FORWARD-LOOKING STATEMENTS: This Form 10-K, the documents that we incorporate by reference, and other written reports and oral statements made from time to time by us and our representatives contain “forward-looking statements” within the meaning of the federal securities laws. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding our financial position, results of operations, growth strategy and plans for future expansion, product development, economic conditions, and other similar forecasts and statements of expectation. We generally indicate these statements by words or phrases such as “anticipate,” “estimate,” “plan,” “expect,” “believe,” “intend,” “foresee,” and similar words or phrases. Forward-looking statements are based upon estimates, projections, beliefs and assumptions of management at the time of such statements and should not be viewed as guarantees of future performance. Such forward-looking information involves important risks and uncertainties that could significantly impact anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements by or on behalf of the company. The factors that could cause our actual results to differ materially, many of which are beyond our control, include, but are not limited to, the following: delays in opening new stores or outlets because of weather, local permitting, and the availability and cost of land and construction; increases in competition and competitive discounting; increases in minimum wage and other operating costs; shortages in raw food products; volatility of commodity prices; consumer preferences, spending patterns and demographic trends; the possibility of unforeseen events affecting the industry generally, and other risks described from time to time in our periodic reports filed with the Securities and Exchange Commission. Back Yard Burgers, Inc. disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

PART I

ITEM 1. BUSINESS

General

     Back Yard Burgers operates and franchises quick-service restaurants in 17 states, primarily in markets throughout the Southeast region of the United States. Our restaurants specialize in charbroiled, freshly prepared, great tasting food. As our name implies, we strive to offer the same high-quality ingredients and special care typified by outdoor grilling in your own back yard. Our menu features made-to-order gourmet 100% Black Angus hamburgers and chicken sandwiches - charbroiled over an open flame, fresh salads, chili and other special entrees as well as hand-dipped milkshakes, fresh-made lemonade and fresh-baked cobblers. As of January 3, 2004, our operations included 42 company-operated restaurants and 90 franchised restaurants.

Corporate History

     The company was incorporated in December, 1986 as Back Yard Burgers, Inc., a Mississippi corporation, and opened its first restaurant in Cleveland, Mississippi in March 1987. The company was reorganized under the laws of the State of Delaware in January 1991. The company consummated its initial public offering on July 2, 1993 and its common stock has traded on the Nasdaq SmallCap Market since that time.

Operating Strategy

     Our restaurants are designed to project a back yard theme that emphasizes charbroiled, freshly prepared, great tasting food, including gourmet 100% Black Angus hamburgers, chicken sandwiches and other gourmet items as customers would prepare in their own back yard. Our operating strategy includes:

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Growth Strategy

     During 2004, we will continue to focus on opening new company-operated and franchised restaurants and increasing same-store sales. Our growth strategy is to continue to:

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     The following table sets forth information as to the sales of both company-operated and franchised restaurants in operation for the periods indicated (in thousands). Because the company’s fiscal year ends on the Saturday closest to December 31, the fiscal year ended January 3, 2004 contains 53 weeks, while the fiscal year ended December 28, 2002 contains 52 weeks.

      Restaurant Openings and Closings . The following table presents an activity summary of the company-operated and franchised restaurants during the periods presented.

      Site Selection . The company believes that the location of a restaurant is critical to its success. Management inspects each potential restaurant site prior to final selection of the site. In evaluating particular sites, the company considers various criteria including traffic count, speed of traffic, convenient access, size and configuration, demographics and density of population, visibility and cost. The company also reviews potential competition and the sales and traffic counts of national and regional chain restaurants operating in the area. A majority of both company-operated and franchised restaurants are located on leased land.

      Restaurant Design and Service . Restaurants with a single drive-thru and indoor dining are built to company-approved specifications. There are some existing double drive-thru restaurants without indoor dining; however, the additional development of this facility type has been discontinued.

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     In some circumstances, restaurants may be constructed via the conversion of buildings used previously by other concepts, including other restaurants. The restaurants range in size from 820 square feet to 4,000 square feet. The restaurants also include company-approved interior and exterior decor, equipment, fixtures, furnishings, signs, parking and site improvements. The restaurants have a highly visible, distinctive and uniform look that is intended to appeal to customers of all ages.

     Prior to 1994, the company operated and franchised predominately double drive-thru restaurants without indoor dining. Since that time, the company has added a number of indoor dining facilities to its operations, including the retrofitting of many existing double drive-thru restaurants to include indoor dining. At January 3, 2004, the number of restaurants with indoor dining was 33 company-operated facilities and 80 franchised facilities.

