You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A, "Risk Factors" and elsewhere in this report and those discussed in other documents we file with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward looking statements represent beliefs and assumptions only as of the date of this report. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this report to reflect future events or circumstances.

OVERVIEW

We opened our first restaurant under the name "Rubio's, Home of the Fish Taco" in 1983. As of March 25, 2008, we have grown to 179 restaurants, including 174 company-operated, three licensed locations and two franchised locations. We position our restaurants in the high-quality, fresh and distinctive fast-casual Mexican cuisine segment of the restaurant industry. Our business strategy is to become a leading brand in this industry segment.

During 2007, we continued to focus on ways to improve our economic model. We believe that shifting our focus to great taste rather than price and increasing the price of our combo meals were two key drivers for our sales growth in 2007. In addition, we priced our promotional events at higher points and provided our guests with more food and sides than before. We also invested in research to better understand our guests' needs and how we compare with our competitors. We have commenced a number of additional initiatives with the goal to improve to go orders and catering from a guest convenience view point as well as multiple in-restaurant programs to improve overall service and satisfaction.

Our 2007 average unit volume, which includes restaurants open for at least 12 months, increased from $980,000 to $1,034,000 due to an increase in comparable store sales of 6.2% and the closure of one underperforming restaurant. We opened 10 new restaurants in 2007. All of the new openings in 2007 and 2008 have the new décor that was developed during 2005 and was the basis for our system wide re-imaging program. The majority of these new restaurants are outperforming average weekly sales for their respective markets.

Our three to five year expansion plan begins with an annual unit growth rate of approximately 10% in 2008, and increases to 20% by 2011. We currently plan to open 18 to 22 company-owned restaurants in fiscal 2008 in our existing geographic markets. The current slow down in housing combined with the general economic climate has caused us to focus almost exclusively on sites located in mature trade areas. This narrower focus could limit our growth potential in 2008 and 2009. In addition, we will be required to secure a credit facility or line of credit in 2008 to support our planned restaurant growth plan. We cannot assure you that we can secure a credit facility or line of credit on acceptable terms, or at all.

On the cost and expense side of our economic model, we are experiencing increases in cost of sales. The demand for seafood is ahead of the short-term supply driving up this cost. In addition, we have increased serving sizes to improve our value proposition. The recent changes in strategy have allowed us to experience higher sales, which in turn is allowing us to better leverage some of our fixed costs in labor and occupancy.

General and administrative costs decreased significantly in 2007 primarily due to the expense recorded in 2006 related to the settlement of our class action lawsuit. In 2007, we added key personnel which we believe will help allow us to execute our development plans as well as to better support our restaurants through hiring, developing and training our new team members. As we continue to add new restaurants, we expect to be able to leverage our general and administrative costs at a better rate than we have historically.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period.

Management evaluates these estimates and assumptions on an ongoing basis including those relating to impairment of assets, restructuring charges, contingencies and litigation. Our estimates and assumptions have been prepared on the basis of the most current information available, and actual results could differ from these estimates under different assumptions and conditions.

We have identified the following critical accounting policies that are most important to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a review of the more critical accounting policies and methods used by us:

SHARE-BASED COMPENSATION - The Company accounts for share-based compensation in accordance with Statement No. 123(R), Share-Based Payment, (SFAS 123R) . Under the provisions of SFAS 123R, share-based compensation cost is estimated at the grant date based on the award's fair value as calculated by an option-pricing model and is recognized as expense on a straight-line basis over the requisite service period. The option-pricing models require various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.

