UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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


For the quarterly period ended September 26, 2010		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 Broad Hollow Road, Melville, New York		11747-4714
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements 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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x 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 number of shares of Common Stock of the registrant outstanding as of November 10, 2010 was 100.

SBARRO, INC.

FORM 10-Q INDEX


		PAGES
PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited):

	Balance Sheets (unaudited)—September 26, 2010 and December 27, 2009	3-4

	Statements of Operations (unaudited)—Nine months ended September 26, 2010 and September 27, 2009 and the quarter ended September 26, 2010 and September 27, 2009	5-6

	Statement of Shareholders’ Deficit (unaudited)—Nine months ended September 26, 2010	7

	Statements of Cash Flows (unaudited)—Nine months ended September 26, 2010 and September 27, 2009	8

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	(Removed and Reserved)	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

Part I – Financial Information

Item 1.

Consolidated Financial Statements

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

(UNAUDITED)

(In thousands)


	September 26, 2010		December 27, 2009
Current assets:
Cash and cash equivalents	$	12,670	$	26,863
Receivables, net of allowance for doubtful accounts of $1,457 and $1,805 at September 26, 2010 and December 27, 2009, respectively:
Franchise		1,881		2,237
Other		2,585		2,916

		4,466		5,153
Inventories		2,845		2,907
Prepaid expenses		3,402		1,771

Total current assets		23,383		36,694

Property and equipment, net		51,758		56,148

Intangible assets:
Goodwill		194,786		194,786
Trademarks		157,400		173,100
Other intangible assets		18,850		19,650

Deferred financing costs, net		7,809		8,977
Other assets		1,567		1,068

Total assets	$	455,553	$	490,423

See Notes to Unaudited Consolidated Financial Statements.

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES & SHAREHOLDERS’ (DEFICIT) EQUITY

(UNAUDITED)

(In thousands except share data)

(CONTINUED)


	September 26, 2010			December 27, 2009
Current liabilities:
Accounts payable	$	7,426		$	9,032
Accrued expenses		19,164			22,631
Accrued interest payable		3,399			7,935

Total current liabilities		29,989			39,598

Deferred rent		7,466			6,482
Deferred tax liability		70,645			76,941
Due to former shareholders and other liabilities		13,258			12,508
Accrued interest payable		6,372			3,048

Long-term debt		341,802			336,095

Commitments and contingencies
Shareholders’ (deficit) equity:
Common stock
Authorized 1,000 shares; $.01 par value issued and outstanding 100 shares at September 26, 2010 and December 27, 2009		—			—
Additional paid-in capital		139,340			139,340
Currency translation adjustments		(60	)		200
Advances to MidOcean SBR Holdings		(305	)		(305	)
Accumulated deficit		(155,146	)		(125,838	)

Total shareholders’ (deficit) equity		(16,171	)		13,397
Noncontrolling interests		2,192			2,354

Total shareholders’ (deficit) equity, including noncontrolling interests		(13,979	)		15,751

Total liabilities and shareholders’ (deficit) equity, Sbarro, Inc.	$	455,553		$	490,423

See Notes to Unaudited Consolidated Financial Statements.

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands)


	For The Nine Months Ended September 26, 2010			For The Nine Months Ended September 27, 2009
Revenues:
Restaurant sales	$	228,658		$	235,083
Franchise related income		10,427			10,162

Total revenues		239,085			245,245
Costs and expenses:
Cost of food and paper products		48,006			48,117
Payroll and other employee benefits		64,476			66,047
Other operating costs		91,881			89,915
Other income, net		(2,846	)		(2,885	)
Depreciation and amortization		10,981			12,297
General and administrative		23,033			22,612
Goodwill and other intangible asset impairment		15,700			31,474
Asset impairment, restaurant closings/remodels		1,457			2,305

Total costs and expenses, net		252,688			269,882

Operating loss		(13,603	)		(24,637	)

Other (expense) income:
Interest expense		(22,902	)		(20,747	)
Write-off of deferred financing costs		—			(423	)
Interest income		1			33

Net other expense		(22,901	)		(21,137	)

Loss before income taxes and equity investments		(36,504	)		(45,774	)
Income tax benefit		(5,955	)		(9,480	)

Loss before equity investments		(30,549	)		(36,294	)
Loss from equity investments		(174	)		(162	)

Net loss		(30,723	)		(36,456	)
Less: Net loss (income) attributable to noncontrolling interests		1,415			(244	)

Net loss attributable to Sbarro, Inc.	$	(29,308	)	$	(36,700	)

See Notes to Unaudited Consolidated Financial Statements.

SBARRO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

(In thousands)


	For The Three Months Ended September 26, 2010			For The Three Months Ended September 27, 2009
Revenues:
Restaurant sales	$	80,467		$	82,141
Franchise related income		3,538			3,388

Total revenues		84,005			85,529
Costs and expenses:
Cost of food and paper products		17,360			16,988
Payroll and other employee benefits		22,628			23,260
Other operating costs		30,880			30,341
Other income, net		(1,059	)		(865	)
Depreciation and amortization		3,888			3,830
General and administrative		7,704			6,786
Goodwill and other intangible asset impairment		—			31,474
Asset impairment, restaurant closings/remodels		339			309

Total costs and expenses, net		81,740			112,123

Operating income (loss)		2,265			(26,594	)

Other expense:
Interest expense		(7,796	)		(7,414	)

Other expense		(7,796	)		(7,414	)

Loss before income taxes and equity investments		(5,531	)		(34,008	)
Income tax expense (benefit)		125			(9,752	)

Loss before equity investments		(5,656	)		(24,256	)
Loss from equity investments		(54	)		(54	)

Net loss		(5,710	)		(24,310	)
Less: Net loss (income) attributable to noncontrolling interests		428			(211	)

Net loss attributable to Sbarro, Inc.	$	(5,282	)	$	(24,521	)

See Notes to Unaudited Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFECIT

(UNAUDITED)

(In thousands)


	Common Stock				Additional paid-in capital		Advances to MidOcean SBR Holdings						Accumulated Other Comprehensive Income (Loss)(b)
	Number of Shares		Amount		Additional paid-in capital		Advances to MidOcean SBR Holdings			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)(b)			Noncontrolling Interest			Total
Balance at December 27, 2009		100	$	—	$	139,340	$	(305	)	$	(125,838	)	$	200		$	2,354		$	15,751
Components of comprehensive loss:
Net loss		—		—		—		—			(29,308	)		—			(1,415	)		(30,723	)
Currency translation adjustments		—		—		—		—			—			(260	)		193			(67	)

Comprehensive loss (a)																				(30,790	)
Capital contribution from noncontrolling interest		—		—		—		—			—			—			1,186			1,186
Distribution of earnings and return of capital		—		—		—		—			—			—			(296	)		(296	)
Proceeds from loan - noncontrolling interest		—		—		—		—			—			—			170			170

Balance at September 26, 2010		100	$	—	$	139,340	$	(305	)	$	(155,146	)	$	(60	)	$	2,192		$	(13,979	)

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


	Nine Months Ended September 26, 2010			Nine Months Ended September 27, 2009
Net loss (including noncontrolling interests)	$	(30,723	)	$	(36,456	)
Currency translation adjustments		(67	)		16

		(30,790	)		(36,440	)
Less: comprehensive (loss) income attributable to noncontrolling interests		(1,222	)		223

Comprehensive loss - Sbarro, Inc.	$	(29,568	)	$	(36,663	)

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


	September 26, 2010			Dec 27, 2009
Currency translation adjustments	$	118		$	185
Less: noncontrolling interests - currency translation adjustments		178			(15	)

