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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-26125

RUBIO’S RESTAURANTS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		33-0100303 (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)

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.

As of August 1, 2002 there were 9,052,258 shares of the Registrant’s common stock, par value $0.001 per share, outstanding.

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RUBIO’S RESTAURANTS, INC.

TABLE OF CONTENTS

						Page
PART I				FINANCIAL INFORMATION
Item 1.				Financial Statements
				Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 30, 2001			3
				Consolidated Statements of Operations (unaudited) for the thirteen weeks ended June 30, 2002 and July 1, 2001 and the twenty-six weeks ended June 30, 2002 and July 1, 2001			4
				Consolidated Statements of Cash Flows (unaudited) for the twenty-six weeks ended June 30, 2002 and July 1, 2001			5
				Notes to Consolidated Financial Statements (unaudited)			6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			26
PART II.				OTHER INFORMATION
Item 1.				Legal Proceedings			27
Item 2.				Changes in Securities and Use of Proceeds			27
Item 3.				Defaults Upon Senior Securities			27
Item 4.				Submission of Matters to a Vote of Security Holders			27
Item 5.				Other Information			28
Item 6.				Exhibits and Reports on Form 8-K			28
				Signatures			29

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RUBIO’S RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

						June 30,				December 30,
						2002				2001
						(unaudited)				(see Note)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents					$	7,302			$	4,710
	Short-term investments						1,994				1,302
	Income taxes receivable						—				798
	Other receivables						515				673
	Inventory						1,059				1,453
	Prepaid expenses						1,963				736
		Total current assets					12,833				9,672
INVESTMENTS							—				367
PROPERTY — NET							34,880				35,911
OTHER ASSETS							301				353
DEFERRED INCOME TAXES							3,447				4,346
TOTAL						$	51,461			$	50,649
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable					$	1,690			$	3,005
	Accrued expenses and other liabilities						4,215				3,634
	Store closure reserve						1,280				1,496
	Line of credit						1,000				1,000
	Income taxes payable						267				—
	Deferred income taxes						211				214
		Total current liabilities					8,663				9,349
STORE CLOSURE RESERVE							2,376				2,981
DEFERRED RENT							1,781				1,608
DEFERRED FRANCHISE REVENUE							59				87
		Total liabilities					12,879				14,025
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS’ EQUITY:
	Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued or outstanding						—				—
	Common stock, $.001 par value, 75,000,000 shares authorized, 9,023,134 issued and outstanding in 2002, and 8,922,786 issued and outstanding in 2001						9				9
	Paid-in capital						41,659				41,441
	Deferred compensation						407				217
	Accumulated other comprehensive income						1				6
	Accumulated deficit						(3,494	)			(5,049	)
		Total stockholders’ equity					38,582				36,624
TOTAL						$	51,461			$	50,649

Note: The balance sheet as of December 30, 2001 is derived from audited consolidated financial statements and is in accordance with accounting principles generally accepted in the United States of America. Entire notes for the audited period are not included in this report.

See notes to consolidated financial statements-unaudited.

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RUBIO’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands, except per share data)

				13 Weeks Ended								26 Weeks Ended
				June 30,				July 1,				June 30,				July 1,
				2002				2001				2002				2001
REVENUE:
	Restaurant sales			$	30,607			$	28,849			$	60,450			$	55,379
	Franchise and licensing revenue				94				63				129				111
TOTAL REVENUE					30,701				28,912				60,579				55,490
COSTS AND EXPENSES:
	Cost of sales				8,248				7,878				16,579				15,356
	Restaurant labor, occupancy and other				16,726				15,846				33,481				31,225
	General and administrative expenses				2,481				2,502				5,189				5,219
	Depreciation and amortization				1,315				1,310				2,599				2,529
	Pre-opening expenses				3				93				93				234
	Loss on disposal/sale of property				40				1				39				1
TOTAL COSTS AND EXPENSES					28,813				27,630				57,980				54,564
OPERATING INCOME					1,888				1,282				2,599				926
OTHER (EXPENSE) INCOME:
	Interest and investment income				24				70				56				188
	Interest expense				(32	)			(22	)			(64	)			(41	)
		OTHER (EXPENSE) INCOME — NET			(8	)			48				(8	)			147
INCOME BEFORE INCOME TAXES					1,880				1,330				2,591				1,073
INCOME TAX EXPENSE					752				532				1,036				429
NET INCOME				$	1,128			$	798			$	1,555			$	644
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS:
	Basic			$	1,128			$	798			$	1,555			$	644
	Diluted			$	1,128			$	798			$	1,555			$	644
NET INCOME PER SHARE:
	Basic			$	0.13			$	0.09			$	0.17			$	0.07
	Diluted			$	0.12			$	0.09			$	0.17			$	0.07
SHARES USED IN CALCULATING NET INCOME PER SHARE:
	Basic				8,998				8,922				8,982				8,917
	Diluted				9,185				9,002				9,126				8,998

