adverse macroeconomic factors, including reduced mall traffic during the holiday shopping season and a decline in consumer spending among other factors can negatively impact our operating cash flow. Improved commodity costs and cost savings initiatives in 2009 enabled us to maintain our liquidity despite the decline in top line sales.

We are highly leveraged and a substantial portion of our liquidity needs arise from debt service on indebtedness incurred in connection with the Merger, and from funding our costs of operations, working capital and capital expenditures. Our ability to borrow funds under our revolver was subject to our compliance with our debt covenant requirements. Prior to the amendment to our Senior Credit Facilities, such covenants included an interest coverage ratio and a total net leverage ratio. As of year end 2008, we were in violation of the total net leverage ratio covenant in the credit agreement governing our Senior Facilities. On March 26, 2009, we entered into an amendment to the Senior Credit Facilities. The amendment permitted the Company to refinance a portion of our Term Loan by entering into a new Second Lien Facility permanently waived a breach of our total net leverage ratio covenant for the fiscal quarter ended December 28, 2008, replaced our total net leverage ratio covenant and interest coverage ratio covenant with a minimum EBITDA covenant and a maximum capital expenditure covenant, increased the margin on our Term Loan and Revolving Facility by 200 basis points, required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility, required prepayment of $3.5 million of the Revolving Facility from cash on hand and simultaneously reduced the Revolving Facility to $21.5 million, and restricted payment of MidOcean’s annual management fee so that such fee will accrue but not be paid until the Company’s EBITDA is at least $55.0 million and after such goal is obtained, a maximum of $2.0 million of such fees may be paid each year.

-45-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

In response to the economic downturn in 2008, we began to implement aggressive strategic initiatives to reduce costs and improve our liquidity. These initiatives, which will be on-going, include closing unprofitable stores, renegotiating store lease terms, reducing headcount and revisions to our recipes without affecting our consumers, as well as other expense controls. We believe these actions will enable us to be in compliance with our debt covenants and that cash generated from operations, together with cash on hand of $26.9 million and amounts available under the Senior Credit Facilities ($5.4 million) will be adequate to permit us to meet our debt service obligations, ongoing costs of operations, working capital needs and capital expenditure requirements for the next year. Our future financial and operating performance, ability to service or refinance our debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Our minimum trailing twelve month EBITDA covenant, as calculated in accordance with our amended bank credit agreement, increases at the end of the fourth quarter of 2010 by $3.0 million dollars to $43.0 million. Our bank credit agreement EBITDA for 2009 was $44.7 million. Based upon our 2010 business plan, we expect our bank credit agreement EBITDA for 2010 to exceed this covenant, however achieving this budgeted bank credit agreement EBITDA amount will be highly dependent on the level of traffic in shopping malls during the fourth quarter holiday shopping season and, as a result, is closely tied to our projected fourth quarter increase in comparable sales percentage change versus the prior year. Our projections assume increases in same store sales commencing in the second half of the year, with the largest increase in our fourth quarter, and include the achievement of a 1% increase year over year same store sales in 2010. Considering related costs, each 1% decrease in comparable sales for the year may result in a net bank credit agreement EBITDA decrease of approximately $1.5 million assuming our payroll as a percentage of sales adjusts accordingly as was the case in 2009. Failing to achieve our budgeted 1% increase in comparable sales percentage, or experiencing a decrease in comparable sales percentage that differs for our business plan by more than 2% for the year, or by approximately 6% of same store sales in the fourth quarter, could cause a bank credit agreement EBITDA shortfall that increases the risk of non-compliance with our minimum EBITDA covenants.

If the expected economic recovery and same store sales increases do not occur in a manner consistent with our business plan, or if we are unable to manage costs, each as discussed above, we may not be able to achieve our 2010 business plan and meet our minimum EBITDA covenants.

Our bank credit agreements provide for certain cures in the event of non-compliance with our minimum EBITDA covenants.

Summary of significant accounting policies:

Business segments:

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

Estimates:

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

-46-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

Cash and cash equivalents:

Cash and cash equivalents represent funds invested in overnight and highly liquid money market accounts with a maturity of three months or less at the time of purchase. Cash and cash equivalents at the end of 2009 and 2008 were $27 million and $38 million, respectively.

Inventories:

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

Property and equipment:

Property and equipment is stated at cost less accumulated depreciation which is expensed using the straight-line method over the estimated useful lives for furniture, fixtures and equipment (three to ten years) and leasehold improvements (the lesser of the useful lives of the assets or lease terms).

Capitalized costs:

We capitalize costs clearly associated with the acquisition, development, design and construction of new locations as these costs have a future benefit to the projects. The types of specifically identifiable costs capitalized by the Company are primarily consulting, payroll, payroll related taxes and benefit costs incurred. If the Company subsequently makes a determination that a site for which development costs have been capitalized will not be acquired or developed, any previously capitalized development costs are expensed and included in general and administrative expenses in the accompanying Consolidated Statements of Operations. The Company capitalized $0.3 million, $0.4 million, and $0.5 million of costs related to the development of Company-owned stores for 2009, 2008 and 2007, respectively.

Intangible assets:

Intangible assets consist of our goodwill, trademarks, franchise relationships, franchise rights acquired and franchise agreements. Intangible asset values, exclusive of franchise rights acquired, were determined based on a fair value allocation of the purchase price from our Merger and were deemed to be indefinite lived intangible assets with the exception of franchise agreements which will be amortized over the estimated remaining life of the franchise agreements. Franchise rights acquired are valued on the date of acquisition based on the acquisition price and are amortized over the estimated useful life of the intangible asset, if deemed to be a definite lived intangible asset. For purposes of our annual goodwill impairment test, one reporting unit is comprised of the operating activities of the company-owned QSR restaurants and other concept restaurants. The other reporting unit is comprised of the franchised operations which offer franchise opportunities worldwide for qualified operators to conduct business under the Sbarro name. Goodwill was allocated to each of these two reporting units based on the fair value of the reporting units. Goodwill impairment testing is a two-step process. Step 1 involves comparing the fair value of the Company’s reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or circumstances that would more likely than not reduce the carrying amount of a reporting unit below its fair value. The Company last performed its annual test for impairment as of December 28, 2008 and performed interim testing in the third quarter of 2009 due to the continuing economic downturn affecting our five year financial forecasts. This resulted in full impairment of goodwill in the amount of $6.7 million for the franchise reporting segment. The fair value of the company owned segment was greater than its carrying value, and therefore no impairment was recorded. The Company then performed its annual testing in the fourth quarter of 2009 with no further impairment.

Consistent with previous tests, we considered the results of both an income approach and a market approach in determining the fair value of the reporting units.

-47-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

For the income approach we assumed that the current economic downturn would continue domestically in 2010 with slight improvements in the second half of the year, followed by growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy in 2010 followed by growth in future years consistent with our growth prior to the recent downturn in the economy.

We applied gross margin assumptions consistent with the Company’s current trends and used a 5.3% growth factor. Discounting the projected cash flows at 15.0% we determined a fair value for the reporting units.

We calculated the fair value of the reporting units’ equity using a market approach based on option pricing principles. This method estimated the fair value of the reporting unit’s equity using inputs such as current debt, future expected interest payments over the term, expected volatility and risk-free rate. For purposes of our analysis, we used a three year term with an expected volatility of 40.0% and risk-free rate of 1.5%. Volatility assumptions were based on published estimates of the Company’s industry peer group. The Company considered each alternative in determining fair value of the reporting units, and in doing so concluded that given the current environment, the market-based equity pricing model (market approach) was most appropriate. This resulted in full impairment of goodwill in the amount of $6.7 million for the franchise reporting segment. No goodwill impairment was recorded for the Company-owned reporting segment as its fair value exceeded its carrying value by 38%. Had the volatility assumption in the market approach been at a point below 35%, Step 2 testing would have been performed on the Company-owned reporting segment and it is likely that an impairment of goodwill would have been necessary. Such tests were performed in the fourth quarter of 2009 with no further impairment deemed necessary.

We perform an annual impairment test on our trademarks and other indefinite lived intangible assets annually or earlier if impairment indicators exist. In connection with the impairment testing of the Company’s goodwill as of September 27, 2009, impairment testing was also performed on our trademarks and other indefinite lived intangible assets. We completed this test to determine any impairment value on trademarks, franchise relationships and franchise rights acquired by using the income approach which projects the present value of future cash flows attributable to these assets using the Relief from Royalty method.

For purposes of establishing inputs for the fair value calculations described above related to indefinite lived intangible assets, we assumed that the current economic downturn would continue domestically through 2010 with slight improvements in the second half of 2010, followed by growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy in 2010 followed by growth in future years consistent with our growth prior to the recent downturn in the economy.

We applied gross margin assumptions consistent with the Company’s current trends and used a 4.4% growth factor. Discounting the projected cash flows of these indefinite lived intangible assets at 14.5%, a rate similar to that used in the Company’s goodwill impairment tests, we determined a value of $173.1 million for our trademarks and $14.4 million for our franchise relationships during the third quarter of 2009. Accordingly, we impaired $21.9 million of trademark and $2.9 million for franchise relationships intangibles at September 27, 2009. The fair value of the franchise rights acquired exceeded their carrying value. If the terminal growth rate used in the fair value calculation for trademarks and franchise relationships intangibles was decreased by 1%, the impairment charge would have increased by $10.3 million and $1.0 million, respectively. If the discount rate used in the fair value calculation for trademarks and franchise relationships was increased by 1%, the impairment charges would have increased by $16.0 million and $1.5 million, respectively. Our testing performed in the fourth quarter of 2009 did not require any further impairment charges.

Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of our goodwill impairment testing performed in 2009 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved, we may be required to record additional impairment charges in future periods, whether in connection with our next annual impairment testing at year-end 2010 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

Deferred financing costs:

Deferred financing costs are amortized as additional interest expense over the life of the related debt.

Long-lived assets:

We evaluate our long-lived assets for impairment by asset group, where appropriate or on an individual restaurant level on an annual basis, or whenever events and circumstances indicate that the carrying amount of a restaurant may not be recoverable, including our

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

business judgment of when to close underperforming units. Certain assets at restaurants where we have leases with common mall landlord/owner relations are evaluated as an asset group as cash flows from these assets are not individually independent enabling us to better estimate projected cash flows in a manner more consistent with the way we view our mall relationships. When any such impairment exists, the related assets are written down to their fair value.

Pre-opening costs:

Exclusive of certain development costs, pre-opening costs incurred in connection with the opening of new restaurants are expensed as incurred and are included in other operating costs in the accompanying consolidated statements of operations.

Variable interest entities:

In general, a variable interest entity (“VIE”) is a corporation, partnership, limited liability company, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

In 2009, the FASB amended the consolidation principles associated with VIEs accounting, as defined in the Consolidation topic of the ASC. The objective is to improve the financial reporting of companies involved with VIEs. The new guidance amends previous accounting guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in the VIE with a qualitative approach focused on identifying which company has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additionally, a company is required to perform ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. Prior to this statement, a company was only required to reassess the status when specific events occurred.

We are required to adopt the new guidance specified in the Consolidation topic of the ASC for our first quarter of 2010. We do not expect any changes in our consolidated entities pursuant to the updated guidance.

Prior to the Merger, we accounted for our investments in 50% or less owned joint ventures, and for 50% owned joint ventures for which we did not have operating control and are not the primary beneficiary under the equity method of accounting. The equity in the net income (loss) of these unconsolidated affiliates is included in “equity in net income (loss) of unconsolidated affiliates” in our statements of operations and the related assets are included in “other assets” in the accompanying balance sheets. These equity investments were transferred to our former shareholders in connection with the Merger.

Currently, we have a 50% interest in a joint venture which operates two units in Beirut. We do not have operating control over these units and therefore they are not consolidated in our Consolidated Financial Statements, however their results are included as an equity investment.

Noncontrolling Interests

We present noncontrolling interests in the equity section of our consolidated balance sheets, as a separate net income attributable to noncontrolling interests in our consolidated statement of operations, and as a distribution to/from noncontrolling interests in the consolidated statements of cash flows.

Accounting for vendor rebates:

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

Concentration of credit risk:

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

-49-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

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

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

Revenue recognition:

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

Allowance for doubtful accounts:

We monitor the financial condition of our franchisees and record provisions for estimated losses on receivables when we believe that our franchisees are unable to make their required payments. While we use the best information available in making our determination, the ultimate recovery of recorded receivables is also dependent upon future economic events and other conditions that may be beyond our control.

Leases:

Certain of the Company’s operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as deferred rent. Any lease incentives received by the Company are deferred over the same period as the lease and amortized on a straight-line basis over the life of the lease as a reduction of rent expense. We calculate deferred rent based on the lease term from when we obtain access or control over the leased property.

Income taxes:

Effective for the first quarter of 2007, the Company adopted the provisions of FASB Interpretation “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB 109.” This guidance prescribes a recognition threshold and a related measurement model. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The adoption did not have a material effect on the Company’s financial statements and we do not expect the change to have a significant impact on our results of operations or financial position during the next twelve months.

As permitted by the guidance, we also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in our income tax provision. Previously, our policy was to classify interest and penalties as an operating expense in arriving at pre-tax income.

In our Successor period, January 31, 2007 through December 27, 2009, we are taxed as a C Corporation. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes based on tax laws as currently enacted.

New Accounting Pronouncements

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

In April 2009, the FASB issued “Recognition and Presentation of Other-Than-Temporary Impairments.” This provides new guidance on the recognition and presentation of an other-than-temporary impairment for debt securities classified as available-for-sale and held-to-maturity and provides some new disclosure requirements for both debt and equity securities. It is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this statement which did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly.” This provides additional guidance for estimating the fair value of assets and liabilities within the scope of “Fair Value Measurements” in markets that have experienced a significant reduction in volume and activity in relation to normal activity. It is effective for interim and annual periods ending after June 15, 2009. We adopted this statement which did not have a material effect on our consolidated financial statements.

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on our consolidated financial statements.

Reclassification

Certain reclassifications have been made to the prior year’s financial statements to conform to the 2009 presentation.

2. Property and equipment, net (in thousands):


	December 27, 2009 (a)		December 28, 2008 (a)
Leasehold improvements	$	50,323	$	53,202
Furniture, fixtures and equipment		35,725		37,236

	$	86,048		90,438
Less accumulated depreciation and amortization (b)		29,900		24,798

	$	56,148	$	65,640

(a)

During 2009 and 2008 we recorded a provision for restaurant closings and remodels of approximately $3.0 million and $1.9 million, respectively. During 2009 and 2008, we recorded an asset impairment of $2.4 million and $1.9 million, respectively. The 2009 amount includes approximately $0.8 million related to our joint venture in India.

(b)	During 2009 and 2008 and Successor and Predecessor 2007, depreciation and amortization of property and equipment was $15.4 million, $15.6 million, $15.7 million and $1.3 million, respectively.

3. Intangibles (in thousands):

Goodwill

We have identified two reporting units for the purposes of evaluating goodwill for impairment. The carrying value of goodwill was allocated to each of our reporting units based upon the fair value of the reporting units at the date of the Merger.