Accumulated other comprehensive (loss) income - Sbarro, Inc.	$	(60	)	$	200

See Notes to Unaudited Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	For The Nine Months Ended September 26, 2010			For The Nine Months Ended September 27, 2009
Operating Activities:
Net loss	$	(30,723	)	$	(36,456	)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill and other intangible asset impairment		15,700			31,474
Depreciation and amortization		10,981			12,297
Amortization of deferred financing costs		1,475			1,084
Provision for doubtful accounts receivable		92			916
Increase in deferred rent, net of tenant allowance		1,248			1,404
Asset impairment and restaurant closings/remodels		1,129			1,100
Change in deferred income taxes, net		(6,296	)		(9,915	)
Write-off of deferred financing costs		—			423
Equity in net loss of unconsolidated affiliates		174			162
Changes in operating assets and liabilities
Decrease in receivables		659			54
Decrease in inventories		62			495
Increase in prepaid expenses		(1,013	)		(350	)
Increase in other assets		(1,110	)		(86	)
Decrease in accounts payable, accrued expenses & other liabilities		(4,983	)		(8,278	)
Decrease in accrued interest payable		(1,212	)		(1,941	)

Net cash used in operating activities		(13,817	)		(7,617	)


Investing Activities:
Purchases of property and equipment		(6,863	)		(6,277	)
Investment in joint ventures		—			(283	)

Net cash used in investing activities		(6,863	)		(6,560	)


Financing Activities:
Proceeds from revolver loan		5,400			—
Proceeds from second lien		—			25,000
Debt issuance and credit agreement costs		—			(1,834	)
Repayment of secured term loan and revolver		—			(32,958	)
Capital contribution from noncontrolling interests		1,186			394
Proceeds from (repayment of) short term loan from (to) noncontrolling interests		170			(374	)
Distribution of earnings to noncontrolling interests		(269	)		(881	)

Net cash provided by (used in) financing activities		6,487			(10,653	)


Decrease in cash and cash equivalents		(14,193	)		(24,830	)
Cash and cash equivalents at beginning of period		26,863			38,286

Cash and cash equivalents at end of period	$	12,670		$	13,456

See Notes to Unaudited Consolidated Financial Statements.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. Basis of Financial Statement Presentation:

On January 31, 2007, entities controlled by MidOcean Partners III, LP, a private equity firm, and certain of its affiliates (“MidOcean”) acquired Sbarro, Inc. (“we,” “us,” “Sbarro” or 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, with the balance of the equity of Holdings being owned by other investors.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Regulation S-X related to interim period financial statements and, therefore, do not include all information and footnotes required by generally accepted accounting principles. However, in the opinion of our management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for the fair presentation of the consolidated financial position of Sbarro and our subsidiaries at September 26, 2010, and our consolidated results of operations for the three and nine months ended September 26, 2010 and September 27, 2009 and cash flows for the nine months ended September 26, 2010 and September 27, 2009 have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. Certain items in the prior year’s consolidated financial statements have been reclassified to conform to the fiscal 2010 presentation. Reference should be made to our annual financial statements, including footnotes thereto, included in our Annual Report on Form 10-K for the year ended December 27, 2009.

Liquidity

We are highly leveraged and a substantial portion of our liquidity needs arise from our debt service obligations. Our other liquidity needs fund our costs of operations, working capital and capital expenditures. Cash flow generated during the fourth quarter is critical to achieving positive annual operating cash flow. While many factors affect our results, some are outside our control, and their impact in the fourth quarter (and on overall liquidity) can be particularly significant, because the fourth quarter accounts for a disproportionate amount of our annual cash flow. Adverse macroeconomic factors, including reduced mall traffic during the holiday shopping season and a decline in consumer spending, can negatively impact our fourth quarter results and our ability to achieve positive operating cash flow for the year. Additionally, we face pressure related to increasing commodity costs, particularly cheese and flour.

At September 26, 2010, we were in compliance with all of our debt covenants under the terms of the Senior Credit Facilities. The most restrictive covenant is trailing 12 month minimum EBITDA which was required to be at least $40 million for the 12 months ended September 26, 2010. Our trailing 12 month EBITDA (as calculated based upon the terms of the Senior Credit Facilities, which we refer to as “bank credit agreement EBITDA”) was $40.4 million for that trailing 12 month period.

Beginning with the fourth quarter of 2010 (which ends on January 2, 2011), our minimum trailing 12 month EBITDA covenant increases by $3 million to $43 million. Based upon our results to date and management’s projections for the fourth quarter of 2010 and first quarter of fiscal 2011, we believe it is probable that we will not achieve the minimum level of EBITDA required by the covenant in either the fourth quarter of 2010 or the first quarter of fiscal 2011.

Our Senior Credit Facilities provide for certain cures in the event we do not meet our minimum EBITDA covenant requirement. Covenant violations can be cured with cash payments made by our principal shareholders (referred to as an “equity cure”). Such cure amounts would be required to equal the amount of the EBITDA shortfall, below the minimum level required by the covenant, provided the shortfall does not exceed ten percent of the amount of our trailing 12 month bank credit agreement EBITDA. The cure amount would then be added to our minimum 12 month EBITDA for the quarter requiring the cure, and for the subsequent three quarters. An equity cure can only be completed twice within each twelve month period. Our principal shareholders have no obligation to fund any cure amount even if an equity cure right is available to us. Based upon our results to date and management’s projections for the fourth quarter of 2010, we believe our EBITDA shortfall could exceed ten percent of the amount of our trailing 12 month bank credit agreement EBITDA. In such event, we would not be able to utilize an equity cure to remedy an EBITDA covenant violation. We are currently exploring options to address our capital structure in light of our forecasts and the terms of our outstanding indebtedness, including discussions with our lenders regarding altering the terms of our debt and/or modifying our capital structure.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

Absent any waiver from or other agreement with the lenders under our Senior Credit Facilities, a violation of our minimum EBITDA covenants that is not remedied will give those lenders the right to accelerate the maturity of our outstanding indebtedness under the Senior Credit Facilities, so that the loans would become immediately due and payable. If this were to occur, we would be required by GAAP to reclassify all of our outstanding indebtedness from long-term to current liabilities on our balance sheet at January 2, 2011. If the lenders under our Senior Credit Facilities were to accelerate the maturity of our outstanding indebtedness, the lenders under our Second Lien Facility and the holders of our Senior Notes would have the right to declare all amounts owed to them immediately due and payable.

Based upon our cash balance of $12.7 million at September 26, 2010 and our current forecasts, our cash flows generated from operations, along with cash on hand, may not provide us with sufficient liquidity to meet our debt service requirements, fund working capital and limited capital expenditures for the next twelve months when we take into account economic uncertainty, the lack of any availability under our existing debt facilities and funding necessary for any debt restructuring or refinancing that may be undertaken along with related advisory fees and expenses. All of the above raises substantial doubt regarding the Company’s ability to continue as a going concern.

2. Recent Accounting Pronouncements

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 adopted this new guidance specified in the “Consolidation” topic of the Accounting Standards Codification in our first quarter of 2010. The adoption of this statement did not have any material impacts on our consolidated financial statements as there were no changes in our consolidated entities.

3. Long Term Debt:

Indenture:

In 2007 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. 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

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

capital stock, sales of assets, liens, mergers and transactions with affiliates. In addition, the notes contain cross-acceleration provisions tied to any of our indebtedness in excess of $10 million, including the Senior Credit Facilities and the Second Lien Facility.

Senior Credit Facilities:

In 2007, 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. 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. On July 1, 2010 the Company borrowed $5.4 million from the Senior Credit Facilities. The Term Loan matures in 2014 and the Revolving Facility is scheduled to terminate and come due in 2013.

