UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 28, 2004

OR

RUBIO’S RESTAURANTS, INC.

1902 WRIGHT PLACE, SUITE 300, CARLSBAD, CALIFORNIA 92008
(Address of Principal Executive Offices, Including Zip Code)

(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. (1) Yes   [X]            No  [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as indicated in Rule 12b-2 of the Exchange Act). Yes  [  ]        No [X]

     As of April 30, 2004 there were 9,107,995 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

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PART I - FINANCIAL INFORMATION

RUBIO’S RESTAURANTS, INC.

See notes to consolidated financial statements-unaudited.

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RUBIO’S RESTAURANTS, INC.

See notes to consolidated financial statements-unaudited.

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RUBIO’S RESTAURANTS, INC.

See notes to consolidated financial statements-unaudited.

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RUBIO’S RESTAURANTS, INC.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 and reflects all adjustments, consisting of normal and recurring adjustments, which are in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. These unaudited 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 28, 2003 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.

Recent Accounting Pronouncements

     In December 2003, the Financial Accounting Standards Board (“FASB”) issued revised FASB Interpretation No. (“FIN”) 46R, “Consolidation of Variable Interest Entities”. This interpretation provides guidance on the identification of, and financial reporting for, variable interest entities. Variable interest entities are entities that lack the characteristics of a controlling financial interest or lack sufficient equity to finance activities without additional subordinated financial support. FIN 46R requires a company to consolidate a variable interest entity if that company is obligated to absorb the majority of the entity’s expected losses or is entitled to receive the majority of the entity’s residual returns, or both. FIN 46R also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. FIN 46R is applicable immediately to variable interest entities created after February 1, 2003. For all variable interest entities created prior to February 1, 2003, FIN 46R is applicable to the first interim period ending after March 15, 2004. We do not believe that this interpretation will have a material impact on our financial statements or results of operations.

Stock-Based Compensation

     SFAS No. 123, “Accounting for Stock Based-Compensation” as amended by SFAS No. 148, “Accounting for Stock Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” provides accounting guidance related to stock-based employee compensation. SFAS No. 123, as amended, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations for all periods presented. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.

     The following table summarizes the impact on the Company’s net income had compensation cost been determined based upon the fair value at the grant date for awards under the stock option plans consistent with the methodology prescribed under SFAS No. 123 (in thousands, except per share data):

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

     The pro forma compensation costs were determined using the weighted average fair values at the date of grant for options granted during the 13 weeks ended March 28, 2004 and March 30, 2003 of $3.70 and $2.47 per share, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Reclassifications

     Certain reclassifications have been made to the December 28, 2003 and March 30, 2003 consolidated financial statements to conform to the March 28, 2004 presentation.

2. BALANCE SHEET DETAILS

     Balance Sheet details as of March 28, 2004 and December 28, 2003, respectively (in thousands) are as follows:

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

3. ASSET IMPAIRMENT AND STORE CLOSURE RESERVE

     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.

     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 unit is closed. 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.

     The changes in the store closure reserve during the 13 weeks ended March 28, 2004 were as follows (in thousands):

     During the 13 weeks ended March 28, 2004, the store closure reserve was increased $11,000 to reflect additional expenses incurred to find a suitable sublessee, and decreased $21,000 to reflect additional sublease income received.

4. COMMITMENTS AND CONTINGENCIES

Litigation

     As previously disclosed in the Company’s filings with the SEC, 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

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

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. The two cases have been consolidated into one action. The Company continues to evaluate results in similar proceedings and to consult with advisors with specialized expertise. The Company is presently unable to predict the probable outcome of this matter or the amounts of any potential damages at issue. An unfavorable outcome in this matter or a significant settlement could have a material impact on the Company’s financial position and results of operations.

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

5. NET INCOME PER SHARE

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

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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 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.

Overview

     We opened our first restaurant under the name “Rubio’s, Home of the Fish Taco” in 1983, and have since grown to 150 restaurants, including 145 Company-operated and 5 franchise locations. We position our restaurants in the high-quality, quick-casual Mexican food segment of the restaurant industry. Our business strategy is to become the leading brand in this industry segment.

     In our first quarter of 2004, we continued to improve our economic model. As such, we focused on executing operations excellence and marketing initiatives, and had controlled new unit growth.

