Rubios Restaurants (RUBO) 10-K/A 2008 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 28, 2008

COMMISSION FILE NUMBER: 000-26125

RUBIO’S RESTAURANTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE	33-0100303
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

1902 WRIGHT PLACE, SUITE 300, CARLSBAD, CALIFORNIA 92008

(Address of Principal Executive Offices)

(760) 929-8226

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	The NASDAQ Global Market

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

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

Yes o No þ

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 þ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company þ

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

The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing sale price of the registrant’s common stock on June 27, 2008 as reported on the NASDAQ Global Market was approximately $35,263,993.

As of March 19, 2009, there were 9,960,007 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

EXPLANATORY NOTE

We filed our Annual Report on Form 10-K for the fiscal year ended December 28, 2008 with the Securities and Exchange Commission on March 24, 2008 (the “Original Report”).  At the time we filed the Original Report, we had received original signed versions from KPMG LLP, our independent registered public accounting firm, of the Report of Independent Registered Public Accounting Firm (the “Report”) and the Consent of Independent Registered Public Accounting Firm (the “Consent”), included in the Original Report as page F-2 and Exhibit 23-1, respectively.  In the Original Report, the conformed signature line of KPMG LLP was inadvertently omitted from the Report and the Consent.  As a result, we are filing this Amendment No. 1 to the Original Report solely to add KPMG LLP’s conformed signature to the Report and the Consent to properly reflect that we had received the executed versions of the Report and the Consent as of the date we filed the Original Report.  This Amendment No. 1 does not reflect events occurring since the filing of the Original Report and it does not modify, update or reiterate the financial information or other disclosure provided in the Original Report.

New certifications of our principal executive officer and principal financial officer are included as exhibits to this amendment.

PART II

Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements as of December 28, 2008 and December 30, 2007 and for each of the three fiscal years in the period ended December 28, 2008 and the report of our independent registered public accounting firm thereon are included elsewhere in this report. Supplementary unaudited quarterly financial data for fiscal 2008 and 2007 are included in this report on page F-23.

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  

(a)	Financial Statements and Financial Statement Schedules:
	The following documents are filed as part of the report:

(1) See the index to our consolidated financial statements on page F-1 for a list of the financial statements being filed herein.

(2) All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or other notes thereto.

(3) See the Exhibits under Item 15(b) below for all Exhibits being filed or incorporated by reference herein.

(b) Exhibits:

Number	Description
3.1(7)	Third Amended and Restated Certificate of Incorporation.
3.2(1)	Restated Bylaws (Exhibit 3.4).
3.4(3)	Certificate of Amendment of the Bylaws (Exhibit 3.4).
3.5(14)	Certificate of Amendment of the Bylaws
4.1(1)	Specimen common stock certificate (Exhibit 4.1).
10.1(1)	Amended and Restated Investors’ Rights Agreement, dated November 19, 1997 (Exhibit 10.7).
10.2(1)	Amendment No. 1 to the Amended and Restated Investors’ Rights Agreement, dated December 31, 1997 (Exhibit 10.8).
10.3(1)	Amendment No. 2 to the Amended and Restated Investor’s Rights Agreement, dated May 1998 (Exhibit 10.9).
10.4 (7)	Investors’ Rights Agreement Standstill and Extension Agreement between us and Rosewood Capital, L.P. dated March 12, 2004 (Exhibit 10.4).
10.5 (6)	Investors’ Rights Agreement Standstill and Extension Agreement between us and Ralph Rubio, dated April 29, 2004 (Exhibit 10.1).
10.6 (8)	Investors’ Rights Agreement Standstill and Extension Agreement between us and Rosewood Capital, L.P. dated July 28, 2005 (Exhibit 10.1).
10.7 (8)	Investors’ Rights Agreement Standstill and Extension Agreement between us and Ralph Rubio, dated July 28, 2005 (Exhibit 10.2).
10.8(1)	Lease Agreement between us and Macro Plaza Enterprises, dated October 27, 1997 (Exhibit 10.15).
10.9(1)	First Amendment to Lease Agreement between us and Cornerstone Corporate Centre, LLC, dated October 16, 1998 (Exhibit 10.16).
10.17(1)(2)	Form of Indemnification Agreement between us and each of our directors (Exhibit 10.25).
10.18(1)(2)	Form of Indemnification Agreement between us and each of our officers (Exhibit 10.26).
10.38(1)(2)	Employee Stock Purchase Plan (Exhibit 10.46).
10.42(4)†	Form of Franchise Agreement as of March 15, 2001.
10.51(5)(2)	Rubio’s Restaurants, Inc. Deferred Compensation Plan for Non-Employee Directors (Exhibit 10.51).
10.54(5)(2)	1999 Stock Incentive Plan, as amended through March 6, 2003 (Exhibit 10.54).
10.56(7)(2)	1999 Stock Incentive Plan Form of Stock Option Agreement.
10.57(7)(2)	1999 Stock Incentive Plan Form of Addendum to Stock Option Agreement.
10.60(7)(2)	1999 Stock Incentive Plan Form of Stock Issuance Agreement.
10.62(9)(2)	Letter Agreement between Gerry Leneweaver and the Company, dated June 1, 2005 (Exhibit 10.2).
10.63(10)(2)	Letter Agreement between Lawrence Rusinko and the Company, dated October 7, 2005 (Exhibit 10.1).
10.64(11)(2)	Letter Agreement between Daniel E. Pittard and the Company, dated August 21, 2006 (as corrected).
10.65(12)(2)	Form of Restricted Stock Unit Agreement under the Rubio’s Restaurants, Inc. 1999 Stock Incentive Plan.
10.66(12)(2)	Rubio’s Restaurants, Inc. Severance Pay Plan.
10.67(13)(2)	Rubio’s Restaurants, Inc. 2006 Executive Incentive Plan.
10.68(12)(2)	Form of Restricted Stock Unit Agreement under the Rubio’s Restaurants, Inc. 2006 Executive Incentive Plan.
10.69(2)	Rubio’s Restaurants, Inc. Deferred Compensation Plan, effective December 1, 2007.
10.70(14)	Investors’ Rights Agreement Standstill and Extension Agreement between us and Rosewood Capital, L.P., dated May 7, 2007 (Exhibit 10.8)
10.71(14)	Investors’ Rights Agreement Standstill and Extension Agreement between us and Ralph Rubio, dated May 7, 2007 (Exhibit 10.9)
10.72(15)†	Sponsorship Agreement between us and the Mighty Ducks Hockey Club, LLC, dated February 28, 2006.
10.73(15)†	Beverage Marketing Agreement between us and The Coca-Cola Company, dated September 20, 2007.
10.74(15)†	Master Distributor Agreement between us and U.S. Foodservice, Inc., dated January 28, 2008.

10.75(15)†	Sponsorship Agreement between us and San Diego Ballpark Funding LLC, dated March 21, 2008.
10.76(2)(16)	Rubio’s Restaurants, Inc. 2008 Equity Incentive Plan.
10.77†(17)	Business Loan Agreement, dated May 13, 2008, by and between the Company and Pacific Western Bank ($15 million guidance line) (Exhibit 10.76).
10.78†(17)	Business Loan Agreement, dated May 13, 2008, by and between the Company and Pacific Western Bank ($5 million revolving line) (Exhibit 10.77)
10.79(18)	Amendment to Investors’ Rights Agreement Standstill and Extension Agreement, dated September 11, 2008, between Rubio’s Restaurants, Inc. and Rosewood Capital, L.P. (Exhibit 10.1).
10.80(18)	Amendment to Investors’ Rights Agreement Standstill and Extension Agreement, dated September 11, 2008, between Rubio’s Restaurants, Inc. and Ralph Rubio (Exhibit 10.2).
10.81(2)(19)	Amendment to Employment Offer Letter Agreement, dated December 19, 2008, between the Company and Daniel E. Pittard (Exhibit 10.76).
10.82(2)(19)	Form of Change of Control Agreement (Exhibit 10.77).
10.83(2)(19)	Form of Addendum to Stock Option Agreement (Exhibit 10.78).
21.1(20)	Subsidiary List.
23.1	Consent of Independent Registered Public Accounting Firm, KPMG LLP.
24.1(20)	Powers of Attorney (Included under the caption “Signatures”).
31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