See notes to consolidated financial statements-unaudited.

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RUBIO’S RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)

						26 Weeks Ended
						June 30,				July 1,
						2002				2001
OPERATING ACTIVITIES:
	Net income					$	1,555			$	644
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization					2,599				2,529
		Deferred compensation					190				25
		Loss on disposal/sale of property					39				1
		Changes in assets and liabilities:
			Income taxes receivable/payable				1,065				428
			Other receivables				158				64
			Inventory				394				453
			Prepaid expenses				(1,227	)			(265	)
			Other assets				52				26
			Deferred income taxes				896				4
			Accounts payable				(1,315	)			(1,196	)
			Accrued expenses and other liabilities				581				158
			Store closure reserve				(821	)			—
			Deferred rent				173				145
			Deferred franchise revenue				(28	)			(34	)
				Cash provided by operating activities			4,311				2,982
INVESTING ACTIVITIES:
	Purchases of property						(1,918	)			(5,326	)
	Proceeds from sales of property						311				562
	Purchases of investments						(2,100	)			(10,451	)
	Sales and maturities of investments						1,770				14,119
				Cash used in investing activities			(1,937	)			(1,096	)
FINANCING ACTIVITIES:
	Proceeds from exercise of common stock options						218				45
INCREASE IN CASH AND CASH EQUIVALENTS							2,592				1,931
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD							4,710				1,311
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$	7,302			$	3,242
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid for interest					$	50			$	—
	Net income tax refund received					$	(875	)		$	—

See notes to consolidated financial statements-unaudited.

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RUBIO’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

1. BASIS OF PRESENTATION

     The accompanying consolidated financial information has been prepared by Rubio’s Restaurants, Inc. and its wholly-owned subsidiary, Rubio’s Restaurants of Nevada, Inc. (collectively, the “Company”) without audit, in accordance with the instructions to Form 10-Q and therefore does not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America.

     UNAUDITED INTERIM FINANCIAL DATA — In the opinion of management, the unaudited consolidated financial statements for the interim periods presented reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of the financial position and results of operations as of and for such periods indicated. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes for the fiscal year ended December 30, 2001 included in the Company’s annual report on Form 10-K and the review of our more critical accounting policies identified under the caption “Critical Accounting Policies” in that report. Results for the interim periods presented in this report are not necessarily indicative of results which may be reported for any other interim period or for the entire fiscal year.

     RECLASSIFICATION — Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, the Company has reclassified $28,000 and $46,000 of licensing revenue for the 13 and 26 weeks ended July 1, 2001, respectively, from restaurant sales to franchise and licensing revenue to conform to the presentation for the 13 and 26 weeks ended June 30, 2002, respectively.

2. ASSET IMPAIRMENT AND STORE CLOSURE EXPENSE — The Company periodically assesses its ability to recover the carrying value of its long-lived assets. If the Company concludes that the carrying value will not be recovered based on expected future cash flows, an impairment write-down is recorded to reduce the asset to its estimated fair value. Impairment is reviewed at the lowest levels for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. In the Company’s circumstances, such analysis is performed on an individual restaurant basis. For assets to be held and used, the impairment charge is the difference between the carrying value and the estimated fair value of the assets. For assets to be disposed of, the impairment charge is the difference between the carrying value and the fair value less cost to sell.

     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 in the same quarter that the decision to close these restaurants is made. These store closure charges primarily represent a liability for the future lease obligations after the expected closure dates, net of estimated sublease income, if any.