     While we had a loss for fiscal year 2003, we were profitable in the second half of 2003, and have continued this favorable trend in the first quarter of 2004. In this profitable first quarter, we gained the benefit of two new restaurants opened in 2004 and 9 new/acquired stores opened in 2003. Our first quarter 2004 results were primarily due to our success in improving the performance of our existing restaurants by growing sales and controlling costs. We accomplished the cost improvement through a variety of initiatives implemented during the second half of 2003 and early 2004. We continue to work diligently to control food and labor costs. We have instituted additional safety programs to reduce workers’ compensation costs, an area that drove the majority of our increase in labor costs in the first half of 2003. We have also focused on reducing our product costs by continuously working with our suppliers to get the best prices available in the market and through strong daily management at the restaurant level.

     Our focus has been on continuous improvement in our existing restaurants’ economic model. This includes working to increase our average unit volumes, and to reduce costs, which results in improvement in our gross margin. In the first quarter, we continued our focus on periodic promotions. These promotions were designed to drive traffic into our units, and we believe that they were successful because we posted a first quarter comp sales increase of 4%. The goal of our menu is to maintain our heritage of offering distinctive and less expensive fish and seafood items, while expanding our offerings of more expensive chicken, pork and beef items. We believe providing this variety of items will continue to improve our overall financial performance by attracting new guests and increasing the frequency of visits by existing guests. We also believe that the greater variety of chicken, beef and pork items will be better received in new geographic markets outside of Southern California, once we renew our expansion efforts outside of California.

     We believe that our focus on improving the economic model in the existing restaurant system in 2004 will position us well for expanded growth. While we have not emphasized franchising in the past, we do have two signed franchise agreements as of March 28, 2004, representing commitments to open 6 units, one of which was open as of March 28, 2004. During the first quarter of 2004, we also opened two company-owned restaurants in the Los Angeles area using our “prototype” look. We also entered into a food service partnership with the new Petco Park baseball stadium in San Diego, where we will serve our fish tacos and quesadillas at three separate concession areas located throughout the stadium. Our current expansion plan calls for us to open five to eight company-owned restaurants in fiscal 2004.

     As a result of our historical 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 fifteen calendar months.

Critical Accounting Policies

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

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

     We have several critical accounting policies, which were discussed in our 2003 Annual Report on Form 10-K, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain. During the 13 weeks ended March 28, 2004, we have not adopted any new

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accounting policies that are considered critical accounting policies nor have there been any significant changes related to our critical accounting policies that would have a material impact on our consolidated financial position, results of operations, cash flow or our ability to conduct business.

Results of Operations

     All comparisons in the following section refer to the 13-week period ended March 28, 2004 and the 13-week period ended March 30, 2003, unless otherwise indicated.

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

13 WEEKS ENDED MARCH 28, 2004 COMPARED TO THE 13 WEEKS ENDED MARCH 30, 2003

     Results of operations reflect 13 weeks of operations for 143 restaurants and a partial period of operations for two restaurants for the 13 weeks ended March 28, 2004. Results of operations also reflect 13 weeks of operations for 135 restaurants and a partial period of operations for two restaurants for the 13 weeks ended March 30, 2003.

     TOTAL REVENUE. Total revenue increased $3.0 million or 10.1%, to $33.5 million for the 13 weeks ended March 28, 2004 from $30.5 million for the 13 weeks ended March 30, 2003. The increase in 2004 was primarily due to sales of $0.3 million from our two 2004 store openings, a $1.6 million increase in sales generated by a full quarter of operations from units opened in 2003 that were not yet in our comparable unit base and an increase in comparable store sales of $1.2 million or 4.0%, offset by a decrease of $0.1 million in sales at the one store that closed in 2003. Units enter the comparable store base after 15 full months of operation. The increase in comparable sales was primarily due to a 0.2% increase in average check, combined with a 3.8% increase in transactions.

     COST OF SALES. Cost of sales as a percentage of revenue decreased to 27.3% in the 13 weeks ended March 28, 2004 from 29.5% in the 13 weeks ended March 30, 2003. This 2.2 margin basis point decrease is a direct result of the initiatives we started in the last half of 2003 to reduce food costs. During the first part of 2003, we experienced higher food and paper costs associated with our larger portions, more menu variety, expanded salsa bar and upgraded packaging for our brand repositioning. In addition, our new menu variety resulted in an anticipated shift in our product mix from lower priced fish menu items to higher priced chicken and steak menu items. In an effort to reduce these costs, during the second half of 2003, we sourced new vendors and switched to less expensive packaging, in addition to implementing a small price increase. Though our chicken and steak costs remained stable during our first quarter ended March 28, 2004, we anticipate that these costs will continue to rise due to recent price increases in both the poultry and cattle markets. We will be running promotions that emphasize our lower cost fish and pork items during the remainder of 2004 in order to offset the increased poultry and cattle prices.