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 a new Second Lien Facility (defined and discussed below), permanently waived a breach of our total net leverage ratio covenant for the fiscal quarter ended 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. In the first quarter of 2009, we wrote off $0.4 million of deferred financing costs related to the prepayment of the Term Loan. There were $3.0 million of letters of credit outstanding as of September 26, 2010. 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. In July 2010 we borrowed $5.4 million from the Senior Credit Facilities. As of September 26, 2010 our remaining borrowing availability under the Senior Credit Facilities was $0.6 million.

In general, borrowings under the Senior Credit Facilities bear interest based, at our option, at either the 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 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.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

Second Lien Facility:

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.

Borrowings under the Second Lien Facility bear interest at 15% per annum payable quarterly in arrears. The Second Lien Facility requires no principal payments until maturity. 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.

In connection with the closing of the Second Lien Facility, Holdings issued immediately exercisable warrants to certain MidOcean entities to acquire 5% of Holdings’ 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.

In connection with the amendment to the Senior Credit Facilities and entry into the new Second Lien Facility, we recorded deferred financing costs of $2.3 million.

Long-term debt of $17.9 million is scheduled to mature in 2013, $180.3 million in 2014 and $150.0 million is scheduled to mature in 2015. Refer to Note 6 “Fair Value Measurement” for the gross balance, net book value and fair value of our long-term debt at September 26, 2010.

4. Intangibles (in thousands):

Goodwill

We have two reporting units (Company-owned and Franchise) 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.

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 27, 2009 and was scheduled to do so again in the fourth quarter of 2010. However, with the continuing economic challenges affecting our five year financial forecasts, management believed that there were circumstances evident to warrant impairment testing as of May 23, 2010.

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, Step 2 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 net assets, excluding goodwill,

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

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.

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 during the second quarter of 2010.

For the income approach we assumed that the current economic downturn would continue domestically in 2010, 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 in 2010 with slight improvements in future years. We applied gross margin assumptions consistent with the Company’s current trends and used a 5.6% 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 estimates the fair value of the Company’s equity using inputs such as current debt, future expected interest payments over 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 1.2%. 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 was most appropriate. As the carrying value of the Company-owned segment was negative as of May 23, 2010, the triggering event date, no further assessment of impairment on goodwill could be made. At the point in which equity becomes positive, the equity of the reporting unit will be compared to the fair value of the reporting unit pursuant to applicable guidance. No goodwill impairment was recorded for the Company-owned reporting segment.

Other Intangibles

In connection with the impairment testing of the Company’s goodwill, 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.

The following table presents trademark, franchise relationships, franchise rights acquired and franchise agreements, net and the activity for the periods shown:


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

December 27, 2009	$	173,100		$	14,400		$	1,601		$	3,649
Impairment		(15,700	)		—			—			—
Amortization		—			—			(12	)		(788	)

September 26, 2010	$	157,400		$	14,400		$	1,589		$	2,861

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, 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 in 2010 with slight improvements in future years.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

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 15.0%, we determined a value of $157.4 million for our trademarks as of May 23, 2010, the triggering event date, and accordingly, we impaired $15.7 million of trademarks during the quarter ended June 27, 2010. The fair value of the franchise relationships and franchise rights acquired exceeded their carrying value and as such no impairment charge was required. If the terminal growth rate, which has the largest impact on fair value, used in the fair value calculation for trademarks was decreased by 1%, the impairment charge would have increased by $6.5 million. If the discount rate used in the fair value calculation for trademarks was increased by 1%, the impairment charges would have increased by $13.9 million.

Franchise rights acquired and franchise agreements are definite lived assets and amortized over the life of the agreements. Amortization expense of $0.8 million and $0.9 million was recorded in the nine months ended September 26, 2010 and September 27, 2009, respectively. At September 26, 2010 and December 27, 2009, accumulated amortization was $5.2 million and $4.4 million, respectively.

5. 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 accounting for uncertainty in income taxes, for a tax benefit to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities.

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 carryforwards 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.

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 carryforward, foreign tax credit carryforward, and all other deferred tax assets will not be realized. During the first nine months of 2010 we recorded an addition of $10.0 million to our full valuation allowance against these deferred tax assets. The valuation allowance was $49.7 million as of September 26, 2010.

The income tax benefit of $6.0 million recognized for the first nine months of 2010 was primarily the result of a $6.3 million benefit recorded in the second quarter of 2010 due to the decrease in our deferred tax liability related to intangible asset impairment charges. Refer to Note 4 “Intangibles” for further information regarding the impairment charges recorded.

6. 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.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

The following table presents the gross balance, net book value and fair value of our long-term debt as of September 26, 2010 (in thousands):


	September 26, 2010
	Gross Balance		Net Book Value		Fair Value
Senior Notes	$	150,000	$	150,000	$	88,500
Senior Credit Facility		172,698		172,698		157,725
Second Lien Facility		25,500		19,104		23,438

Total	$	348,198	$	341,802	$	269,663

The estimated fair value of our Senior Notes is based on the quoted market price and trades (level 1 input). Fair value of the Senior Credit Facility was obtained from an independent source of composite bid prices from multiple dealers (level 2 input). Fair value of the Second Lien Facility was obtained from an independent source based on broker quotes, as well as consideration of peer group credit spread analysis (level 1 input). Fair value of the warrants issued in connection with the credit agreement governing the Second Lien Facility was $6.3 million.

7. Business Segment Information:

We operate our business through two segments. Our company-owned restaurant segment is comprised of the operating activities of our company-owned Quick Service Restaurants (“QSR’s”) 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. 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 our Annual Report on Form 10-K for the year ended December 27, 2009.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

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


	Company- Owned Restaurants			Franchised Restaurants		Totals

3rd Quarter 2010
Total revenue	$	80,467		$	3,538	$	84,005

Operating income before unallocated costs	$	6,375		$	2,591	$	8,966

Unallocated costs and expenses ⁽¹⁾							6,701

Operating income						$	2,265


3rd Quarter 2009
Total revenue	$	82,141		$	3,388	$	85,529

Operating (loss) income before unallocated costs	$	(23,195	)	$	2,150	$	(21,045	)

Unallocated costs and expenses ⁽¹⁾							5,549

Operating loss						$	(26,594	)


YTD 3rd Quarter 2010
Total revenue	$	228,658		$	10,427	$	239,085

Operating (loss) income before unallocated costs	$	(1,053	)	$	7,648	$	6,595

Unallocated costs and expenses ⁽¹⁾							20,198

Operating loss						$	(13,603	)


YTD 3rd Quarter 2009
Total revenue	$	235,083		$	10,162	$	245,245

Operating (loss) income before unallocated costs	$	(11,936	)	$	6,277	$	(5,659	)

Unallocated costs and expenses ⁽¹⁾							18,978

Operating loss						$	(24,637	)

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

Geographic Information

The Company recorded revenues of $230.2 million and $8.9 million and $239.2 million and $6.0 million in the United States and all other foreign countries in the first nine months of 2010 and 2009, respectively, and $80.4 million and $3.6 million and $83.4 million and $2.1 million in the United States and all other foreign countries in the third quarter of 2010 and 2009, respectively.

SBARRO INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Continued)

8. 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 September 26, 2010 and December 27, 2009 and unaudited statements of operations for the three and nine months ended September 26, 2010 and September 27, 2009 and our unaudited statement of cash flows for the nine months ended September 26, 2010 and September 27, 2009 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 equity method.