The following table presents goodwill balances of these two reporting units and the activity during the twelve months ended December 27, 2009 and December 28, 2008:


	2009								2008
	Company-owned		Franchise			Total			Company-owned			Franchise			Total
Balance at beginning of year:
Goodwill	$	194,786	$	15,149		$	209,935		$	196,087		$	15,149		$	211,236
Accumulated impairment losses		—		(8,475	)		(8,475	)		—			—			—

		194,786		6,674			201,460			196,087			15,149			211,236

Activity during the year:
Impairment loses		—		(6,674	)		(6,674	)		—			(8,475	)		(8,475	)
Other adjustments		—		—			—			(1,301	)		—			(1,301	)

Balance at end of year:
Goodwill		194,786		15,149			209,935			194,786		$	15,149			209,935
Accumulated impairment losses		—		(15,149	)		(15,149	)		—			(8,475	)		(8,475	)

	$	194,786	$	—		$	194,786		$	194,786		$	6,674		$	201,460

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

Goodwill impairment testing is a two-step process. Step 1 involves comparing the fair value of the Company’s reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is greater than the fair value, the second step must be completed to measure the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or circumstances that would more likely than not reduce the carrying amount of a reporting unit below its fair value. The Company last performed its annual test for impairment as of December 28, 2008 and performed interim testing in the third quarter of 2009 due to the continuing economic downturn affecting our five year financial forecasts, resulting in the full impairment of goodwill in the amount of $6.7 million for the franchise segment. The fair value of the company owned segment was greater than its carrying value, and therefore no impairment was recorded. There was no further impairment required based on the Company’s test performed in the fourth quarter of 2009.

Consistent with previous tests, we considered the results of both an income approach and a market approach in determining the fair value of the reporting units.

Other Intangibles

The following table presents trademark, franchise rights acquired, franchise relationships and franchise agreements, net and the activity as of and for the year ended December 27, 2009:


	Trademark			Franchise Relationships			Franchise Rights Acquired		Franchise Agreements, net
December 28, 2008	$	195,000		$	17,300		$	1,351	$	4,888
Additions		—			—			250		—
Amortization		—			—			—		(1,239	)
Impairment		(21,900	)		(2,900	)		—		—

December 27, 2009	$	173,100		$	14,400		$	1,601	$	3,649

-53-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

We perform an annual impairment test on our trademarks and other indefinite lived intangible assets annually or earlier if impairment indicators exist. In connection with the impairment testing of the Company’s goodwill as of September 27, 2009, impairment testing was also performed on our trademarks and other indefinite lived intangible assets. We completed this test to determine any impairment value on trademarks, franchise relationships and franchise rights acquired by using the income approach which projects the present value of future cash flows attributable to these assets using the Relief from Royalty method.

Solely for the purposes of establishing inputs for the fair value calculations described above related to indefinite lived intangible assets, we assumed that the current economic downturn would continue domestically through 2010 with slight improvements in the second half of 2010, followed by growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy would continue in 2010 followed by growth in future years consistent with our growth prior to the recent downturn in the economy.

We applied gross margin assumptions consistent with the Company’s current trends and used a 4.4% growth factor. Discounting the projected cash flows of these indefinite lived intangible assets at 14.5%, a rate similar to that used in the Company’s goodwill impairment tests, we determined a value of $173.1 million for our trademarks and $14.4 million for our franchise relationships at September 27, 2009. Accordingly, we impaired $21.9 million of trademark and $2.9 million for franchise relationships intangibles at September 27, 2009. The fair value of the franchise rights acquired exceeded their carrying value. If the terminal growth rate used in the fair value calculation for trademarks and franchise relationships intangibles was decreased by 1%, the impairment charge would have increased by $10.3 million and $1.0 million, respectively. If the discount rate used in the fair value calculation for trademarks and franchise relationships was increased by 1%, the impairment charges would have increased by $16.0 million and $1.5 million, respectively. Our testing performed in the fourth quarter of 2009 did not require any further impairment charges.

Franchise Rights Acquired and Agreements

During 2009, the Company repurchased certain franchise development rights from one of its franchisees. This definite – lived intangible asset valued at $250 thousand will be amortized over an 8 year period. During 2007, we purchased 9 stores in Utah and Hawaii owned by two franchisees. The total purchase price of these indefinite-lived intangible assets was $4.0 million of which $2.6 million was allocated to fixed assets and $1.4 million was allocated to franchise rights.

Franchise agreements are definite lived assets and amortized over the life of the agreements.

Amortization expense was $1.2 million in 2009, $1.5 million in 2008 and $1.6 million in the Successor period 2007. At December 27, 2009 and December 28, 2008 accumulated amortization was $4.3 million and $3.1 million, respectively.

Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the indefinite lived asset impairment testing during the period ended December 27, 2009 will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved, we may be required to record additional goodwill impairment charges in future periods, whether in connection with our next annual impairment testing at year end 2010 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

4. Deferred financing costs (in thousands):

Deferred financing costs consist of the following:


	December 27, 2009			December 28, 2008
Deferred financing costs	$	12,301		$	11,031
Less accumulated amortization		(3,324	)		(2,097	)

	$	8,977		$	8,934

Amortization expense of the deferred financing costs (included in interest expense) was $1.4 million in 2009, $1.1 million in 2008 and $962 thousand and $80 thousand in Successor and Predecessor 2007, respectively.

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

In all years presented, deferred financing costs are amortized over the life of the related debt which is seven years for the Senior Credit Facility and eight years for the Senior Notes.

5. Accrued expenses (in thousands):

Accrued expenses consist of the following:


	December 27, 2009		December 28, 2008
Accrued payroll	$	4,340	$	4,275
Payroll, sales and other taxes		3,753		3,545
Rent and related costs		3,128		2,819
Rebates and other advances		1,912		2,067
Accrued health insurance		1,407		1,618
Franchise development fees		2,459		4,230
Other		5,632		4,418

	$	22,631	$	22,972

6. Income taxes:

We provide for income taxes using the liability method. Deferred taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and income tax purposes, as determined under enacted tax laws and rates. The effect of changes in tax laws or rates is accounted for in the period of enactment. In our Successor period we are taxed as a C Corporation.

Our provision for income taxes is comprised of the following (in thousands):


	For year ended December 27, 2009			For year ended December 28, 2008		January 31- December 30, 2007
	Successor			Successor		Successor
Current
Federal	$	—		$	—	$	—
State and Local		430			104		252
Foreign		318			—		911

		748			104		1,163

Deferred
Federal		(8,813	)		7,332		779
State and Local		(1,284	)		1,917		106

		(10,097	)		9,249		885

Total income taxes	$	(9,349	)	$	9,353	$	2,048

-55-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

The income tax benefit of $9.3 million in 2009 was primarily the result of a $10.3 million decrease in the Company’s deferred tax liability related to impairment charges. The 2008 tax expense of $9.4 million was related to the establishment of a valuation allowance in the amount of $35.0 million against our deferred tax assets.

The following table indicates the significant elements contributing to the difference between the U.S. Federal statutory tax rate and the Company’s effective tax rate:


	For year ended December 27, 2009		For year ended December 28, 2008		January 31- December 30, 2007
Statutory tax rate	35.0	%	35.0	%	35.0	%
State and local taxes, net of federal benefit	3.7	%	4.3	%	8.9	%
Permanent difference	(0.3	%)	(0.1	%)	3.5	%
Goodwill impairment	(6.4	%)	(3.7	%)	—
Tax credits	1.0	%	0.1	%	(5.3	%)
Deferred tax adjustment	(0.4	%)	(3.8	%)	—
Valuation allowance	(10.1	%)	(43.0	%)	—
Other	(2.4	%)	(0.3	%)	1.7	%

Effective tax rate	20.1	%	(11.5	%)	43.8	%

As of December 27, 2009 and December 28, 2008 there were no reserves for uncertain tax positions. In addition, there were no changes to the reserves for the years then ended.

Effective for the first quarter of 2007, we adopted the provisions of FASB Interpretation “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB 109”. This guidance prescribes a recognition threshold and a related measurement model. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The adoption of the provisions of the guidance did not have a material impact on our consolidated financial statements.

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

As permitted by “Accounting for Uncertainty in Income Taxes” an interpretation of “FAS 109”, we also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in our tax provision. Previously, our policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At December 27, 2009, we do not have any accrued interest or penalties related to any unrecognized tax benefits.

Sbarro and it’s subsidiaries file income tax returns in various jurisdictions including United States federal and state jurisdictions and foreign jurisdictions. Our United States federal, and in most cases our major states income tax returns are no longer subject to income tax examination for years before 2006. The years subject to potential audit vary slightly depending on the taxing jurisdiction. Prior to the Merger, we were taxed as an S Corporation. On November 11, 2009 the Company agreed with the IRS to close the ongoing audit for the tax year ending December 31, 2006. The conclusion of the audit resulted in no change to the income tax for the C Corporation.

In our Predecessor period, we were taxed under the provisions of Subchapter S of the Internal Revenue Code of 1986 and where applicable and permitted, under similar state and local income tax provisions. Prior to the Merger, the provision for income taxes which was comprised of taxes payable directly by us to the jurisdictions that do not recognize S corporation status or that tax entities based on net worth and of taxes withheld at the source of payment on foreign franchise income related payments, was as follows:


	January 1– January 30, 2007
	Predecessor
Current state and local	$	—
Foreign		44

	$	44

The components of the deferred tax assets and liabilities included on the balance sheet are as follows (in thousands):


	December 27, 2009			December 28, 2008
Assets
Depreciation & amortization	$	17,457		$	16,474
Accruals and provisions		7,467			5,986
Net operating loss carry forwards		12,114			10,313
Tax credits		2,672			2,200
Valuation allowance		(39,710	)		(34,973	)

Total deferred tax assets	$	—		$	—

Liabilities, accruals and provisions		269
Intangible assets		76,672			87,238

Total deferred tax liabilities	$	76,941		$	87,238

Total net deferred tax liability	$	76,941		$	87,238

In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. Ultimately, the realization of the deferred tax asset is dependent upon the generation of sufficient future taxable income during those periods in which temporary differences become deductible and/or net operating loss and tax credit carry forwards can be utilized. Management considers the level of historical taxable income, scheduled reversal of taxable temporary differences, projected future taxable income and impairment of other assets.

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

Based on these considerations and the uncertainty surrounding the future economic climate, management believes that it is more likely than not that our net operating loss carry forward, foreign tax credit carry forward, and other deferred tax assets will not be realized. At December 27, 2009 the Company has a valuation allowance against these deferred tax assets of approximately $39.7 million.

We had federal and state net operating loss carry forwards of approximately $29.5 million at December 27, 2009, of which $27.5 million will expire in 2027 and the remaining $2.0 million will begin to expire in 2028. Our foreign tax credit carry forwards at December 27, 2009 and December 28, 2008 were approximately $2.3 million and $2.0 million respectively. The foreign tax credits will begin to expire in 2017. At December 27, 2009 the Company had a foreign NOL carry forward in India of approximately $1.2 million which has an indefinite carry forward period.

7. Long-term debt:

Indenture:

In connection with the Merger, we issued $150.0 million of senior notes at 10.375% due 2015 (“Senior Notes”). The interest is payable on February 1 and August 1 of each year.

The Senior Notes are senior unsecured obligations of ours and are guaranteed by all of our current and future domestic subsidiaries and rank equally in right of payment with all existing and future senior indebtedness of ours. The Senior Notes are effectively subordinated to all secured indebtedness of ours to the extent of the collateral securing such indebtedness, including the Senior Credit Facilities and Second Lien Facility (both defined below). In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have prior claim to those of our assets that constitute their collateral. The Senior Notes are structurally subordinated to all existing and future indebtedness, claims of holders of preferred stock and other liabilities of our subsidiaries that do not guarantee the Senior Notes. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims in full from the assets of those subsidiaries before any assets are made available for distribution to us. The Senior Notes are senior in right of payment to any future subordinated obligations of ours.

The indenture governing the notes contains certain events of default and restrictive covenants which are customary with respect to non-investment grade debt securities, including limitations on the incurrence of additional indebtedness, dividends, repurchases of capital stock, sales of assets, liens, mergers and transactions with affiliates. In addition, the notes contain cross-acceleration provisions and cross-default provisions tied to the Senior Credit Facilities and the Second Lien Facility.

Senior Credit Facilities

In connection with the Merger, we borrowed the entire $183.0 million available under the Term Loan. On October 17, 2008 and November 18, 2008, we borrowed $8.0 million and $12.0 million, respectively, under the Revolving Facility. Additionally, as of December 27, 2009, there were $3.6 million in letters of credit outstanding. The letters of credit were issued instead of cash security deposits under our operating leases or to guarantee construction costs of our locations, and for run-out claims under our medical plan. As a result, as of December 27, 2009, our remaining borrowing availability under the Senior Credit Facilities was $5.4 million.

Our Senior Credit Facilities require us to comply with certain financial and operating covenants. In connection with the preparation of our financial results for the fiscal year ended December 28, 2008, we determined, based on our preliminary financial results, that we would not be in compliance with the total net leverage ratio covenant upon delivery of our compliance certificate and audited financial results for 2008. As a result, we initiated discussions with our lenders with a view towards amending the Senior Credit Facilities and also obtaining a waiver for any non-compliance.

-58-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

On March 26, 2009, we entered into an amendment to the Senior Credit Facilities which was designed to provide the Company with certain covenant relief and also to increase our operating flexibility for the remaining term of the facilities. Key provisions of the amendment include the following:

•

Permitted the incurrence of a new Second Lien Facility;

•

Required prepayment of $25.0 million of the Term Loan from the proceeds of the Second Lien Facility;

•

Required prepayment of $3.5 million of the Revolving Facility from cash on hand and simultaneously reduced the Revolving Facilities’ amount outstanding and commitment to $21.5 million;

•

Increased the margins on the Term Loan and the Revolving Facility by 200 basis points resulting in a fixed rate of interest for borrowings under the Senior Credit Facilities of LIBOR plus 4.50% or ABR plus 3.50%;

•

Required delivery of monthly financials rather than quarterly;

•

Permanently waived non-compliance with the total net leverage ratio covenant for the fiscal quarter ended December 28, 2008 and replaced the total net leverage ratio and the interest coverage ratio covenants with a minimum EBITDA covenant and a maximum capital expenditure covenant;

•

Tightened certain non-financial covenants, including various indebtedness, disposition, acquisition and investment baskets; and

•

Restricted payment of MidOcean’s annual management fee so that such fee will accrue but not be paid until the Company’s EBITDA is at least $55.0 million and after such goal is obtained, a maximum of $2.0 million of such fees may be paid each year.

EBITDA, as calculated under our bank credit agreement, includes certain additional adjustments as disclosed in our Senior Credit Facility amendment. The Company was in compliance with our minimum trailing twelve months EBITDA covenant under our amended bank credit agreement at December 27, 2009. Such minimums at the end of each quarter are as follows:


Fourth quarter 2009 – Third quarter 2010	$	40 million
Fourth quarter 2010 – Third quarter 2011	$	43 million
Fourth quarter 2011 – Third quarter 2012	$	48 million
Fourth quarter 2010 – Third quarter 2013	$	53 million
December 29, 2013 until maturity	$	60 million

The maximum capital expenditure covenant limits our capital spend on a trailing twelve month basis to an annual spend of $12 million in 2009 and 2010, and an annual spend of $14 million in 2011 and 2012 and $15 million thereafter before giving affect of any carryover. A shortfall in any given twelve month period may be carried over to the immediately succeeding four fiscal quarters.