     RESTAURANT LABOR, OCCUPANCY AND OTHER. Restaurant labor, occupancy, and other expenses as a percentage of revenue decreased to 56.8% for the 13 weeks ended March 28, 2004 from 57.6% for the 13 weeks ended March 30, 2003. This 0.8 margin basis point decrease is the net effect of a 0.5% increase in workers’ compensation expenses, a 0.8% decrease in training labor and unit operating expenses, and a 0.5% decrease in relatively fixed unit operating costs such as occupancy and utilities. Workers’

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compensation expenses increased during the 13 weeks ended March 28, 2004 as compared with the 13 weeks ended March 30, 2003 due to the fact that our workers’ compensation expenses during the first half of 2003 were based on an estimated loss development reserve that proved to be too low. We have since increased our workers’ compensation accruals to reflect our higher estimated loss development. We do not anticipate the need to significantly adjust our workers’ compensation accrual in 2004. Actual loss development, however, may be better or worse than the development estimated by the actuary, which could positively or negatively impact our results of operations. Labor and unit operating expenses were higher in the first quarter of 2003 than during the first quarter of 2004 as we incurred higher training, supply, repair, and uniform costs associated with our brand repositioning mentioned in the discussion of cost of sales above. Generally, operating costs are lower in the current period as compared with the prior year period as many operating expenses in a retail unit are semi-fixed, and therefore, represent a lower percentage of revenue when retail sales decline.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $2.9 million or 8.7% of revenue for the 13 weeks ended March 28, 2004, as compared to $2.4 million or 8.0% of revenue for the 13 weeks ended March 30, 2003. The 0.7 margin basis point increase as a percentage of revenue was primarily due to a 0.3% increase in labor costs, a 0.2% increase in recruiting costs, and a 0.2% increase in professional service fees.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $1.5 million in the 13 weeks ended March 28, 2004 increased $0.1 million from $1.4 million for the 13 weeks ended March 30, 2003. The $0.1 million increase was primarily due to the additional depreciation on the seven new units opened since March 30, 2003, as well as the two franchise stores converted to Company-owned restaurants during this same time period. These increases were partially offset by reductions in depreciation expense due to the closure of one store and to the impairment charge, both of which were recorded in the second quarter of 2003.

     PRE-OPENING EXPENSES. Pre-opening expenses remained relatively constant at $53,000 for the 13 weeks ended March 28, 2004 compared to $45,000 for the 13 weeks ended March 30, 2003.

     ASSET IMPAIRMENT AND STORE CLOSURE EXPENSE. In the 13 weeks ended March 28, 2004, the Company reversed $10,000, net, of its store closure expense as compared with no charges or reversals during the 13 weeks ended March 30, 2003. This $10,000 reversal was the net effect of an $11,000 increase to reflect additional expenses incurred to find a suitable sublessee, combined with a $21,000 reversal to reflect additional sublease income received.

     OTHER INCOME (EXPENSE) - NET. Net other income (expense) fluctuated to $42,000 income for the 13 weeks ended March 28, 2004 from $10,000 expense for the 13 weeks ended March 30, 2003. Interest income increased to $42,000 for the 13 weeks ended March 28, 2004 from $20,000 for the 13 weeks ended March 30, 2003 primarily due to the increase in our interest- bearing investments from $3.3 million in 2003 to $7.2 million in 2004. No interest expense was recorded for the 13 weeks ended March 28, 2004 as compared with $30,000 for the 13 weeks ended March 30, 2003 due to the fact that we repaid our $1.0 million line of credit during 2003.

     INCOME TAXES. The income tax expense for the 13 weeks ended March 28, 2004 and March 30, 2003 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 March 28, 2004 comprises the federal and state statutory rates based on the estimated annual effective rate on a pre-tax income of $1.0 million. The 40% tax rate applied to the 13 weeks ended March 30, 2003 comprises the federal and state statutory rates based on the estimated annual effective rate on pre-tax income of $94,000.