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of September 26, 2010

ASSETS

(In thousands)


	Parent			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Current assets:
Cash and cash equivalents	$	9,605		$	2,734	$	331		$	—		$	12,670
Receivables:
Franchise		1,881			—		—			—			1,881
Other		2,208			—		377			—			2,585

		4,089			—		377			—			4,466
Inventories		1,043			1,533		269			—			2,845
Prepaid expenses		2,757			499		146			—			3,402

Total current assets		17,494			4,766		1,123			—			23,383
Intercompany receivables		(44,920	)		48,083		(3,512	)		349			—

Investment in subsidiaries		74,280			—		2,307			(76,587	)		—

Property and equipment, net		16,696			33,363		1,929			(230	)		51,758
Goodwill		194,786			—		—			—			194,786
Trademarks		157,400			—		—			—			157,400
Other intangible assets		18,850			—		—			—			18,850
Deferred financing costs, net		7,809			—		—			—			7,809
Other assets		165			203		1,199			—			1,567

Total assets	$	442,560		$	86,415	$	3,046		$	(76,468	)	$	455,553

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of September 26, 2010

LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY

(In thousands)

(Continued)


	Parent			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Current liabilities:
Accounts payable	$	6,135		$	284	$	1,007		$	—		$	7,426
Accrued expenses		14,838			2,060		2,496			(230	)		19,164
Accrued interest payable		3,399			—		—			—			3,399

Total current liabilities		24,372			2,344		3,503			(230	)		29,989

Deferred rent		1,885			5,510		71			—			7,466
Deferred tax liability		70,645			—		—			—			70,645
Due to former shareholders & other liabilities		13,258			—		—			—			13,258
Accrued interest payable		6,372			—		—			—			6,372
Long-term debt		341,802			—		—			—			341,802
Commitment and contingencies

Shareholders’ (deficit) equity:
Common stock
Authorized 1,000 shares; $.01 par value issued and outstanding 100 shares at September 26, 2010		—			—		1,891			(1,891	)		—
Additional paid in capital		139,340			68,302		2,196			(70,498	)		139,340
Currency translation adjustment		(60	)		—		175			(175	)		(60	)
Advances to MidOcean SBR Holding		(305	)		—		—			—			(305	)
(Accumulated deficit) retained earnings		(155,146	)		8,221		(4,547	)		(3,674	)		(155,146	)

Total shareholders’ (deficit) equity		(16,171	)		76,523		(285	)		(76,238	)		(16,171	)
Noncontrolling interests		397			2,038		(243	)		—			2,192

Total shareholders’ (deficit) equity, including noncontrolling interests		(15,774	)		78,561		(528	)		(76,238	)		(13,979	)

Total liabilities & shareholders’ (deficit) equity, Sbarro, Inc.	$	442,560		$	86,415	$	3,046		$	(76,468	)	$	455,553

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

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

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

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Balance Sheet

As of December 27, 2009

LIABILITIES AND SHAREHOLDERS’ 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 at December 27, 2009		—			—		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, Sbarro, Inc.	$	478,767		$	86,810	$	1,226		$	(76,380	)	$	490,423

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Statement of Operations

For The Three Months Ended September 26, 2010

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	33,649		$	45,043		$	1,775		$	—		$	80,467
Franchise related income		3,538			—			—			—			3,538

Total revenues		37,187			45,043			1,775			—			84,005
Costs and expenses:
Cost of food and paper products		8,427			8,374			559			—			17,360
Payroll and other employee benefits		9,074			12,747			807			—			22,628
Other operating costs		12,545			17,654			681			—			30,880
Other income, net		(244	)		(766	)		(49	)		—			(1,059	)
Depreciation and amortization		1,443			1,692			753			—			3,888
General and administrative		7,349			—			355			—			7,704
Intercompany charges		(4,293	)		4,126			167			—			—
Goodwill and other intangible asset impairment		—			—			—			—			—
Asset impairment, restaurant closings/remodels		122			105			112			—			339

Total costs and expenses, net		34,423			43,932			3,385			—			81,740


Operating income (loss)		2,764			1,111			(1,610	)		—			2,265

Other expense:
Interest expense		(7,796	)		—			—			—			(7,796	)

Other expense		(7,796	)		—			—			—			(7,796	)

Equity in loss of subsidiaries		109			—			—			(109	)		—

(Loss) income before income taxes and equity investments		(4,923	)		1,111			(1,610	)		(109	)		(5,531	)
Income tax expense		125			—			—			—			125

(Loss) income before equity investments		(5,048	)		1,111			(1,610	)		(109	)		(5,656	)
Loss from equity investments		—			—			(54	)		—			(54	)

Net (loss) income		(5,048	)		1,111			(1,664	)		(109	)		(5,710	)
Less: Net (income) loss attributable to noncontrolling interests		(234	)		—			662			—			428

Net (loss) income attributable to Sbarro, Inc.	$	(5,282	)	$	1,111		$	(1,002	)	$	(109	)	$	(5,282	)

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Operations

For The Three Months Ended September 27, 2009

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	35,431		$	46,084		$	626		$	—		$	82,141
Franchise related income		3,388			—			—			—			3,388

Total revenues		38,819			46,084			626			—			85,529

Costs and expenses:
Cost of food and paper products		8,556			8,256			176			—			16,988
Payroll and other employee benefits		9,485			13,560			215			—			23,260
Other operating costs		12,975			17,000			366			—			30,341
Other income, net		(48	)		(806	)		(11	)		—			(865	)
Depreciation and amortization		1,945			1,860			25			—			3,830
General and administrative		6,763			4			19			—			6,786
Asset impairment, restaurant closings		(1,766	)		1,753			13			—			—
Goodwill and other intangible asset impairment		31,474			—			—			—			31,474
Intercompany charges		199			110			—			—			309

Total costs and expenses, net		69,583			41,737			803			—			112,123


Operating (loss) income		(30,764	)		4,347			(177	)		—			(26,594	)

Other expense:
Interest expense		(7,414	)		—			—			—			(7,414	)

Net other expense		(7,414	)		—			—			—			(7,414	)

Equity in loss of subsidiaries		3,802			—			—			(3,802	)		—

(Loss) income before income taxes and equity investments		(34,376	)		4,347			(177	)		(3,802	)		(34,008	)
Income tax benefit		(9,752	)		—			—			—			(9,752	)

(Loss) income before equity investments		(24,624	)		4,347			(177	)		(3,802	)		(24,256	)
Loss from equity investments		—			—			(54	)		—			(54	)

Net (loss) income		(24,624	)		4,347			(231	)		(3,802	)		(24,310	)
Less: Net loss (income) attributable to noncontrolling interests		103			(393	)		79			—			(211	)

Net (loss) income attributable to Sbarro, Inc.	$	(24,521	)	$	3,954		$	(152	)	$	(3,802	)	$	(24,521	)

SBARRO, INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Consolidating Statement of Operations

For The Nine Months Ended September 26, 2010

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated Total
Revenues:
Restaurant sales	$	94,846		$	130,411		$	3,401		$	—	$	228,658
Franchise related income		10,427			—			—			—		10,427

Total revenues		105,273			130,411			3,401			—		239,085
Costs and expenses:
Cost of food and paper products		23,363			23,549			1,094			—		48,006
Payroll and other employee benefits		25,686			37,412			1,378			—		64,476
Other operating costs		37,327			52,007			2,547			—		91,881
Other income, net		(529	)		(2,251	)		(66	)		—		(2,846	)
Depreciation and amortization		4,806			5,338			837			—		10,981
General and administrative		22,221			—			812			—		23,033
Intercompany charges		(12,892	)		12,564			328			—		—
Goodwill and other intangible asset impairment		15,700			—			—			—		15,700
Asset impairment, restaurant closings/remodels		234			1,080			143			—		1,457

Total costs and expenses, net		115,916			129,699			7,073			—		252,688


Operating (loss) income		(10,643	)		712			(3,672	)		—		(13,603	)

Other (expense) income:
Interest expense		(22,902	)		—			—			—		(22,902	)
Interest income		1			—			—			—		1