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

Second Lien Facility

In connection with the closing of the Second Lien Facility, Holdings issued immediately exercisable warrants to certain MidOcean entities to acquire 5% of Holdings Class A Units issued and outstanding on the dates of exercise. The fair value of the warrants issued in connection with the credit agreement governing the Second Lien Facility was $6.3 million and was recorded as paid-in capital with the offset recorded as a discount on the Second Lien Facility which is amortized over the life of the Second Lien Facility.

11% Notes:

Interest on the 11% Notes due September 15, 2009 was payable semi-annually on March 15 and September 15 of each year. Our 11% Notes were repurchased in conjunction with the Merger.

The 11% Notes were issued, at an aggregate discount of approximately $3.8 million, which was accreted to the 11% Notes on a straight-line basis over the original ten-year life of the notes.

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. In connection with the Merger, we transferred our interests in the real estate secured by the mortgage and our obligations under the related mortgage to a company owned by certain of our former shareholders.

Guarantee Arrangements Pertaining to Other Concepts:

Prior to the Merger, we were party to separate financial guarantees to a bank for two of our unconsolidated joint ventures. These guarantees were released in connection with the Merger.

Maturities of Long Term Debt (in millions):


Fiscal Years Ending	As of 12/27/09
2010		—
2011		—
2012		—
2013	$	12.5
2014	$	180.3
2015 and thereafter	$	150.0

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

Based on the quoted market price and trades the estimated fair value of our Senior Notes at December 27, 2009 approximated $117.8 million with a carrying value of $150.0 million. Fair value of the Senior Credit Facility was obtained from an independent source of composite bid prices from multiple dealers (level 2 input) and approximated $144.0 million at December 27, 2009 with a carrying value of $167.3 million. The fair value of the Second Lien was obtained from an independent source based on research broker quotes, as well as consideration of peer group credit spread analysis and was determined to be $24.2 million at December 27, 2009 with a carrying value of $22.0 million.

8. Commitments and Contingencies:

Leases:

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

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


	2009		2008		2007
	(Successor)		(Successor)		(Combined)
Minimum rentals	$	59	$	59	$	51
Common area charges		17		17		15
Percentage rent		3		2		2

	$	79	$	78	$	68

Future minimum rental and other payments required under non-cancelable operating leases for our Sbarro and other concept restaurants as of December 27, 2009 are as follows (in millions):


Fiscal Years Ending:
2010	$	78
2011		74
2012		69
2013		65
2014		60
Thereafter		166

	$	512

We are the principal lessee under operating leases for certain franchised restaurants and one other concept restaurant which are subleased to franchisees. Franchisees pay rent and related expenses directly to the landlord. Future minimum rental payments required under these non-cancelable operating leases for franchised restaurants that were open as of December 27, 2009 are as follows (in thousands):


Fiscal Years Ending:
2010	$	1,071
2011		890
2012		847
2013		553
2014		272
Thereafter		934

	$	4,567

Future minimum rental payments required under non-cancelable operating leases for restaurants that had not opened as of December 27, 2009 are as follows (in thousands):

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)


Fiscal Years Ending:
2010	$	621
2011		695
2012		684
2013		697
2014		711
Thereafter		2,694

	$	6,102

In accordance with “Guarantor’s Accounting and Disclosure Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of Others”, we have recorded a liability of approximately $18 thousand and $34 thousand in 2009 and 2008 respectively, which represents the fair value of the guarantees related to our guarantee of certain leases.

Construction contracts and other:

As of December 27, 2009, we were party to contracts for approximately $1.6 million with respect to the new construction and restaurant remodels. Payments of approximately $0.4 million were made on those contracts in 2009. The balance of the contracts is expected to be paid in 2010.

Product purchase distribution arrangement:

We have a contractual arrangement with a national independent wholesale distributor that commenced in February 2003 and that requires us, until January 2013, subject to early termination for certain specified causes, to purchase 95% of most of our food ingredients for our company-owned restaurants. The agreement does not, however, require us to purchase any specific fixed quantities. Among the factors that will affect the dollar amount of purchases we make under the contract are:

•

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

•

level of sales made at Sbarro locations;

•

market price of mozzarella cheese and other commodity items;

•

price of diesel fuel; and

•

mix of products sold by Sbarro locations

Defined contribution plan:

We have a 401(k) Plan (“Plan”) for all qualified employees. The Plan provides for a discretionary 25% matching employer contribution of up to 4% of the employee’s deferred savings (maximum contribution of 1% of an employee’s salary). The employer contributions vest over five years. The employee’s deferred savings cannot exceed 15% of an individual participant’s compensation in any calendar year. Effective April 2009, the employee match was suspended indefinitely. Our contribution to the Plan was $17 thousand in 2009, $70 thousand in 2008, $61 thousand and $5 thousand in Successor and Predecessor 2007, respectively.

Litigation:

In September 2008, an action was commenced against the Company and other non related parties for an unspecified amount, in the United States District Court in Nevada, by a franchisee in connection with a franchise location he purchased in Las Vegas, NV from a prior franchisee. The franchisee claims Company representatives misled him by overstating sales and projected sales and understating expenses. This action is in the process of being settled with no liability due from the Company. No accruals have been recorded in the Company’s financial statements at December 27, 2009.

In November 2008, an action was commenced by partners in a joint venture against the Company for an unspecified amount in the Supreme Court of New York in Suffolk County. The joint venture operated two locations. Sbarro, as a result of the joint venture partners failure to meet a capital call, diluted their interest in the partnership so that they no longer had any rights, entitlement or interest therein. The Company intends to defend its rights under this action and the outcome is uncertain. No accruals have been recorded in the Company’s financial statements at December 27, 2009.

-62-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

In March 2008, the Company became a party to a purported class action lawsuit, in the Superior Court of the State of California for the County of Los Angeles, alleging that the Company violated regulations related to meal breaks, rest breaks and payroll related matters. The Company has reached a settlement agreement, pending final court approval, in an amount approximating $550,000, which was accrued for in the Company’s financial statements at December 27, 2009.

9. Fair Value Measurement

Current accounting guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:

•

Level 1 – Quoted prices for identical instruments in active markets.

•

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets.

•

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

In addition, the guidance requires disclosures about the use of fair value to measure assets and liabilities to enable the assessment of inputs used to develop fair value measures, and for unobservable inputs to determine the effects of the measurements on earnings.

The fair values of cash and cash equivalents, accounts receivables-net, and accounts payable approximate carrying amounts because of the short maturities of these instruments. Based on the quoted market price and trades, the estimated fair value of our Senior Notes as of December 27, 2009 approximated $117.8 million. Fair value of the Senior Credit Facility was obtained from an independent source of composite bid prices from multiple dealers (level 2 input) and approximated $144.0 million as of December 27, 2009.

Fair value of the Second Lien was obtained from an independent source based on research broker quotes, as well as consideration of peer group credit spread analysis and was determined to be $24.2 million at December 27, 2009.

The fair values of goodwill and intangible assets were determined using level 3 inputs. The level 3 fair values were determined using both the market approach and the income approach (discounted cash flow). The market approach determined the fair value using an options valuation model. This model estimated the fair value of the Company’s equity using inputs such as current debt, future expected interest payments over the term, expected volatility and risk-free rate. The fair value of certain intangibles was determined under the discounted cash flow approach. In doing so, the Company determined fair value based on estimated future cash flows discounted at a rate commensurate with the Company’s risk characteristics. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others. We assumed that the current economic downturn would continue domestically in 2010 with slight improvements in the second half of the year, followed by moderate growth in future years consistent with our growth prior to the recent downturn in the economy. Internationally, we assumed the continued downturn in the economy would continue through 2010 with slight improvements in future years. This is discussed further in Note 3 – Intangibles to our Consolidated Financial Statements.

10. Transactions with related parties:

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

During 2008, Sbarro loaned Holdings $0.3 million to purchase shares of Holdings from two former senior managers in connection with their termination from the Company. The loan does not bear interest and has been classified as a reduction of shareholder’s equity.

On April 5, 2001, we loaned $3.2 million to certain of our then shareholders, including: Mario Sbarro, $1.1 million, Joseph Sbarro, $1.2 million and Anthony Sbarro, $0.9 million. The due dates of the related notes were extended to April 6, 2007. The notes bore interest at the rate of 4.63% per annum, payable annually. These loans were paid off in connection with the Merger.

On December 28, 2001, we loaned $2.8 million to our then shareholders, including: Mario Sbarro, $0.6 million, Joseph Sbarro, $0.7 million, Anthony Sbarro, $0.5 million, and the Trust of Carmela Sbarro, $1.0 million. The due dates of the related notes were extended to December 28, 2007. The notes bore interest at the rate of 2.48% per annum, payable annually. These loans were paid off in connection with the Merger.

In June 2003, Anna Missano, spouse of Anthony Missano and the daughter of Joseph Sbarro, issued to us a note for approximately $90 thousand for royalties due us for 2001 and 2000. The note was repayable at approximately $10 thousand per year, including interest at 2.96% per annum, with a balloon payment due on June 30, 2010. The principal balance of the note at December 27, 2009 was approximately $68 thousand.

In February 2005, a joint venture in which we had a 70% interest, sold the assets of one of its restaurants to a company owned by Gennaro A. Sbarro, our then Corporate Vice President and President of our Franchising and Licensing Division and the son of Mario Sbarro. The Company received $300 thousand in cash and promissory notes aggregating $600 thousand. The promissory notes were payable monthly in 72 equal monthly installments of $8,333 including interest at 5% per annum with a balloon payment of $111,375 at maturity. The company owned by Mr. Sbarro entered into a sublease, and a Security Agreement to secure the obligations under the promissory notes. The sublease and Security Agreement are intended to enable Sbarro to recapture the business in the event of an uncured default. This note was paid off in connection with the Merger.

We provided administrative services to Boulder Creek Steakhouse for $939 thousand and $50 thousand for Successor and Predecessor 2007, respectively.

11. Provision for asset impairment and restaurant closings/remodels (in thousands):

The provision for asset impairment and restaurant closings/remodels consists of the following:


	2009		2008		2007		2007
	Successor		Successor		Successor		Predecessor
Impairment of assets	$	2,429	$	1,919	$	500	$	—
Write-offs related to restaurant closings/remodels		1,066		—		—		—
Restaurant closings/remodels		1,920		1,895		858		74

	$	5,415	$	3,814	$	1,358	$	74

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

12. Quarterly financial information (unaudited) (in thousands):


	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2009
Revenues	$	79,582		$	80,134		$	85,529		$	94,040
Gross profit (a)	$	64,084		$	64,503		$	68,541		$	75,852
Net loss (b)	$	(5,710	)	$	(6,469	)	$	(24,521	)	$	(499	)

2008
Revenues	$	83,238		$	85,382		$	91,867		$	98,677
Gross profit (a)	$	65,856		$	65,996		$	71,652		$	77,985
Net loss (c)	$	(2,751	)	$	(4,981	)	$	(1,174	)	$	(82,362	)

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

(b)	In the third quarter of 2009, we recorded impairment charges of $6.7 million, $21.9 million and $2.9 million to reduce the carrying value of goodwill, trademarks and franchise relationships, respectively.

(c)

In the fourth quarter of 2008, we recorded impairment charges of $8.5 million, $53.0 million and $7.0 million and $1.9 million to reduce the carrying value of goodwill, trademarks, franchise relationships, store property and equipment, respectively. We also recorded income tax expense for a valuation allowance of $35.0 million for our deferred tax assets.

13. Business Segment and Geographic Information

We operate our business through two segments. Our company-owned restaurant segment is comprised of the operating activities of our company-owned QSR’s, joint ventures and other concept restaurants. Our franchise restaurant segment is comprised of our franchised restaurants which offer opportunities worldwide for qualified operators to conduct business under the Sbarro name and other trade names owned by Sbarro. Revenue from our franchised restaurant segment is generated from initial franchise fees, ongoing royalties and other franchising revenue. We do not allocate indirect corporate charges to our operating segments. 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 performance, as the assets are managed on an entity-wide basis.

-65-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

The following table sets forth the information concerning the revenue and operating (loss) income before unallocated costs of each of our company-owned and franchised restaurant segments:


	Company Owned Restaurants⁽¹⁾			Franchise Restaurants		Totals
				(In thousands)
2009 (Successor)
Total revenue	$	324,401		$	14,884	$	339,285

Operating (loss) income before unallocated costs	$	(1,385	)	$	8,878	$	7,493
Unallocated costs and expenses ⁽²⁾							25,340

Operating loss ⁽⁴⁾						$	(17,847	)

2008 (Successor)
Total revenue	$	343,323		$	15,841	$	359,164

Operating (loss) income before unallocated costs	$	(39,197	)	$	11,216	$	(27,981	)

Unallocated costs and expenses ⁽²⁾							24,808

Operating loss ⁽⁵⁾						$	(52,789	)

1/1/07 – 1/30/2007 (Predecessor)
Total revenue	$	23,917		$	993	$	24,910

Operating (loss) income before unallocated costs	$	(28,166	)	$	594	$	(27,572	)

Unallocated costs and expenses ⁽²⁾							2,445

Operating loss ⁽³⁾						$	(30,017	)

1/31/07 – 12/30/2007 (Successor)
Total revenue	$	319,342		$	14,543	$	333,885

Operating income before unallocated costs	$	44,504		$	10,168	$	54,672

Unallocated costs and expenses ⁽²⁾							19,407

Operating income						$	35,265

2007 (Combined)
Total revenue	$	343,259		$	15,536	$	358,795

Operating income before unallocated costs	$	16,338		$	10,762	$	27,100

Unallocated costs and expenses ⁽²⁾							21,852

Operating income ⁽³⁾						$	5,248

(1)	Total revenue includes restaurants sales in the Successor period and restaurant sales and real estate revenue in the Predecessor period.

(2)	Represents certain general and administrative expenses that are not allocated by segment.

(3)	2007 includes $31.4 million related to the special event bonuses.

(4)	In 2009, we recognized goodwill and intangible asset impairment charges of $6.7 million and $24.8 million, respectively. This transaction is discussed in further detail under Note 3 – Intangibles to our Consolidated Financial Statements included in this Report

(5)	In 2008, we recognized goodwill and intangible asset impairment charges of $8.5 million and $60.0 million, respectively

Geographic Information

The Company recorded revenues of $329.5 million and $9.8 million, $349.3 million and $9.8 million and $350.4 million and $8.4 million in the United States and all of their foreign countries in 2009, 2008 and combined 2007 respectively.

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Continued)

14. Guarantor and Non-Guarantor Financial Statements:

Certain subsidiaries have guaranteed amounts outstanding under our credit facilities. Each of the guaranteeing subsidiaries is a direct or indirect wholly-owned subsidiary of the Company and each has fully and unconditionally guaranteed the Senior Notes, the Senior Credit Facilities, and the Second Lien Facility on a joint and several basis.