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 food, beverage, lease, utility, labor and insurance costs. Substantial increases in costs and expenses, particularly food, supplies, labor, and operating expenses could have a significant impact on our operating results to the extent that such increases cannot be passed along to our guests. Our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are subject to inflationary increases. We believe inflation with respect to

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workers’ compensation insurance and utility expense has had a material impact on our results of operations in 2003 and 2002. Additionally, accrued expenses and other liabilities associated with workers’ compensation insurance, as reflected on our consolidated balance sheets, increased by $0.1 million to $2.9 million as of March 28, 2004 from $2.8 million as of December 28, 2003.

Liquidity and Capital Resources

     We have funded our capital requirements in recent years through public sale of equity securities, private placement of preferred stock, bank debt and cash flow from operations. We generated $3.2 million in cash flow from operating activities for the 13 weeks ended March 28, 2004 compared to $1.7 million for the 13 weeks ended March 30, 2003.

     Net cash used in investing activities was $5.1 million for the 13 weeks ended March 28, 2004 compared to net cash used in investing activities of $2.8 million for the 13 weeks ended March 30, 2003. Net cash used in investing activities for the 13 weeks ended March 28, 2004 included $1.2 million in capital expenditures and $3.9 million in purchases of investments. Net cash used in investing activities for the 13 weeks ended March 30, 2003 consisted of $2.0 million in capital expenditures and $1.5 million in purchases of investments, partially offset by $0.7 million in proceeds received from the sale of property and the sale/maturities of investments.

     Net cash provided by financing activities was $11,000 for the 13 weeks ended March 28, 2004 compared to net cash provided of $84,000 for the 13 weeks ended March 30, 2003. Financing activities in both periods consisted of proceeds from the exercise of common stock options, net of tax.

     As of March 30, 2003, we had $1 million borrowed on our $12 million line of credit. In June 2003, we repaid this outstanding balance, and in August 2003, we terminated the line of credit agreement. On October 29, 2003, we obtained a letter of credit in the amount of $2 million related to our workers’ compensation policy that matures in October 2004. The letter of credit is subject to automatic extension one year from the expiration date and thereafter, unless notification is made prior to the expiration date. We were also required, per the terms of the letter of credit, to pledge collateral of $2.2 million.

     Our funds were principally used for the development and opening of new units. We incurred $1.2 million in capital expenditures during the 13 weeks ended March 28, 2004, of which $0.4 million was for newly opened units, $0.3 million for future openings, $0.4 million for routine capital expenditures at our existing locations, and $0.1 million for corporate and information technology expenditures.

     We currently expect total capital expenditures in 2004 to be approximately $6 million to $8 million for restaurant openings, remodels, maintenance, and for corporate and information technology. We currently expect that future locations will generally cost between $475,000 and $525,000 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 $20,000 and $30,000 per restaurant.

     We believe that the anticipated cash flow from operations combined with our cash and short term investments balance of $9.6 million as of March 28, 2004 will be sufficient to satisfy our working capital and capital expenditure requirements for the foreseeable future. Changes in our operating plans, changes in our expansion plans, lower than anticipated sales, increased expenses, potential acquisitions or other events may cause us to seek additional or alternative financing sooner than anticipated. Additional or alternative financing may not be available on acceptable terms, or at all. Failure to obtain additional or alternative financing as needed could have a material adverse effect on our business and results of operations.

Contractual Obligations and Commitments

     The following represents a comprehensive list of our contractual obligations and commitments as of March 28, 2004:

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     We lease restaurant and office facilities and real property under operating leases expiring through 2016. We have leased all of our facilities, except for one building, to minimize the cash investment associated with each unit. Most of our leases are for 10-year terms and include options to extend the terms. The majority of our leases also include fixed rate and percentage-of-sales rent provisions, and most require us to pay a proportionate share of real estate taxes, insurance, common area, and other operating costs. In addition, we are on the master leases for 4 franchise locations. These 4 locations were previously Company-operated before they were sold to a franchisee. Once they were sold to the franchisee, sublease documents were executed, and the franchisee began to pay rent directly to the landlords. Should this franchisee default on its subleases, we would be responsible. Our maximum theoretical future exposure at March 28, 2004, computed as the sum of all remaining lease payments through the expiration dates of the respective leases was $1.3 million. This amount does not take into consideration any mitigating measures that we could take to reduce this exposure in the event of default, including re-leasing the locations, or terminating the master lease by negotiating a lump payment to the landlord less than the sum of all remaining future rents.