Net other (expense) income		(22,901	)		—			—			—		(22,901	)

Equity in loss of subsidiaries		(1,525	)		—			—			1,525		—

(Loss) income before income taxes and equity investments		(35,069	)		712			(3,672	)		1,525		(36,504	)
Income tax benefit		(5,955	)		—			—			—		(5,955	)

(Loss) income before equity investments		(29,114	)		712			(3,672	)		1,525		(30,549	)
Loss from equity investments		—			—			(174	)		—		(174	)

Net (loss) income		(29,114	)		712			(3,846	)		1,525		(30,723	)
Less: Net (income) loss attributable to noncontrolling interests		(194	)		—			1,609			—		1,415

Net (loss) income attributable to Sbarro, Inc.	$	(29,308	)	$	712		$	(2,237	)	$	1,525	$	(29,308	)

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Operations

For The Nine Months Ended September 27, 2009

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenues:
Restaurant sales	$	99,855		$	133,785		$	1,443		$	—		$	235,083
Franchise related income		10,162			—			—			—			10,162

Total revenues		110,017			133,785			1,443			—			245,245


Costs and expenses:
Cost of food and paper products		23,887			23,773			457			—			48,117
Payroll and other employee benefits		26,705			38,770			572			—			66,047
Other operating costs		38,166			50,748			1,001			—			89,915
Other income, net		(270	)		(2,510	)		(105	)		—			(2,885	)
Depreciation and amortization		5,723			6,516			58			—			12,297
General and administrative		22,588			5			19			—			22,612
Asset impairment, restaurant closings		1,232			1,073			—			—			2,305
Goodwill and other intangible asset impairment		31,474			—			—			—			31,474
Intercompany charges		(13,979	)		13,893			86			—			—

Total costs and expenses, net		135,526			132,268			2,088			—			269,882


Operating (loss) income		(25,509	)		1,517			(645	)		—			(24,637	)

Other (expense) income:
Interest expense		(20,747	)		—			—			—			(20,747	)
Write-off of deferred financing costs		(423	)		—			—			—			(423	)
Interest income		33			—			—			—			33

Net other (expense) income		(21,137	)		—			—			—			(21,137	)

Equity in loss of subsidiaries		396			—			—			(396	)		—

(Loss) income before income taxes and equity investments		(46,250	)		1,517			(645	)		(396	)		(45,774	)
Income tax benefit		(9,480	)		—			—			—			(9,480	)

(Loss) income before equity investments		(36,770	)		1,517			(645	)		(396	)		(36,294	)
Loss from equity investments		—			—			(162	)		—			(162	)

Net (loss) income		(36,770	)		1,517			(807	)		(396	)		(36,456	)
Net loss (income) attributable to noncontrolling interests		70			(583	)		269			—			(244	)

Net (loss) income attributable to Sbarro, Inc.	$	(36,700	)	$	934		$	(538	)	$	(396	)	$	(36,700	)

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Cash Flows

For The Nine Months Ended September 26, 2010

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Operating Activities:
Net (loss) income	$	(29,114	)	$	712		$	(3,846	)	$	1,525		$	(30,723	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Goodwill and other intangible asset impairment charges		15,700			—			—			—			15,700
Depreciation and amortization		4,806			5,338			837			—			10,981
Amortization of deferred financing costs		1,475			—			—			—			1,475
Provision for doubtful accounts receivable		92			—			—			—			92
Increase in deferred rent, net of tenant allowance		460			778			10			—			1,248
Asset impairment & restaurant closings/remodels		82			904			143			—			1,129
Change in deferred income taxes, net		(6,296	)		—			—			—			(6,296	)
Equity in net loss of unconsolidated affiliates		—			—			174			—			174
Changes in operating assets and liabilities:
Decrease (increase) in receivables		669			304			(314	)		—			659
Decrease (increase) in inventories		109			110			(157	)		—			62
(Increase) decrease in prepaid expenses		(1,045	)		34			(2	)		—			(1,013	)
Decrease (increase) in other assets		40			(2	)		(1,148	)		—			(1,110	)
(Decrease) increase in accounts payable, accrued expenses & other liabilities		(6,665	)		(483	)		2,165			—			(4,983	)
Decrease in accrued interest payable		(1,212	)		—			—			—			(1,212	)

Net cash (used in) provided by operating activities		(20,899	)		7,695			(2,138	)		1,525			(13,817	)


Investing Activities:
Purchases of property and equipment		(1,604	)		(3,055	)		(2,204	)		—			(6,863	)

Net cash used in investing activities		(1,604	)		(3,055	)		(2,204	)		—			(6,863	)


Financing Activities:
Proceeds from revolver loan		5,400			—			—			—			5,400
Capital contribution from noncontrolling interests		—			—			1,186			—			1,186
Proceeds from short term loan from noncontrolling interests		—			—			170			—			170
Distribution of earnings to noncontrolling interests		(269	)		—			—			—			(269	)
Intercompany balances		3,264			(4,370	)		2,631			(1,525	)		—

Net cash provided by (used in) financing activities		8,395			(4,370	)		3,987			(1,525	)		6,487

(Decrease) increase in cash and cash equivalents		(14,108	)		270			(355	)		—			(14,193	)
Cash and cash equivalents at beginning of period		23,713			2,464			686						26,863

Cash and cash equivalents at end of period	$	9,605		$	2,734		$	331		$	—		$	12,670

SBARRO, INC. AND SUBSIDIARIES

Notes To Unaudited Consolidated Financial Statements

Consolidating Statement of Cash Flows

For The Nine Months Ended September 27, 2009

(In thousands)


	Parent			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Operating Activities:
Net (loss) income	$	(36,770	)	$	1,517		$	(807	)	$	(396	)	$	(36,456	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Goodwill and other intangible asset impairment charges		31,474			—			—			—			31,474
Depreciation and amortization		5,723			6,516			58			—			12,297
Amortization of deferred financing costs		1,084			—			—			—			1,084
Provision for doubtful accounts receivable		916			—			—			—			916
Increase in deferred rent, net of tenant allowance		510			883			11			—			1,404
Asset impairment, restaurant closings/remodels		817			283			—			—			1,100
Change in deferred income taxes, net		(9,915	)		—			—			—			(9,915	)
Equity in net loss of unconsolidated affiliates		—			—			162			—			162
Write-off of deferred financing costs		423			—			—			—			423
Changes in operating assets and liabilities:
(Increase) decrease in receivables		(189	)		251			363			(371	)		54
Decrease in inventories		213			271			11			—			495
(Increase) decrease in prepaid expenses		(726	)		129			247			—			(350	)
Increase in other assets		(86	)		—			—			—			(86	)
(Decrease) increase in accounts payable and accrued expenses		(7,747	)		(580	)		698			(649	)		(8,278	)
Decrease in accrued interest payable		(1,941	)		—			—			—			(1,941	)

Net cash (used in) provided by operating activities		(16,214	)		9,270			743			(1,416	)		(7,617	)


Investing Activities:
Purchases of property and equipment		(1,378	)		(4,424	)		(475	)		—			(6,277	)
Investment in joint ventures		(283	)		—			—			—			(283	)

Net cash used in investing activities		(1,661	)		(4,424	)		(475	)		—			(6,560	)


Financing Activities:
Proceeds from second lien		25,000			—			—			—			25,000
Repayment of secured term loan and revolver		(32,958	)		—			—			—			(32,958	)
Debt issue costs		(1,834	)		—			—			—			(1,834	)
Capital contribution from noncontrolling interests		—			—			394			—			394
Repayment of short term loan to noncontrolling interests		—			—			(374	)		—			(374	)
Distribution of earnings to noncontrolling interests		(881	)		—			—			—			(881	)
Intercompany balances		6,105			(6,868	)		(653	)		1,416			—

Net cash (used in) provided by financing activities		(4,568	)		(6,868	)		(633	)		1,416			(10,653	)

Decrease in cash and cash equivalents		(22,443	)		(2,022	)		(365	)		—			(24,830	)
Cash and cash equivalents at beginning of period		34,249			3,468			569			—			38,286

Cash and cash equivalents at end of period	$	11,806		$	1,446		$	204		$	—		$	13,456

Item 2.