†	The Commission has granted confidential treatment to us with respect to certain omitted portions of this exhibit (indicated by asterisks). We have filed separately with the Commission an unredacted copy of the exhibit.
(1)	Incorporated by reference to the above noted exhibit to our registration statement on Form S-1 (333-75087) filed with the SEC on March 26, 1999, as amended.
(2)	Management contract or compensation plan.
(3)	Incorporated by reference to our annual report on Form 10-K filed with the SEC on April 2, 2001.
(4)	Incorporated by reference to our annual report on Form 10-K filed with the SEC on April 1, 2002.
(5)	Incorporated by reference to our annual report on Form 10-K filed with the SEC on March 24, 2004 and amended on April 6, 2005.
(6)	Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on May 11, 2004.
(7)	Incorporated by reference to our annual report on Form 10-K filed with the SEC on April 8, 2005.
(8)	Incorporated by reference to our current report on Form 8-K filed with the SEC on August 1, 2005.
(9)	Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on August 5, 2005.
(10)	Incorporated by reference to our current report on Form 8-K filed with the SEC on October 14, 2005.
(11)	Incorporated by reference to our current report on Form 8-K/A filed with the SEC on August 29, 2006.
(12)	Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on November 6, 2006.
(13)	Incorporated by reference to our Definitive Proxy Statement filed with the SEC on June 23, 2006.
(14)	Incorporated by reference to our current report on Form 8-K filed with the SEC on December 19, 2007.
(15)	Incorporated by reference to our annual report on Form 10-K filed with the SEC on March 31, 2008.
(16)	Incorporated by reference to our Definitive Proxy Statement filed with the SEC on August 28, 2008.
(17)	Incorporated by reference to our quarterly report on Form 10-Q filed with the SEC on August 8, 2008.
(18)	Incorporated by reference to our current report on Form 8-K filed with the SEC on September 16, 2008.
(19)	Incorporated by reference to our current report on Form 8-K filed with the SEC on December 22, 2008.

(20) Incorporated by reference to our current annual report on Form 10-K filed with the SEC on March 24, 2009.

(c) Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or other notes hereto.

SIGNATURES

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

	RUBIO'S RESTAURANTS, INC.
Dated:  March 27, 2009	By:	/s/	Dan Pittard
		Name:	Dan Pittard
		Title:	President and Chief Executive Officer

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

Signature	Title	Date
/s/ Dan Pittard	President and Chief	March 27, 2009
Dan Pittard	Executive Officer (Principal Executive Officer)
/s/ Frank Henigman	Chief Financial Officer	March 27, 2009
Frank Henigman	(Principal Financial and Accounting Officer)
*	Chairman of the Board of Directors	March 27, 2009
Ralph Rubio
*	Director	March 27, 2009
Kyle A. Anderson
*	Director	March 27, 2009
Craig S. Andrews
*	Director	March 27, 2009
William R. Bensyl
*	Director	March 27, 2009
Loren C. Pannier
*	Director	March 27, 2009
Timothy J. Ryan
*By  /s/ Frank Henigman	Attorney-in-Fact	March 27, 2009
Frank Henigman

RUBIO’S RESTAURANTS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 28, 2008 and December 30, 2007	F-3
Consolidated Statements of Operations for Fiscal Years Ended 2008, 2007 and 2006	F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for Fiscal Years Ended 2008, 2007 and 2006	F-5
Consolidated Statements of Cash Flows for Fiscal Years Ended 2008, 2007 and 2006	F-6
Notes to Consolidated Financial Statements	F-8

Schedules not filed: All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Rubio’s Restaurants, Inc.:

We have audited the accompanying consolidated balance sheets of Rubio’s Restaurants, Inc. and subsidiaries (the Company) as of December 28, 2008 and December 30, 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 28, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rubio’s Restaurants, Inc. and subsidiaries as of December 28, 2008 and December 30, 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 2008, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

San Diego, California

March 24, 2009

F-2

RUBIO’S RESTAURANTS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	December 28, 2008			December 30, 2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,816		$	3,562
Other receivables		3,866			4,407
Inventory		2,389			1,773
Prepaid expenses		2,777			2,737
Deferred income taxes		1,764			2,746
Total current assets		16,612			15,225
PROPERTY, net		45,947			40,916
GOODWILL		519			519
LONG-TERM INVESTMENTS		—			3,069
OTHER ASSETS		694			496
DEFERRED INCOME TAXES		9,260			10,843
TOTAL	$	73,032		$	71,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,182		$	3,819
Accrued expenses and other liabilities		14,509			14,010
Store closure accrual		45			370
Total current liabilities		18,736			18,199
STORE CLOSURE ACCRUAL		17			104
DEFERRED INCOME		272			157
DEFERRED RENT AND OTHER LIABILITIES		8,302			8,533
Total liabilities		27,327			26,993
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.001 par value, 35,000,000 shares authorized, 9,951,077 shares issued and outstanding in 2008 and 9,950,477 shares issued and outstanding in 2007		10			10
Paid-in capital		52,549			51,108
Accumulated deficit		(6,854	)		(7,043	)
Total stockholders’ equity		45,705			44,075
TOTAL	$	73,032		$	71,068

See notes to consolidated financial statements.

F-3

RUBIO’S RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years Ended
	December 28, 2008			December 30, 2007			December 31, 2006
REVENUES:
Restaurant sales	$	179,130		$	169,519		$	151,995
Franchise and licensing revenues		174			212			273
TOTAL REVENUES		179,304			169,731			152,268
COSTS AND EXPENSES:
Cost of sales		51,348			48,369			42,079
Restaurant labor		56,470			54,364			48,472
Restaurant occupancy and other		42,591			39,192			35,987
General and administrative expenses		17,920			16,215			23,429
Depreciation and amortization		9,652			8,834			8,215
Pre-opening expenses		689			572			537
Asset impairment and store closure (reversal) expense		(46	)		274			(405	)
Loss on disposal/sale of property		295			127			281
TOTAL COSTS AND EXPENSES		178,919			167,947			158,595
OPERATING INCOME (LOSS)		385			1,784			(6,327	)
OTHER INCOME (EXPENSE):
Interest (expense) income and investment income, net		(133	)		302			482
INCOME (LOSS) BEFORE INCOME TAXES		252			2,086			(5,845	)
INCOME TAX (EXPENSE) BENEFIT		(63	)		(897	)		2,384
NET INCOME (LOSS)	$	189		$	1,189		$	(3,461	)
NET INCOME (LOSS) PER SHARE:
Basic and diluted	$	0.02		$	0.12		$	(0.36	)
SHARES USED IN CALCULATING NET INCOME (LOSS) PER SHARE:
Basic and diluted		9,951			9,889			9,592

See notes to consolidated financial statements.

F-4

RUBIO’S RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

 (In thousands, except share data)

								Accumulated
	Common Stock							Other						Total			Total
	Shares		Amount		Paid-in-Capital			Comprehensive Income (Loss)			Accumulated Deficit			Stockholders’ Equity			Comprehensive Income (Loss)
Balance, December 25, 2005		9,425,752	$	9	$	45,636		$	4		$	(4,684	)	$	40,965		$	(239	)
Exercise of common stock options, including related tax benefit		367,739		1		2,401			—			—			2,402
Compensation expense - common stock options		—		—		600			—			—			600
Net loss		—		—		—			—			(3,461	)		(3,461	)		(3,461	)
Other comprehensive income:
Net unrealized loss on available-for-sale investments, net of tax		—		—		—			(4	)		—			(4	)		(4	)
Balance, December 31, 2006		9,793,491		10		48,637			—			(8,145	)		40,502		$	(3,465	)
Cumulative effective of adoption of FIN 48 (Note 7)		—		—		—			—			(87	)		(87	)
Exercise of common stock options, including related tax benefit		156,986		—		1,228			—			—			1,228
Compensation expense - common stock options		—		—		1,243			—			—			1,243
Net income		—		—		—			—			1,189			1,189			1,189
Balance, December 30, 2007		9,950,477		10		51,108			—			(7,043	)		44,075		$	1,189
Exercise of common stock options, including related tax deficiency		600		—		(77	)		—			—			(77	)
Compensation expense - common stock options		—		—		1,518			—			—			1,518
Net income		—		—		—			—			189			189			189
Balance, December 28, 2008		9,951,077	$	10	$	52,549		$	—		$	(6,854	)	$	45,705		$	189

See notes to consolidated financial statements.