ASSET IMPAIRMENT AND STORE CLOSURE EXPENSE (REVERSAL) - We evaluate the carrying value of long-lived assets for impairment when a restaurant experiences a negative event, including, but not limited to, a significant downturn in sales, a substantial loss of customers, an unfavorable change in demographics or a store closure. Upon the occurrence of a negative event, we estimate the future undiscounted cash flows for the individual restaurants that are affected by the negative event. If the projected undiscounted cash flows do not exceed the carrying value of the assets at each restaurant, we recognize an impairment loss to reduce the assets' carrying amounts to their estimated fair value (for assets to be held and used) and fair value less cost to sell (for assets to be disposed of) based on the discounted projected cash flows derived from the restaurant. The most significant assumptions in the analysis are those used to estimate a restaurant's future cash flows. We use the assumptions in our strategic plan and modify them as necessary based on restaurant specific information. If the significant assumptions are incorrect, the carrying value of our operating restaurant assets, as well as the related impairment charge, may be overstated or understated. We estimate that it takes a new restaurant approximately 24 months to reach operating efficiency. Any restaurant open 24 months or less, therefore, is not included in the analysis of long-lived asset impairment, unless other events or circumstances arise.

We make decisions to close stores based on their cash flows and anticipated future profitability. We record losses associated with the closure of a restaurant at the time the unit is closed. These store closure charges primarily represent a liability for the future lease obligations after the closure dates, net of estimated sublease income, if any. The amount of our store closure liability, and related store closure charges, may decrease if we are successful in either terminating a lease early or obtaining a more favorable sublease, and may increase if any of our sublessee's default on their leases.

Asset impairment and store closure expense are estimates that we have recorded based on reasonable assumptions related to our restaurant locations at this point in time. The conditions regarding these locations may change in the future and could be materially affected by factors such as our ability to maintain or improve sales levels, our ability to secure subleases, our success at negotiating early termination agreements with lessors, the general health of the economy and resultant demand for commercial property. Because the factors used to estimate impairment and store closure expense are subject to change, amounts recorded may not be sufficient, and adjustments may be necessary.

PROPERTY - Property is stated at cost. A variety of costs are incurred in the leasing and construction of restaurant facilities. The costs of buildings under development include specifically identifiable costs. The capitalized costs include development costs, construction costs, salaries and related costs, and other costs incurred during the acquisition or construction stage. Salaries and related costs capitalized totaled $323,000, $81,000 and $51,000 for fiscal years 2007, 2006 and 2005, respectively. Depreciation and amortization of buildings, leasehold improvements, and equipment are computed using the straight-line method over the shorter of the estimated useful lives of the assets or the initial lease term for certain leased properties (buildings and improvements range from 1 to 20 years, and equipment 3 to 7 years). For leases with renewal periods at the Company's option, the Company generally uses the original lease term, excluding renewal option periods to determine useful lives; if failure to exercise a renewal option imposes an economic penalty to the Company, management may determine at the inception of the lease that renewal is reasonably assured and include the renewal option period in the determination of appropriate estimated useful lives. The Company's policy requires lease-term consistency when calculating the depreciation period, in classifying the lease, and in computing straight-line rent expense.

SELF-INSURANCE LIABILITIES - We are self-insured for a portion of our workers' compensation insurance program. Maximum self-insured retention, including defense costs per occurrence was $350,000 during each of our claim years ended October 31, 2008, 2007, 2006 and 2005. We account for insurance liabilities based on independent actuarial estimates of the amount of loss incurred. These estimates rely on actuarial observations of industry-wide and Rubio's specific historical claim loss development. Our actual loss development may be better or worse than the development estimated by the actuary. In that event, we will modify the accrual, and our operating expenses will increase or decrease accordingly.

REVENUE RECOGNITION - Revenues from the operation of company-owned restaurants are recognized when sales occur. Franchise revenue is comprised of (i) area development fees, (ii) new store opening fees, and (iii) royalties. Fees received pursuant to area development agreements under individual franchise agreements, which grant the right to develop franchised restaurants in future periods in specific geographic areas, are deferred and recognized as revenue on a pro rata basis as the individual franchised restaurants subject to the development agreements are opened. New store opening fees are recognized as revenue in the month a franchised location opens. Royalties from franchised restaurants are recorded in revenue as earned. We recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants. Revenues from the portion of the gift cards that is not expected to be redeemed (breakage) are recognized ratably over three years based on historical and expected redemption trends. This adjustment is classified as revenues in our consolidated statement of operations.