     It is the company’s objective to serve customers within 60 seconds of their arrival at the drive-thru window. Each restaurant has a computerized point-of-sale system which displays each individual item ordered on a monitor in front of the food and drink preparers. This enables the preparers to begin filling an order before the order is completed and totaled, and thereby increases the speed of service to the customer and the number of sales per hour. The restaurants are generally open from 12 to 15 hours per day, seven days a week, for lunch, dinner and late-night snacks and meals.

      Supplies . The company and its franchisees purchase their food, beverages and supplies from company-approved suppliers. All products must meet standards and specifications set by the company. Management constantly monitors the quality of the food, beverages and supplies provided to the restaurants. The company has been successful in negotiating price concessions from suppliers for bulk purchases of food and paper supplies used by the restaurants. The company believes that these arrangements have achieved cost savings, improved food quality and consistency and helped decrease volatility of food and supply costs for the restaurants. All essential food and beverage products are available or, upon short notice, could be made available from alternate qualified suppliers.

      Management and Employees . Each company-operated restaurant employs an average of approximately 25 employees, many of whom work part-time. The management staff of a typical restaurant operated by the company consists of a general manager and two assistant managers. Each company-operated restaurant unit supervisor reports directly to a district manager. The district managers are able to provide close, hands-on management of each company-operated restaurant since they have responsibility for only five to eight restaurants. Each district manager reports directly to a director of operations.

      Supervision and Training . The company believes that training and personnel development are crucial to its success. The company’s training program is an intensive four-week program consisting of both in-store and classroom training. The in-store training stresses food quality, fast, friendly customer service, restaurant cleanliness, and proper management operations of a quick service restaurant. The classroom training consists of such topics as food safety and sanitation, employment laws and regulations, interviewing and hiring of employees, and systems to control both food and labor costs. Prior to opening, each restaurant must have a minimum of three trained and certified managers that have successfully completed the company training program.

      Advertising and Promotion . Marketing promotions are planned by the company’s national marketing committee made up of company employees and selected franchisee representatives from the Back Yard Burgers, Inc. franchisee association’s board of directors. The four franchisees are elected to two-year terms by the franchise association. These franchisees also serve as officers of the franchise association for the two-year term as well. Production of some marketing materials is paid for through a national advertising fund, which collects 1% of taxable sales from each franchisee and company-operated restaurant. Of that 1%, 50% goes toward the creation of marketing tools such as advertising copy for use on local radio and television, ad slicks, four-color art, design and other collateral pieces and marketing expenses and 50% goes toward testing new products and systems, market research, improvements in operating methods and techniques or for other such purposes that the company deems to be in the interest of improving operations and earnings of restaurants.

      Restaurant Reporting . Each restaurant has a computerized point-of-sale system monitored by the management of the restaurant. With this system, managers are able to monitor sales, labor and food costs, customer counts and other pertinent information every 30 minutes that the restaurant is open. This information allows a manager to better control labor utilization, inventories and operating costs. For company-operated restaurants,

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management monitors sales, food and labor costs, product mix, inventories and customer counts on a weekly basis and profit and loss statements and balance sheets on a monthly basis.

Franchise Operations

      Strategy. In addition to the development of company-operated restaurants, the company will continue to emphasize the development of additional franchised restaurants expected to be opened pursuant to existing area development agreements and franchise agreements as well as the pursuit of additional franchised restaurants pursuant to new area development agreements and franchise agreements. The company believes that it has attracted a committed and enthusiastic group of franchisees as a result of the strength of its concepts and operating strategies.

      Franchisee Support Services . The company maintains a staff of four well-trained and experienced restaurant operations personnel whose only responsibilities are to help train and assist franchisees in opening new restaurants and to monitor the operations of existing restaurants. These services are provided as part of the company’s franchise program. Upon the opening of a new franchised restaurant, the company sends an opening team to the restaurant to assist the franchisee during the first several days that the restaurant is open. This management team works in the restaurant to monitor compliance with the company’s standards as to quality of product and service.

     The company employs four franchise field consultants, each of whom supervises franchised restaurants in defined geographic areas. Presently, the company has one franchise field consultant for each 23 restaurants. That ratio will increase as existing franchisees develop new stores within existing territories. Each franchise field consultant has been fully trained by the company to assist franchisees in implementing the operating procedures and policies of the company once a restaurant is open. As part of these services, the franchise service representative rates the restaurant’s hospitality, food quality, speed of service and cleanliness and maintenance of facilities. The franchisees receive a written report of the findings and, if any deficiencies are noted, recommended procedures to be followed to correct such deficiencies. In addition, the consultant assists in developing business and marketing plans, as well as assisting in the training and development of the franchisee’s staff.

     The company also provides construction support services to its franchisees. All site plans must be approved by the company before construction or site improvements begin. These plans include information detailing building location, internal traffic patterns and curb cuts, location of utilities, walkways, driveways, signs and parking lots and a complete landscape plan. The company also approves all plans and specifications for the restaurant building to ensure uniformity of design of the building and the site improvements. The company’s personnel also visit the site during construction, to meet with the franchisees and verify that all standards are met.