The following condensed consolidating financial information presents:

(1)

Condensed unaudited consolidating balance sheets as of December 27, 2009 and December 28, 2008 and unaudited statements of operations and cash flows for the twelve months ended December 27, 2009 and December 28, 2008 of: (a) Sbarro (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 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.

-67-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet - Successor

As of December 27, 2009

ASSETS

(In thousands)


	Parent			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Current assets:

Cash and cash equivalents	$	23,713		$	2,464	$	686		$	—		$	26,863
Receivables
Franchise		2,237			—		—			—			2,237
Other		2,549			304		63			—			2,916

		4,786			304		63			—			5,153
Inventories		1,152			1,643		112			—			2,907
Prepaid expenses		1,094			533		144			—			1,771

Total current assets		30,745			4,944		1,005			—			36,694

Intercompany receivables		(43,062	)		45,250		(2,472	)		284			—

Investment in subsidiaries		73,468			—		1,240			(74,708	)		—

Property and equipment, net		19,358			36,415		605			(230	)		56,148
Goodwill		194,786			—		—			—			194,786
Trademarks		173,100			—		—			—			173,100
Other intangible assets		19,650			—		—			—			19,650
Deferred financing costs, net		8,977			—		—			—			8,977
Other assets		1,745			201		848			(1,726	)		1,068

	$	478,767		$	86,810	$	1,226		$	(76,380	)	$	490,423

-68-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet - Successor

As of December 27, 2009

LIABILITIES AND SHAREHOLDER’S EQUITY

(In thousands)

(Continued)


	Parent			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Current liabilities:
Accounts payable	$	8,730		$	164	$	138		$	—		$	9,032
Accrued expenses		19,329			2,599		933			(230	)		22,631
Accrued interest payable		7,935			—		—			—			7,935

Total current liabilities		35,994			2,763		1,071			(230	)		39,598

Deferred rent		139			6,343		—			—			6,482
Deferred tax liability		76,941			—		—			—			76,941
Due to former shareholders & other liabilities		12,508			—		—			—			12,508
Accrued interest payable		3,048			—		—			—			3,048
Long-term debt		336,095			—		—			—			336,095


Shareholders’ equity:
Common stock, $.01 par value, 1000 shares authorized, 100 issued & outstanding		—			—		484			(484	)		—
Additional paid-in capital		139,340			68,302		1,910			(70,212	)		139,340
Currency translation adjustments		200			—		255			(255	)		200
Advances to MidOcean SBR Holding		(305	)		—		—			—			(305	)
(Accumulated deficit) retained earnings		(125,838	)		7,509		(2,310	)		(5,199	)		(125,838	)

Total shareholders’ equity		13,397			75,811		339			(76,150	)		13,397
Noncontrolling interest		645			1,893		(184	)		—			2,354

Total shareholders’ equity, including noncontrolling interests		14,042			77,704		155			(76,150	)		15,751

Total liabilities and shareholders’ equity	$	478,767		$	86,810	$	1,226		$	(76,380	)	$	490,423

-69-

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Statement of Operations - Successor

For the twelve months ended December 27, 2009

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	137,462		$	184,783		$	2,156					$	324,401
Franchise related income		14,884			—			—						14,884

Total revenues		152,346			184,783			2,156			—			339,285

Costs and expenses:
Cost of food and paper products		32,916			32,743			646						66,305
Payroll and other employee benefits		36,163			52,358			789						89,310
Other operating costs		49,982			68,729			2,104						120,815
Other income, net		(455	)		(3,330	)		(118	)					(3,903	)
Depreciation and amortization		7,656			8,885			75						16,616
General and administrative		30,792			—			308						31,100
Intercompany charges		(13,979	)		13,893			86						—
Goodwill and other intangible asset impairment		31,474			—			—						31,474
Asset impairment, restaurant closings		1,490			3,140			785						5,415

Total costs and expenses, net		176,039			176,418			4,675			—			357,132


Operating (loss) income		(23,693	)		8,365			(2,519	)		—			(17,847	)

Other (expense) income:
Interest expense		(28,240	)		—			—			—			(28,240	)
Write-off of deferred financing costs		(423	)		—			—			—			(423	)
Interest income		34			—			—			—			34

Net other (expense) income		(28,629	)		—			—			—			(28,629	)

Equity in loss of subsidiaries		6,764			—			—			(6,764	)		—
(Loss) income before income taxes and equity investments		(45,558	)		8,365			(2,519	)		(6,764	)		(46,476	)
Income tax benefit		(9,349	)		—			—			—			(9,349	)

(Loss) income before equity investments		(36,209	)		8,365			(2,519	)		(6,764	)		(37,127	)
Loss from equity investments		—			—			(213	)		—			(213	)

Net (loss) income		(36,209	)		8,365			(2,732	)		(6,764	)		(37,340	)
Less: Net income (loss) attributable to noncontrolling interests		(990	)		—			1,131			—			141

Net (loss) income attributable to Sbarro, Inc.	$	(37,199	)	$	8,365		$	(1,601	)	$	(6,764	)	$	(37,199	)

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Statement of Cash Flows

For the period December 27, 2009

(In thousands)


Operating Activities:	Parent			Guarantor Subsidiaries		Nonguarantor Subsidiaries		Eliminations		Consolidated Total
Net (loss) income		(36,209	)	8,365		(2,732	)	(6,764	)		(37,340	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Goodwill and intangible asset impairment charges		31,474									31,474
Depreciation and amortization		7,656		8,885		75		—			16,616
Amortization of deferred financing costs		1,518		—		—		—			1,518
Provision for doubtful accounts receivable		2,422									2,422
Increase in deferred rent, net of tenant allowance		566		1,197		16		—			1,779
Asset impairment & restaurant closings/remodels		996		2,045		1,150		—			4,191
Write-off of deferred financing costs		423		—		—					423
Changes in deferred income taxes, net		(10,297	)								(10,297	)
Equity in net loss of unconsolidated affiliates		—				213					213
Changes in operating assets and liabilities, net of effects of merger:
(Increase) decrease in receivables		(324	)	199		379		(371	)		(117	)
Decrease in inventories		90		77		8		—			175
(Increase) decrease in prepaid expenses		(131	)	57		169		—			95
Increase in other assets		(126	)	—		—		—			(126	)
Decrease (increase) in accounts payable, accrued expenses and other liabilities		(6,368	)	(580	)	896		(156	)		(6,208	)
Increase in accrued interest payable		3,693		—		—		—			3,693

Net cash provided by (used in) operating activities		(4,617	)	20,245		174		(7,291	)		8,511

Investing Activities:
Purchases of property and equipment		(2,164	)	(6,158	)	(486	)	—			(8,808	)
Investment in joint ventures		(130	)	—		—		—			(130	)
Contributions from partners to joint ventures		—				—		—			—
Cash paid for merger, net of cash acquired				—		—		—			—

Net cash used in investing activities		(2,294	)	(6,158	)	(486	)	—			(8,938	)

Financing Activities:

Proceeds from 2nd Lien		25,000		—		—		—			25,000
Repayment of secured loan and revolving loan		(32,958	)	—		—		—			(32,958	)
Debt issuance and credit agreement costs		(1,849	)	—		—		—			(1,849	)
Capital contribution from noncontrolling interests				—		510		—			510
Repayment of short term loan to noncontrolling interests				—		(368	)	—			(368	)
Distribution of earning to noncontrolling interests		(1,331	)								(1,331	)
Intercompany balances		7,513		(15,091	)	287		7,291			—

Net cash (used in) provided by financing activities		(3,625	)	(15,091	)	429		7,291			(10,996	)

Increase in cash and cash equivalents		(10,536	)	(1,004	)	117		—			(11,423	)
Cash and cash equivalents at beginning of period		34,249		3,468		569		—			38,286

Cash and cash equivalents at end of period		23,713		2,464		686		—			26,863


Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes	$	210		—		—		—		$	210
Cash paid during the period for interest	$	22,922		—		—		—		$	22,922

-71-

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of December 28, 2008

ASSETS

(In thousands)


	Parent			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Current assets:
Cash and cash equivalents	$	34,249		$	3,468	$	569		$	—		$	38,286
Receivables
Franchise		3,845			—		—			—			3,845
Other		3,346			531		442			(371	)		3,948

		7,191			531		442			(371	)		7,793
Inventories		1,243			1,720		120			—			3,083
Prepaid expenses		2,050			590		313			—			2,953
Deferred tax asset		—			—		—			—			—

Total current assets		44,733			6,309		1,444			(371	)		52,115

Intercompany receivables		(27,269	)		28,887		(2,038	)		420			—

Investment in subsidiaries		66,447			—		—			(66,447	)		—

Property and equipment, net		24,199			40,685		986			(230	)		65,640
Goodwill		201,460			—		—			—			201,460
Trademarks		195,000			—		—			—			195,000
Other intangible assets, net		23,539			—		—			—			23,539
Deferred financing costs, net		8,934			—		—			—			8,934
Other assets		1,080			183		1,479			(1,662	)		1,080

Total assets	$	538,123		$	76,064	$	1,871		$	(68,290	)	$	547,768

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of December 28, 2008

LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT)

(In thousands)

(Continued)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Current liabilities:
Accounts payable	$	11,255		$	219		$	147		$	—		$	11,621
Accrued expenses		21,358			1,647			504			(537	)		22,972
Accrued interest payable		7,291			—			—			—			7,291
Due to former shareholders		2,993			—			—			—			2,993
Insurance premium financing		1,087			—			—			—			1,087
Current portion of debt		3,958			—			—			—			3,958

Total current liabilities		47,942			1,866			651			(537	)		49,922

Deferred rent		500			4,689			—			—			5,189
Deferred tax liability		87,238			—			—			—			87,238
Due to former shareholders		11,043			—			—			—			11,043
Long-term debt		346,297			—			—			—			346,297

Shareholders’ equity:
Common stock, $.01 par value, 1000 shares authorized, 100 issued & outstanding		—			—			148			(148	)		—
Additional paid-in capital		133,000			68,301			699			(69,000	)		133,000
Currency translation adjustments		135			—			169			(169	)		135
Advances to MidOcean SBR Holding		(305	)		—			—			—			(305	)
(Accumulated deficit) retained earnings		(88,639	)		(856	)		(708	)		1,564			(88,639	)

Total shareholders’ equity		44,191			67,445			308			(67,753	)		44,191
Noncontrolling interest		912			2,064			912			—			3,888

Total shareholders’ equity, including noncontrolling interests		45,103			69,509			1,220			(67,753	)		48,079

Total liabilities and shareholders’ equity	$	538,123		$	76,064		$	1,871		$	(68,290	)	$	547,768

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Statement of Operations - Successor

For the twelve months ended December 28, 2008

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated Total
Revenues:
Restaurant sales	$	148,380		$	192,850		$	2,093		$	—	$	343,323
Franchise related income		15,841			—			—			—		15,841
Intercompany charges		20,685			(20,525	)		(160	)		—		—

Total revenues		184,906			172,325			1,933			—		359,164


Costs and expenses:
Cost of food and paper products		36,648			40,307			720			—		77,675
Payroll and other employee benefits		39,119			55,700			721			—		95,540
Other operating costs		52,975			70,071			1,358			—		124,404
Other income, net		(1,278	)		(3,149	)		(71	)		—		(4,498	)
Depreciation and amortization		7,664			9,275			155			—		17,094
General and administrative		29,449			—			—			—		29,449
Asset impairment, restaurant closings		68,475			—			—			—		68,475
Goodwill & other intangible asset impairment		372			3,442			—			—		3,814

Total costs and expenses, net		233,424			175,646			2,883			—		411,953


Operating (loss) income		(48,518	)		(3,321	)		(950	)		—		(52,789	)

Other (expense) income:
Interest expense		(28,368	)		—			(40	)		—		(28,408	)
Interest income		169			2			—			—		171

Net other (expense) income		(28,199	)		2			(40	)		—		(28,237	)

Equity in loss of subsidiaries		(5,220	)		—			—			5,220		—
(Loss) income before income taxes and equity investments		(81,937	)		(3,319	)		(990	)		5,220		(81,026	)
Income tax expense		9,353			—			—			—		9,353

(Loss) income before equity investments		(91,290	)		(3,319	)		(990	)		5,220		(90,379	)
Loss from equity investments		—			—			(243	)		—		(243	)

Net (loss) income		(91,290	)		(3,319	)		(1,233	)		5,220		(90,622	)
Less: Net loss (income) attributable to noncontrolling interests		22			(1,039	)		371			—		(646	)

Net (loss) income attributable to Sbarro Inc.	$	(91,268	)	$	(4,358	)	$	(862	)		85,220	$	(91,268	)

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SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Statement of Cash Flows - Successor

For the twelve months ended December 28, 2008

(In thousands)


Operating Activities:	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Operating Activities:
Net (loss) income	$	(91,290	)	$	(3,319	)	$	(1,233	)	$	5,220		$	(90,622	)
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Goodwill and intangible asset impairment charges		68,475			—			—			—			68,475
Depreciation and amortization		7,664			9,275			155			—			17,094
Amortization of deferred financing costs		1,133			—			—			—			1,133
Provision for doubtful accounts receivable		486			—			—			—			486
Increase (decrease) in deferred rent, net		881			1,213			—			—			2,094
Asset impairment and restaurant closings/remodels		372			3,442			—			—			3,814
Deferred income taxes		8,944			—			—			—			8,944
Equity in net loss of unconsolidated affiliates		—			—			243			—			243
Equity in loss of subsidiaries		5,220			—			—			(5,220	)		—
Changes in operating assets and liabilities:
(Increase) decrease in receivables		(1,408	)		360			(895	)		371			(1,572	)
Decrease (increase) in inventories		67			11			27			—			105
Decrease (increase) in prepaid expenses		530			(180	)		(46	)		—			304
Increase in other assets		(217	)		(86	)		—			—			(303	)
Increase (decrease) in accounts payable and accrued expenses		2,601			(1,963	)		296			(22	)		912
Decrease in accrued interest payable		(455	)		—			—			—			(455	)

Net cash provided by (used in) operating activities		3,003			8,753			(1,453	)		349			10,652

Investing Activities:
Purchases of property and equipment		(4,106	)		(13,505	)		(21	)		—			(17,632	)
Purchases of franchise and other locations		—			(1,261	)		—			—			(1,261	)
Investment in joint ventures		(269	)		—			—			—			(269	)

Net cash used in investing activities		(4,375	)		(14,766	)		(21	)		—			(19,162	)

Financing Activities:
Proceeds from secured term loan		20,000			—			—			—			20,000
Repayment of secured term loan		(1,830	)		—			—			—			(1,830	)
Advances to MidOcean SBR Holding		(305	)		—			—			—			(305	)
Capital contribution from noncontrolling interest		—			—			1,076			—			1,076
(Repayment) proceeds of short-term loan to/from noncontrolling interest		—			—			396			—			396
Distribution of earnings to noncontrolling interest		(1,408	)		—			—			—			(1,408	)
Intercompany balances		(6,529	)		6,588			290			(349	)		—

Net cash provided by (used in) financing activities		9,928			6,588			1,762			(349	)		17,929

Increase (decrease) in cash and cash equivalents		8,556			575			288			—			9,419
Cash and cash equivalents at beginning of period		25,693			2,893			281			—			28,867

Cash and cash equivalents at end of period	$	34,249		$	3,468		$	569		$	—		$	38,286

Supplemental disclosure of cash flow information:
Cash paid during period for income taxes	$	214		$	—		$	—		$	—		$	214
Cash paid during period for interest	$	27,572		$	—		$	—		$	—		$	27,572

Supplemental non-cash financing activities:

In June 2008 and June 2007, we entered into a non-cash insurance premium financing agreement for $3.0 million and $3.5 million respectively.