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 or sell our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. If any of the following risks actually occur, our business would likely suffer and our results could differ materially from those expressed in any forward-looking statements contained in this quarterly report including those contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 2. 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.

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

     Our expected sales levels and earnings rely heavily on the acceptability and quality of the products we serve. If any variances are experienced with respect to the recognition of our brand, the acceptableness of our promotions, the impact of our advertising campaigns or the ability to manage our ongoing operations, including the ability to absorb unexpected costs, we could fall short of our revenue and earnings expectations. Factors that could have a significant impact on earnings include:

•		labor costs for our hourly and management personnel, including increases in federal or state minimum wage requirements;
•		fluctuations in food and beverage costs, particularly the cost of chicken, beef, fish, cheese and produce;
•		costs related to our leases;
•		timing of new restaurant openings and related expenses;
•		the amount of sales contributed by new and existing restaurants;
•		our ability to achieve and sustain profitability on a quarterly or annual basis;
•		the ability of our marketing initiatives and operating improvement initiatives to increase sales;
•		consumer confidence;
•		changes in consumer preferences;
•		the level of competition from existing or new competitors in the quick-casual restaurant industry;
•		impact of weather on revenues and costs of food;
•		insurance and utility costs; and
•		general economic conditions.

OUR CURRENT PROJECTS TO IMPROVE OUR BRAND COULD HAVE A MATERIAL ADVERSE IMPACT ON THE COMPANY.

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     We are working on a number of projects designed to improve the strength of our brand and increase sales. These projects include our expanding prototype restaurant design, a potential restaurant remodel or continuing re-image program for existing restaurants, signage changes, and new menu items.

     The implementation of these projects has capital costs and expenses associated with it. Last year’s increase in portion sizes, packaging, new menu items and salsa bar changes increased the food and paper cost of our restaurants. There is a risk that if these changes do not result in increased sales, either through increased transactions or higher average check or both, there could be a material adverse impact on our company’s earnings. Also, the capital requirements of these projects could have an adverse material impact on our cash balances and long-term liquidity.

WE MAY NOT PREVAIL IN OUR DEFENSE OF THE CLASS ACTION CLAIMS RELATED TO CALIFORNIA EXEMPT EMPLOYEE LAWS.

     During 2001, two similar class action claims were filed against us and consolidated into one action. The consolidated action involves the issue of whether current and former employees in the general manager and assistant manager positions who worked in our California restaurants during specified time periods were misclassified as exempt employees and thereby and deprived of overtime pay. Although we believe these matters are without merit and we intend to vigorously defend the claims related to these matters, we are unable at present to predict the probable outcome of this matter, the amount of damages that may occur if we do not prevail or the amount of any potential settlement. This area of the law is rapidly evolving. An unfavorable outcome in these matters or a significant settlement may have a material adverse impact on our financial position and results of operations.

OUR FAILURE OR INABILITY TO ENFORCE OUR CURRENT AND FUTURE TRADEMARKS AND TRADE NAMES COULD ADVERSELY AFFECT OUR EFFORTS TO ESTABLISH BRAND EQUITY.

     Our ability to successfully expand our concept will depend on our ability to establish and maintain “brand equity” through the use of our current and future trademarks, service marks, trade dress and other proprietary intellectual property, including our name and logos. We currently hold two trademarks and have 9 service marks relating to our brand and we have filed applications for two additional marks. Some or all of the rights in our intellectual property may not be enforceable, even if registered against any prior users of similar intellectual property or our competitors who seek to utilize similar intellectual property in areas where we operate or intend to conduct operations. If we fail to enforce any of our intellectual property rights, we may be unable to capitalize on our efforts to establish brand equity. It is also possible that we will encounter claims from prior users of similar intellectual property in areas where we operate or intend to conduct operations.

     On October 2, 2002, La Salsa, Inc. requested that we immediately stop all use of the phrase “FRESH MEXICAN GRILL”, which La Salsa, Inc. contends is its service mark. We have notified La Salsa, Inc that we believe they have no current enforceable right against us to the phrase “Fresh Mexican Grill” under U.S. trademark law. La Salsa, Inc. has requested that the Company license from La Salsa, Inc. the “Fresh Mexican Grill” service mark in order to avoid litigation.