INCOME TAXES - The Company accounts for uncertainty in income taxes in accordance with FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FAS 109, and provides guidance on the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

RESULTS OF OPERATIONS

All comparisons under this heading between fiscal 2007, 2006 and 2005 refer to the 52-week period ended December 30, 2007, the 53-week period ended December 31, 2006 and the 52-week period ended December 25, 2005.

The following table sets forth our operating results, expressed as a percentage of total revenues, with respect to certain items included in our consolidated statements of operations.

                                                             Fiscal Year Ended
                                               December 30,     December 31,     December 25,
                                                   2007             2006             2005
Total revenues                                        100.0 %          100.0 %          100.0 %
Costs and expenses:
Cost of sales (1)                                      28.5             27.7             27.0
Restaurant labor (1)                                   32.1             31.9             32.6
Restaurant occupancy and other (1)                     23.1             23.7             24.0
General and administrative expenses                     9.6             15.4             11.3
Depreciation and amortization                           5.2              5.4              5.5
Pre-opening expenses                                    0.3              0.4              0.1
Asset impairment and store closure expense
(reversal)                                              0.2             (0.3 )            0.2
Loss on disposal/sale of property                       0.1              0.2              0.4
Operating income (loss)                                 1.1             (4.2 )           (0.9 )
Other income (expense), net                             0.2              0.3              0.3
Income (loss) before income taxes                       1.2             (3.8 )           (0.6 )
Income tax (expense) benefit                           (0.5 )            1.6              0.5
Net income (loss)                                       0.7 %           (2.3 )%          (0.2 )%

(1) As a percentage of restaurant sales.

The following table summarizes the number of restaurants:

                                                 December 30, 2007     December 31, 2006     December 25, 2005
Company-operated                                                171                   162                   149
Franchised and licensed locations                                 5                     4                     8
Total                                                           176                   166                   157

Revenues

Total revenues were $169.7 million, $152.3 million and $140.8 million in fiscal 2007, 2006 and 2005, respectively. The increase in revenues in fiscal 2007 as compared with fiscal 2006 resulted from several factors: first, we opened 10 new stores in fiscal 2007, which contributed sales of $2.4 million; second, stores opened before fiscal 2007 but not yet in our comparable store base contributed sales of $9.1 million; third, comparable store sales contributed $9.0 million; and fourth, revenue recognized for the portion of the gift card liability that is not expected to be redeemed (breakage) contributed $0.3 million. The $9.0 million increase attributable to comparable store sales was offset by $2.6 million due to the one extra week in fiscal 2006 as compared with fiscal 2007. This was further offset by a decrease of $0.8 million in sales from one store that closed in the third quarter of fiscal 2006 and one store that closed during the second quarter of fiscal year 2007. Units enter the comparable store base after 15 full months of operation. The increase in comparable store sales in fiscal 2007 from fiscal 2006 was primarily due to an 8.3% increase in the average check amount. Comparable store sales increased 6.2% in comparison to prior year. The Company's average unit volume was $1,034,000 compared with $980,000 in fiscal 2006 and $957,000 in fiscal 2005. The increase in revenues in fiscal 2006 as compared with fiscal 2005 was primarily due to sales of $2.7 million from our nine store openings, $2.7 million from stores opened before fiscal 2006 but not yet in our comparable store base, $1.5 million from five acquired franchise location and an increase in comparable store sales of $5.4 million. This increase was offset by a decrease of $0.8 million in sales from the one store that closed in the fourth quarter of fiscal 2005 and two stores that closed during the third quarter of fiscal year 2006. The increase in comparable stores sales in fiscal 2006 from fiscal 2005 was primarily due to a 3% increase in the average check amount, which was offset by a 1% decrease in the number of transactions.