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Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None

Item 9A(T).

Controls And Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of 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, the Company’s 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.

Internal Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. As there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our Company have been detected. Inherent limitations include human errors or misjudgments. Controls also can be circumvented by the intentional acts of individuals or groups.

Our management, under the direction of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our system of internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

Our management has assessed the effectiveness of our internal control over financial reporting as of December 27, 2009. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective at a reasonable assurance level as of December 27, 2009 based on the criteria set forth by COSO in Internal Control – Integrated Framework.

This Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the applicable guidance of the Securities and Exchange Commission that permits the Company to provide only management’s report in this Annual Report.

Changes to Internal Controls 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 quarter ended December 27, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B.

Other Information

On March 26, 2010, the Company’s Board of Directors approved a cash bonus plan for corporate office employees of the Company, including its named executive officers, for the 2010 fiscal year (The “2010 Bonus Plan”). The 2010 Bonus Plan is intended to assist the Company in attracting, retaining, and motivating executive officers and key employees, and to increase the linkage between executive compensation and corporate performance and to enable the Company to pay cash bonuses based upon achievement by the Company of annual operating goals based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in accordance with the Company’s bank credit agreement. Payments under the 2010 Bonus Plan are contingent upon the employee’s continued employment with the Company on the date of payment, except for employees who die or become disabled during the year as they will remain eligible for a pro-rated bonus except as may be provided for under a separate employment agreement. The payment date for participants is expected to be 15 days after the first quarter 2011 financial statements have been filed with the Securities and Exchange Commission, but no later than May 30, 2011.

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PART III

Item 10.

Directors, Executive Officers And Corporate Governance

The following table sets forth our directors, executive officers and key employees, their ages and the positions held by them as of March 26, 2010.


Name	Age	Present Position	Other Positions Held During Past Five Years
Peter Beaudrault	55	Chairman of the Board of Directors (since January 2007), President and Chief Executive Officer (since March 2005)	Corporate Vice President and President of Quick Service Division

Anthony J. Missano	51	President, Business Development (since February 2004) and Corporate Vice President (since 1996)	President of Quick Service Division

Carolyn M. Spatafora	44	Chief Financial Officer (since December 2009)	Senior Vice President of Finance, Vice President of Finance and Controller, Director of Finance and Controller

Stuart Steinberg	53	General Counsel (since 2001) and Secretary (since January 2007)	Assistant Secretary

Harsha Agadi	47	Director (since 2009)	None

Dennis Malamatinas	54	Director (since January 2007)	None

Nicholas McGrane	41	Director (since January 2007)	None

Michael O’Donnell	53	Director (since January 2007)	President and Chief Executive Officer

Robert Sharp	44	Director (since January 2007)	None

Peter Beaudrault was elected President and Chief Executive Officer in March 2005, and became Chairman of the Board of Directors in January 2007 in connection with the Merger. Prior to March 2005, Mr. Beaudrault served as Corporate Vice President and President of our Quick Service Division since joining us in January 2004. Prior to joining Sbarro, Mr. Beaudrault was an industry consultant from January 2003 and for more than five years prior to that was the President and Chief Executive Officer of the Hard Rock Cafe International, a restaurant chain. Mr. Beaudrault was elected a member of our Board of Directors in November 2005.

Anthony J. Missano joined us in 1975 and was elected President of Business Development in February 2004. He has been a Corporate Vice President since 1996 and served as President of our Quick Service Division from January 2000 until February 2004.

Carolyn M. Spatafora was appointed Chief Financial Officer on December 30, 2009. Prior to December 30, 2009, Ms. Spatafora served as the Senior Vice President of Finance, assuming the responsibilities of Daniel G. Montgomery whose employment with the Company was terminated effective May 5, 2009. Ms. Spatafora joined Sbarro in March 2005 as Director of Finance and Controller. Prior to joining Sbarro, Ms. Spatafora was employed by Adecco, a staffing services company, for ten years as a Director and Assistant Vice President in positions of Internal Audit and Information Technology. Ms. Spatafora spent the first five years of her career at KPMG and is a Certified Public Accountant in the state of New York.

Stuart Steinberg joined us as General Counsel in 2001 and Assistant Secretary in January 2006 and became Secretary in January 2007 in connection with the Merger. Mr. Steinberg is directly employed by Sbarro as Secretary, but acts as our General Counsel pursuant to a retainer agreement with the law firm of Steinberg, Fineo, Berger & Fischoff, P.C., of which he is a named partner. Prior to joining Sbarro, Mr. Steinberg practiced transactional law with his firm.

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Dennis Malamatinas serves as Chief Executive Officer of Marfin Investment Group, the leading investment holding company in Southeast Europe with $10 billion in assets. He is also the non-executive Chairman of Vivartia, the largest food company in South East Europe with sales of $2 billion. He serves on the following boards as a non-executive Director: SSP Group, Ltd., Saxo Bank, Celio Group Ltd. and also as a member of the Advisory Board of MidOcean Partners. Previously he has served as the worldwide CEO of Burger King Corp., CEO of Smirnoff Vodka, CEO of Pepsi-Cola Italy, Chairman and CEO of Priceline Europe, President of Diageo Pic Asia division, CEO of Metaxa Distillers, and has served in various management positions with Procter & Gamble international where he started his career. He had served as a non-executive Director of Reuters Plc., non-executive Chairman of Metro International, non-executive Director of Alltracle Plc., MCB Ltd., IRF European Investments, Chairman of Philox Ltd and as Executive Director of Diageo Plc.

Nicholas McGrane is a Partner of MidOcean. Prior to joining MidOcean in 2003, Mr. McGrane was a Vice President at DB Capital Partners. Prior to joining DB Capital Partners’ predecessor BT Capital Partners in 1997, Mr. McGrane was Director of Business Development at Imax Corporation, the large screen entertainment company. Mr. McGrane also has experience as a consultant at Bain & Company and a financial analyst at Kidder, Peabody & Co. Incorporated, Mr. McGrane serves as a Director of True 2 Form, Inc. and Hunter Fan Company.

Michael O’Donnell has been President and Chief Executive Officer of Ruth’s Hospitality Group Inc. since August 2008. Prior to that he had been Chairman of the Board of Directors, Chief Executive Officer and President of Champps Entertainment, Inc., a restaurant chain operator and franchisor, from March 2005 until October 2007 when Champps Entertainment was sold. He served as our President and Chief Executive Officer from September 2003 until March 2005. Prior to his joining Sbarro, Mr. O’Donnell was an industry consultant from January 2003 and, for more than five years prior to that, was the President and Chief Executive Officer of New Business at Outback Steakhouse Inc., a restaurant chain. Mr. O’Donnell was previously a Director of Sbarro from September 2003 until March 2005. Mr. O’Donnell is also a Director of Cosi, Logan’s and Ruth’s Hospitality Group, Inc.

Robert Sharp is a Partner of MidOcean. Prior to his current position, Mr. Sharp was a Managing Director at DB Capital Partners. Previously, Mr. Sharp was a Principal at Investcorp International Inc., a leading corporate investment group. Earlier, he served as a Vice President at BT Securities, specializing in bank lending and high yield and equity underwriting, as an Executive Vice President at Remsen Partners Ltd., a private investment firm, and as an associate in the mergers and acquisitions group at Drexel Burnham Lambert. Mr. Sharp is also a Director of Hunter Fan Company, Totes—Isotoner Corporation, Bushnell, Inc. and Stratus Technologies.

Harsha Agadi serves as Chairman and CEO of GHS Holdings, LLC. Prior to his current position, Mr. Agadi had been President and CEO of Church’s Chicken, Inc. from 2004 through 2009. From 1997 through 2000 he was President of Little Caesars, Inc. Mr. Agadi currently serves on the Board of Church’s Chicken, Inc., Bijoux Terner, Inc. and Fuqua School of Business, Duke University.

Our Board of Directors

As of December 27, 2009, our Board of Directors consisted of six members, who serve until the next annual meeting of shareholders or until his or her successor has been elected and qualified. Directors may be removed at any time, with or without cause, by vote of our shareholders. See Item 13 – Certain Relationships and Related Transactions and Director Independence under the caption “LLC Agreement” for details regarding arrangements and understandings with respect to the composition of our Board of Directors.

Our Board of Directors has two standing committees: an audit committee and an executive committee.

Audit Committee

The audit committee selects our independent accountants, reviews our internal accounting procedures, monitors compliance with our code of ethics and reports to our board of directors with respect to other auditing and accounting matters, the scope of annual audits, fees to be paid to our independent accountants and the performance of our independent accountants. The members of the audit committee are Nicholas McGrane, Robert Sharp, Harsha Agadi and Michael O’Donnell. Nicholas McGrane serves as the Chair of the Audit Committee. Our Board of Directors has determined that two members of our Audit Committee, Michael O’Donnell and Harsha Agadi are qualified to be “audit committee financial experts” within the meaning of the SEC regulations. The Board reached its conclusion as to the qualifications of Mr. O’Donnell and Mr. Agadi based on each individuals’ education and experience in analyzing financial statements with a variety of companies.

Executive Committee

The executive committee oversees the strategic development of the business on behalf of the full board of directors. The members of the executive committee are Nicholas McGrane, Robert Sharp and Peter Beaudrault.

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Nominees to the Board of Directors

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

Code of Ethics

We adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and other persons performing similar functions. A copy of our Code of Ethics has been filed as an exhibit to this report. We undertake to provide to any person, without charge, upon request, a copy of our Code of Ethics. If you would like a copy of our Code of Ethics, please write to our Chief Financial Officer, Sbarro, Inc., 401 Broadhollow Road, Melville, New York 11747-4714.

Item 11.

Executive Compensation

For the fiscal year ended December 27, 2009, our named executive officers were Peter Beaudrault, Carolyn Spatafora, Dan Montgomery, Anthony Puglisi, Anthony Missano and Stuart Steinberg. We refer to our named executive officers for the fiscal year ended as of December 27, 2009 as the “Named Executive Officers” or “NEO’s.”

Compensation Policies and Practices

The primary objectives of our 2009 executive compensation program were to:

•

attract and retain the best possible executive talent,

•

achieve accountability for performance by linking annual cash and long term incentive awards to achievement of measurable performance objectives, and

•

align executives’ incentives with shareholder value creation, primarily through incentive rewards for growth in EBITDA and achievement of increased value upon a sale transaction.

Our executive compensation programs were designed to encourage our executive officers to operate the business in a manner that enhances shareholder value. An objective of our compensation program is to align interests of our executive officers with our shareholders’ short and long term interests by tying a substantial portion of our executives’ overall compensation to our financial performance, specifically EBITDA as calculated under our bank credit agreement. Our compensation philosophy provides for a direct relationship between compensation and the achievement of our goals and seeks to include management in upside rewards.

Compensation Process

As of December 27, 2009, our board of directors consisted of five non-employee directors and one employee director, Peter Beaudrault, Chairman of the Board. Our board of directors does not have a Compensation Committee. Decisions regarding the compensation of executive officers are made by our board of directors.

The Board has responsibility for approving all compensation and short and long term awards to executive officers, which includes the chief executive officer and the chief financial officer. In addition, the Board reviews and approves all annual executive bonus plans and approves revisions to the compensation or bonus plans.

Compensation Design and Elements

We seek to achieve an overall compensation program that provides foundational elements such as base salary and benefits that are sufficient to attract and retain our key executives, in light of their prior compensation packages and opportunities available to them at other companies as well as an opportunity for variable incentive compensation when short and long term performance goals are met. Our executive compensation in 2009 consisted of the following components:

•

Base salary;

•

Annual cash bonus incentive(s) through our Bonus Plan (as defined below); and

•

A special incentive bonus opportunity based on the value of the Company’s equity in a sale transaction or similar extraordinary event.

Base Salary. Base salary was established based on the experience, skills, knowledge and responsibilities required of the executive officers in their roles. When establishing base salaries of the executive officers, a number of factors were considered, including the years of service, duties and responsibilities, the ability to replace the individual and the base salary at the individual’s prior employment. We sought to maintain base salaries that are competitive with the marketplace in light of our executives prior

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compensation packages and opportunities available to them at other companies to allow us to attract and retain executive talent. The company does not perform any benchmarking analysis.

Salaries for executive officers are reviewed on an annual basis, at the time of a promotion or other change in level of responsibilities, as well as when competitive circumstances may require review. Increases in salary are based on evaluation of factors such as the individual’s level of responsibility, performance and level of compensation compared to comparable companies. In January 2009, Anthony Missano’s salary was increased from $320,000 to $350,000. Effective May 5, 2009, Ms. Spatafora was promoted from Vice President of Finance and Controller to Senior Vice President of Finance and assumed the responsibilities of Financial Officer. In connection with such promotion, her base salary was increased from $195,000 to $220,000.

The base salaries of Messrs. Beaudrault and Steinberg for 2009 were established through negotiations with representatives of MidOcean in connection with the Merger. Mr. Missano’s increase in 2009 was approved by the Board of Directors and was based on the current market value of his position and experience. Mr. Montgomery’s base salary for 2009 was determined by recommendations from executive search firms based on current market conditions.

Annual Cash Bonus Incentive. Annual cash bonus incentives were established pursuant to our Corporate Employee Bonus Plan for 2009 (the “Bonus Plan”), which was approved by the Board in the first quarter of 2009. The objective of the Bonus Plan was to reward executive officers for the Company’s performance, as measured by EBITDA as calculated under our bank credit agreement and defined as earnings before interest, taxes, depreciation and amortization and other credit agreement add backs. The targets under the bonus plans were established based on our budgeted EBITDA for 2009.

Annual target cash bonuses are determined initially as a percentage of each executive officer’s base salary for the fiscal year, and the payment of target cash bonuses depends upon the achievement of the pre-determined performance targets. The target cash bonus is established based on an individual’s level of responsibility. The Bonus Plan began funding a bonus pool when the Company’s bank credit agreement EBITDA exceeded $47 million. The bank credit agreement EBITDA did not exceed $47 million in 2009. As a result, no annual bonus awards were paid with respect to 2009.

