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 SEC. 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 19, 2009, we have grown to 195 restaurants, including 190 company-operated, two licensed and three 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 2008, we continued to focus on ways to improve our economic model. Fiscal 2008 was impacted by the overall challenging macroeconomic environment in the areas we operate our restaurants, and in particular, rising unemployment and the weak housing markets in Arizona, Nevada and parts of California. In addition, the current significant downturn in the overall economy has reduced consumer confidence in the economy and negatively affected consumer spending and dining out frequency. Over the past several months, we have undergone a vigorous assessment of the opportunities to better leverage our resources and gain efficiencies in our cost structure, while continuing to focus on delivering unique products and an unsurpassed guest experience. Notably, we reduced our corporate support staff by just over 10% at the end of April 2008 and have several initiatives underway to lower food and labor costs while maintaining the integrity of our brand. We believe this balanced approach will better position us to achieve our business goals in the near term and still execute our longer term strategy.

Our 2008 average unit volume, which includes restaurants open for at least 12 months, decreased from $1,034,000 to $1,008,000 due to a decrease in comparable store sales of 5.7% and the closure of two restaurants during fiscal 2008. We opened 17 new restaurants in 2008. 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.

We currently plan to open 10-20 company-owned restaurants in fiscal 2009 in our existing geographic markets. The current slow down in housing, combined with the weak economy, has caused us to focus almost exclusively on sites located in mature trade areas, where we will look for attractive long-term opportunities in the softening real estate market. This narrower focus could limit our growth potential in 2009 and 2010. Our three-year expansion plan begins with an annual unit growth rate of approximately 6% in 2009, and increases to 20% by 2011. We intend to tailor our expansion plan during 2009 based on economic conditions, our financial results and our ability to continue to satisfy the covenants contained in our credit facility. If our financial results drop below our expectations or we are unable to comply with the covenants in our credit facility, we will slow or curtail our expansion plan.

On the cost and expense side of our economic model, we are experiencing increases in cost of sales. Continued food cost inflation pressure increased our food and distribution costs during fiscal 2008. This increase was mitigated by the price increase that we implemented in July of fiscal 2008, the second quarter 2008 price increase on our high volume Taco Tuesday promotion, as well as with ongoing menu engineering efforts.

General and administrative costs increased in 2008 primarily due to the addition of key personnel in late 2007, which we believe is helping allow us to execute our development plans as well as to better support our restaurants through hiring, developing and training our new team members, in addition to an increase in non-cash share-based compensation, legal costs and professional service fees. 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 AND ESTIMATES

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.

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.

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 $334,000, $323,000 and $81,000 for fiscal years 2008, 2007 and 2006, 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.

IMPAIRMENT OF GOODWILL - Goodwill, which represents the excess of the cost of acquired businesses over the fair value of amounts assigned to assets acquired and liabilities assumed, is not amortized. Instead, goodwill is assessed for impairment under Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS No. 142 requires goodwill to be tested annually at the same time every year, and when an event occurs or circumstances change, such that it is reasonably possible that an impairment may exist. We selected our fiscal year-end as our annual date. As a result of our assessment at December 28, 2008 and December 30, 2007, no impairment was indicated.

IMPAIRMENT OF LONG-LIVED ASSETS - 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.

Long-lived asset impairment amounts 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 expenses are subject to change, amounts recorded may not be sufficient, and adjustments may be necessary.

STORE CLOSURE EXPENSE (REVERSAL) - 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.

Consistent with long-lived asset impairment amounts, store closure expenses 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 expenses are subject to change, amounts recorded may not be sufficient, and adjustments may be necessary.

SHARE-BASED PAYMENT - We account for share-based compensation in accordance with SFAS 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.

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 is $150,000 for the claim year ended October 31, 2009 and $350,000 during each of our claim years ended October 31, 2008 and 2007. 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.