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RUBIO’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

2. ASSET IMPAIRMENT AND STORE CLOSURE EXPENSE (continued)

     Asset impairment and store closure expenses are estimates that the Company has recorded based on reasonable assumptions related to these restaurant locations at a point in time. The conditions regarding these locations may change in the future and could be materially affected by factors such as the Company’s ability to maintain or improve sales levels, the Company’s ability to secure subleases, the Company’s success at negotiating early termination agreements with lessors, the general health of the economy and resultant demand for commercial property. Amounts recorded may not be sufficient and adjustments may be necessary.

     During the second half of fiscal year 2001, the Company recorded a $6.6 million charge related to the impairment of a select number of under-performing restaurants. Additionally, the Company recorded a $4.8 million charge related to store closures, consisting primarily of future lease obligations on these closed stores (net of estimated sublease income, if any), severance and other related charges, when management committed to its store closure plan during the fourth quarter of 2001. Total charges recorded in fiscal year 2001 related to impairment and store closures were $11.4 million.

     The changes in the store closure reserve during the 26 weeks ended June 30, 2002 were as follows (in thousands):

     In addition, the Company has decided to pursue a franchising effort on 13 selected Company-owned locations in certain regions. On April 15, 2002, the Company completed the sale of four of its Company-owned stores in the Las Vegas, Nevada market to a franchisee. There was no gain or loss on the sale of the stores as they had been written down to their estimated fair value less costs to sell as part of the 2001 fiscal year impairment write-down. Although the leases for those locations were assigned as part of the franchise arrangements, the Company remains contingently liable under those leases. The Company is also actively marketing its stores in Salt Lake City, Utah, Denver, Colorado and Tucson, Arizona for sale to qualified franchisees. During the 26 weeks ending June 30, 2002, there have been no significant changes to the estimates used to determine the reserve balances.

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RUBIO’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

3. BALANCE SHEET DETAILS as of June 30, 2002 and December 30, 2001, respectively (in thousands):

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RUBIO’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

4. CREDIT FACILITIES

     REVOLVING LINE OF CREDIT — As of June 30, 2002 and December 30, 2001, the Company had available $10.4 million of a $12 million revolving line of credit with a maturity date of July 2004. The credit line bears interest based on certain leverage ratios and ranges from the lower of a bank reference rate plus 1% – 2%, or an adjusted London Interbank Offered Rate plus 2.5% – 3.5% per annum (4.38% as of June 30, 2002). The Company pays a commitment fee on the unused portion of the line of credit. As of June 30, 2002 and December 30, 2001, the Company had borrowings of $1.0 million on the line of credit and $0.6 million assigned to a standby letter of credit, related to the Company’s workers compensation insurance policy, that matures in October 2002.

     The credit facility contains various covenants including a minimum EBITDA, fixed charge coverage ratio, minimum interest coverage ratio, and maximum total leverage ratio, and places restrictions on fixed asset purchases. The revolving line of credit restricts the payment of cash dividends and other stock redemptions or repurchases. The Company’s assets collateralize borrowings under the revolving line of credit.

5. COMMITMENTS AND CONTINGENCIES

     LITIGATION — On June 28, 2001, a class action complaint was filed against the Company in Orange County, California Superior Court by a former employee, who worked in the position of general manager. A second similar class action complaint was filed in Orange County, California Superior Court on December 21, 2001, on behalf of another former employee who worked in the positions of general manager and assistant manager. The Company classifies both positions as exempt. The former employees each purport to represent a class of former and current employees who are allegedly similarly situated. These cases currently involve the issue of whether employees and former employees in the general and assistant manager positions who worked in the California restaurants during specified time periods were misclassified as exempt and deprived of overtime pay. In addition to unpaid overtime, these cases seek to recover waiting time penalties, interest, attorneys’ fees, and other types of relief on behalf of the current and former employees that these former employees purport to represent.

     The Company believes these cases are without merit and intends to vigorously defend against the related claims. These cases are in the early stages of discovery and the status of the class action certification is yet to be determined for both suits. It is probable that the latter action may either be stayed pending resolution of the previously described action or consolidated into the former action. The Company is presently unable to predict the probable outcome of these matters and the amounts of damages at issue are also unknown at this time.