      Advertising and Promotion . Franchisees are required to participate in seasonal promotions, which are supported by television, radio, newspaper, banners, point-of-purchase materials and other local store marketing activities. The company’s marketing manual outlines advertising and public relations promotions as well as new store opening information, grand opening information, trade area surveys and describes how to write a marketing plan and budget for the franchisee’s area. Marketing is supported by a staff consisting of two field marketing managers who coordinate plans and implementation with a national advertising agency. Approved suppliers are set up to facilitate such things as uniforms and collateral materials.

      Area Development and Franchise Agreements . In addition to offering single unit franchise agreements, the company also promotes franchisees to enter into area development agreements. The area development agreement grants to the franchisee the exclusive right to develop and open a specified number of restaurants within a limited period of time and in a defined geographic territory and thereafter to operate each restaurant in accordance with the terms and conditions of the franchise agreement. The franchise agreement grants an exclusive license at a specified location to operate a restaurant in accordance with the Back Yard Burgers system and to utilize the company’s trademarks, service marks and other rights of the company relating to the sale of its menu items. The term of a franchise agreement is 10 years, renewable for successive five year periods, if certain conditions pertaining to such renewal are met, including the payment of a $1,000 renewal fee.

     Each area development agreement establishes the number of restaurants the franchisee is to construct and open in the territory during the term of the area development agreement after considering many factors, including the

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residential, commercial and industrial characteristics of the area, geographic factors, population of the area and the previous experience of the franchisee. The franchisee’s development schedule for the restaurants is set forth in the area development agreement. As of January 3, 2004, the company had entered into franchise agreements and area development agreements with certain franchisees that require them to open or have under construction a minimum of 208 restaurants by the end of August 31, 2013. Of the 90 franchised restaurants open as of January 3, 2004, 71 were being operated under area development agreements by multiple unit franchisees and 19 were being operated under single franchise agreements by single unit franchisees. The company may revoke an area development agreement of any franchisee who is unsuccessful in meeting its projected development schedule. During the past three years, the company has exercised its right to terminate eleven area development agreements, which related to the development of up to 28 stores, for lack of performance by multiple unit franchisees with respect to their projected development schedules. Eight of these agreements were terminated during 2003, which related to the development of up to 19 stores. Additionally, during the past three years, two franchise agreements were terminated because of a lack of performance by single unit franchisees with respect to certain franchise agreement requirements, both of which were during 2001. The company believes that its overall experience with franchisees who commit to develop restaurants under franchise agreements and area development agreements has been favorable, although there can be no assurance that future performance by franchisees under these agreements will be successful.

     The franchise agreement and area development agreement require that the franchisee submit information regarding proposed restaurant sites to the company for its review. The company does not arrange or make any provisions for financing the development of restaurants by its franchisees. Each franchisee is required to purchase all fixtures, equipment, inventory, products, ingredients, materials and other supplies used in the operation of its restaurants from approved suppliers, all in accordance with the company’s specifications. The company provides a training program for management personnel of its franchisees. Under the terms of the franchise agreement, the company has adopted standards of quality, service and food preparation for franchised restaurants. Each franchisee is required to comply with all of the standards for restaurant operations as published from time to time in the company’s operations manual.

     The company may terminate a franchise agreement for several reasons, including among others, the franchisee’s bankruptcy or insolvency, default in the payment of royalties or advertising fees to the company, failure to maintain standards set forth in the franchise agreement or operations manual, material violation of any law, ordinance or governmental rule or regulation or cessation of business. In such event, the company may also elect to terminate a multiple unit franchisee’s area development agreement.

      Franchise Fees and Royalties . Under the current franchise agreement, each franchisee is generally required to pay a franchise fee of $25,000. If a franchisee purchases franchise development rights in an area pursuant to an area development agreement, the franchisee must pay $25,000 for the first restaurant and agree to pay a franchise fee of $22,000 for each additional restaurant covered under the agreement. With respect to the area development agreement, the amount of the fee varies depending upon the number of restaurants the company estimates can be developed within the territory. Upon signing the area development agreement, the franchisee will pay to the company a franchise fee of $25,000 for the first restaurant, plus a $5,000 (per restaurant) area development fee (to be credited toward the subsequent $22,000 franchise fees(s)) for subsequent restaurants covered under the area development agreement. For example, for a franchisee whose area development agreement requires the development of five restaurants, the franchise fee will be $25,000 for the first restaurant, and $17,000 ($22,000 less $5,000) for each of the next four restaurants for an aggregate total of $113,000. Each franchisee is also generally required to pay the company a weekly royalty of 4% of the restaurant’s taxable sales and to pay 1% of the restaurant’s weekly taxable sales to the company’s national advertising fund. Each restaurant is required to spend not less than 2% of the restaurant’s taxable sales on local store marketing.