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

Forward-Looking Statements

We make statements in this Quarterly Report that are considered forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. The words “anticipate,” “believe,” “estimate,” “intend,” “may,” “will,” “expect” and similar words often indicate that a statement is a “forward-looking statement.” Statements about non-historic results also are considered to be forward-looking statements. None of these forward-looking statements are guarantees of future performance or events, and they are subject to numerous risks, uncertainties and other factors. These risks, uncertainties and other factors include, but are not limited to:

•

general economic, inflation, national security, weather and business conditions;

•

decrease in mall traffic, and other events arising from the downturn in the economy;

•

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

•

changes in consumer tastes;

•

changes in population and traffic patterns, including the effects that military action and terrorism or other events may have on the willingness of consumers to frequent malls, airports or downtown areas which are the predominant areas in which our restaurants are located;

•

our ability to continue to attract franchisees;

•

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

•

changes in commodity and commodity related prices (particularly cheese and flour), beverage and paper products;

•

our ability to pass along cost increases to our customers;

•

increases in the Federal minimum wage;

•

the continuity of services of members of our senior management team;

•

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

•

competition;

•

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

•

our ability to generate sufficient cash flow to make interest payments under our borrowing agreements;

•

our ability to comply with financial covenants and ratios and the effects the restrictions imposed by those financial covenants and ratios may have on our ability to operate our business; and

•

our ability to repurchase and/or repay amounts under our borrowing agreements to the extent required in the event of certain circumstances as defined in our borrowing agreements.

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

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

Executive Overview

For the purposes of management’s discussion and analysis, the year to date third quarter of 2010 is the thirty-nine weeks ended September 26, 2010 and the year to date third quarter of 2009 is the thirty-nine weeks ended September 27, 2009. The third quarter of 2010 is the thirteen weeks ended September 26, 2010 and the third quarter of 2009 is the thirteen weeks ended September 27, 2009.

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 1,032 units in 40 countries, with 476 company-owned units, 538 franchised units and 18 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. Our franchised 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. 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 our Annual Report on Form 10-K for the year ended December 27, 2009.

Our Restaurant Expansion

The following table summarizes the number of company-owned, franchised, and joint venture restaurants in operation during each indicated period:


	Three Months Ended September 26, 2010			Three Months Ended September 27, 2009			Nine Months Ended September 26, 2010			Nine Months Ended September 27, 2009
Company-owned Sbarro restaurants:
Open at beginning of period		482			485			484			509
Opened during period		—			2			4			7
Closed during period		(6	)		(2	)		(12	)		(31	)

Open at end of period		476			485			476			485

Franchised Sbarro restaurants:
Open at beginning of period		536			560			555			566
Opened during period		16			13			33			49
Closed during period		(14	)		(19	)		(50	)		(61	)

Open at end of period		538			554			538			554

Joint venture Sbarro restaurants:
Open at beginning of period		23			17			17			16
Opened during period		—			—			6			1
Closed during period		(5	)		—			(5	)		—

Open at end of period		18			17			18			17

All restaurants:
Open at beginning of period		1,041			1,062			1,056			1,091
Opened during period		16			15			43			57
Closed during period		(25	)		(21	)		(67	)		(92	)

Open at end of period		1,032			1,056			1,032			1,056

Seasonality

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

Goodwill and Other Intangible Assets

Due to the seasonality of our business, we perform our annual test for impairment on our goodwill and intangible assets with indefinite lives as required by the accounting for goodwill and other intangible assets and fully evaluate the impairment of long-lived assets as required by the accounting for the impairment and disposal of long-lived assets in the fourth quarter of our fiscal year. Any required adjustments are recorded at that time unless our assumptions regarding forecasted revenue or margin growth rates are not achieved, then we may be required to record an impairment charge prior to that if any such change constitutes a triggering event

outside of the quarter from when the annual goodwill impairment test is performed. Refer to Note 4 “Intangibles” to our Unaudited Consolidated Financial Statements for further information regarding impairment testing performed during the second quarter of 2010 and the impairment charges recorded during the second quarter of 2010.

Noncontrolling Interests

We present minority interests as noncontrolling interests in the equity section of our consolidated balance sheet as a separate net income or loss 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.

Summary Financial Information (dollars in thousands)


	Three Months Ended September 26, 2010			Three Months Ended September 27, 2009			Nine Months Ended September 26, 2010			Nine Months Ended September 27, 2009
Comparable sales-percentage change vs. prior comparable period ⁽¹⁾:
QSR-owned locations		-3.5	%		-5.2	%		-3.1	%		-5.0	%
Franchise locations:
Domestic Franchise		-2.4	%		-7.1	%		-3.4	%		-5.4	%
International Franchise:
Local Currency		6.1	%		-12.9	%		6.1	%		-9.2	%
Foreign Currency Impact		0.8	%		-14.4	%		4.8	%		-16.7	%

International Franchise, net		6.9	%		-27.3	%		10.9	%		-25.9	%
Cost of food and paper products as a percentage of restaurant sales		21.6	%		20.7	%		21.0	%		20.5	%
Payroll and other benefits as a percentage of restaurant sales		28.1	%		28.3	%		28.2	%		28.1	%
Other operating expense as a percentage of restaurant sales		38.4	%		36.9	%		40.2	%		38.2	%
General and administrative costs as a percentage of revenues		9.2	%		7.9	%		9.6	%		9.2	%
Bank credit agreement EBITDA ⁽²⁾	$	9,076		$	10,206		$	23,716		$	27,728

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

(2)

Bank credit agreement EBITDA includes certain adjustments to EBITDA disclosed in our Senior Credit Facilities. 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 U.S. generally accepted accounting principles (“GAAP”) or as a measure of a company’s profitability or liquidity. Rather, we believe that EBITDA and bank credit agreement EBITDA provide 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.

The following table reconciles our net loss to EBITDA and bank credit agreement EBITDA for each of the periods presented. EBITDA and bank credit agreement EBITDA are non-GAAP financial measures. We believe net loss is the most direct comparable GAAP financial measure to EBITDA and bank credit agreement EBITDA (dollars in thousands):


	Three Months Ended September 26, 2010			Three Months Ended September 27, 2009			Nine Months Ended September 26, 2010			Nine Months Ended September 27, 2009
Net loss attributable to Sbarro, Inc.	$	(5,282	)	$	(24,521	)	$	(29,308	)	$	(36,700	)
Interest Expense		7,796			7,414			22,902			20,747
Interest Income		—			—			(1	)		(33	)
Income Tax Expense (Benefit)		125			(9,752	)		(5,955	)		(9,480	)
Depreciation and Amortization		3,888			3,830			10,981			12,297

EBITDA attributable to Sbarro, Inc.		6,527			(23,029	)		(1,381	)		(13,169	)
Goodwill and other intangible asset impairment		—			31,474			15,700			31,474

EBITDA attributable to Sbarro, Inc. exclusive of goodwill and other intangible asset impairment	$	6,527		$	8,445		$	14,319		$	18,305
Adjustments:
Non-cash charges		1,644			420			3,459			3,239
Management fees and related expenses		295			311			889			1,290
Restructuring related expenses, store closing costs and severance		398			722			2,714			3,864
Preopening, joint venture operations and taxes in lieu of income tax		212			308			2,335			1,030