     The Company is unaware of any other litigation that could have a material adverse effect on the Company’s results of operations, financial position or business.

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RUBIO’S RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

6. EARNINGS PER SHARE

     A reconciliation of basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share,” is as follows (in thousands, except per share data):

					13 Weeks Ended								26 Weeks Ended
					June 30,				July 1,				June 30,				July 1,
					2002				2001				2002				2001
Numerator
	Basic:
		Net income attributable to common stockholders			$	1,128			$	798			$	1,555			$	644
	Diluted:
		Net income attributable to common stockholders			$	1,128			$	798			$	1,555			$	644
Denominator
	Basic:
		Weighted average common shares outstanding				8,998				8,922				8,982				8,917
	Diluted:
		Effect of dilutive securities:
			Common stock options			187				80				144				81
			Total weighted average common and potential common shares outstanding			9,185				9,002				9,126				8,998
Earnings per share:
	Basic				$	0.13			$	0.09			$	0.17			$	0.07
	Diluted				$	0.12			$	0.09			$	0.17			$	0.07

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This quarterly report on Form 10-Q may contain predictions, projections, estimates and other forward-looking statements that involve a number of risks and uncertainties, including without limitation, those discussed below under “Risk Factors.” While this outlook represents our current judgment on the future direction of the business, such risks and uncertainties could cause actual results to differ materially from any future performance suggested below. We undertake no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. The cautionary statements made in this discussion and analysis should be read as applying to all related forward-looking statements wherever they appear in this 10-Q.

OVERVIEW

     We opened our first restaurant under the name “Rubio’s, Home of the Fish Taco” in 1983. We position our restaurants in the high-quality, quick-service Mexican food segment of the restaurant industry. Our business strategy is to become the leading brand in this industry segment nationwide.

     Rubio’s Restaurants, Inc. was incorporated in California in 1985 and reincorporated in Delaware in 1997. In May 1999, we completed our initial public offering. In late 2000 and early 2001, we started a franchise program by entering into agreements with two franchisee groups. These two agreements represent commitments to open 14 units, of which three units were open as of August 1, 2002. On April 15, 2002, we completed the sale of four company-owned stores in the Las Vegas, Nevada market to a new franchisee. We opened five stores during the first quarter of 2002. We also closed one underperforming store in Arizona on February 8, 2002. We plan to close one other location in Southern California by the end of fiscal 2002. Our current expansion plan calls for us to open approximately nine company-owned restaurants and our franchisees to open one restaurant in fiscal year 2002. We also decided to actively pursue several franchise groups in an effort to sell the remaining company-owned locations in Colorado and Utah. We will continue to focus our efforts on building our presence in our core markets in California and Arizona.

     As a result of our expansion, period-to-period comparisons of our financial results may not be meaningful. When a new unit opens, it will typically incur higher than normal levels of food and labor costs until new personnel gain experience. Hourly labor schedules are gradually adjusted downward during the first three months of a restaurant opening, in order to reach operating efficiencies similar to those at established units. In calculating our comparable restaurant base, we introduce a restaurant into our comparable restaurant base once it has been in operation for 15 calendar months.

     Revenues represent gross restaurant sales, less coupons and other discounts, and franchise and licensing revenue. Cost of sales is composed of food, beverage, and paper supply expense. Components of restaurant labor, occupancy and other expenses include direct hourly and management wages, bonuses, fringe benefit costs, rent and other occupancy costs, advertising and promotion, operating supplies, utilities, maintenance and repairs, and other operating expenses.

General and administrative expenses include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include management, supervisory and staff salaries and employee benefits, travel, information systems, training, corporate rent, professional and consulting fees and franchise expense.

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     Pre-opening expenses, which are expensed as incurred, consist of the costs of hiring and training the initial workforce, travel, the cost of food used in training, the cost of the initial stocking of operating supplies and other direct costs related to opening a new restaurant.