F-5

RUBIO’S RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended
	December 28, 2008			December 30, 2007			December 31, 2006
OPERATING ACTIVITIES:
Net income (loss)	$	189		$	1,189		$	(3,461	)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization		9,652			8,834			8,215
Share-based compensation expense		1,518			1,243			600
Amortization of debt issuance costs		47			—			—
Tax benefit from share-based compensation		—			(284	)		(121	)
Asset impairment and store closure expense (reversal)		—			274			(405	)
Loss on disposal/sale of property		295			127			281
Provision (benefits) for deferred income taxes		2,565			(154	)		(4,544	)
Changes in assets and liabilities:
Other receivables		461			(2,479	)		941
Inventory		(616	)		(393	)		10
Prepaid expenses		159			(1,902	)		(335	)
Other assets		(198	)		41			(104	)
Accounts payable		363			1,536			205
Accrued expenses and other liabilities		(1,109	)		(1,831	)		4,575
Store closure accrual		(412	)		(81	)		(149	)
Deferred income		115			(43	)		(46	)
Deferred rent and other liabilities		(231	)		(1,853	)		4,521
Deferred franchise revenue		—			(35	)		15
Net cash provided by operating activities		12,798			4,189			10,198
INVESTING ACTIVITIES:
Purchases of property		(5,033	)		(7,338	)		(6,894	)
Purchases of leasehold improvements		(8,337	)		(4,726	)		(6,454	)
Acquisition of franchised restaurants		—			—			(1,139	)
Proceeds from sale of property		—			—			18
Purchases of investments		(96	)		(193	)		(3,137	)
Maturities of investments		—			172			6,809
Proceeds from the sales of investments		3,165			—			—
Net cash used in investing activities		(10,301	)		(12,085	)		(10,797	)
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options		3			1,228			2,402
Excess tax benefits from shared-based compensation		—			284			121
Payment of debt issuance costs		(246	)		—			—
Net cash (used in) provided by financing activities		(243	)		1,512			2,523
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,254			(6,384	)		1,924
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		3,562			9,946			8,022
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	5,816		$	3,562		$	9,946

(continued)

F-6

RUBIO’S RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

(In thousands)

	Years Ended
	December 28, 2008		December 30, 2007		December 31, 2006
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid for interest	$	11	$	—	$	—
Cash paid for income taxes	$	1,141	$	1,351	$	687
SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING AND INVESTING ACTIVITIES:
Property, net, purchased and included in accrued expenses and other liabilities	$	1,608	$	904	$	661
Non-cash investing activities:
Business acquisitions :
Assets acquired:
Property and equipment	$	—	$	—	$	813
Goodwill		—		—		326
Assets acquired		—		—		1,139
Cash paid for acquisitions, net of cash acquired	$	—	$	—	$	1,139

See notes to consolidated financial statements.

F-7

RUBIO’S RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 28, 2008, DECEMBER 30, 2007 AND DECEMBER 31, 2006

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS - Rubio’s Restaurants, Inc. was incorporated in California in 1985 and reincorporated in Delaware in 1997. Rubio’s Restaurants, Inc. has two wholly owned subsidiaries, Rubio’s Restaurants of Nevada, Inc. and Rubio’s Incentives, LLC (collectively, the Company). As of December 28, 2008, the Company owns and operates a chain of 186 restaurants, two licensed and three franchise locations, in California, Arizona, Nevada, Colorado, and Utah.

The Company’s 186 restaurants are located more specifically as follows: 74 in the greater Los Angeles, California area, 46 in the San Diego, California area, 14 in the San Francisco, California area, 11 in the Sacramento, California area, 30 in Phoenix/Tucson, Arizona, 3 in Las Vegas, Nevada, 4 in the Denver, Colorado area and 4 in Salt Lake City, Utah.

BASIS OF PRESENTATION AND FISCAL YEAR - The consolidated financial statements include the accounts of the Company. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company operates and reports on a 52- or 53-week fiscal year ending on the last Sunday of December. Fiscal year 2006, which ended on December 31, 2006, included 53 weeks. Fiscal years 2008 and 2007, which ended on December 28, 2008 and December 30, 2007, respectively, included 52 weeks.

RECLASSIFICATIONS – The Company has reclassified certain items in the accompanying Consolidated Financial Statements and Notes thereto for prior periods to be comparable with the classification for the fiscal year ended December 28, 2008.  

ACCOUNTING ESTIMATES - The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingencies at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from those estimates.

CASH EQUIVALENTS - Cash equivalents consist of money market instruments purchased with an original maturity of three months or less.

INVESTMENTS - - Long-term investments valued at $3.1 million at December 30, 2007 represented restricted cash, pledged as collateral for a standby letter of credit related to the Company’s workers’ compensation policy. These investments were composed of money market accounts and certificates of deposit. These pledged collateral accounts were invested in one-year durations or less, but were classified on the Company’s consolidated balance sheet as long-term assets because these investments were restricted, automatically renewed and reinvested each year. During the second quarter of 2008, a standby letter of credit was issued under the credit facility mentioned in Note 5. Beginning in the second quarter of fiscal 2008, the Company was no longer required to pledge collateral for this standby letter of credit.

OTHER RECEIVABLES – Other receivables primarily comprise receivables from tenant improvement allowances due from landlords, delivery companies, income taxes and credit card processors. The allowance for doubtful accounts is based on historical experience, a review of existing receivables and existing economic conditions. The allowance for doubtful accounts at December 28, 2008 and December 30, 2007 was $239,000 and $51,000, respectively. Changes in other receivables are classified as operating activity in the consolidated statements of cash flows.

INVENTORY - - Inventory consists of food, beverage, paper and restaurant supplies, and is stated at the lower of cost (first-in, first-out method) or market value. Changes in inventories are classified as operating activity in the consolidated statements of cash flows.

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.

F-8

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) Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. 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. The Company selected its fiscal year-end as its annual date. As a result of the Company’s assessment at December 28, 2008 and December 30, 2007, no impairment was indicated.

LONG-LIVED ASSETS - In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates 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, the Company estimates 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, the Company recognizes an impairment loss to reduce the assets’ carrying amounts to their estimated fair values (for assets to be held and used) and fair value less cost to sell (for assets to be disposed of) based on the estimated 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. The Company generally uses the assumptions in its strategic plan and modifies them as necessary based on restaurant-specific information.

STORE CLOSURE EXPENSE (REVERSAL) - The Company makes decisions to close stores based on their cash flows and anticipated future profitability. The Company records losses associated with the closure of restaurants at the time the store 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.

SELF-INSURANCE LIABILITIES - The Company is self-insured for a portion of its 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 the claim years ended October 31, 2008 and 2007. Insurance liabilities are accounted for based on independent actuarial estimates of the amount of loss incurred. These estimates rely on actuarial observations of industry-wide and the Company’s historical claim loss development, and are subject to change based on actual loss development.

DEFERRED RENT AND OTHER LIABILITIES - Rent expense on operating leases with scheduled or minimum rent increases is expensed on the straight-line basis over the initial lease term, which includes the period of time from when the Company takes possession of the leased space until the store opening date (the build-out period). Deferred rent represents the excess of rent charged to expense over rent payable under the lease agreement. In connection with certain of the Company’s leases, the landlord has provided the Company with tenant improvement allowances. These lease incentives, as well as rent holidays, are recorded as long-term liabilities in “Deferred rent and other liabilities” and are amortized over the initial lease term as reductions to rent expense.

FINANCIAL INSTRUMENTS - The carrying values of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair values due to the short-term nature of these instruments. At December 28, 2008 and December 30, 2007, the Company had no material financial instruments subject to significant market exposure.

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 period a franchised location opens. Royalties from franchised restaurants are recorded in revenue as earned. The Company recognizes a liability upon the sale of its gift cards and recognizes revenue when these gift cards are redeemed in its 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 the Company’s consolidated statements of operations. Revenue recognized on unredeemed gift card balances was $106,000 in fiscal 2008 and $382,000 in the fourth quarter of fiscal 2007. No income from unredeemed gift cards (“breakage”) was recognized prior to the fourth quarter of fiscal 2007 due to, among other things, insufficient gift card history necessary to estimate potential breakage.

Revenue is reported using the net method under Emerging Issues Task Force bulletin 06-3 How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3 indicates that the statement of operations presentation on either a gross basis or a net basis of the taxes within the scope of the issue is an accounting policy decision.

STORE PRE-OPENING EXPENSES - Costs incurred in connection with the training of personnel, occupancy during the build-out period, and promotion of new store openings are expensed as incurred.

F-9

ADVERTISING - - Advertising costs incurred to produce media advertising for new campaigns are expensed in the year in which the advertising first takes place. Other advertising costs are expensed when incurred. Advertising costs are included in restaurant occupancy and other expenses and totaled $4.7 million for fiscal year 2008, $5.0 million for fiscal year 2007 and $5.3 million for fiscal year 2006.

INCOME TAXES - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as tax loss and credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48) effective at the beginning of fiscal 2007. FIN 48 specifies the accounting for uncertainties in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

SHARE-BASED PAYMENT - Share-based payments are accounted for in accordance with Statement No. 123(R), Share-Based Payment (SFAS 123R) using the modified prospective transition method. Under this method, compensation expense is recognized for new grants beginning in fiscal 2006 and any unvested grants prior to the adoption of SFAS 123R (December 26, 2005). The Company recognizes compensation expense on a straight-line basis over the employee's vesting period or to the date of the employee's eligibility for retirement, if earlier. In accordance with the modified prospective transition method, the consolidated financial statements for prior periods have not been restated.