     La Salsa, Inc. is the owner of a service mark for “La Salsa Fresh Mexican Grill,” but disclaims any right to “Fresh Mexican Grill”. La Salsa, Inc. is the owner of registration number 2,190,028 on the Supplemental Register of the USPTO for “Fresh Mexican Grill”. This supplemental registration disclaims any right to “Mexican Grill”. The U.S. Patent and Trademark Office has approved for publication the application of La Salsa, Inc. for the mark “Fresh Mexican Grill.” The opposition period opened on April 8, 2003, and we filed a timely opposition. Because of the descriptive nature of “Fresh Mexican Grill”, we believe that opposition to the mark will be successful.

     La Salsa, Inc. to date has not filed a lawsuit against us. We intend to vigorously defend our right to use the term “Fresh Mexican Grill” and believe we will be successful in doing so. We are presently engaged with La Salsa, Inc. in settlement discussions to resolve the dispute in a manner which preserves our right to continue to utilize “Fresh Mexican Grill”.

WE HAVE CREATED RESERVES RELATED TO THE CLOSURE OF SOME SELECTED STORES. IF THE AMOUNTS OF THESE RESERVES ARE INADEQUATE, WE COULD EXPERIENCE AN ADVERSE EFFECT TO OUR EARNINGS EXPECTATIONS IN THE FUTURE.

     Our reserves for expenses related to closed stores are estimates, and are inherently uncertain. The amounts we have recorded are our reasonable assumptions based on the conditions of these locations at this point in time. The conditions regarding these locations may adversely change in the future and materially affect our future earnings. We will review these reserves on a quarterly basis and will likely have adjustments that may materially have a positive or negative impact to our future earnings.

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OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER FACTORS, WHICH COULD HAVE A NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.

     Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and third quarters of each fiscal year. As a result, we generally find our highest earnings occur in the second and third quarters of each fiscal year. Accordingly, results for any one quarter or for any year are not necessarily indicative of results to be expected for any other quarter or for any other year. Comparable unit sales for any particular future period may increase or decrease versus previous history.

THE ABILITY TO ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL TO OPERATE, MANAGE AND SUPPORT OUR RESTAURANTS IS EXTREMELY IMPORTANT AND OUR FAILURE TO DO SO COULD ADVERSELY AFFECT US.

     Our success and the success of our individual restaurants depends upon our ability to attract and retain highly motivated, well-qualified restaurant operators and management personnel, as well as a sufficient number of qualified employees, including guest service and kitchen staff, to keep pace with our expansion schedule. Qualified individuals needed to fill these positions are in short supply in some geographic areas. Our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could have a material adverse effect on our business or results of operations. We also face significant competition in the recruitment of qualified employees. In addition, we are heavily dependent upon the services of our officers and key management involved in restaurant operations, marketing, product development, finance, purchasing, real estate development, information technologies, human resources and administration. The loss of any of these individuals could have a material adverse effect on our business and results of operations. We generally do not have long-term employment contracts with key personnel except for the employment agreement with our President and Chief Operating Officer, Sheri Miksa.

WE OFFER A FRANCHISE PROGRAM. WE MAY BE UNSUCCESSFUL IN FULLY EXECUTING THIS PROGRAM.

     We started a franchise program by entering into agreements with three franchisee groups between 2001 and 2002. In April 2003, our relationship with one of the franchisee groups was terminated when they defaulted on their franchise agreement and closed their franchised location. In May 2003, we re-opened this closed restaurant as a Company-owned restaurant. In September 2003, we agreed to acquire a franchisee’s location, with the stipulation that this franchisee would build a new location in a separate area. As of March 28, 2004, this new location has not been completed. As of March 28, 2004, we have two franchise agreements representing five franchised restaurants. Restaurant companies typically rely on franchise revenues as a significant source of revenues and potential for growth. Our inability to successfully execute our franchising program could adversely affect our business and results of operations. The opening and success of franchised restaurants is dependent on a number of factors, including availability of suitable sites, negotiations of acceptable lease or purchase terms for new locations, permitting and government regulatory compliance and the ability to meet construction schedules. The franchisees may not have all of the business abilities or access to financial resources necessary to open our restaurants or to successfully develop or operate our restaurants in their franchise areas in a manner consistent with our standards.

IF WE ARE NOT ABLE TO SUCCESSFULLY PURSUE OUR EXPANSION STRATEGY, OUR BUSINESS AND RESULTS OF OPERATIONS MAY BE ADVERSELY IMPACTED.