     On June 14, 2002, we entered into a one-year consulting agreement with Jack Goodall, a non-employee member of our Board of Directors. Under the consulting agreement, Mr. Goodall advises and consults with our President and Chief Executive Officer on various issues including marketing review, real estate review and other strategic corporate initiatives as identified by our Board of Directors. In consideration for his services and in lieu of cash compensation, Mr. Goodall received a non-statutory stock option to purchase an aggregate of 50,000 registered shares of our common stock pursuant to our 1999 Stock Incentive Plan. The option is fully vested and immediately exercisable and expires on June 14, 2004. The Board of Directors, with Mr. Goodall recusing himself, approved the consulting agreement and the option.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that can have a material impact on a company’s financial condition and results. Critical accounting policies are those that are most important to the portrayal of a company’s financial condition and results, and that require management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. A summary of our critical accounting policies is set forth in our annual report on Form 10-K for the fiscal year ended December 30, 2001 under the caption “Critical Accounting Policies.”

RESULTS OF OPERATIONS

     All comparisons under this heading between 2002 and 2001 refer to the 13-week period ended June 30, 2002 and the 13-week period ended July 1, 2001, respectively, unless otherwise indicated.

     Our operating results, expressed as a percentage of revenue, were as follows:

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13 WEEKS ENDED JUNE 30, 2002 COMPARED TO THE 13 WEEKS ENDED JULY 1, 2001

     Results of operations reflect 13 weeks of operations for 134 restaurants and a partial period of operations for four restaurants for the 13 weeks ended June 30, 2002. Results of operations also reflect 13 weeks of operations for 130 restaurants and a partial period of operations for five restaurants for the 13 weeks ended July 1, 2001.

     REVENUE. Revenue increased $1.8 million or 6.2%, to $30.7 million for the 13 weeks ended June 30, 2002 from $28.9 million for the 13 weeks ended July 1, 2001. The increase in 2002 was primarily due to sales of $1.4 million from our five 2002 store openings, a $2.1 million increase in sales generated by a full quarter of operations from units opened in 2001 that were not yet in our comparable unit base, an increase in comparable store sales of $0.2 million or 0.9%, a $0.1 million increase in franchising and licensing revenue, offset by a decrease of $1.4 million in sales at the 12 stores that have been closed and $0.6 million for the four stores sold to a franchisee. Units enter the comparable store base after 15 full months of operation. The increase in comparable store sales was primarily due to a 2.2% increase in average check, offset by a 1.3% decrease in transactions. The increase in comparable store sales is due primarily to the success of the company-wide fajita promotion, followed by the crispy shrimp taco promotion in San Diego, Los Angeles and Orange Counties in California.

     COST OF SALES. Cost of sales as a percentage of revenue decreased to 27.0% in the 13 weeks ended June 30, 2002 from 27.3% in the 13 weeks ended July 1, 2001. The decrease was primarily due to the elimination of certain discounts, (0.3%), and enhanced operational controls, (0.6%), partially offset by an increase in produce prices, (0.6%).

     RESTAURANT LABOR, OCCUPANCY AND OTHER. Restaurant labor, occupancy, and other decreased as a percentage of revenue to 54.5% for the 13 weeks ended June 30, 2002 from 54.9% in the 13 weeks ended July 1, 2001. The decrease as a percentage of revenue is due in part to a decrease in total direct and related labor costs of approximately 1.4%. These labor decreases were primarily due to the closure of

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under-performing stores, (0.9%), combined with improved operational efficiencies, (0.5%). The 1.4% labor cost decrease was offset by 0.7% increase in advertising and a 0.3% increase in menu upgrade and concept repositioning costs.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of $2.5 million for the 13 weeks ended June 30, 2002 were consistent with the 13 weeks ended July 1, 2001. As a percentage of revenue, general and administrative expenses decreased to 8.1% for the 13 weeks ended June 30, 2002 from 8.7% for the 13 weeks ended July 1, 2001. The decrease as a percentage of sales was primarily due to the leveraging of our expanding revenue base.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses of $1.3 million in the 13 weeks ended June 30, 2002 were essentially flat to $1.3 million in the 13 weeks ended July 1, 2001. As a percentage of restaurant sales, depreciation and amortization decreased to 4.3% for the 13 weeks ended June 30, 2002 from 4.5% for the 13 weeks ended July 1, 2001.