SFAS 123R requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation as opposed to recognizing forfeitures as an expense reduction as they occur. The adjustment to apply estimated forfeitures to previously recognized share-based compensation was considered immaterial and as such was not classified as a cumulative effect of a change in accounting principle. SFAS 123R also requires companies to calculate an initial “pool” of excess tax benefits available at the adoption date to absorb any tax deficiencies that may be recognized under SFAS 123R. The pool includes the net excess tax benefits that would have been recognized if the Company had adopted SFAS 123 for recognition purposes on its effective date.

The Company elected to calculate the pool of excess tax benefits under the alternative transition method described in FASB Staff Position (FSP) 123-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, which also specifies the method it must use to calculate excess tax benefits reported on the consolidated statements of cash flows. The excess tax (deficiencies) benefits from share-based payment arrangements classified as financing cash flows of $80,000 in deficiencies and $284,000 in benefits for the years ended December 28, 2008 and December 30, 2007, respectively, would not have been materially different if the Company had not adopted SFAS 123R; however, they would have been classified as operating cash flows rather than as financing cash flows.

In accordance with SFAS 123R, the Company recorded share-based compensation expense of $1,518,000, $1,243,000 and $600,000 in fiscal 2008, 2007 and 2006, respectively. The recognized tax benefit was $607,000 for fiscal 2008, $491,000 for fiscal 2007 and $239,000 for fiscal 2006.

Refer to Note 8, Share-Based Compensation Plans, for information regarding the assumptions used by the Company in valuing its stock options.

COMMON STOCK AND EARNINGS PER SHARE - Basic earnings per share are computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share, except that the weighted average number of shares of common stock outstanding is increased to include the effect of potentially dilutive common shares, which are comprised of stock options and restricted stock awards granted to employees under equity-based compensation plans that were outstanding during the period. Potentially dilutive common shares are excluded from the diluted earnings per share computation when their effect would be anti-dilutive (Note 12).

CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in money market accounts with third party financial institutions. These balances may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company monitors the cash balances in its operating accounts on a daily basis and adjusts the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. The Company has not experienced any material losses on its cash accounts or other investments.

FAIR VALUE OF FINANCIAL STATEMENTS - In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). For those financial assets and liabilities the Company records or discloses at fair value, the Company adopted SFAS 157 at the beginning of fiscal 2008. SFAS 157 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value. SFAS 157 also establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This statement applies to fair value measurements that are already required or permitted by most existing FASB accounting standards. The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

F-10

NEW ACCOUNTING STANDARDS – In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (SFAS 157-3), which clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. SFAS 157-3 is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ended on or before December 30, 2008. The implementation of SFAS 157-3 did not have an impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently in the process of assessing the impact that SFAS 161 will have on the disclosures in the consolidated financial statements.

In February 2008, the FASB issued FSP SFAS No. 157-2, Effective Date of FASB Statement No. 157 (SFAS 157-2), which delayed the effective date of SFAS 157 for most nonfinancial asset and nonfinancial liabilities until fiscal years beginning after November 15, 2008 (fiscal year 2009 for the Company). The Company does not expect the adoption of SFAS 157 for nonfinancial assets and liabilities will have a material impact on its consolidated financial statements.

In December 2007, the FASB issued Statement No. 141R (revised 2007), Business Combinations (SFAS 141R). SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosures for certain specific items in a business combination. SFAS 141R became effective for the Company at the beginning of fiscal 2009. Acquisitions, if any, after the effective date will be accounted for in accordance with SFAS 141R.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements (SFAS 160). SFAS 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest and requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. In addition, this statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 became effective for the Company at the beginning of 2009. This statement will be applied prospectively, except for the presentation and disclosure requirements, which will be applied retrospectively for all periods presented. The Company does not currently have any minority or non-controlling interests in a subsidiary and it does not expect the adoption of SFAS 160 will have a material impact on its consolidated financial statements.

2. CONSOLIDATED BALANCE SHEET DETAILS

Consolidated balance sheet detailsas of December 28, 2008 and December 30, 2007, respectively (in thousands):

	2008			2007
OTHER RECEIVABLES:
Tenant improvement receivables	$	747		$	874
Beverage usage receivables		285			227
Credit cards		1,289			1,005
Income taxes		850			687
Food supplier receivable		141			917
Other		793			748
Allowance for doubtful accounts		(239	)		(51	)
Total	$	3,866		$	4,407
PROPERTY - at cost:
Building and leasehold improvements	$	66,458		$	57,030
Equipment and furniture		47,491			42,280
Construction in process		2,975			4,696
		116,924			104,006
Less: accumulated depreciation and amortization		(70,977	)		(63,090	)
Total	$	45,947		$	40,916
ACCRUED EXPENSES AND OTHER LIABILITIES:
Compensation	$	3,005		$	2,654
Workers’ compensation		1,453			2,244
Sales taxes		1,208			1,065
Vacation pay		1,031			938
Advertising		319			135
Gift cards		859			845
Occupancy		975			998
Legal and settlement fees regarding class action litigation (Note 6)		2,600			2,551
Construction in process		1,608			904
Other		1,451			1,676
Total	$	14,509		$	14,010
DEFERRED RENT AND OTHER LIABILITIES:
Deferred rent	$	2,600		$	2,620
Deferred tenant improvement allowances		2,389			1,839
FIN 48 liability (Note 7)		263			1,150
Legal and settlement fees regarding class action litigation (Note 6)		2,600			2,500
Other		450			424
Total	$	8,302		$	8,533

F-11

3. ACQUISITIONS OF FRANCHISED LOCATIONS

On June 19, 2006, the Company acquired the assets of four previously franchised locations for a total cost of $645,000. The purchase price was allocated to the assets acquired based upon their estimated fair values consisting of $590,000 related to leasehold improvements and $55,000 related to furniture and equipment. There was no goodwill in conjunction with the acquisition.

On December 28, 2006, the Company acquired the assets of a previously franchised location for a total cost of $494,000. The purchase price was allocated to the assets acquired based upon their estimated fair values consisting of $150,000 related to leasehold improvements and $18,000 related to furniture and equipment. Goodwill in the amount of $326,000 was recognized in conjunction with the acquisition.

Both acquisitions were accounted for under the purchase method of accounting, and the results of each of the restaurant’s operations have been included in the consolidated financial statements since the acquisition date.

4. ASSET IMPAIRMENT AND STORE CLOSURE ACCRUAL

The Company recorded a net store closure reversal of $46,000 during fiscal 2008. A store closure reversal of $91,000 was recorded in the first quarter of fiscal 2008 due to the Company’s 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 the Beverly Center location in Los Angeles, California during the second quarter of fiscal 2008.

The Company recorded a net asset impairment and store closure accrual of $274,000 during fiscal 2007. This charge was the net effect of a reduction to store closure 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 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.

The Company recorded a net store closure reversal of $405,000 during fiscal 2006. The reversal was comprised of $223,000 due to the Company entering into a new sublease agreement at its Portland, Oregon location, while $158,000 was to reflect additional sublease income received. An additional reversal of $24,000 was recorded in the second quarter of 2006.

The components of the store closure accrual in fiscal 2006, 2007 and 2008 are as follows (in thousands):

	Accrual Balance at December 25, 2005			Store Closure Expense		Store Closure Reversal			Usage			Accrual Balance at December 31, 2006
Accrual for stores closed in 2001	$	272		$	—	$	(24	)	$	(54	)	$	194
Accrual for stores closed in 2002		275			—		(158	)		(9	)		108
Accrual for stores closed in 2005		288			—		(223	)		(87	)		(21	)
Total store closure accrual		835		$	—	$	(405	)	$	(149	)		281
Less: current portion		(179	)										(84	)
Non-current	$	656										$	197

F-12

	Accrual Balance at December 31, 2006			Store Closure Expense		Store Closure Reversal			Usage			Accrual Balance at December 30, 2007
Accrual for stores closed in 2001	$	194		$	64	$	(19	)	$	(52	)	$	187
Accrual for stores closed in 2002		108			—		—			(29	)		79
Accrual for stores closed in 2005		(21	)		—		—			—			(21	)
Accrual for stores closed in 2008		—			229		—			—			229
Total store closure accrual		281		$	293	$	(19	)	$	(81	)		474
Less: current portion		(84	)										(370	)
Non-current	$	197										$	104