INCOME TAXES - We account for uncertainty in income taxes in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 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. On a quarterly basis, we review and update our inventory of tax positions as necessary to add any new uncertain positions taken, or to remove previously identified uncertain positions that have been adequately resolved. Additionally, uncertain positions may be re-measured as warranted by changes in facts or law. Accounting for uncertain tax positions requires significant judgments, including estimating the amount, timing and likelihood of ultimate settlement. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.

RESULTS OF OPERATIONS

All comparisons under this heading between fiscal 2008, 2007 and 2006 refer to the 52-week period ended December 28, 2008, the 52-week period ended December 30, 2007 and the 53-week period ended December 31, 2006.

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 28,      December 30,      December 31,
                                                            2008              2007              2006
Total revenues                                                  100.0 %           100.0 %           100.0 %
Costs and expenses:
Cost of sales (1)                                                28.7              28.5              27.7
Restaurant labor (1)                                             31.5              32.1              31.9
Restaurant occupancy and other (1)                               23.8              23.1              23.7
General and administrative expenses                              10.0               9.6              15.4
Depreciation and amortization                                     5.4               5.2               5.4
Pre-opening expenses                                              0.4               0.3               0.4
Asset impairment and store closure expense (reversal)             0.0               0.2              (0.3 )
Loss on disposal/sale of property                                 0.2               0.1               0.2
Operating income (loss)                                           0.2               1.1              (4.2 )
Other income (expense), net                                      (0.1 )             0.2               0.3
Income (loss) before income taxes                                 0.1               1.2              (3.8 )
Income tax (expense) benefit                                      0.0              (0.5 )             1.6
Net income (loss)                                                 0.1 %             0.7 %            (2.3 )%

(1) As a percentage of restaurant sales.

The following table summarizes the number of restaurants:

                                    December 28,      December 30,      December 31,
                                        2008              2007              2006
Company-operated                              186               171               162
Franchised and licensed locations               5                 5                 4
Total                                         191               176               166

Revenues

Total revenues were $179.3 million, $169.7 million and $152.3 million in fiscal 2008, 2007 and 2006, respectively. The increase in revenues in fiscal 2008 as compared with fiscal 2007 resulted from the following factors: first, we opened 17 new stores in fiscal 2008, which contributed sales of $8.3 million; second, stores opened before fiscal 2008 but not yet in our comparable store base contributed sales of $5.2 million; third, a decrease in comparable store sales of $3.9 million. The decrease in comparable store sales in fiscal 2008 compared to fiscal 2007 was primarily due to a decrease in transactions of 5.7%, which was partially offset by an increase in average check amount of 3.5%. Comparable store sales decreased 2.4% in comparison to the prior year. Units enter the comparable store base after 15 full months of operation. The increase in revenues in fiscal 2007 as compared with fiscal 2006 resulted from the following 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. Our average unit volume was $1,008,000 in fiscal 2008 as compared with $1,034,000 in fiscal 2007 and $980,000 in fiscal 2006.

Costs and Expenses

Cost of sales increased to $51.3 million in fiscal 2008, from $48.4 million in fiscal 2007 and $42.1 million in fiscal 2006, due primarily to an increase in the number of company-operated restaurants. As a percentage of restaurant sales, cost of sales increased to 28.7% in fiscal 2008, as compared with 28.5% in fiscal 2007 and 27.7% in 2006. Fiscal 2008 was impacted by continued food cost inflation pressure, which we mitigated with a price increase we implemented in July of this year, as well as with ongoing menu engineering efforts and diversification of our supply chain. In addition, increases in the cost of fish, tortillas, avocados, cheese and beverage syrup, as well as cost increases related to our transition to the use of zero trans fat oil during the third quarter of 2007 contributed to the increase in cost of sales as a percentage of restaurant sales during fiscal 2008. Our distribution costs also increased during fiscal 2008, driven largely by higher gasoline costs. 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 2007. 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.