     PRE-OPENING EXPENSES. Pre-opening expenses decreased to $3,000 for the 13 weeks ended June 30, 2002 from $93,000 for the 13 weeks ended July 1, 2001. The decrease was due to no new stores opening during the 13 weeks ended June 30, 2002.

     INTEREST INCOME, NET. Net interest income (expense) fluctuated to $(8,000) for the 13 weeks ended June 30, 2002 from $48,000 in net interest income for the 13 weeks ended July 1, 2001, primarily due to interest expense incurred by our borrowing on the credit line in July 2001 and the reduction in interest rates paid on our investments. Interest income decreased to $24,000 for the 13 weeks ended June 30, 2002 from $70,000 for the 13 weeks ended June 1, 2001 primarily due to lower interest rates paid on our investments.

     INCOME TAXES. The provision for income taxes for the 13 weeks ended June 30, 2002 and 13 weeks ended July 1, 2001 is based on the approximate annual effective tax rate of 40% applied to the respective period’s pretax book income. The 40% tax rate applied to the 13 weeks ended June 30, 2002 comprises the federal and state statutory rates based on the estimated annual effective rate on pre-tax income of $1,880,000. The 40% tax rate applied to the 13 weeks ended July 1, 2001 comprises the federal and state statutory rates based on the estimated annual effective rate on pre-tax income of $1,330,000.

     All comparisons in the following section refer to the 26-week period ended June 30, 2002 and the 26-week period ended July 1, 2001, respectively, unless otherwise indicated.

     Our operating results, expressed as a percentage of revenue, were as follows:

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26 WEEKS ENDED JUNE 30, 2002 COMPARED TO THE 26 WEEKS ENDED JULY 1, 2001

     Results of operations reflect 26 weeks of operations for 129 restaurants and partial period operations for ten restaurants for the 26 weeks ended June 30, 2002. Results of operations also reflect 26 weeks of operations for 126 restaurants and a partial period of operations for nine restaurants for the 26 weeks ended July 1, 2001.

     REVENUE. Revenue increased $5.1 million or 9.2%, to $60.6 million for the 26 weeks ended June 30, 2002 from $55.5 million for the 26 weeks ended July 1, 2001. The increase in 2002 was primarily due to sales of $2.3 million from our five 2002 store openings, $5.3 million in sales generated by a full six months of operations from units opened in 2001 and 2000 that were not yet in our comparable unit base, an increase in comparable store sales of $0.7 million or 1.4%, offset by a decrease of $2.6 million in sales from the 12 stores that have been closed and $0.6 million for the four stores sold to a franchisee. Units enter the comparable store base after 15 full months of operation. The increase in comparable store sales was primarily due to a 1.0% increase in the average check amount and a 0.3% increase in transactions.

     COST OF SALES. Cost of sales as a percentage of revenue decreased to 27.4% in the 26 weeks ended June 30, 2002 from 27.7% in the 26 weeks ended July 1, 2001. The decrease was primarily due to the elimination of certain discounts, (0.4%), and enhanced operational controls, (0.3%), partially offset by an increase in produce prices, (0.4%).

     RESTAURANT LABOR, OCCUPANCY AND OTHER. Restaurant labor, occupancy, and other decreased as a percentage of revenue to 55.3% for the 26 weeks ended June 30, 2002 from 56.3% in the 26 weeks ended July 1, 2001. The decrease as a percentage of sales is due in part to a decrease in total direct and related labor costs of approximately 1.5%. These labor decreases were primarily due to the closure of under-performing stores combined with improved operational efficiencies. In addition, unit operating expenses were 0.3% lower than last year primarily due to lower utility costs. Partially offsetting the decreases in labor and unit operating expenses was a 0.4% increase in advertising costs and 0.3% in costs related to our concept repositioning project.

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     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of $5.2 million for the 26 weeks ended June 30, 2002 were essentially flat to $5.2 million for the 26 weeks ended July 1, 2001. As a percentage of restaurant sales, general and administrative expenses decreased to 8.6% for the 26 weeks ended June 30, 2002 from 9.4% for the 26 weeks ended July 1, 2001. The decrease as a percentage of sales was primarily due to the leveraging of our expanding revenue base.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased to $2.6 million in the 26 weeks ended June 30, 2002 from $2.5 million in the 26 weeks ended July 1, 2001. The net $0.1 million increase was primarily due to the additional depreciation on the 9 new units opened during the last six months of 2001 and the 5 new units opened during 2002, offset by the reduction in depreciation from the stores closed or impaired in 2001. As a percentage of revenue, depreciation and amortization decreased to 4.3% for the 26 weeks ended June 30, 2002 from 4.6% for the 26 weeks ended July 1, 2001.