	Accrual Balance at December 30, 2007			Store Closure Expense		Store Closure Reversal			Usage			Accrual Balance at December 28, 2008
Accrual for stores closed in 2001	$	187		$	—	$	(91	)	$	(67	)	$	29
Accrual for stores closed in 2002		79			—		—			(27	)		52
Accrual for stores closed in 2005		(21	)		—		—			2			(19	)
Accrual for stores closed in 2008		229			45		—			(274	)		—
Total store closure accrual		474		$	45	$	(91	)	$	(366	)		62
Less: current portion		(370	)										(45	)
Non-current	$	104										$	17

5. CREDIT FACILITIES

LETTER OF CREDIT - On May 13, 2008, the Company entered into a $5.0 million revolving line of credit and a $15.0 million non-revolving line of credit (the “Credit Facility”) with Pacific Western Bank (the “Bank”). The revolving line of credit calls for monthly interest payments beginning June 5, 2008 at a variable interest rate based on the prime rate plus 0.25%, resulting in an initial rate of 5.25%. All outstanding principal plus accrued unpaid interest on the revolving line of credit is due May 13, 2010. The non-revolving line of credit calls for each advance to be evidenced by a separate note. Each advance shall have a maximum term of 57 months with an interest rate based on the prime rate plus 0.25%. Payments on advances shall be interest only for the first nine months, then principal and interest payments monthly. Both lines are collateralized by all assets of the Company and guaranteed by its subsidiaries. In addition, both lines require the Company to maintain its primary depository relationship with the Bank and the related accounts are subject to the right of offset for amounts due under the lines. Both lines are subject to certain financial and non-financial debt covenants and include a restriction on the payment of dividends without prior consent of the Bank. As of December 28, 2008, the Company was in compliance with all debt covenants and there were no funded borrowings outstanding under the Credit Facility. At December 28, 2008, the Company had $2.4 million of availability under the revolving line of credit, net of $2.6 million of outstanding letters of credit, and $15.0 million of availability under the non-revolving line of credit.

6. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES - The Company leases restaurant and office facilities, land, vehicles and office equipment under various operating leases expiring through 2019. The leases generally provide renewal options from 3 to 10 years. Certain leases are subject to scheduled annual increases or minimum annual increases based upon the consumer price index, not to exceed specific maximum amounts. Certain leases require contingent percentage rents based upon sales and other leases pass through common area charges to the Company. Rental expense under these operating leases was $20.0 million, $17.8 million, and $16.0 million for fiscal years 2008, 2007 and 2006, respectively. Contingent percentage rent based on sales included in rental expense was $612,000, $666,000 and $751,000 for fiscal years 2008, 2007 and 2006, respectively.

F-13

Future minimum annual lease commitments, including obligations for closed stores and minimum future sublease rentals expected to be received as of December 28, 2008 are as follows (in thousands):

	Company Operated Retail Locations and Other		Sublease Income (A)
FISCAL YEAR
2009	$	15,078	$	(235	)
2010		12,517		(207	)
2011		9,787		(136	)
2012		7,864		(131	)
2013		6,313		(131	)
Thereafter		18,962		(87	)
	$	70,521	$	(927	)

(A) The Company has subleased buildings to others, primarily as a result of closing certain underperforming company-operated locations. These leases provide for fixed payments with contingent rents when sales exceed certain levels. Sub lessees generally bear the cost of maintenance, insurance, and property taxes. The Company directly pays the rent on these master leases, and then collects associated sublease rent amounts from its sub lessees. These obligations are the responsibility of the Company should the sub lessee not perform under the sublease.

LITIGATION - - In March 2007, the Company reached an agreement to settle a class action lawsuit related to how it classified certain employees under California overtime laws. The lawsuit was similar to numerous lawsuits filed against restaurant operators, retailers and others with operations in California. The settlement agreement, which was approved by the court in June 2007, provides for a settlement payment of $7.5 million payable in three installments. The first $2.5 million installment was distributed on August 31, 2007. The second $2.5 million installment was paid into a qualified settlement fund on December 29, 2008. The third and final installment of $2.5 million is due on or before June 28, 2010. As of December 28, 2008, the remaining balance of $5.0 million, plus accrued interest of $199,000, was accrued in “Accrued expenses and other liabilities” and “Deferred rent and other liabilities” in the amounts of $2.6 million and $2.6 million, respectively. The Company learned that 140 current and former employees who qualified to participate as class members in this class action settlement were not included in the settlement list approved by the court. The Company filed a motion requesting the court to include these individuals in the approved settlement and to provide that their claims are payable out of the aggregate settlement payment, as the Company believes the parties intended when they reached a settlement. The matter has not yet been finally resolved and there is no assurance that the Company will be successful.

On March 24, 2005, a former employee of the Company filed a California state court action alleging that the Company failed to provide the former employee with certain meal and rest period breaks and overtime pay. The parties moved the matter into arbitration, and the former employee amended the complaint to claim that the former employee represents a class of potential plaintiffs. The amended complaint alleges that current and former shift leaders who worked in the Company's California restaurants during specified time periods worked off the clock and missed meal and rest breaks. This case is still in the pre-class certification discovery stage, and no class has been certified. The Company denies the former employee’s claims, and intends to continue to vigorously defend this action. A recent decision by the California Court of Appeals in Brinker Restaurant Corporation v. Superior Court (Hohnbaum) last year held that employers do not need to affirmatively ensure employees actually take their meal and rest breaks but need only make meal and rest breaks “available” to employees. The Brinker case was recently taken up for review by the California Supreme Court. At this time, the Company has no assurances of how the California Supreme Court will rule in the Brinker case. Regardless of merit or eventual outcome, this arbitration may cause a diversion of the Company’s management’s time and attention and the expenditure of legal fees and expenses.

The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

7. INCOME TAXES

The components of the income tax (expense) benefit for fiscal years 2008, 2007 and 2006 are as follows (in thousands):

	2008			2007			2006
Federal benefit (expense):
Current	$	1,680		$	(799	)	$	(1,788	)
Deferred		(1,788	)		233			3,637
State (expense) benefit:
Current		(30	)		(222	)		(372	)
Deferred		(60	)		(59	)		907
FIN 48 tax expense		1			—			—
Interest expense, gross of tax benefits		—			(50	)		—
Interest income, gross of tax benefits		134			—			—
Total income tax (expense) benefit	$	(63	)	$	(897	)	$	2,384

F-14

The income tax (expense) benefit differs from the federal statutory rate because of the effect of the following items for fiscal years 2008, 2007 and 2006:

	2008			2007			2006
Statutory rate		34.0	%		34.0	%		34.0	%
State income taxes, net of federal benefit		20.1			9.1			6.0
Interest benefit or expense, net of tax benefits		(31.2	)		1.4			0.0
Non-deductible items		15.2			0.5			(0.2	)
Credits		(13.5	)		(2.7	)		1.0
Other		(0.4	)		0.7			0.0
Effective tax (expense) benefit rate		24.2	%		43.0	%		40.8	%

In 2006, the effective state tax rate was higher than the statutory state rate net of federal benefit as a result of California targeted employment tax credits claimed. In 2007, the Company reduced its statutory state tax rate net of federal benefit from 5.8% to 5.6% to reflect the shifting of operations to jurisdictions with no income tax or low income tax rates. The result of this change was a one-time, unfavorable adjustment of 3.2% to the Company's state tax rate for the revaluation of the Company's state deferred tax asset at the lower effective state tax rate. In 2008, the Company similarly reduced its statutory state tax rate net of federal benefit to 5.5%. Although the dollar amount of the one-time, unfavorable adjustment for the revaluation of the deferred tax asset was not significant, the impact of the adjustment to the state tax rate was 7.9% due to the Company's pre-tax book income being closer to $0 than in prior years.

For the years ended December 28, 2008 and December 30, 2007, the Company’s combined federal and state income tax receivables were $850,000 and $687,000, respectively.

Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes, as well as available tax credits. The tax-effected temporary differences and credit carryforwards comprising the Company’s deferred income taxes as of December 28, 2008 and December 30, 2007 are as follows (in thousands): 

	2008			2007
Accruals currently not deductible	$	810		$	1,626
Deferred rent		1,180			1,222
Difference between book and tax basis of property		5,163			7,579
Net operating losses		159			—
State taxes		231			224
Deferred compensation		1,457			939
Deferred income		72			6
Accrued legal settlement		1,976			1,979
Other		(24	)		14
Net deferred income tax asset	$	11,024		$	13,589
Net current deferred income tax asset	$	1,764		$	2,746
Net non-current deferred income tax asset	$	9,260		$	10,843

The Company has State Enterprise Zone credit carryforwards as of December 28, 2008 and December 30, 2007 of $228,000 and $230,000, respectively. State income tax credits will carry forward indefinitely and may be used to offset future state income tax. The Company believes that the remaining deferred tax assets will be realized through future taxable income or alternative tax strategies.