Long-term Equity Compensation. The purpose of the long-term incentive awards is to provide the executive officers with an incentive to increase the long-term value of the Company and to seek to achieve meaningful annual performance targets, thereby aligning their economic interests with the interests of MidOcean and our other owners. The incentive packages were negotiated directly by the executive officers with representatives of MidOcean. The executive officers and certain other members of senior management received long-term incentive awards from Holdings in connection with the Merger as compensation for their services to Holdings. These incentive awards consist of Class B units and Class C units that are non-voting profit interests in Holdings (collectively, the “Units”) that are subject to time and performance vesting requirements, respectively. The Class B Units vest, so long as the member is an employee of Sbarro or a subsidiary as of the applicable anniversary date of the issuance of the Class B Units, at 20% of the total number of Class B units issued to a member on a given date on each of the first five anniversaries of the issuance date. The Class C units vest, so long as the member is an employee of Sbarro or a subsidiary as of the applicable anniversary date of the issuance of the Class C units, at 20% of the total number of Class C Units issued to a member on a given date on each of the first five anniversaries of the issuance date so long as certain performance targets, based on the Company’s EBITDA, for the fiscal year end immediately prior to the applicable anniversary date as established by the Board are achieved. The Board has discretion to adjust the annual performance targets to account for acquisitions and dispositions as well as the effects of non-recurring items or changes in accounting principles mandated by GAAP. In 2009, the Board reset the targets for the Class C Units. The Units that are unvested shall cease vesting and shall be forfeited when a holder ceases to be an employee. In the event that the performance targets are not met, the Class C units due to vest, will not vest and shall be forfeited. Notwithstanding the foregoing, both Class B and Class C units vest in the event of a change in control of Sbarro. See “Potential Payments Upon Termination or Change of Control.”

All of the authorized Class B units were issued in connection with the Merger. The Board of Directors of Holdings has the authority to issue the remaining authorized but unissued Class C units as well as to authorize and issue additional units. Subsequent to the Merger, the Board authorized and approved the issuance of Class B and C Units to new members of senior management and Class C Units to new members of the Board that were forfeited from former executive officers, members of senior management or other Board members.

Other Compensation. We also provide our Named Executive Officers with an employee benefit package which includes medical, dental, life, and disability coverage, and a car allowance program.

We expect that our compensation objectives and salary and annual bonus components will be substantially similar in 2010 to those described for fiscal year 2009. With the addition of awards of incentive units to our compensation program, determinations regarding compensation packages and annual awards will also take into account the value and impact of these equity-based incentives.

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Report of the Board

We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on such review and discussion with management, we have recommended that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended December 27, 2009.


Submitted by:

Peter Beaudrault		Chairman of the Board of Directors
Harsha Agadi		Director
Dennis Malamatinas		Director
Nicholas McGrane		Director


Michael O’Donnell		Director
Robert Sharp		Director

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Summary Compensation Table

The following table summarizes the total compensation paid to, earned by or awarded to our Named Executive Officers for the fiscal years 2009, 2008 and 2007(in thousands):


Name and Principal Position	Year	Salary ($)		Bonus ⁽¹⁾ ($)		Non-Equity Incentive Plan Compensation ⁽²⁾ ($)		All Other Compen- sation ⁽⁴⁾ ($)		Total ($)

Peter Beaudrault Chairman of the Board of Directors President and Chief Executive Officer	2009 2008 2007	$	450 450 450	$	— — 14,814	$	— —	$	169 133 127	$	619 583 15,391

Carolyn M. Spatafora (5) Chief Financial Officer and Principal Accounting Officer	2009		211		—		—		9		220

Dan Montgomery (6) Vice President, Chief Financial Officer and Principal Accounting Officer	2009		110		—		—		248		358

Anthony Puglisi (7) Vice President, Chief Financial Officer and Principal Accounting Officer	2009 2008 2007		36 265 265		— — 2,963		— — —		202 46 32		238 311 3,260

Anthony Missano President, Business Development and Corporate Vice President	2009 2008 2007		349 320 320		— — 2,469		— — —		52 54 34		401 374 2,823

Stuart Steinberg General Counsel and Secretary⁽³⁾	2009 2008 2007		5 5 5		— — 1,817		— — —		— — —		5 5 1,822

⁽¹⁾	Represents special event bonuses paid due to change of control.

⁽²⁾	Represents amounts paid pursuant to the Bonus Plan.

⁽³⁾	General counsel & secretary salary includes fees paid for attending board meetings & excludes payments made under the retainer agreement.

⁽⁴⁾	The dollar value of the amounts shown in this column includes the following (in thousands):


	Year	Car Lease and Expenses		Health/Life Insurance Premiums		Airfare		Local Housing & Meals		Severance		Total

Peter Beaudrault	2009 2008 2007	$	38 37 21	$	19 21 20	$	59 21 17	$	53 54 69	$	— — —	$	169 133 127

Carolyn M. Spatafora	2009		9		—		—		—		—		9

Dan Montgomery	2009		6		5		—		—		237		248

Anthony Puglisi	2009 2008 2007		2 27 18		4 19 14		— — —		— — —		196 — —		202 46 32

Anthony Missano	2009 2008 2007		31 29 15		23 25 19		— — —		— — —		— — —		54 54 34

⁽⁵⁾	Ms. Spatafora was appointed Chief Financial Officer on December 30, 2009. Prior to December 30, 2009, Ms. Spatafora served as the Senior Vice President of Finance, assuming the responsibilities of Daniel G. Montgomery whose employment with the Company was terminated effective May 5, 2009.

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(6)

Mr. Montgomery was hired January 12, 2009. Mr. Montgomery’s employment with the Company officially terminated on May 5, 2009. Mr. Montgomery was entitled to certain severance payments and benefits pursuant to the terms of his employment agreement (as described below). Mr. Montgomery’s severance, equal to his base salary and medical benefits for a period of one year are being paid over twelve months following his termination date.

(7)

Mr. Puglisi’s employment with the Company officially terminated on February 12, 2009. Mr. Puglisi was entitled to certain severance payments and benefits pursuant to the terms of his employment agreement (as described below). Additionally, pursuant to the terms of a Cooperation Agreement (defined below) by and among Holdings, the Company and Mr. Puglisi dated January 12, 2009 (the “Cooperation Agreement”), Mr. Puglisi agreed to provide certain transitional services to the Company, as an independent contractor, after his official departure date until April 15, 2009. In consideration for such services, the Company paid Mr. Puglisi an aggregate amount of $93,333, reimbursed Mr. Puglisi for any reasonably incurred expenses, and provided Mr. Puglisi with continued medical coverage during such period. Mr. Puglisi’s severance, equal to his base salary, bonus payment and medical benefits for a period of one year is being paid over the twelve months following the conclusion of his transitional services.

Pension Benefits and Nonqualified Deferred Compensation

We currently do not have a pension or nonqualified deferred compensation program for our employees.

Stock Awards and Stock Options

We currently do not have any stock awards or stock options award programs for our employees.

The Company entered into employment agreements with several of the Named Executive Officers. The principal terms of these employment agreements are as follows:

Mr. Beaudrault: The initial term of employment is four years from the Merger, subject to automatic annual extensions unless terminated by either party on at least three months written notice. Mr. Beaudrault is entitled to a base salary of $450,000 and he has an annual cash bonus opportunity consistent with the Company’s past practice. Mr. Beaudrault is entitled to either 24 months (if termination occurs prior to the second anniversary of the execution of the agreement) or 12 months (if termination occurs after the second anniversary of the execution of the agreement) salary and benefits, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreement) by the officer. Mr. Beaudrault also received Units of Holdings which are subject to time and performance based vesting requirements described above in “Long Term Equity Compensation.” The Units also provide for vesting in the event of certain termination events or changes in control. See “Potential Payments Upon Termination or Change of Control”. Additionally, the agreement contains a non-competition provision restricting Mr. Beaudrault from competing with the Company for the longer of one year from the date of termination or the period of time during which he continues to be paid severance following termination.

Mr. Missano: The initial term of the employment specified in Mr. Missano’s agreement is two years from the Merger, subject to automatic annual extensions unless terminated by either party on at least three months written notice. Mr. Missano is entitled to a base salary of $350,000, and he has an annual cash bonus opportunity consistent with the Company’s past practice. Mr. Missano is entitled to 12 months salary and benefits, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreement) by the officer. Mr. Missano also received Units of Holdings which are subject to time and performance based vesting requirements described above in “Long Term Equity Compensation.” The Units also provide for vesting in the event of certain termination events or changes in control. See “Potential Payments Upon Termination or Change of Control”. Additionally, the agreement contains a non-competition provision restricting Mr. Missano from competing with the Company for one year from the date of termination.

Mr. Montgomery: The initial term of Mr. Montgomery’s employment was one year, subject to automatic annual extensions unless terminated by either party on at least three months written notice. Mr. Montgomery was entitled to a base salary of $350,000 and he had an annual cash bonus opportunity consistent with the Company’s past practice. Mr. Montgomery was entitled to 12 months salary and benefits and severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreement) by the officer. Additionally, the agreement contained a non-competition provision restricting Mr. Montgomery from competing with the Company for one year from the date of termination.

Mr. Montgomery’s employment with the Company officially terminated on May 5, 2009. Mr. Montgomery was entitled to certain severance payments and benefits pursuant to the terms of his employment agreement (as described above). Mr. Montgomery’s severance, equal to his base salary and medical benefits for a period of one year are being paid over twelve months following his termination date.

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Mr. Puglisi: The initial term of the employment was two years from the Merger, subject to automatic annual extensions unless terminated by either party on at least three months written notice. Mr. Puglisi was entitled to a base salary of $265,000, and he had an annual cash bonus opportunity consistent with the Company’s past practice. Mr. Puglisi was entitled to 12 months salary and benefits, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreement) by the officer. Mr. Puglisi also received Units of Holdings which are subject to time and performance based vesting requirements described above in “Long Term Equity Compensation.” The Units also provide for vesting in the event of certain termination events or changes in control. See “Potential Payments Upon Termination or Change of Control.” Additionally, the agreement contained a non-competition provision restricting Mr. Puglisi from competing with the Company for one year from the date of termination.

Mr. Puglisi’s employment with the Company officially terminated on February 12, 2009. Mr. Puglisi was entitled to certain severance payments and benefits pursuant to the terms of his employment agreement (as described above). Additionally, pursuant to the terms of a cooperation letter agreement by and among Holdings, the Company and Mr. Puglisi dated January 12, 2009 (the “Cooperation Agreement”), Mr. Puglisi agreed to provide certain transitional services to the Company, as an independent contractor, after his official departure date until April 15, 2009. In consideration for such services, the Company paid Mr. Puglisi an aggregate amount of $93,333, reimbursed Mr. Puglisi for any reasonably incurred expenses, and provided Mr. Puglisi with continued medical coverage during such period. Mr. Puglisi’s severance, equal to his base salary, bonus payment and medical benefits for a period of one year is being paid over the twelve months following the conclusion of his transitional services.

Mr. Steinberg: The initial term of the employment agreement is two years from the Merger, subject to automatic annual extensions unless terminated by either party on at least three months written notice, and will terminate automatically in the event that the Retainer Agreement (as defined below) is terminated. Mr. Steinberg will be entitled to 12 months salary, at a rate of $250,000 per annum, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreement) by the officer, including termination of the Retainer Agreement for the above reasons. Mr. Steinberg also received Units of Holdings which are subject to time and performance based vesting requirements described above in “Long Term Equity Compensation.” The Units also provide for vesting in the event of certain termination events or changes in control. See “Potential Payments Upon Termination or Change of Control”. Additionally, Mr. Steinberg’s agreement contains a non-competition provision restricting him (but not his law firm) from competing with the Company for one year from the date of termination. In addition to Mr. Steinberg’s employment agreement, the Company entered into a retainer agreement (the “Retainer Agreement”) pursuant to which Mr. Steinberg’s firm, Steinberg, Fineo, Berger & Fischoff, P.C. (the “Steinberg Firm”), acts as the legal department of the Company, with Mr. Steinberg personally acting as general counsel, in exchange for an annual payment of $480,000 with an increase of 3% per annum. The Steinberg Firm waived the right to an increase in 2008 and 2009. The term of the Retainer Agreement is for two years, subject to automatic annual extensions unless terminated by either party on at least three months written notice, and terminates automatically in the event that Mr. Steinberg’s employment agreement is terminated. The Steinberg Firm provides all personnel (including paying salary, bonus and benefits to such personnel) necessary for the day-to-day legal operation of the Company’s business. In the event that the Steinberg Firm is requested or obligated to undertake any exceptional litigation or transactional work on behalf of the Company, the fees for such work are not included in the annual retainer, but will be agreed between Mr. Steinberg and our Chief Executive Officer.

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Potential Payments Upon Termination or Change of Control

Pursuant to the employment agreements discussed above, entered into, several of our executive officers are entitled to receive certain severance payments upon termination without Cause by the Company or with Good Reason by the officer in either lump sum or over the stated period of time.

Mr. Beaudrault will be entitled to either 24 months (if termination occurs prior to the second anniversary of the execution of the agreement) or 12 months (if termination occurs after the second anniversary of the execution of the agreement) salary and benefits, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreements) by the officer.

Ms. Spatafora does not have an employment agreement. She will be entitled to 12 months salary as severance upon termination without cause.

Mr. Missano will be entitled to 12 months salary and benefits, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreements) by the officer.

Mr. Montgomery’s employment with the Company officially terminated on May 5, 2009. Mr. Montgomery was entitled to certain severance payments and benefits pursuant to the terms of his employment agreement (as described above). Mr. Montgomery’s severance, equal to his base salary and medical benefits for a period of one year is being paid over twelve months following his termination date.

Mr. Puglisi’s employment with the Company officially terminated on February 12, 2009. Mr. Puglisi was entitled to certain severance payments and benefits pursuant to the terms of his employment agreement (as defined above). Additionally, pursuant to the terms of a cooperation letter agreement by and among Holdings, the Company and Mr. Puglisi dated January 12, 2009 (the “Cooperation Agreement”), Mr. Puglisi agreed to provide certain transitional services to the Company, as an independent contractor, after his official departure date until April 15, 2009. In consideration for such services, the Company paid Mr. Puglisi an aggregate amount of $93,333, reimbursed Mr. Puglisi for reasonably incurred expenses, and provided Mr. Puglisi with continued medical coverage during such period. Mr. Puglisi’s severance, equal to his base salary, bonus payments and medical benefits for a period of one year is being paid over the twelve months following the conclusion of his transitional services.

Mr. Steinberg will be entitled to 12 months salary, at a rate of $250,000 per annum, as well as a bonus payment, as severance upon termination without Cause (as defined in the employment agreement) by the Company or with Good Reason (as defined in the employment agreement) by the officer, including termination of the Retainer Agreement.

The employment agreements do not provide for any type of severance payment due to the employee upon a change of control of the Company; however, the Units of Holdings do contain vesting provisions in the event of a change in control of Sbarro. If a holder of Class B units is terminated by the Company without Cause, the employee terminates for Good Reason, the Company elects not to renew the employment agreement pursuant to its terms or as a result of death or incapacity, then the holder shall be vested in the number of Class B units equal to the number of Class B units that would have vested on the next anniversary occurring within one year of termination on a pro rata basis for the portion of the year from the last anniversary of issuance of the Units that the holder was employed by the Company. In addition, the Units (both Class B and C not withstanding the foregoing) will vest in connection with certain public offerings of our common stock or a change in control of Sbarro, including by merger, sale of stock or sale of asset.