     PRE-OPENING EXPENSES. Pre-opening expenses decreased to $93,000 for the 26 weeks ended June 30, 2002 from $234,000 for the 26 weeks ended July 1, 2001. The decrease was due in part to opening four less units in the first six months of 2002 versus 2001. The average pre-opening cost per new unit opening decreased from approximately $26,000 per new unit in the prior year to approximately $19,000 per new unit in the current year due to opening more locations in mature markets in 2002 than in 2001. New markets traditionally require higher pre-opening costs than mature markets due to the lack of leveraging an existing region’s resources.

     INTEREST INCOME, NET. Net interest income (expense) decreased to $(8,000) for the 26 weeks ended June 30, 2002 from $147,000 in net interest income for the 26 weeks ended July 1, 2001. Interest income decreased to $56,000 for the 26 weeks ended June 30, 2002 from $188,000 for the 26 weeks ended July 1, 2001. The decrease is primarily due to reduced interest rates paid on investments. Interest expense increased to $64,000 in the current year from $41,000 in the same prior year period due to interest expense incurred by our borrowing on the credit line in July 2001.

     INCOME TAXES. The provision for income taxes for the 26 weeks ended June 30, 2002 and 26 weeks ended July 1, 2001 is based on the approximate annual effective tax rate of 40% applied to the respective period’s pretax book income. The 40% tax rate applied to the 26 weeks ended June 30, 2002 comprises the federal and state statutory rates based on the estimated annual effective rate on pre-tax income of $2,591,000. The 40% tax rate applied to the 26 weeks ended July 1, 2001 comprises the federal and state statutory rates based on the estimated annual effective rate on pre-tax income of $1,073,000.

     SEASONALITY

     Historically, we have experienced seasonal variability in our quarterly operating results with higher sales per restaurant in the second and third quarters than in the first and fourth quarters. The higher sales in the second and third quarters improve profitability by reducing the impact of our restaurants’ fixed and semi-fixed costs, as well as through increased revenues. This seasonal impact on our operating results is expected to continue.

     INFLATION

     Components of our operations subject to inflation include labor, food, beverage, and lease costs. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are subject to inflationary increases. We believe that current adverse conditions in the insurance, utility

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and labor areas specifically, could have an impact on our results of operations during the upcoming year.

     DEFERRED TAX ASSETS

     The Company utilizes Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and income tax returns. Under this method, deferred income taxes are recorded based on current income tax rates applied to differences between the financial statement and tax basis of assets and liabilities, as well as the effects of operating loss carryforwards and income tax credits. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Management must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. The Company does not believe a valuation allowance is necessary at June 30, 2002. The provision for income taxes represents the income tax payable for the period and the change during the period in deferred income tax assets and liabilities. For the 26 weeks ended June 30, 2002, the Company’s income tax provision of $1,036,000 consisted of a reduction in deferred income taxes of $896,000 and an increase in income taxes payable of $140,000.

     LIQUIDITY AND CAPITAL RESOURCES

     We have funded our capital requirements in recent years through the public sale of equity securities, cash flow from operations and bank debt. We generated $4.3 million in cash flow from operating activities for the 26 weeks ended June 30, 2002 and $3.0 million for the 26 weeks ended July 1, 2001.

     Net cash used by investing activities was $1.9 million for the 26 weeks ended June 30, 2002 compared to net cash used by investing activities of $1.1 million for the 26 weeks ended July 1, 2001. Net cash used by investing activities for the 26 weeks ended June 30, 2002 included $1.9 million in capital expenditures, where net cash used by investing activities for the 26 weeks ended July 1, 2001 consisted of $5.3 million of capital expenditures offset by a net $3.7 million provided by the sale, purchases and maturities of investments.