Costs and Expenses

Cost of sales increased to $48.4 million in fiscal 2007, from $42.1 million in fiscal 2006 and $38.0 million in fiscal 2005, due primarily to an increase in the number of company-operated restaurants. As a percentage of restaurant sales, cost of sales increased to 28.5% in fiscal 2007, as compared with 27.7% in fiscal 2006 and 27.0% in 2005. The percentage increase in fiscal 2007 as compared with fiscal 2006 is a direct result of higher seafood costs due to increased demand and reduced supply. Additionally, avocado costs spiked due to a significant shortage in the supply as a result of the freezing weather in the Western United States in January. The escalation of gasoline prices and increased ethanol sourcing is increasing the cost of corn, which is directly tied to the costs of chicken, steak, tortillas, cheese and beverage syrup. The cost of transporting food supplies to our distributors has increased and this cost is passed through to us. Finally, the cost of oil increased due to the transition to the exclusive use of zero trans fat oil in our stores during the third quarter of 2007. The percentage increase in fiscal 2006 as compared with fiscal 2005 was a direct result of higher seafood costs and transitioning our stores from pre-cut fish purchases to a pre-battered fish product during early 2006. Branding initiatives such as increased fish portions and enhanced flavors also impacted the cost of some of the premium products in fiscal 2006. These cost increases were partially offset by lower produce costs, primarily avocados.

Restaurant labor costs increased to $54.4 million in fiscal 2007 from $48.5 million in fiscal 2006 and $45.8 million in fiscal 2005. As a percentage of restaurant sales, these costs increased to 32.1% in fiscal 2007 compared with 31.9% in fiscal 2006 and decreased compared with 32.6% in fiscal 2005. The increase in 2007 compared with 2006 is primarily the result of the increase in the minimum wage at the beginning of the fiscal year, increased staffing levels at the restaurants and the cost of our long term incentive plan for restaurant general managers. We believe the improved staffing also contributed to the increase in revenues. This decrease in fiscal 2006 as compared with fiscal 2005 was primarily the result of our ability to leverage our costs with the increase in revenues, lower workers' compensation expenses, and less labor required due to the switch to the pre-battered fish product.

Restaurant occupancy and other costs increased to $39.2 million in fiscal 2007, from $36.0 million in fiscal 2006 and $33.7 million in fiscal 2005. As a percentage of restaurant sales, these costs decreased to 23.1% in fiscal 2007 from 23.7% in fiscal 2006 and 24.0% in fiscal 2005. This decrease is primarily the result of our decision to shift a significant amount of advertising dollars from radio advertising in the Los Angeles and Phoenix markets to localized neighborhood marketing efforts. The decrease in fiscal 2006 from 2005 was primarily the result of our ability to leverage our costs with the increase in revenues and the decision to focus advertising expenditure in the Los Angeles market during the fourth quarter to a local marketing approach versus more expensive radio spots.

General and administrative expenses decreased to $16.2 million in fiscal 2007, from $23.4 million in fiscal 2006 and increased from $15.8 million in fiscal 2005. As a percentage of revenue, these costs were 9.6% in fiscal 2007, 15.4% in fiscal 2006 and 11.3% in fiscal 2005. General and administrative expenses in 2006 include the accrual of approximately $8.0 million for the settlement of the class action wage and hour lawsuit and related costs. In addition, we also expensed approximately $1.0 million in legal fees related to this class action lawsuit. Excluding the one-time accruals in fiscal 2006, general and administrative expense as a percentage of revenue for fiscal 2007, as compared with fiscal 2006 was relatively flat. The dollar increase was due to additional head count added during 2006 and share-based compensation expense. Fiscal 2005 expenses were a result of large expenses outside of our normal restaurant operations support. Legal and professional fees for previous years consolidated financial statement restatements, Sarbanes Oxley Section 404 compliance efforts and ongoing litigation defense amounted to $1.1 million for the first three quarters of the 2005 fiscal year. In the fourth quarter of 2005, an additional $2.6 million was recorded related to executive separation of $200,000 severance and $562,000 revaluation of stock options; legal fees and lobster lawsuit settlement costs of $553,000; other legal and professional fees of $631,000; executive search and relocation expenses of $404,000 and other miscellaneous expenses of $250,000.

Depreciation and amortization increased to $8.8 million in fiscal 2007, from $8.2 million in fiscal 2006 and $7.8 million in fiscal 2005. This increase was primarily due to the additional depreciation on the new restaurants added in 2007 and 2006 as well as depreciation associated with the restaurant re-imaging program. Fiscal 2006 also had one additional week as compared with fiscal 2007 and fiscal 2005.