Restaurant labor costs increased to $56.5 million in fiscal 2008, from $54.4 million in fiscal 2007 and $48.5 million in fiscal 2006. As a percentage of restaurant sales, these costs decreased to 31.5% in fiscal 2008 compared with 32.1% in fiscal 2007 and decreased compared with 31.9% in fiscal 2006. The decrease in labor cost as a percentage of sales during fiscal 2008 compared to fiscal 2007 was due to continued favorable adjustments to our worker's compensation reserves that resulted primarily from the closure of a large number of cases during the year and our continued focus on safety in our restaurants, as well as from improvements in labor management driven by our new labor scheduling system. These favorable drivers were partially offset by de-leveraging of the fixed component of labor due to lower comparable store sales and the increase in the minimum wage rate in the State of California, which occurred during January 2008. 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.

Restaurant occupancy and other costs increased to $42.6 million in fiscal 2008, from $39.2 million in fiscal 2007 and $36.0 million in fiscal 2006. As a percentage of restaurant sales, these costs increased to 23.8% in fiscal 2008, from 23.1% in fiscal 2007 and 23.7% in fiscal 2006. The increase in restaurant occupancy and other costs as a percentage of restaurant sales during fiscal 2008 compared to fiscal 2007 is primarily a result of lower average unit volumes on a partially fixed cost base. The decrease from fiscal 2007 compared to fiscal 2006 as a percentage of restaurant sales 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.

General and administrative expenses increased to $17.9 million in fiscal 2008, from $16.2 million in fiscal 2007, and decreased from $23.4 million in fiscal 2006. As a percentage of revenue, these costs were 10.0% in fiscal 2008, 9.6% in fiscal 2007 and 15.4% in fiscal 2006. The increase in general administrative expenses in dollars, and as a percentage of revenue, in fiscal 2008 compared to fiscal 2007 is due to an increase in non-cash share based compensation, higher legal costs, the addition of senior executives in the fourth quarter of 2007, and professional fees associated with an income tax method change study that allowed us to immediately expense for tax purposes previously capitalized repairs and remodeling expenses. 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 expenses 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.

Depreciation and amortization increased to $9.7 million in fiscal 2008, from $8.8 million in fiscal 2007 and $8.2 million in fiscal 2006. This increase was primarily due to the additional depreciation on the new restaurants added in 2008 and 2007 as well as depreciation associated with the restaurant re-imaging program, which occurred during fiscal 2007 and fiscal 2006.

Pre-opening expenses increased to $689,000 in fiscal 2008, from $572,000 in fiscal 2007 and $537,000 in fiscal 2006. During fiscal 2008, we opened 17 restaurants compared with 10 during fiscal 2007 and nine during fiscal 2006. The increase in pre-opening expenses in fiscal 2008 compared to fiscal 2007 is due to an increase in the number of restaurants opened during the fiscal year. This is offset by an overall decline in pre-opening expenditures on a per store basis. This per store reduction is primarily due to the shifting of certain marketing related costs to post-opening. 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.

Asset impairment and store closure (reversal) expense comprised a net $46,000 reversal in fiscal 2008, compared to a $274,000 charge in fiscal 2007, and a $405,000 reversal in fiscal 2006. A store closure reversal of $91,000 was recorded in the first quarter of fiscal 2008 due to our decision to re-brand a location in the Fort Collins, Colorado area that was closed in 2001 and was offset by a $45,000 store closure expense related to the closure of our Beverly Center location in Los Angeles, California during the second quarter of fiscal 2008. The $274,000 charge in fiscal 2007 was the net effect of an adjustment to store closure reserve of $19,000 for the sublease 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 our Beverly Center location in Los Angeles, California 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 subtenant occupying its space longer than anticipated at the signing of the sublease.

Other (expense) income, net, primarily interest, decreased to expense of $133,000 in fiscal 2008, compared with income of $302,000 in fiscal 2007 and . . .