     Net cash provided by financing activities was $218,000 for the 26 weeks ended June 30, 2002 compared to net cash provided of $45,000 for the 26 weeks ended July 1, 2001. Financing activities in both quarters consisted of proceeds from the exercise of common stock options.

     As of June 30, 2002, we had available $10.4 million of a $12.0 million revolving line of credit agreement with a financial institution that matures in July 2004. On July 25, 2001, we drew $1.0 million on the line of credit. As of June 30, 2002, our outstanding principal balance under this agreement was $1.0 million and we had $0.6 million assigned to a standby letter of credit that matures in October 2002. Interest on the revolving line of credit is calculated on the lower of either a bank reference rate plus 1% – 2%, or on an adjusted London Interbank Offered Rate plus 2.5% – 3.5% per annum.

     Our funds are principally used for the development and opening of new units. We incurred $1.9 million in capital expenditures during the 26 weeks ended June 30, 2002, of which $1.3 million was for newly opened units, $0.4 million for existing locations and $0.2 million for corporate and information technology expenditures. During the 26 weeks ended July 1, 2001, we incurred $5.3 million in capital expenditures, of which $3.6 million was for new unit openings, $0.2 million for future openings, $0.9 million for remodels and point of sale system upgrades, $0.5 million for existing locations and $0.1 million for corporate and information technology expenditures.

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     We currently expect total capital expenditures in 2002 to be approximately $6.2 million, of which approximately $3.6 million is forecasted for the opening of new restaurants, $1.5 million to implement the concept repositioning, $0.7 million for existing stores and $0.4 million for corporate, information technology and other. We currently plan to open approximately nine units in 2002 and a minimum of ten units in 2003. We currently expect that future locations will generally cost between $425,000 and $500,000 per unit, net of landlord allowances and excluding pre-opening expenses. Some units may exceed this range due to the area in which they are built and the specific requirements of the project. Pre-opening expenses are expected to average between $19,000 and $25,000 per restaurant.

     The Company is undertaking a number of projects in 2002 and carrying over into 2003 that are designed to potentially improve sales. Certain of these projects, including proposed new store design, a potential retrofit design that can be incorporated into existing restaurants, signage changes, and new menu items, bigger portions, the addition of some value priced menu items, additional salsa bar choices, and new product packaging could require a significant amount of capital. These projects may require that certain existing assets be disposed of as a result of these projects. The Company is unable to estimate the capital requirements for these projects or the potential asset disposals until certain project tests are complete and rollout schedules are determined.

     We believe that anticipated cash flow from operations combined with funds anticipated to be available from our $12.0 million credit facility and our cash and investments balance of $9.3 million as of June 30, 2002 will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next 12 months. Changes in our operating plans, changes in our expansion plans, lower than anticipated sales, our ability to meet the financial covenants of our credit facility, increased expenses, potential acquisitions or other events may cause us to seek additional financing sooner than anticipated. Additional financing may not be available on acceptable terms, or at all. Failure to obtain additional financing as needed could have a material adverse effect on our business and results of operations.

     RELATED PARTY TRANSACTION

     On June 14, 2002, we entered into a one-year consulting agreement with Jack Goodall, a non-employee member of our Board of Directors. Under the consulting agreement, Mr. Goodall advises and consults with our President and Chief Executive Officer on various issues including marketing review, real estate review and other strategic corporate initiatives as identified by our Board of Directors. In consideration for his services and in lieu of cash compensation, Mr. Goodall received a non-statutory stock option to purchase an aggregate of 50,000 registered shares of our common stock pursuant to our 1999 Stock Incentive Plan. The option is fully vested and immediately exercisable and expires on June 14, 2004. The Board of Directors, with Mr. Goodall recusing himself, approved the consulting agreement and the option.

     RISK FACTORS

     Any investment in our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with the other information contained in this quarterly report, before you decide to buy our common stock. If any of the following risks actually occur, our business would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

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OUR EXPECTED REVENUES, COMPARABLE STORE SALES AND OVERALL EARNINGS PER SHARE MAY NOT BE ATTAINED DUE TO FACTORS REGARDING OUR BRAND AWARENESS, MARKETING STRATEGY AND OUR ABILITY TO MANAGE ONGOING AND UNANTICIPATED COSTS.