Bank Credit Agreement EBITDA	$	9,076		$	10,206		$	23,716		$	27,728


	Company- Owned Restaurants			Franchised Restaurants		Totals
3rd Quarter 2010
Total revenue	$	80,467		$	3,538	$	84,005

Operating income before unallocated costs	$	6,375		$	2,591	$	8,966

Unallocated costs and expenses ⁽¹⁾							6,701

Operating income						$	2,265


3rd Quarter 2009
Total revenue	$	82,141		$	3,388	$	85,529

Operating (loss) income before unallocated costs	$	(23,195	)	$	2,150	$	(21,045	)

Unallocated costs and expenses ⁽¹⁾							5,549

Operating loss						$	(26,594	)


YTD 3rd Quarter 2010
Total revenue	$	228,658		$	10,427	$	239,085

Operating (loss) income before unallocated costs	$	(1,053	)	$	7,648	$	6,595

Unallocated costs and expenses ⁽¹⁾							20,198

Operating loss						$	(13,603	)


YTD 3rd Quarter 2009
Total revenue	$	235,083		$	10,162	$	245,245

Operating (loss) income before unallocated costs	$	(11,936	)	$	6,277	$	(5,659	)

Unallocated costs and expenses ⁽¹⁾							18,978

Operating loss						$	(24,637	)

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

Third Quarter 2010 versus Third Quarter 2009

Sales by QSR and consolidated other concept restaurants were $80.5 million for the third quarter of 2010 compared to $82.1 million for the third quarter of 2009. The decrease in sales is due to a decrease in comparable unit sales of $2.7 million, or 3.5%, in our QSR restaurants. The decrease in comparable unit sales primarily reflects the reduction in consumer spending throughout the United States as a result of the current economic environment. Lost sales from stores strategically closed were offset by sales generated by new stores opened. The QSR sales decline was offset by an increase of $0.7 million in sales from international joint ventures.

Franchise related revenues were $3.5 million in the third quarter of 2010 compared to $3.4 million for the third quarter of 2009. This result is primarily from an increase in international comparable unit sales.

Cost of food and paper products as a percentage of restaurant sales increased to 21.6% for the third quarter of 2010 as compared to 20.7% for the third quarter of 2009 primarily due to increased cheese costs. The cost of cheese in the third quarter of 2010 averaged $1.77 per pound compared to an average of $1.43 per pound for the third quarter of 2009. This $.34 per pound increase in cheese costs accounted for $0.5 million or 0.6% of restaurant sales. The cost of flour in the third quarter of 2010 averaged $.30 per pound compared to an average of $0.32 per pound for the third quarter of 2009. This $.02 per pound decrease in flour costs accounted for $60 thousand or 0.1% of restaurant sales

Payroll and other employee benefits as a percentage of restaurant sales decreased to 28.1% in the third quarter of 2010 from 28.3% in the third quarter of 2009.

Other operating costs were $30.9 million in the third quarter of 2010 compared to $30.3 million in the third quarter of 2009. As a percentage of restaurant sales, other operating costs increased to 38.4% in the third quarter of 2010 as compared to 36.9% in the third quarter of 2009 primarily due to an increase in operating costs related to our joint venture operations in the third quarter of 2010.

Other income, net increased to $1.1 million in the third quarter of 2010 from $0.9 million in the third quarter of 2009.

Depreciation and amortization increased to $3.9 million in the third quarter of 2010 compared to $3.8 million in the third quarter of 2009.

General and administrative expenses were $7.7 million in the third quarter of 2010 as compared to $6.8 million in the third quarter of 2009. The increase was primarily related to an increase in severance expense compared to the prior year period.

There were no goodwill and other intangible asset impairment charges in the third quarter of 2010. Goodwill and other intangible asset impairment totaled $31.5 million in the third quarter of 2009.

Asset impairment, restaurant closing and remodeling costs were $0.3 million in both the third quarter of 2010 and 2009.

Interest expense of $7.8 million in the third quarter of 2010 and $7.4 million for the third quarter of 2009 relates primarily to the Senior Notes, the Term Loans and Revolving Facility under our Senior Credit Facilities and our Second Lien Facility. Included in interest expense in the third quarter of 2010 and 2009 was the amortization of deferred financing costs for the Senior Notes, Term Loan and Second Lien Facility of $0.4 million and $0.3 million, respectively.

Income tax expense was $0.1 million for the third quarter of 2010 and our effective tax rate was negative 2.5%. During the third quarter of 2010, we recorded a $4.8 million increase to the full valuation allowance against our deferred tax assets increasing the valuation allowance to $49.7 million as of the end of the third quarter of 2010. The income tax benefit was $9.8 million in the third quarter of 2009 and our effective tax rate was 28.7%. During the third quarter of 2009, we recorded a $1.0 million increase to the full valuation allowance against our deferred tax assets.

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

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

Net loss attributable to Sbarro, Inc. was $5.3 million for the third quarter of 2010 as compared to a net loss attributable to Sbarro, Inc. of $24.5 million for the third quarter of 2009. Recorded in the third quarter of 2009 were goodwill and other intangible asset impairment charges of $31.5 million offset by an income tax benefit of $9.8 million.

Nine Months Ended 2010 versus Nine Months Ended 2009

Sales by QSR and consolidated other concept restaurants were $228.7 million for the first nine months of 2010 compared to $235.1 million for the first nine months of 2009. The decrease in sales is due to a decrease in comparable unit sales of $6.7 million, or 3.1%, in our QSR restaurants. The decrease in comparable unit sales primarily reflects the reduction in consumer spending throughout the United States as a result of the current economic environment. Lost sales from stores strategically closed were partially offset by sales generated by new stores opened. The QSR sales decline was offset by an increase of $0.9 million in sales from international joint ventures.

Franchise related revenues were $10.4 million in the first nine months of 2010 compared to $10.2 million for the first nine months of 2009. This resulted from an increase in franchise comparable unit sales and international development fee income partially offset by lost royalties from stores closed.

Cost of food and paper products as a percentage of restaurant sales increased to 21.0% for the first nine months of 2010 as compared to 20.5% for the first nine months of 2009 primarily due to increased cheese costs. The cost of cheese in the first nine months of 2010 averaged $1.75 per pound compared to an average of $1.40 per pound for the first nine months of 2009. This $.35 per pound increase in cheese costs accounted for $1.3 million or 0.6% of restaurant sales. The cost of flour in the first nine months of 2010 averaged $.30 per pound compared to an average of $.31 per pound for the first nine months of 2009. This $.01 per pound decrease in flour costs accounted for $80 thousand.

Payroll and other employee benefits as a percentage of restaurant sales increased slightly to 28.2% in the first nine months of 2010 from 28.1% in the first nine months of 2009. The increase is primarily due to the decrease in comparable unit sales in the first nine months of 2010.

Other operating costs were $91.9 million in the first nine months of 2010 compared to $89.9 million in the first nine months of 2009. As a percentage of restaurant sales, other operating costs increased to 40.2% in the first nine months of 2010 as compared to 38.2% in the first nine months of 2009 due primarily to an increase in operating costs related to our joint venture operations in the first nine months of 2010 partially offset by cost control initiatives.

Other income, net decreased to $2.8 million in the first nine months of 2010 from $2.9 million in the first nine months of 2009.

Depreciation and amortization decreased to $11.0 million in the first nine months of 2010 compared to $12.3 million in the first nine months of 2009 due to underperforming stores closed.

General and administrative expenses were $23.0 million in the first nine months of 2010 as compared to $22.6 million in the first nine months of 2009. The increase was primarily related to costs associated with marketing initiatives and joint venture expenses offset by a reduction in the bad debt provision compared to the prior year.