     We currently plan to open approximately five to eight Company-owned restaurants in 2004, two of which have been opened as of March 28 2004. None of the planned 2004 openings are outside California. Our ability to successfully achieve our expansion strategy will depend on a variety of factors, many of which are beyond our control.

     These factors include:

•		our ability to operate our restaurants profitably;
•		our ability to respond effectively to the intense competition in the quick-casual restaurant industry;
•		our ability to locate suitable high-quality restaurant sites or negotiate acceptable lease terms;
•		our ability to obtain required local, state and federal governmental approvals and permits related to construction of the sites, food and alcoholic beverages;
•		our dependence on contractors to construct new restaurants in a timely manner;

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•		our ability to attract, train and retain qualified and experienced restaurant personnel and management;
•		our need for additional capital and our ability to obtain such capital on favorable terms or at all; and
•		general economic conditions.

     If we are not able to successfully address these factors, we may not be able to expand at the rate contemplated and may have to adjust our expansion strategy, and our business and results of operations may be adversely impacted.

GOVERNMENT REGULATION CHANGES MAY IMPACT OUR BUSINESS

     Our restaurants are subject to licensing and regulation by state and local health, sanitation, safety, fire and other authorities, including licensing and regulation requirements for the sale of food and alcoholic beverages. A substantial number of our employees are subject to various minimum wage requirements. Many of our employees work in restaurants located in California and receive salaries equal to or slightly greater than the California minimum wage. The State of California hourly minimum wage is $6.75. Any increase in the hourly minimum wage in California or other states or jurisdictions where we do business may increase the cost of labor and reduce our profitability.

     Additionally, the State of California has increased benefits provided to employees covered under workers’ compensation insurance. Federal and state laws may also require us to provide paid and unpaid leave to our employees, which could result in significant additional expense to us. In accordance with California Senate Bill 2, effective January 2006 all large employers in California, including us, will be required to participate in a State Health Purchasing Program administered by the Managed Risk Medical Insurance Board of California. We will be required to provide health care coverage for all employees and their families who work at least 100 hours per month, and who have been employed by us for at least three months. We estimate the cost of this mandatory healthcare program for us and for all other companies doing business in the State of California will be significant.

IF WE ARE NOT ABLE TO ANTICIPATE AND REACT TO INCREASES IN OUR FOOD AND LABOR COSTS, OUR PROFITABILITY COULD BE ADVERSELY AFFECTED.

     Our restaurant operating costs principally consist of food and labor costs. Our profitability is dependent on our ability to anticipate and react to changes in food and labor costs. Various factors beyond our control, including adverse weather conditions and governmental regulation, may affect our food costs. We may be unable to anticipate and react to changing food costs, whether through our purchasing practices, menu composition or menu price adjustments in the future. In the event that food price increases cause us to increase our menu prices, we face the risk that our guests will choose to patronize lower-priced restaurants. Failure to react to changing food costs or to retain guests if we are forced to raise menu prices could have a material adverse effect on our business and results of operations.

OUR RESTAURANTS ARE CONCENTRATED IN THE WESTERN REGION OF THE UNITED STATES, AND THEREFORE, OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IF ADVERSE CONDITIONS OCCUR IN THAT REGION.

     As of March 28 2004, all but six of our existing restaurants are located in the western region of the United States. Accordingly, we are susceptible to fluctuations in our business caused by adverse economic or other conditions in this region, including natural disasters, terrorist activities or similar events. Our significant investment in, and long-term commitment to, each of our units limits our ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect our operations. In addition, some of our competitors have many more units than we do. Consequently, adverse economic or other conditions in a region, a decline in the profitability of several existing units or the introduction of several unsuccessful new units in a geographic area, could have a more significant effect on our results of operations than would be the case for a company with a larger number of restaurants or with more geographically dispersed restaurants.

AS A RESTAURANT SERVICE PROVIDER, WE COULD BE SUBJECT TO ADVERSE PUBLICITY OR CLAIMS FROM OUR GUESTS.

     We may be the subject of complaints or litigation from guests alleging food-related illness, injuries suffered on the premises or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially affect us and our restaurants, regardless of whether such allegations are true or whether we are ultimately held liable. A lawsuit or claim could result in an adverse decision against us that could have a material adverse effect on our business and results of operations.

THE RESTAURANT INDUSTRY IS INTENSELY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES TO COMPETE ADEQUATELY.