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Compensation of Directors

The following table summarizes the total compensation earned by our Board for the fiscal year 2009 (in thousands):


Name and Principal Position	Year	Total Fees Earned or Paid in Cash ($)		All Other Compen- sation ($)		Total ($)
Michael O’Donnell Director	2009	$	40	$	—	$	40

Nicholas McGrane Director and Chairman of the Audit Committee	2009		—		—		—

Robert Sharp Director	2009		—		—		—

Ted Host Director	2009		30		—		30

Dennis Malamatinas Director	2009		40		—		40

Harsha Agadi Director	2009		20		—		20

In connection with the Merger, we changed our director compensation policy. Directors appointed by MidOcean that are not currently partners or employees of MidOcean will receive compensation at the rate of $40,000 per annum and Class C units, which are subject to performance based vesting requirements as well as provisions providing for vesting in the event of certain termination events or changes in control. See “Potential Payments Upon Terminations or Change of Control.” We will continue to reimburse our non-employee directors for all reasonable out-of-pocket expenses incurred in the performance of their duties as our directors.

Compensation Committee Interlocks and Insider Participation

None of our executive officers have served as a member of a compensation committee of a board of directors of any other entity which has an executive officer serving as a member of our Board of Directors, and there are no other matters regarding interlocks or insider participation that are required to be disclosed.

Item 12.

Security Ownership Of Certain Beneficial Owners And Management And Related Shareholder Matters

Sbarro Holdings, LLC owns 100% of our outstanding common stock. Holdings owns 100% of the limited liability company interests of Sbarro Holdings, LLC. MidOcean, other investors and certain members of our senior management team own Holdings.

The following table sets forth certain information regarding the beneficial ownership of the limited liability company interests of Holdings as of March 26, 2010 by each person who beneficially owns 5% or more of the outstanding Class A Units of limited liability company interest of Holdings, each person who is a director, proposed director or named executive officer and all current directors and executive officers as a group. Each Class A Unit is entitled to one vote on all matters to be voted upon by members of Holdings and generally will share in distributions by Holdings up to certain amounts.

The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated shares of common stock.

Applicable percentage ownership in the following table is based on 133,000 Class A Units of limited liability company interest of Holdings outstanding as of March 26, 2010.

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Name of Beneficial Owners (1)	Number of Class A Units Owned	Percentage of Class A Units
Peter Beaudrault	4,400	3.3	%
Carolyn M. Spatafora	—	—
Daniel Montgomery	—	—
Anthony Puglisi	800	*
Anthony Missano	652	*
Stuart Steinberg	652	*
Harsha Agadi	—	—
Dennis Malamatinas(2), (5)	—	—
Michael O’Donnell	—	—
Nicholas McGrane(3), (5)	—	—
Robert Sharp(4), (5)	—	—
Directors and executive officers as a group (eleven persons)	6,504	4.9	%
MidOcean(5)	105,976	75.7	%
Aktiva Investments International NV(6)	16,000	12.0	%

*	less than one percent.

(1)	Unless otherwise specified, the address of each of the named individuals is c/o Sbarro, Inc. 401 Broadhollow Road, Melville, New York 11747.

(2)	Mr. Malamatinas is an investor in MOP III and accordingly Mr. Malamatinas may be deemed to beneficially own the units owned by MOP III-E. Mr. Malamatinas disclaims beneficial ownership of such units except to the extent of his pecuniary interest therein.

(3)	Mr. McGrane is a managing director of the MOP Entities and accordingly Mr. McGrane may be deemed to beneficially own the units owned by these entities. Mr. McGrane disclaims beneficial ownership of such units except to the extent of his pecuniary interest therein.

(4)	Mr. Sharp is a managing director of the MOP Entities and accordingly Mr. Sharp may be deemed to beneficially own the units owned by these entities. Mr. Sharp disclaims beneficial ownership of such units except to the extent of his pecuniary interest therein.

(5)

Includes (i) limited liability company interests held by MidOcean Partners III, LP, MidOcean Partners III-A, LP and MidOcean Partners III-D, LP (collectively, the MOP Entities”) and MidOcean Partners III-E, LP (“MOP III- E”) and (ii) immediately exercisable warrants to purchase limited liability company interests held by the MOP Entities. MidOcean Associates, SPC (“Associates”) is the General Partner of each of the MOP Entities. MidOcean US Advisor, LP (“US Advisor”) provides investment advisory services to each of the MOP Entities and Associates. MidOcean US Advisor Holdings LLC is the general partner of MOP III-E. The MOP Entities, Associates and US Advisor are affiliates of MOP III-E due to the fact that common entities control MidOcean US Advisors Holdings LLC, Associates and US Advisor. Accordingly, each of these entities, the MOP Entities and MOP III-E may be deemed to have beneficial ownership of these units, although each entity disclaims beneficial ownership of units owned of record by any other person or entity except to the extent of their pecuniary interest therein. The address for each of the MOP Entities, Associates, US Advisor, MOP III-E and MidOcean US Advisors Holdings LLC and the affiliated MidOcean entities is 320 Park Avenue, 17th Floor, New York, New York 10022.

(6)	The address for Aktiva Investments International NV is Zuidplein 156, 1077 XV Amsterdam, The Netherlands.

Item 13.

Certain Relationships And Related Transactions And Director Independence

Professional Services Agreement

In connection with the Merger, Holdings and the Company entered into a professional services agreement with MidOcean US Advisor, LP, an affiliate of MidOcean (“MidOcean Advisor”). The professional services agreement provides that MidOcean Advisor will have the right to receive from the Company an annual management fee of $1.0 million and reimbursement of expenses reasonably incurred by it for providing management and other similar services to the Company each year, as well as a closing fee for services provided to the Company in connection with the Merger in the amount of $2.0 million, which was paid on January 31, 2007. Additionally, MidOcean Advisor will be entitled to receive a financial advisory transaction fee from the entity that receives the advisory services upon consummation by Holdings or any of its subsidiaries of any debt or equity financing or other transaction involving Holdings or any of its subsidiaries, in each case in an amount that is to be determined and that is consistent with market practice for the services being performed, plus reimbursement of all reasonable expenses incurred by MidOcean Advisor or any of its affiliates (other than Holdings or the Company) in connection with any such transaction. The term for the professional services agreement commenced on January 31, 2007 and shall remain in effect until the 10th anniversary of such date, unless earlier terminated in accordance with its terms.

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In addition, Holdings and the Company will indemnify each of MidOcean Advisor and MidOcean and, among others, their respective directors, officers, partners, members, employees and representatives to the fullest extent permitted by law against certain claims, losses, damages, liabilities and expenses that may arise in connection with services provided under the professional service agreement.

On March 26, 2009, the Company amended its Senior Credit Facilities. The amendment includes provisions which restrict payment of MidOcean’s annual management fee. MidOcean’s annual management fee will now be accrued but not paid until the Company’s EBITDA is at least $55.0 million. After such EBITDA goal is obtained, MidOcean will be entitled to receive its accrued fees subject to a maximum cap of $2.0 million per year.

Second Lien Facility

Refer to the “Contractual Obligations” table in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7 – Long-term debt to our Consolidated Financial Statements included in this Report for further information regarding our indebtedness as of December 27, 2009

LLC Agreement

In connection with the Merger, MidOcean and certain other investors and executive officers entered into a limited liability agreement with respect to Holdings (the “LLC Agreement”). The LLC Agreement contains various rights and restrictions relating to the ownership of Holdings’ equity securities. Subject to certain exceptions, the LLC Agreement will prohibit the transfer of certain units of Holdings by certain members of Holdings described below. The LLC Agreement will further provide that each person that holds any equity in Holdings must become a party to the LLC Agreement.

The LLC Agreement will require that the board of directors of Sbarro be identical to the board of directors of Holdings. As such, it will initially be comprised of six directors and the board of directors shall have the right from time to time to alter the number of directors. One member of the board of directors shall be the Chief Executive Officer of Sbarro and the remainder shall be designated by MidOcean. The LLC Agreement also requires all members holding voting units in Holdings to vote their units in favor of electing the Chief Executive Officer and the individuals designated by MidOcean to Holdings’ board of directors. The LLC Agreement and the Company’s bylaws provide that a quorum for a meeting of the board of directors of Holdings or the Company shall not exist unless (i) a majority of the total number of directors constituting the entire board of directors is present and (ii) a majority of those present are directors who are designees of MidOcean. The LLC Agreement and the Company’s bylaws further require that (i) a majority of the members of each committee of the board of directors be comprised of directors designated by MidOcean (unless no such director is willing to serve on the committee) and (ii) that the Chief Executive Officer shall serve on any executive or similar committee.

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The LLC Agreement contains customary transfer restrictions, subject to certain limited exceptions, and provides that, subject to certain exceptions, MidOcean may transfer its units subject to the “tag-along rights” of the other members, which allow for the other members of Holdings to participate in any sale of Holdings’ equity by MidOcean to an unaffiliated third party. Finally, prior to transferring any units (other than in connection with a sale of Holdings or an initial public offering) to any person, the transferring member shall cause the prospective transferee to be bound by the LLC Agreement.

Except for certain issuances that are permitted under the LLC Agreement, if Holdings authorizes the issuance or sale of any of its securities that are junior to or on par with the common units in terms of priority rights on distributions, each holder of common units shall have the right to elect to purchase, at the price and on the terms of the offering of such units, a portion of such securities that will allow such holder to retain the same portion of ownership in such units that such member held prior to the proposed sale.

The LLC Agreement also provides that if MidOcean proposes to consummate a sale of Holdings or Sbarro, then all members of Holdings shall consent to vote in favor of and raise no objections against the sale or the process associated therewith. In connection with such a sale, each member will agree, among other things, to (i) cooperate with and participate in such sale and vote all of such holder’s units to approve the sale, (ii) sell all of such holder’s units on the terms and conditions so approved by MidOcean and (iii) entering into any sale agreements necessary for consummation of such sale, in each case subject to certain conditions.

Registration Rights Agreement

In connection with the Merger, Holdings and certain of its members entered into a registration rights agreement. The registration rights agreement grants demand registration rights to MidOcean, as well as piggyback registration rights to all members of Holdings who are or become parties to the agreement if Holdings registers securities for sale under the Securities Act. In the case of a piggyback registration, the members attempting to register shares in connection with Holdings’ registration of shares may be required to holdback certain shares if requested by the managing underwriter. Holdings will be required to pay all reasonable out-of-pocket costs and expenses of any registration under the registration rights agreement.

Indemnification Agreements

In connection with the Merger, we entered into indemnification agreements with each of our directors and officers. Under each agreement, a director or officer will be indemnified to the fullest extent permitted by law for claims arising in his or her capacity as our director or officer. We also agreed to advance monies to each director and officer to cover expenses incurred by him or her in connection with such claims if the director or officer agrees to repay the monies advanced if it is later determined that he or she is not entitled to such amounts. We believe these agreements are necessary to attract and retain skilled management with experience relevant to our industry.

Policies and Procedures for Related Party Transactions

The Audit Committee or another independent body of the Board of Directors review[s] for approval or ratification all transactions required to be reported under the SEC’s rules regarding transactions with related parties. In reviewing such a transaction, the Audit Committee or another independent body of the Board evaluate the transaction in light of factors including:

•

the benefits of the transaction to the Company;

•

the material terms of the transaction and whether they are arm’s-length and in the ordinary course of the Company’s business;

•

the direct or indirect nature of the related person’s interest in the transaction;

•

the size and expected term of the transaction;

•

other facts and circumstances that bear on the materiality of the related person transaction under applicable law and listing standards; and

•

whether the transaction is expected to occur on an ongoing basis as part of the Company’s ordinary course of business.

Refer to Note 10 Transactions with Related Parties to our Consolidated Financial Statements for further details regarding our related party transactions.

Corporate Governance

Our board of directors has determined that Harsha Agadi and Dennis Malamatinas are independent directors based on the definition of independent director set forth in Rule 4200(a)(15) of the Nasdaq Marketplace rules. In making the determination that Messrs. Agadi and Malamatinas are independent, our board of directors considered all relevant relationships and determined that the existence of any

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such relationships would not interfere with their exercise of independent judgment in carrying out the responsibilities of a director. Because MidOcean owns 74% of the voting equity of Holdings and Holdings indirectly owns 100% of our voting common stock, we would be a “controlled company” within the meaning of Rule 4350(c)(5) of the Nasdaq Marketplace rules, which would qualify us for exemptions from certain corporate governance rules of The Nasdaq Stock Market LLC, including the requirement that the board of directors be composed of a majority of independent directors.

Item 14.

Principal Independent Registered Public Accountant Fees And Services

Our principal independent registered public accountants beginning June 4, 2007 are PricewaterhouseCoopers LLP and prior to then our principal independent registered public accountants was BDO Seidman LLP.

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The following is a schedule of fees billed for professional services rendered by both our current and former principal accountants (in thousands):


	2009 Current Principal Accountant		2008 Current Principal Accountant		2008 Prior Principal Accountant
Audit fees	$	478	$	549	$	25
Audit-related fees		240		53		—
Tax fees		45		—		—
Other fees		2		2		—

Total fees	$	765	$	604	$	25

Audit fees are for the 2009 and 2008 annual financial statements included in our report on Form 10-K, as well as review of our quarterly financial statements included in our reports on Form 10-Q. Audit-related fees in 2009 and 2008 relate to recommendations made for improvements in internal controls in connection with Section 404 of the Sarbanes-Oxley Act.

Pre–approval policies and procedures:

It is our policy that before we engage our principal accountants for any audit or non—audit services, the engagement is approved by our audit committee. Our audit committee has granted pre-approval to our Chief Financial Officer to engage our principal accountants for certain tax planning services up to $25,000 per engagement and up to $50,000 for assistance or review of our Federal Income Tax Returns. Our audit committee has delegated to Nicholas McGrane the authority to grant any such additional pre-approvals during periods when the audit committee is not in session and a meeting cannot be readily convened. A decision by Mr. McGrane to pre-approve an audit or non-audit service must be presented to the full audit committee at its next scheduled meeting.

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PART IV

Item 15.