The Company adopted Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with the FASB's Statement No. 109, Accounting for Income Taxes (SFAS 109) effective January 1, 2007 and as of the date of adoption established a total amount of unrecognized tax benefits of $1.1 million, exclusive of accrued interest. Of this total, $11,000 related to permanent differences (as defined in SFAS 109) and resulted in a reduction, net of state tax benefits, of $7,000 to the Company's opening retained earnings as of the adoption date. The remainder of this balance consisted of temporary differences (as defined in SFAS 109) and resulted in the creation of additional deferred tax assets. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 28, 2008 and December 30, 2007 is as follows (in thousands):

F-15

		2008			2007
Beginning balance	$	1,044		$	1,121
Gross increases for tax positions taken in prior years		44			39
Gross decreases for tax positions taken in prior years		—			(308	)
Gross increases for tax positions taken in the current year		147			192
Consents for accounting method changes		(953	)		—
Lapse of statute of limitations		(11	)		—
Ending balance	$	271		$	1,044

As of December 28, 2008, the unrecognized tax benefits, net of their federal tax benefits, that would negatively impact the Company’s effective tax rate if recognized were $7,000.

A significant portion of the Company's balance of unrecognized tax benefits as of December 30, 2007 related to an uncertain tax position for worker's compensation costs. In the fourth quarter of 2007, the Company filed a request to change its accounting method for workers' compensation costs with the IRS. During the third quarter of 2008, the IRS approved the Company's request allowing the Company to increase its tax liability for the impact of the change over a four-year period beginning with its 2007 tax return. The Company reduced its balance of unrecognized tax benefits by $953,000 for the impact of the approval on this uncertain tax position. The Company is not aware of any other events that might significantly impact the balance of unrecognized tax benefits during the next twelve months.

As of December 28, 2008, the Company's open tax years for federal purposes are 2005, 2006 and 2007. The Company's open years for California are 2004 through 2007. During the second quarter of 2008, the Company completed an examination of its 2003 and 2004 tax years by a major tax jurisdiction. The only adjustment was an immaterial reduction to the Company's state tax credit carryforwards. During the third quarter of 2008, the IRS initiated an examination of the Company's 2006 and 2007 tax years and, as of yet, has not notified the Company of any potential adjustments to its returns. As of the end of the year, the Company was not under examination by any other major tax jurisdiction.

The Company has historically classified interest expense and penalties on income tax liabilities and interest income on income tax refunds as additional income tax expense or benefit, respectively, and will continue to do so under FIN 48. As of the adoption of FIN 48, the Company accrued $131,000 of interest expense, gross of its related tax benefits. The Company reduced opening retained earnings by $79,000 for this accrual net of its related tax benefits. During the 2008 and 2007 years, the Company earned net interest income of $134,000 and accrued net interest expense of $50,000, respectively. The interest income in 2008 was primarily the result of the Company's reversal of approximately $105,000 of accrued interest expense as a result of the IRS approval of the Company’s request for method change and the lapse of the statute of limitations on the Company’s 2004 federal tax year. As of December 28, 2008 and December 30, 2007, the Company's balances of accrued interest expense were $55,000 and $181,000, respectively.

8. SHARE-BASED COMPENSATION PLANS

1999 STOCK INCENTIVE PLAN - On March 18, 1999 and March 24, 1999, the Board of Directors and the stockholders, respectively, of the Company approved the 1999 Stock Incentive Plan (the 1999 Plan). All outstanding options under the 1995 Stock Option/Stock Issuance Plan and the 1998 Stock Option/Stock Issuance Plan (collectively, the “predecessor plans”) were incorporated into the 1999 Plan. After the adoption of the 1999 plan, no further grants were made under the predecessor plans. The 1999 Plan is administered by the Company’s Compensation Committee with respect to the officers and directors of the Company and by the Company’s Board of Directors with respect to other eligible employees and consultants of the Company (the Compensation Committee or the Board of Directors, as applicable, the “1999 Plan Administrator”).

The stock issuable under the 1999 Plan consists of shares of authorized but unissued or reacquired common stock, including shares repurchased by the Company on the open market. As of December 28, 2008, a total of 3,923,606 shares of common stock were authorized for issuance under the 1999 Plan, which includes the shares subject to outstanding options under the predecessor plans. The number of shares of common stock reserved for issuance under the 1999 Plan automatically increased on the first trading day in January each year. The increase was equal to 3% of the total number of shares of common stock outstanding as of the last trading day in December of the preceding year, not to exceed 450,000 shares in any given year. In addition, no participant in the 1999 Plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of common stock in the aggregate per calendar year. Each option has a maximum term of 10 years, or 5 years in the case of any greater than 10% stockholder, and is subject to earlier termination in the event of the optionee’s termination of service.

The 1999 Plan is divided into five separate components: (1) the discretionary option grant program, (2) the stock issuance program, (3) the salary investment option grant program, (4) the automatic option grant program and (5) the director fee option grant program. The salary investment option grant program was never implemented, and the automatic option grant program and the director fee option grant program have been discontinued.

F-16

The discretionary option grant and stock issuance programs provide for the issuance of incentive and non-statutory options for eligible employees and service providers, and stock issuances and share right awards, including restricted stock units, for cash or in consideration for services rendered. The option exercise price per share is fixed by the 1999 Plan Administrator in accordance with the following provisions: (1) the exercise price shall not be less than 100% of the fair market value per share of the common stock on the date of grant and (2) if the person to whom the option is granted is a greater-than-10%-stockholder, then the exercise price per share shall not be less than 110% of the fair market value per share of the common stock on the date of grant. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the 1999 Plan Administrator as set forth in the related individual option agreements. Generally, options granted under the 1999 Plan have become exercisable and vest in three equal annual installments over a three-year period. Stock issuances and share right awards, including restricted stock units, may be issued for past services rendered to the Company without any cash payment. In addition, the 1999 Plan Administrator can determine a purchase price to be paid in cash or check that will not be less than the fair market value of the common stock on the issuance date.

The automatic option grant program was available to non-employee board members through 2005. Eligible individuals would automatically receive an option grant for 15,000 to 25,000 shares on the date of their initial election to the board provided that they had not been previously employed by the Company. In addition, in the past, at the date of each annual meeting of stockholders, each non-employee board member would automatically be granted an option to purchase 5,000 shares of common stock, provided that the individual had served on the board for at least six months. All grants under the automatic option grant program vested immediately upon issuance. The exercise price per share was equal to 100% of the fair market value of the common stock on the date of grant. In April 2006, the Company’s board indefinitely suspended the annual option grants under the automatic option grant program.

On the date of each annual stockholders’ meeting after the 2006 annual stockholders’ meeting, each individual who continues to serve as a non-employee board member will be granted an annual award under the 1999 Plan consisting of restricted stock units for 4,500 shares of our common stock, which will vest upon the earlier of the expiration of 12 months of continuous service as a director or the director’s death, or permanent disability, a change of control or a corporate transaction, as such terms are defined in the 1999 Plan. In fiscal 2008, 2007 and 2006, each non-employee director received restricted stock units for 4,500 shares of our common stock.

The 1999 Plan terminated in accordance with its terms on March 17, 2009. As discussed below, the Company’s Board of Directors and stockholders approved the 2008 Equity Incentive Plan in connection with the Company’s annual meeting in 2008 to replace the 1999 Plan. No further grants or awards will be made under the 1999 Plan.