Goodwill and other intangible asset impairment totaled $15.7 million in the first nine months of 2010. This is discussed further in Note 4 – Intangibles to our Unaudited Consolidated Financial Statements included within this Report. Goodwill and other intangible asset impairment totaled $31.5 million for the first nine months of 2009.

Asset impairment, restaurant closing and remodeling costs decreased to $1.5 million for the first nine months of 2010 compared to $2.3 million for the first nine months of 2009 as 12 stores were strategically closed in 2010 versus 31 in the prior year.

Interest expense of $22.9 million in the first nine months of 2010 and $20.7 million for the first nine months of 2009 relates primarily to the Senior Notes, the Term Loans and Revolving Facility under our Senior Credit Facilities and our Second Lien Facility. Included in interest expense in the first nine months of 2010 and 2009 was the amortization of deferred financing costs for the Senior Notes, Term Loan and Second Lien Facility of $1.2 million and $1.0 million, respectively.

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

The income tax benefit of $6.0 million for the first nine months of 2010 was primarily the result of a $6.3 million benefit recognized in the second quarter of 2010 due to the decrease in our deferred tax liability related to intangible asset impairment charges recorded. Our effective tax rate for the first nine months of 2010 was 17.0%. During the first nine months of 2010, we recorded a $10.0 million increase to the full valuation allowance against our deferred tax assets, increasing the valuation allowance to $49.7 million. The income tax benefit was $9.5 million in the first nine months of 2009 and our effective tax rate was 20.7%. During the first nine months of 2009, we recorded a $5.6 million increase to the full valuation allowance against our deferred tax assets.

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

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

Net loss attributable to Sbarro, Inc. was $29.3 million for the first nine months of 2010 as compared to a net loss attributable to Sbarro, Inc. of $36.7 million for the first nine months of 2009. Included in the net loss for the first nine months of 2010 were goodwill and other intangible asset impairment charges of $15.7 million offset by an income tax benefit of $6.0 million. Without impairment charges and taxes, the net loss would have been $19.6 million and $14.7 million in the first nine months of 2010 and 2009, respectively. This increase in net loss was due to the items discussed above, primarily the decrease in comparable unit sales and an increase in other operating costs.

Liquidity and Capital Resources

Principal Cash Requirements and Sources

We estimate that our cash interest payments for the fiscal year under the Senior Notes and the amended Senior Credit Facilities will be approximately $25.8 million, assuming a 0.3% 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.

The 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. We are not required to make principal payments, absent the occurrence of certain events, on our Senior Notes until they mature in 2015. In July 2010 we borrowed $5.4 million from our Senior Credit Facilities. As of September 26, 2010, our remaining borrowing availability under the Senior Credit Facilities was $0.6 million.

Sources and Uses of Cash

The following table summarizes our cash and cash equivalents and working capital at September 26, 2010 and September 27, 2009 respectively, and the sources and uses of our cash flows for the nine months ended September 26, 2010 and September 27, 2009, respectively (in millions):


	Nine Months Ended September 26, 2010			Nine Months Ended September 27, 2009
Liquidity at the end of period
Cash and cash equivalents	$	12.7		$	13.5
Working capital	$	(6.6	)	$	(7.5	)

Net cash flows
Used in operating activities	$	(13.8	)	$	(7.6	)
Used in investing activities	$	(6.9	)	$	(6.6	)
Provided by (used in) financing activities	$	6.5		$	(10.6	)

Net decrease in cash	$	(14.2	)	$	(24.8	)

Net cash used in operating activities was $13.8 million during the nine months ended September 26, 2010 as compared to $7.6 million for the nine months ended September 27, 2009. The increase in net cash used in the nine months ended September 26, 2010 is mainly due to a net loss after non-cash adjustments of $8.7 million more in 2010 as compared to 2009 offset by a $2.5 million net change in operating assets and liabilities when compared to the prior year, due primarily to the timing of payment of current liabilities.

Net cash used in investing activities was $6.9 million for the nine months ended September 26, 2010 and was relatively flat when compared to the same period in 2009. Net cash used in investing activities in both 2010 and 2009 was mostly related to capital expenditures utilized primarily for restaurant openings and renovation activity.

Net cash provided by financing activities was $6.5 million for the nine months ended September 26, 2010. This net cash provided primarily represents $5.4 million borrowed from our Senior Credit Facilities in July 2010 and capital contributions from noncontrolling interests. The cash used in financing activities was $10.6 million in the nine months ended September 27, 2009 and 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.

Critical Accounting Policies and Judgments

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

During the quarter ended September 26, 2010, there were no changes in the accounting policies whose application may have the most significant effect on our reported results of financial position and that require judgments, estimates and assumptions by management that can affect their application and our results of operations and financial position from those discussed under the heading “Critical Accounting Policies and Judgments” in Part II Item 7 of our Annual Report on Form 10-K for the year ended December 27, 2009.

Recent Accounting Pronouncements

Refer to Note 2 to the Notes to our Unaudited Consolidated Financial Statements for information regarding recent accounting pronouncements.

Certain Relationships and Related Transactions

During the first nine months of 2010, there were no related party transactions other than those discussed under the heading “Certain Relationships and Related Transactions” in Part II, Item 13 of our Annual Report on Form 10-K for the year ended December 27, 2009.

Item 3.

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 the commodities we purchase. 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 our 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 $1.7 million.

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.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Interim President and 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 Interim President and 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 Securities Exchange Act of 1934 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.

Changes in 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 September 26, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

Legal proceedings included in our Annual Report on Form 10-K for the year ended December 27, 2009 in Note 8 to the Notes to Consolidated Financial Statements have not materially changed.

Item 1A.

Risk Factors

The risk factors included in our Annual Report on Form 10-K for the year ended December 27, 2009 have not materially changed. You should consider carefully the risks described under Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 27, 2009. The risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 27, 2009 are not the only ones that may affect us. If any of the events described actually occur, our business and financial results could be materially adversely affected.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Default upon senior securities

None.

Item 4.

(Removed and Reserved)

Item 5.

Other information

On November 10, 2010, the Company’s sole shareholder, Sbarro Holdings, LLC elected Robert S. (Steve) Miller to the Company’s Board of Directors.

Mr. Miller, the Chairman of MidOcean Partners is widely recognized for his broad operational experience and has considerable experience serving on boards of directors in a variety of industries. He currently serves as the Chairman of the Board of American International Group, Inc., and as a director of Symantec Corporation and United Airlines.

He has held top leadership positions at many companies including as Chairman and CEO of Delphi Corporation, CEO of Federal-Mogul, Inc., Chairman and CEO of Bethlehem Steel, Chairman and CEO of Waste Management, and as Chairman of Morrison Knudsen. Mr. Miller began his career at Ford Motor Company and then after more than a decade joined Chrysler Corporation, eventually serving as Vice-Chairman.

Mr. Miller will not be compensated by the Company for his role as a director.

Item 6.

Exhibits


Exhibit Number		Description
*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)

*+10.1		Letter Agreement dated July 28, 2010 by and among MidOcean SBR Holdings, LLC, Sbarro, Inc. and Peter Beaudrault (Exhibit 10.1 to our Current Report on Form 8-K filed on July 28, 2010)

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

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

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

**32.02		Certification of 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 this Quarterly Report on Form 10-Q or as a separate disclosure document.

+	Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SBARRO, INC.

Registrant


Date: November 10, 2010	By:	/s/ Nicholas McGrane
		Nicholas McGrane
		Interim President and Chief Executive Officer Principal Executive Officer

Date: November 10, 2010	By:	/s/ Carolyn M. Spatafora
		Carolyn M. Spatafora
		Chief Financial Officer Principal Financial and Accounting Officer

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SBARRO INC 10-Q