Exhibits And Financial Statement Schedules

(a) (1) Consolidated Financial Statements

The following Consolidated Financial Statements of Sbarro, Inc. and the Report of Independent Registered Public Accountants thereon are included in Item 8 above:


		Page
Report of Independent Registered Public Accounting Firm		36

Consolidated Balance Sheets as of December 27, 2009 (Successor) and December 28, 2008 (Successor)		38

Consolidated Statements of Operations for the year ended December 27, 2009 (Successor), December 28, 2008 (Successor) and the period January 31, 2007 through December 30, 2007 (Successor) and the period January 1, 2007 through January 30, 2007 (Predecessor)		40

Consolidated Statements of Shareholders’ Equity for the year ended December 27, 2009 (Successor), December 28, 2008 (Successor) and the period January 31, 2007 through December 30, 2007 (Successor), and the period January 1, 2007 through January 30, 2007 (Predecessor)		41

Consolidated Statements of Cash Flows for the year ended December 27, 2009 (Successor), December 28, 2008 (Successor) and the period January 31, 2007 through December 30, 2007 (Successor) and the period January 1, 2007 through January 30, 2007 (Predecessor)		43

Notes to Consolidated Financial Statements		45

(a) (2) Financial Statement Schedules

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


		Page
Report of Independent Registered Public Accounting Firm		36

Valuation and Qualifying Accounts for 2009, 2008 and 2007		S-1

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

(a) (3) Exhibits


*2.1		Agreement and Plan of Merger dated as of November 22, 2006, by and among MidOcean SBR Holdings LLC, MidOcean SBR Acquisition Corp., Sbarro, Inc., the stockholders of Sbarro, Inc. and the other parties identified therein. (Exhibit 2.1 to our Current Report on Form 8-K dated November 22, 2006)

*3.1		Restated Certificate of Incorporation of Sbarro, Inc. (Exhibit 3.1 to our Registration Statement on Form S-4, File No. 333-142081)

*3.2		Amended and Restated Bylaws of Sbarro, Inc. (Exhibit 3.2 to our Registration Statement on Form S-4, File No. 333-142081)

*4.1		Indenture dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., the subsidiary guarantors party thereto from time to time and the Bank of New York, as trustee. (Exhibit 4.1 to our Registration Statement on Form S-4, File No. 333-142081)

*4.2		Registration Rights Agreement dated January 31, 2007 among Sbarro, Inc., Credit Suisse Securities (USA) LLC and Banc of America Securities LLC, as Initial Purchasers. (Exhibit 4.2 to our Registration Statement on Form S-4, File No. 333-142081)

*4.3		MidOcean SBR Holdings, LLC Unit Purchase Warrant dated as of March 26, 2009 issued to MidOcean Partners III, L.P. (Exhibit 4.3 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*4.4		MidOcean SBR Holdings, LLC Unit Purchase Warrant dated as of March 26, 2009 issued to MidOcean Partners III-A, L.P. (Exhibit 4.4 to our Annual Report on Form 10-K for the year ended December 28, 2008)

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*4.5		MidOcean SBR Holdings, LLC Unit Purchase Warrant dated as of March 26, 2009 issued to MidOcean Partners III-D, L.P. (Exhibit 4.5 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*+10.1		Form of Indemnification Agreement between Sbarro, Inc. and each of its officers and directors. (Exhibit 10.1 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.2		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Peter Beaudrault regarding Mr. Beaudrault’s employment with Sbarro. (Exhibit 10.4 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.3		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Anthony Missano regarding Mr. Missano’s employment with Sbarro. (Exhibit 10.5 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.4		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Anthony Puglisi regarding Mr. Puglisi’s employment with Sbarro. (Exhibit 10.6 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.5		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Stuart Steinberg regarding Mr. Steinberg’s employment with Sbarro. (Exhibit 10.7 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.6		Engagement Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc., Steinberg, Fineo, Berger & Fischoff, P.C. and Stuart Steinberg. (Exhibit 10.23 to our Registration Statement on Form S-4, File No. 333-142081)

*10.7		Professional Services Agreement dated as of January 31, 2007 among Sbarro, MidOcean SBR Holdings, LLC and MidOcean US Advisor, LP. (Exhibit 10.13 to our Registration Statement on Form S-4, File No. 333-142081)

*10.8		Credit Agreement dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., Sbarro Holdings, LLC, the lenders party thereto from time to time, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, Credit Suisse, as Syndication Agent, Banc of America Securities LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Book Managers, Natixis and Bank of Ireland, as Co-Documentation Agents. (Exhibit 10.14 to our Registration Statement on Form S-4, File No. 333-142081)

*10.9		First Amendment to Credit Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the lenders party thereto from time to time, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, Credit Suisse, as Syndication Agent, Banc of America Securities LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Book Managers, Natixis and Bank of Ireland, as Co-Documentation Agents. (Exhibit 10.9 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*10.10		Second Lien Credit Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the lenders party thereto from time to time, and Natixis, as Administrative Agent and Collateral Agent. (Exhibit 10.10 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*10.11		Intercreditor Agreement dated as of March 26, 2009 between Bank of America, N.A., as Collateral Agent for first lien facility, and Natixis, as Collateral Agent for second lien facility. (Exhibit 10.11 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*10.12		Security Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the other loan parties thereto from time to time, and Natixis, as Collateral Agent. (Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*10.13		Guaranty dated as of March 26, 2009 among Sbarro Holdings, LLC, the subsidiary guarantors parties thereto from time to time, and Natixis, as Administrative Agent. (Exhibit 10.13 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*10.14		Pledge Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the other loan parties thereto from time to time, and Natixis, as Collateral Agent. (Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*10.15		Security Agreement dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., Sbarro Holdings, LLC, the other loan party’s party thereto from time to time and Bank of America, N.A., as Collateral Agent. (Exhibit 10.15 to our Registration Statement on Form S-4, File No. 333-142081)

*10.16		Guaranty dated as of January 31, 2007 among Sbarro Holdings, LLC, the subsidiary guarantors party thereto from time to time and Bank of America, N.A., as Administrative Agent. (Exhibit 10.16 to our Registration Statement on Form S-4, File No. 333-142081)

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*10.17		Pledge Agreement dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., Sbarro Holdings, LLC, the other loan parties party thereto from time to time and Bank of America, N.A., as Collateral Agent. (Exhibit 10.17 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.18		Corporate Office Employee Bonus Plan for 2007. (Exhibit 10.22 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.19		Corporate Office Employee Bonus Plan for 2008. (Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 30, 2008)

+10.20		Corporate Office Employee Bonus Plan for 2009. (Exhibit 10.20 to our Annual Report on Form 10-K for the year ended December 28, 2008.)

+10.21		Corporate Office Employee Bonus Plan for 2010.

*+10.22		Employment Agreement dated January 12, 2009 by and among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Daniel G. Montgomery. (Exhibit 10.1 to our Current Report on Form 8-K dated January 12, 2009)

*+10.23		Cooperation Letter Agreement dated January 12, 2009 by and among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Anthony J. Puglisi. (Exhibit 10.2 to our Current Report on Form 8-K dated January 12, 2009)

12.1		Computation of ratio of earnings to fixed charges.

*14.1		Code of Ethics – For Executive Officers and Directors of Sbarro, Inc. (Exhibit 14.1 to our Registration Statement on Form S-4, File No. 333-142081)

21.1		List of subsidiaries.

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

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

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

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

*	Incorporated by reference to the document indicated.

**	These certifications are being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and are not being filed as part of this Annual Report on Form 10-K or as a separate disclosure document.

+	Management contract or compensatory plan.

UNDERTAKING

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 26, 2010.


SBARRO, INC.

By:		/s/ Peter Beaudrault
		Peter Beaudrault,
		Chairman of the Board of Directors,
		President and Chief Executive Officer

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


Signature	Title	Date

/s/ Peter Beaudrault	Chairman of the Board of Directors,	March 26, 2010
Peter Beaudrault	President and Chief Executive Officer

/s/ Carolyn M. Spatafora	Chief Financial Officer and Principal Accounting	March 26, 2010
Carolyn M. Spatafora	Officer

/s/ Harsha Agadi	Director	March 26, 2010
Harsha Agadi

/s/ Dennis Malamatinas	Director	March 26, 2010
Dennis Malamatinas

/s/ Nicholas McGrane	Director	March 26, 2010
Nicholas McGrane

/s/ Michael O’Donnell	Director	March 26, 2010
Michael O’Donnell

/s/ Robert Sharp	Director	March 26, 2010
Robert Sharp

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SBARRO, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

For The Three Years Ended December 27, 2009


Description	Balance at Beginning of Period			Charged to Costs and Expenses	Charged to Other Accounts	Deductions	Balance at End of Period
December 27, 2009
(Successor)
Allowance for doubtful accounts receivable	$	446		2,422	200	1,263	$	1,805

Valuation allowance on deferred tax assets	$	34,973		5,624	—	887	$	39,710

December 28, 2008
(Successor)
Allowance for doubtful accounts receivable	$	—		486	—	40	$	446

Valuation allowance on deferred tax assets	$	—		34,973	—	—	$	34,973

January 31, 2007-December 30, 2007
(Successor)
Allowance for doubtful accounts receivable	$	—	⁽¹⁾	—	—	—	$	—

Valuation allowance on deferred tax assets	$	—		—	—	—	$	—

January 1-January 30, 2007
(Predecessor)
Allowance for doubtful accounts receivable	$	263		—	—	—	$	263

(1)	Beginning balance of accounts receivable was adjusted to fair value in connection with the Merger.

S-1

EXHIBIT INDEX


Exhibit Number		Description
*2.1		Agreement and Plan of Merger dated as of November 22, 2006, by and among MidOcean SBR Holdings LLC, MidOcean SBR Acquisition Corp., Sbarro, Inc., the stockholders of Sbarro, Inc. and the other parties identified therein. (Exhibit 2.1 to our Current Report on Form 8-K dated November 22, 2006)

*3.1		Restated Certificate of Incorporation of Sbarro, Inc. (Exhibit 3.1 to our Registration Statement on Form S-4, File No. 333-142081)

*3.2		Amended and Restated Bylaws of Sbarro, Inc. (Exhibit 3.2 to our Registration Statement on Form S-4, File No. 333-142081)

*4.1		Indenture dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., the subsidiary guarantors party thereto from time to time and the Bank of New York, as trustee. (Exhibit 4.1 to our Registration Statement on Form S-4, File No. 333-142081)

*4.2		Registration Rights Agreement dated January 31, 2007 among Sbarro, Inc., Credit Suisse Securities (USA) LLC and Banc of America Securities LLC, as Initial Purchasers. (Exhibit 4.2 to our Registration Statement on Form S-4, File No. 333-142081)

*4.3		MidOcean SBR Holdings, LLC Unit Purchase Warrant dated as of March 26, 2009 issued to MidOcean Partners III, L.P. (Exhibit 4.3 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*4.4		MidOcean SBR Holdings, LLC Unit Purchase Warrant dated as of March 26, 2009 issued to MidOcean Partners III-A, L.P. (Exhibit 4.4 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*4.5		MidOcean SBR Holdings, LLC Unit Purchase Warrant dated as of March 26, 2009 issued to MidOcean Partners III-D, L.P. (Exhibit 4.5 to our Annual Report on Form 10-K for the year ended December 28, 2008)

*+10.1		Form of Indemnification Agreement between Sbarro, Inc. and each of its officers and directors. (Exhibit 10.1 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.2		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Peter Beaudrault regarding Mr. Beaudrault’s employment with Sbarro. (Exhibit 10.4 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.3		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Anthony Missano regarding Mr. Missano’s employment with Sbarro. (Exhibit 10.5 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.4		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Anthony Puglisi regarding Mr. Puglisi’s employment with Sbarro. (Exhibit 10.6 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.5		Employment Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Stuart Steinberg regarding Mr. Steinberg’s employment with Sbarro. (Exhibit 10.7 to our Registration Statement on Form S-4, File No. 333-142081)

*+10.6		Engagement Agreement dated as of January 31, 2007 among MidOcean SBR Holdings, LLC, Sbarro, Inc., Steinberg, Fineo, Berger & Fischoff, P.C. and Stuart Steinberg. (Exhibit 10.23 to our Registration Statement on Form S-4, File No. 333-142081)

*10.7		Professional Services Agreement dated as of January 31, 2007 among Sbarro, MidOcean SBR Holdings, LLC and MidOcean US Advisor, LP. (Exhibit 10.13 to our Registration Statement on Form S-4, File No. 333-142081)

*10.8		Credit Agreement dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., Sbarro Holdings, LLC, the lenders party thereto from time to time, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, Credit Suisse, as Syndication Agent, Banc of America Securities LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Book Managers, Natixis and Bank of Ireland, as Co-Documentation Agents. (Exhibit 10.14 to our Registration Statement on Form S-4, File No. 333-142081)


10.9		First Amendment to Credit Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the lenders party thereto from time to time, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer, Credit Suisse, as Syndication Agent, Banc of America Securities LLC and Credit Suisse Securities (USA) LLC, as Joint Lead Arrangers and Book Managers, Natixis and Bank of Ireland, as Co-Documentation Agents.
10.10		Second Lien Credit Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the lenders party thereto from time to time, and Natixis, as Administrative Agent and Collateral Agent.
10.11		Intercreditor Agreement dated as of March 26, 2009 between Bank of America, N.A., as Collateral Agent for first lien facility, and Natixis, as Collateral Agent for second lien facility.
10.12		Security Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the other loan parties thereto from time to time, and Natixis, as Collateral Agent.
10.13		Guaranty dated as of March 26, 2009 among Sbarro Holdings, LLC, the subsidiary guarantors parties thereto from time to time, and Natixis, as Administrative Agent.
10.14		Pledge Agreement dated as of March 26, 2009 among Sbarro, Inc., Sbarro Holdings, LLC, the other loan parties thereto from time to time, and Natixis, as Collateral Agent.
*10.15		Security Agreement dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., Sbarro Holdings, LLC, the other loan party’s party thereto from time to time and Bank of America, N.A., as Collateral Agent. (Exhibit 10.15 to our Registration Statement on Form S-4, File No. 333-142081)
*10.16		Guaranty dated as of January 31, 2007 among Sbarro Holdings, LLC, the subsidiary guarantors party thereto from time to time and Bank of America, N.A., as Administrative Agent. (Exhibit 10.16 to our Registration Statement on Form S-4, File No. 333-142081)
*10.17		Pledge Agreement dated as of January 31, 2007 among MidOcean SBR Acquisition Corp., Sbarro, Inc., Sbarro Holdings, LLC, the other loan parties party thereto from time to time and Bank of America, N.A., as Collateral Agent. (Exhibit 10.17 to our Registration Statement on Form S-4, File No. 333-142081)
*+10.18		Corporate Office Employee Bonus Plan for 2007. (Exhibit 10.22 to our Registration Statement on Form S-4, File No. 333-142081)
*+10.19		Corporate Office Employee Bonus Plan for 2008. (Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 30, 2008)
+10.20		Corporate Office Employee Bonus Plan for 2009.
+10.21		Corporate Office Employee Bonus Plan for 2010.
*+10.22		Employment Agreement dated January 12, 2009 by and among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Daniel G. Montgomery. (Exhibit 10.1 to our Current Report on Form 8-K dated January 12, 2009)
*+10.23		Cooperation Letter Agreement dated January 12, 2009 by and among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Anthony J. Puglisi. (Exhibit 10.2 to our Current Report on Form 8-K dated January 12, 2009)
12.1		Computation of ratio of earnings to fixed charges.
*14.1		Code of Ethics – For Executive Officers and Directors of Sbarro, Inc. (Exhibit 14.1 to our Registration Statement on Form S-4, File No. 333-142081)
21.1		List of subsidiaries.
31.01		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02		Certification of Vice President, Chief Financial Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**32.01		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**32.02		Certification of Chief Financial Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Incorporated by reference to the document indicated.

**	These certifications are being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and are not being filed as part of this Annual Report on Form 10-K or as a separate disclosure document.

+	Management contract or compensatory plan.

SBARRO INC - FORM 10-K - March 26, 2010

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