The following is a summary of stock option activity for fiscal years 2006, 2007 and 2008:

							Weighted
	Shares						Average
	Options						Exercise
	Available			Options			Price Per
	for Grant			Outstanding			Share
Balance at December 25, 2005		667,776			1,797,502		$	7.86
Authorized		282,773			—			—
Granted		(431,375	)		431,375			8.59
Exercised		—			(367,739	)		6.27
Forfeited		283,687			(283,687	)		8.91
Balance at December 31, 2006		802,860			1,577,451			8.25
Authorized		293,805			—			—
Granted		(482,519	)		482,519			9.27
Exercised		—			(156,986	)		5.73
Forfeited		203,062			(203,062	)		10.05
Balance at December 30, 2007		817,208			1,699,922			8.55
Authorized		298,493			—			—
Granted		(321,698	)		321,698			4.40
Exercised		—			(600	)		4.75
Forfeited		143,749			(143,749	)		9.26
Expired		6,550			(6,550	)		9.00
Balance at December 28, 2008		944,302			1,870,721			7.78
Exercisable, December 31, 2006					1,004,011			8.21
Exercisable, December 30, 2007					821,927			8.23
Exercisable, December 28, 2008					1,013,898			8.09

F-17

The following table summarizes information as of December 28, 2008 concerning currently outstanding and exercisable options:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining ContractualLife (Years)		Weighted Average ExercisePrice		Number Exercisable		Weighted Average Exercise Price
$    2.90  -  $   4.97		400,809		7.55	$	4.02		157,809	$	3.92
5.00  -      6.50		150,977		5.45		5.94		112,960		6.01
7.00  -      9.87		1,161,272		7.32		8.83		595,132		8.76
10.00  -    11.50		69,486		4.10		10.27		59,820		10.19
12.00  -    15.06		88,177		5.64		12.31		88,177		12.31
		1,870,721		7.02		7.78		1,013,898		8.09

F-18

STOCK OPTIONS - The following table summarizes stock option activity for fiscal year 2008:

	Options			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Term
Outstanding at beginning of period		1,699,922		$	8.55
Granted		321,698			4.40
Exercised		(600	)		4.75
Forfeited		(150,299	)		9.24
Outstanding at end of period		1,870,721		$	7.78	$	40,970		7.02
Exercisable at end of period		1,013,898		$	8.09	$	40,970		5.37

In 2008, 2007 and 2006, the aggregate intrinsic value of stock options (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) exercised was $0, $900,000 and $828,000, respectively.

Compensation cost, which was determined using the weighted average fair value at the date of grant, was $1.96, $4.61 and $4.87 for options granted during 2008, 2007 and 2006, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. For fiscal 2008, the assumptions used were: an expected dividend of zero; an expected stock price volatility of 49%; a risk-free interest rate of 2.0% and expected lives of options of 5.0 years. For fiscal 2007, the assumptions used were: an expected dividend of zero; an expected stock price volatility of 45%; a risk-free interest rate of 3.9% and expected lives of options of 6.4 years. For fiscal 2006, the assumptions used were: an expected dividend of zero; an expected stock price volatility of 53%; a risk-free interest rate of 4.7% and expected lives of options of 6.3 years. As of December 28, 2008, there was $1,303,503 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 2.1 years. As of December 30, 2007, there was $1,916,452 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 2.4 years. As of December 31, 2006, there was $1,387,724 of unrecognized compensation expense related to non-vested option awards that is expected to be recognized over a weighted average period of 2.2 years.

The estimated fair value of options granted is subject to the assumptions made, and if the assumptions change, the estimated fair value amounts could be significantly different.

 Included in general and administrative and restaurant labor expenses on the consolidated statements of operations is stock compensation expense measured and recognized at $1,518,000 in 2008, $1,243,000 in 2007, and $600,000 in 2006.

1999 EMPLOYEE STOCK PURCHASE PLAN - On March 18, 1999 and March 24, 1999, the board and stockholders, respectively, approved the 1999 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the completion of the Company’s initial public offering. The ESPP allows eligible employees, as specified in the ESPP, to purchase shares of common stock in semi-annual intervals through payroll deductions under this plan. The accumulated payroll deductions will be applied to the purchase of shares on the employee’s behalf at a price per share equal to 85% of the lower of (1) the fair market value of the Company’s common stock at the date of entry into the current offering period or (2) the fair market value on the purchase date. An initial reserve of 200,000 shares of common stock has been authorized for issuance under the ESPP. The board may alter, suspend or discontinue the ESPP. However, certain amendments to the ESPP may require stockholder approval. There has been no activity under the ESPP. The ESPP shall terminate upon the earliest of (i) the last business day in July 2009, (ii) the date on which all shares available for issuance under the ESPP shall have been sold pursuant to purchase rights exercised under the ESPP or (iii) the date on which all purchase rights are exercised in connection with a corporate transaction (as defined in the ESPP). 2006 EXECUTIVE INCENTIVE PLAN - On July 27, 2006, the stockholders of the Company approved the Rubio’s Restaurants, Inc. 2006 Executive Incentive Plan (the “EIP”). The purpose of the EIP is to motivate executive officers and other members of senior management with the grant of long-term performance based stock or cash awards.

F-19

The EIP is administered by the compensation committee of the board, which will select participants eligible to receive awards, usually in the form of restricted stock units, determine the amount of each award and the measurement periods for evaluating participant performance, and establish for each measurement period (i) the performance goals, based on business criteria, and the target levels of performance for each participant and (ii) a payout formula or matrix for calculating a participant’s award based on actual performance. Performance goals may be based on one or more of the following business criteria: return on equity, assets or invested capital; stockholder return, actual or relative to an appropriate index (including share price or market capitalization); actual or growth in revenues, orders, operating income, or net income (with or without regard to amortization/impairment of goodwill); free cash flow generation, operational performance, including asset turns, revenues per employee or per square foot, or comparable store sales; or individually designed goals and objectives that are consistent with the participant’s specific duties and responsibilities and that are designed to improve the financial performance of the Company or a specific division, region or subsidiary.

At the end of each measurement period, the compensation committee will determine the extent to which the performance goals for each participant were achieved. Stock awards and restricted stock units under the EIP are payable from the Company’s 1999 Plan or any stock option, equity incentive or similar plan that may be adopted by the Company in the future, or in cash, at the option of the Company. No participant may receive an award of more than 300,000 shares under the EIP in any one fiscal or calendar year.

The Company granted market performance vested stock awards to certain employees under the EIP in fiscal years 2006 and 2007. No awards were granted during fiscal 2008. The awards granted in fiscal years 2006 and 2007 represent a right to receive a certain number of shares of common stock upon achievement of share price performance goals at the end of one-year, two-year and three-year periods. The first three performance periods end on December 20, 2007, 2008 and 2009, respectively. SFAS No. 123R requires that the valuation of market condition awards consider the likelihood that the market condition will be satisfied rather than assuming that the award is vested on the award date. Because the share-price compounded annual growth rate targets represent a more difficult threshold to meet before payout, with greater uncertainty that the market condition will be satisfied, these awards have a lower fair value than those that vest based solely on the passage of time. However, compensation expense is required to be recognized under SFAS No. 123R for an award regardless of when, if ever, the market condition is satisfied. The Company determined the fair value on the date of grant of $4.27, $4.48 and $4.78 for the awards with performance periods ending in 2007, 2008 and 2009, respectively. The fair value of each option grant was estimated on the date of grant using a Stochastic model, under the following assumptions: an expected dividend of zero; expected stock price volatility of 25.7%, 32.2% and 37.8% for the awards with performance periods ending in 2007, 2008 and 2009, respectively, and; risk-free interest rate of 4.9%, 4.6% and 4.5% for the awards with performance periods ending in 2007, 2008 and 2009, respectively. The compensation associated with these shares is being expensed over the service period. The amount of compensation expense recorded was $86,000 $173,000 and $6,000 for fiscal 2008, 2007 and 2006, respectively. The expected cost for all awards granted is based on the fair value on the date of grant, as it is the Company’s intent to settle these awards with shares of common stock. These stock awards are payable under the 1999 Plan.

RESTRICTED STOCK UNITS - The following table summarizes restricted stock unit activity during fiscal years 2008, 2007 and 2006:

	Restricted Stock Units (# of shares)
	2008			2007			2006
Outstanding at beginning of period		85,537			117,822			—
Awards granted		27,000			27,000			117,822
Awards forfeited		(5,332	)		(14,998	)		—
Shares vested		(42,955	)		(44,287	)		—
Non-vested shares at end of period		64,250			85,537			117,822
Weighted Average Grant Date Fair Value	$	4.94		$	6.32		$	5.22

As of December 28, 2008, there was $120,582 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted average period of 0.75 years. For the fiscal year ended December 30, 2007, there was $270,015 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted average period of 1.16 years. For the fiscal year ended December 31, 2006, there was $524,407 of unrecognized compensation expense related to non-vested restricted stock unit awards that is expected to be recognized over a weighted average period of 1.96 years.

2008 EQUITY INCENTIVE PLAN – In connection with the Company’s annual meeting in 2008, the Board of Directors and the stockholders of the Company approved the 2008 Equity Incentive Plan (the “2008 Plan”) to replace the 1999 Plan, which terminated on March 17, 2009. The 2008 Plan permits the Company to issue stock options (both incentive stock options and nonstatutory stock options) and stock awards (including stock appreciation rights, stock units, stock grants and other similar equity awards). The 2008 Plan will be administered by the Company’s Compensation Committee and the Company’s Board of Directors. To date, no stock options or other stock awards have been issued under the 2008 Plan.