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     The restaurant industry is intensely competitive. There are many different segments within the restaurant industry that are distinguished by types of service, food types and price/value relationships. We position our restaurants in the high-quality, fresh Mexican grill segment of the industry. In this segment, our direct competitors include Baja Fresh, La Salsa and Chipotle. We also compete indirectly with full-service Mexican restaurants including Chevy’s, Chi Chi’s and El Torito and fast food restaurants, particularly those focused on Mexican food such as Taco Bell and Del Taco. Competition in our industry segment is based primarily upon food quality, price, restaurant ambiance, service and location. Many of our direct and indirect competitors are well-established national, regional or local chains and have substantially greater financial, marketing, personnel and other resources than we do. We also compete with many other retail establishments for site locations.

OUR CURRENT INSURANCE MAY NOT PROVIDE ADEQUATE LEVELS OF COVERAGE AGAINST CLAIMS OR THE AFFECTS OF ADVERSE PUBLICITY.

     There are types of losses we may incur that may be uninsurable or that we believe are not economically insurable, such as losses due to earthquakes and other natural disasters. In view of the location of many of our existing and planned units, our operations are particularly susceptible to damage and disruption caused by earthquakes. Further, we do maintain insurance coverage for employee-related litigation, however, the deductible per incident is high and because of the high cost, we carry only limited insurance for the effects of adverse publicity. In addition, punitive damage awards are generally not covered by insurance. We may also be subject to litigation which, regardless of the outcome, could result in adverse publicity and damages. Such litigation, adverse publicity or damages could have a material adverse effect on our business and results of operations. We do from time to time have employee related claims brought against us. These claims and expenses related to these claims typically have not been material to our overall financial performance. We may experience claims or be the subject of complaints or allegations from former, current or prospective employees from time to time that are material in nature and that may have a material adverse effect on our financial results.

WE MAY INCUR SIGNIFICANT REAL ESTATE RELATED COSTS AND LIABILITIES WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION

     The majority of our units are leased locations in multi-unit retail centers. The age and condition of the real estate we occupy varies. Some of our locations may require significant repairs due to normal deterioration or due to sudden and accidental incidents, such as plumbing failures. It is difficult to predict how many of our unit locations will require major repairs or refurbishment, and it is also difficult to predict what portion of these potential costs would be covered by insurance. Also, as a lessee of real estate, we are subject to and have received claims that our operations at these locations may have caused property damage or personal injury to others. The fact that the majority of our units are located in multi-unit retail buildings means that if there is a plumbing failure or other event in one of our units, neighboring tenants may be affected, which can subject us to liability for property damage and personal injuries. If we were to incur increased real estate costs and liabilities, it could adversely affect our financial condition and results of operations.

SALES BY OUR EXISTING STOCKHOLDERS OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.

     The market price of our common stock could decline as a result of sales by our existing stockholders of a large number of shares of our common stock in the market or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY CONFLICT WITH YOUR INTERESTS.

     As of March 28, 2004, the executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 34.1% of our outstanding common stock. These stockholders are able to influence the outcome of matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of our Company.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our market risk exposures are related to our cash, cash equivalents and investments. We invest our excess cash in highly liquid short-term investments primarily with maturities of less than one year. The portfolio consists primarily of corporate and municipal bonds. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment

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income we earn on our investments and, therefore, impact our cash flows and results of operations. Due to the types of investment and debt instruments we hold, a 10% change in period-end interest rates or a hypothetical 100 basis point adverse move in interest rates would not have a significant negative affect on our financial results.

     Many of the food products purchased by us are affected by changes in weather, production, availability, seasonality and other factors outside our control. In an effort to control some of this risk, we have entered into some fixed price purchase commitments with terms of less than a year. We do not believe that these purchase commitments are material to our operations as a whole. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to control food commodity risks.

Item 4. CONTROLS AND PROCEDURES

     Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the period covered by this quarterly report, our disclosure controls and procedures are adequately designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in applicable rules and forms.

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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     We have no updates to the litigation disclosure in our Form 10-K.

Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

     Not applicable

Item 3: DEFAULTS UPON SENIOR SECURITIES

     Not applicable

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable

Item 5. OTHER INFORMATION

     Not applicable

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

Set forth below is a list of the exhibits included as part of this quarterly report.

     b) Reports on Form 8-K:

     The Company filed a current report on Form 8-K on March 10, 2004, reporting under Items 7 and 12 the results of operations for the fourth quarter and year ended December 28, 2003.

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SIGNATURES

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

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