Pre-opening expenses increased to $572,000 in fiscal 2007, from $537,000 in fiscal 2006 and $147,000 in fiscal 2005. During fiscal 2007, we opened 10 restaurants compared with nine during fiscal 2006 and five during fiscal 2005. Pre-opening costs in 2007 and 2006 also increased from prior years as we now open our restaurants with a very specific local marketing plan that costs approximately $15,000 per location. Other pre-opening costs include non-cash rent expense during the build out period of $20,000 to $30,000 per location and compensation expense of approximately $15,000 to $20,000 per location. The lower costs in fiscal 2005 were also due in part to the fact that one of the restaurants opened in fiscal 2005 was a replacement unit, and, as such, training costs were minimal.

Asset impairment and store closure expense was comprised of a $274,000 charge in fiscal 2007, as compared with a $405,000 reversal in fiscal 2006 and a $275,000 charge in fiscal 2005. The $274,000 charge in fiscal 2007 was the net effect of an adjustment to store closure reserve of $19,000 for the sub-lease income for a Salt Lake City, Utah location, which closed in 2001, combined with a charge to impairment of $229,000, for the closure of a Los Angeles, California area restaurant and a $64,000 adjustment to anticipated sublease income for a restaurant in the Denver, Colorado area that closed in 2001 An additional reversal of $24,000 was recorded in the second quarter of 2006. During the fourth quarter of 2006, the Company reversed $158,000 of the store closure accrual due to a sub-tenant occupying its space longer than anticipated at the signing of the sub-lease. The $275,000 charge during fiscal 2005 was the net effect of a charge to impairment of $288,000, for the closure of the Portland, Oregon restaurant, combined with a reversal to store closure of $13,000 based on the recalculation of the closed store accrual for a Phoenix, Arizona restaurant.

Other income, primarily interest, decreased to $302,000 in fiscal 2007, compared with $482,000 in fiscal 2006 and $444,000 in fiscal 2005. The decrease in interest income in 2007 was due to reduced cash balances, as well as lower interest rates. Fiscal 2006 has one additional week of interest and investment income as compared with fiscal 2007 and fiscal 2005.

The provision for income taxes for fiscal 2007, 2006 and 2005 is based on the approximate annual effective tax rate applied to the respective period's pre-tax book income or loss. Our fiscal 2007 annual income tax provision rate of 43.0% consisted of our statutory blended federal and state income tax rate applied against our pre-tax book income and increased for the net impact of various items. These items included a decrease of 2.5% for federal tax credits, an increase of 1.3% for accrued interest under FIN 48, and a one-time increase of 3.2% related to the revaluation of the our state deferred tax asset to reflect a revised statutory state tax rate. Our fiscal 2006 annual income tax benefit rate of 40.8% consisted of our statutory blended federal and state income tax rate applied against our pre-tax book loss and increased by the benefit of federal and California targeted employment tax credits that were claimed. During fiscal 2005, we reduced our fiscal 2005 projected annual rate due to our tax planning initiatives. The 74.1% tax benefit applied to fiscal 2005 comprises the federal and state statutory rate benefit, increased by additional benefit for 2005 federal and California targeted employment tax credits, tax-exempt interest and for prior year California targeted employment tax credits and Alternative Minimum Tax credits benefited during 2005.

SEASONALITY

Historically, we have experienced seasonal variability in our quarterly operating results with higher sales per restaurant in the second and third quarters than in the first and fourth quarters. The higher sales in the second and third quarters affect profitability by reducing the impact of our restaurants' fixed and partially fixed costs, as a percentage of sales. This seasonal impact on our operating results is expected to continue.

INFLATION

The primary areas of our operations affected by inflation are food, supplies, labor, fuel, lease, utility, insurance costs and materials used in the construction of our restaurants. Substantial increases in costs and expenses, particularly food, supplies, labor, fuel and operating expenses could have a significant impact on our operating results to the extent that such increases cannot be passed through to our guests. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are subject to . . .