F-20

The number of shares of common stock initially reserved for issuance under the 2008 Plan consist of that number of shares that (i) remain available for sale or issuance under the 1999 Plan and (ii) shares subject to outstanding awards issued under the 1999 Plan (including the 2006 Executive Incentive Plan); provided that in the case of (ii) such shares only become available for issuance under the 2008 Plan if and to the extent such outstanding awards are cancelled, expire or are forfeited or such shares are repurchased by the Company. The number of shares available for sale or issuance under the 2008 Plan will automatically increase on the first trading day of January each calendar year during the term of the 2008 Plan, beginning with calendar year 2009, by an amount equal to three percent (3%) of the total number of shares outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 450,000 shares.

9. BENEFIT PLANS

EMPLOYEE SAVINGS PLAN - The Company has a defined contribution 401(k) plan. This plan allows eligible employees to contribute a percentage of their salary, subject to annual limits, to the plan. The Company matches 25% of each eligible employee’s contributions up to 6% of gross salary. The Company’s contributions vest over a five-year period. The Company contributed $56,000, $54,000 and $38,000 for fiscal years 2008, 2007 and 2006, respectively.

EXECUTIVE DEFERRED COMPENSATION PLAN - The Company adopted a deferred compensation plan (the Plan), effective on December 1, 2007. Under the Plan, beginning on December 31, 2007, the Company’s management and other highly compensated employees and non-employee members of the board who are not eligible to participate in the Company’s 401(k) plan based on their compensation levels can defer a portion of their compensation and contribute such amounts to one or more investment funds. The Plan is not intended to meet the qualification requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended, but is intended to meet the requirements of Section 409A of the Internal Revenue Code, and to be an unfunded arrangement providing deferred compensation to eligible employees who are part of a select group of management or highly compensated employees within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended.The maximum aggregate amount deferrable under the Plan is 80% of base salary and 100% of cash incentive compensation. The Company makes bi-weekly matching contributions in an amount equal to 25% of the first 6% of employee compensation contributed, with a maximum annual Company contribution of 6% of employee compensation per year (subject to annual dollar maximum limits). The Company’s contributions to the Plan vest at the rate of 25% each year beginning after the employee’s first year of service. For the fiscal year ended December 28, 2008, the Company’s matching contribution expense under the Plan was $33,000.

Additionally, the Company entered into a rabbi trust agreement to protect the assets of the Plan. Each participant’s account is comprised of their contribution, the Company’s matching contribution and their share of earnings or losses in the Plan. In accordance with EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and Invested, the accounts of the rabbi trust are reported in the Company’s consolidated financial statements. The Company reports these investments within other assets and the related obligation within other liabilities on the consolidated balance sheet. Such amounts totaled $201,000 and $180,000 at December 28, 2008, respectively. The investments are considered trading securities and are reported at fair value with the realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recorded in general and administrative expenses.

NON-EMPLOYEE DEFERRED COMPENSATION PLAN - The Company adopted a non-employee deferred compensation plan on March 6, 2003. Under this plan, non-employee directors can defer fees into either a cash account or into discounted options under the Company’s 1999 Plan. Any deferrals into cash are credited to a cash account that will accrue earnings at an annual rate of 2% above the prime lending rate. At the time of election, a participant must choose the dates on which the cash benefit will be distributed. In October 2004, Congress enacted Internal Revenue Code Section 409A governing deferred compensation. The Company operates this deferred compensation plan in accordance with Section 409A. Because Section 409A restricts the use of discounted stock options, the Company will evaluate the extent to which that portion of the non-employee deferred compensation plan will be implemented in the future.

10. FAIR VALUE MEASUREMENT

At December 28, 2008 and December 30, 2007, the fair value of cash and cash equivalents, other receivables and accounts payable approximated their carrying value based on the short-term nature of these instruments. On December 31, 2007, the Company adopted SFAS 157, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value.

As of December 28, 2008, the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis are comprised of an Executive Deferred Compensation Plan of Rubio’s Restaurants, Inc., (the “Plan”). The Plan is a nonqualified deferred compensation plan which allows highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds held in a rabbi trust. The Plan investments are reported at fair value based on third-party broker statements which represents level 2 in the SFAS 157 fair value hierarchy. The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, are recorded in general and administrative expense on the consolidated statements of operations.

F-21

11. RELATED PARTIES

The following is a listing of the Company’s related-party transactions:

Craig Andrews, a Company director, is a partner at the law firm of DLA Piper LLP (US) and was a shareholder of Heller Ehrman, LLP through June 2008. During fiscal 2008, the Company paid DLA Piper LLP $182,425, and during fiscal 2008, 2007, and 2006, the Company paid Heller Ehrman, LLP $150,955, $258,963 and $736,691, respectively, for rendering general corporate and other legal services.

Timothy Ryan, a Company director, entered into a consulting agreement with the Company effective September 1, 2005 to provide certain marketing services to the Company. The agreement terminated in December 2005. Under the terms of the agreement, Mr. Ryan received consulting fees of $25,000 per month. Through December 25, 2005, $80,000 was paid to Mr. Ryan under the consulting agreement. Mr. Ryan also received a bonus of $100,000 under his consulting agreement, which was paid in 2006.

In July 2005, the Company entered into agreements with Rosewood Capital, L.P. or Rosewood, and Ralph Rubio, who at the time was Chairman of the Board and Chief Executive Officer, to extend the registration rights held by Rosewood and Mr. Rubio under an investor’s rights agreement entered into prior to the Company’s initial public offering. Neither Mr. Rubio nor Mr. Anderson, a Company director, voted on the approval of the transaction with respect to these extension agreements. In May 2007, the Company, Rosewood and Mr. Rubio, who at the time was Chairman of the Board, entered into agreements to further extend the registration rights held by Rosewood and Mr. Rubio from December 31, 2007 to June 30, 2009. As part of these extension agreements, Rosewood and Mr. Rubio agreed that they would not demand that the Company register their stock prior to June 30, 2009. Neither Mr. Rubio nor Mr. Anderson, a Company director and affiliated with Rosewood, voted on the approval of the transaction with respect to these extension agreements. On September 11, 2008, the Company entered into an agreement with each of Rosewood and Mr. Rubio to extend the time period in which Rosewood and Mr. Rubio may exercise their registration rights from June 30, 2009 to December 30, 2010. In consideration for this extension, Rosewood and Mr. Rubio each agreed not submit a request to register their stock until December 31, 2008. Neither Mr. Rubio nor Mr. Anderson voted on the approval of the transaction with respect to these extension agreements.

12. NET INCOME (LOSS) PER SHARE

A reconciliation of basic and diluted net income (loss) per share in accordance with SFAS No. 128, Earnings per Share, is as follows (in thousands, except per share data):

	Fiscal Years
	2008		2007		2006
Numerator
Basic:
Net income (loss)	$	189	$	1,189	$	(3,461	)
Denominator
Basic:
Weighted average common shares outstanding		9,951		9,889		9,592
Diluted:
Effect of dilutive securities:
Common stock options		—		—		—
Total weighted average common and potential common shares outstanding		9,951		9,889		9,952
Net income (loss) per share:
Basic	$	0.02	$	0.12	$	(0.36	)
Diluted	$	0.02	$	0.12	$	(0.36	)

For the fiscal years ended December 28, 2008, December 30, 2007, and December 25, 2006, common stock options of 1.7 million, 511,000, and 687,000 shares, respectively, were excluded in calculating diluted earnings per share as the exercise price exceeded fair market value and inclusion would have been anti-dilutive.

13. SEGMENT INFORMATION

The Company owns and operates high-quality, fast-casual Mexican restaurants under the name “Rubio’s Fresh Mexican Grill,” with restaurants primarily in California, Arizona, Nevada, Colorado and Utah. In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company currently considers its business to consist of one reportable operating segment.

F-22

14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is summarized unaudited quarterly financial data (in thousands, except per share data) for fiscal 2008 and 2007:

	Fiscal 2008
	First Quarter			Second Quarter		Third Quarter		Fourth Quarter
Total revenues	$	42,161		$	45,147	$	47,012	$	44,984
Operating (loss) income		(1,243	)		611		1,244		(227	)
Net (loss) income		(745	)		335		789		(190	)
Basic net (loss) income per share		(0.07	)		0.03		0.08		(0.02	)
Diluted net (loss) income per share		(0.07	)		0.03		0.08		(0.02	)

	Fiscal 2007
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total revenues	$	40,979	$	43,048	$	43,993	$	41,710
Operating income (loss)		236		743		1,250		(444	)
Net income (loss)		196		503		732		(242	)
Basic net income (loss) per share		0.02		0.05		0.07		(0.02	)
Diluted net income (loss) per share		0.02		0.05		0.07		(0.02	)

Operating income (loss) and net income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the annual amount for the year.

F-23