      Development Agreement with YUM Brands, Inc. Under the terms of a Development Agreement entered into in January 2002 with YUM! Brands, Inc., the company granted YUM the right to use Back Yard Burgers’ trademarks in connection with the establishment and operation of up to ten Back Yard Burgers outlets as part of multi-brand units with Taco Bell, Pizza Hut and/or KFC operations. The Development Agreement also granted YUM! an option to co-brand up to 500 additional Back Yard Burgers restaurants within certain geographic areas if certain conditions were satisfied. YUM did not exercise its option, but has entered into a non-binding term sheet which contemplates that the Development Agreement would be amended to provide YUM with the right to license and sublicense the Back Yard Burgers concept and trademarks in connection with the establishment and operation of

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up to 500 stand alone and multi-brand outlets. While no binding agreement has been reached with YUM to amend the terms of the Development Agreement to provide for the operation of more than ten co-branded stores, the company is currently holding discussions with YUM! with respect to the terms and conditions under which such a license and sublicense would be granted. Such terms and conditions may be different from the provisions described above.

Competition

      Restaurant Operations. The restaurant industry, particularly the fast food segment, is highly competitive with respect to price, service, food quality and location and there are numerous well-established competitors possessing substantially greater financial, marketing, personnel and other resources than the company. The company believes that its primary direct competitors consist of McDonald’s Corp., Burger King Corp. and Wendy’s International, Inc. In addition, there are other national, regional and local fast food chains, many of which specialize in or offer quick serve hamburger and chicken products. The company can also be expected to face competition from a broad range of other restaurants and food service establishments. Many of the company’s competitors have achieved significant national, regional and local brand name and product recognition and engage in extensive advertising and promotional programs, both generally and in response to efforts by additional competitors to enter new markets or introduce new products. In addition, the fast food industry is characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. In recent years, numerous companies in the fast food industry have introduced products positioned to capitalize on growing consumer preference for food products which are, or are perceived to be, healthful, nutritious, low in calories and low in fat content. It can be expected that the company will be subject to competition from companies whose products or marketing strategies address these consumer preferences. In addition, the market for suitable restaurant locations is highly competitive in that fast food companies, major restaurant companies and non-food companies compete for prime real estate sites.

      Certain Factors Affecting the Fast Food Restaurant Industry. The company constantly responds to various factors affecting the restaurant industry, including changes in consumer preferences, tastes and eating habits, demographic trends and traffic patterns, increases in food and labor costs and national, regional and local economic conditions. A number of fast food restaurant companies have recently been experiencing flattening growth rates and declines in average sales per restaurant, in response to which certain of such companies have adopted competitive discounting or “value pricing” strategies. As the company’s principal method of competition is based on quality and service, rather than price, such strategies could have the effect of drawing customers away from the company.

      Franchise Operations . In addition to its restaurant operations, the company competes with fast food chains, major restaurant chains and other franchisors for franchisees. Many franchisors, including those in the restaurant industry, have greater market recognition and greater financial, marketing and human resources.

Trademarks and Service Marks

     The company believes its trademarks and service marks have significant value and are important to its marketing efforts. The company has registered the name “Back Yard Burgers” and the kettle and flame design as service marks with the United States Patent and Trademark Office. The company’s policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its marks.

Government Regulations

     The company is subject to Federal Trade Commission regulation and several state laws which regulate the offer and sale of franchises. The company is also subject to state laws that regulate substantive aspects of the franchisor - franchisee relationship. The FTC’s Trade Regulation Rule on Franchising requires the company to furnish to prospective franchisees a franchise offering circular containing information prescribed by this rule.

     State laws that regulate the offer and sale of franchises and the franchisor - franchisee relationship presently exist in a substantial number of states. Such laws generally require registration of the franchise offering with state authorities and regulate the franchise relationship by, for example, requiring the franchisor to deal with its franchisees in good faith, prohibiting interference with the right of free association among franchisees, limiting the

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imposition of standards of performance on a franchisee and regulating discrimination against franchisees in charges, royalties or fees. Although such laws may restrict a franchisor in the termination of a franchise agreement by, for example, requiring “good cause” to exist as a basis for the termination, advance notice to the franchisee of the termination, an opportunity to cure a default and a repurchase of inventory or other compensation, these provisions have not had a significant effect on the company’s franchise operations. The company is not aware of any pending franchise legislation which in its view is likely to affect significantly the operations of the company. The company believes that its operations comply in all material respects with rules and the applicable state franchise laws.

     Each company-operated and franchised restaurant is subject to licensing and regulation by a number of governmental authorities, which may include health, sanitation, safety, fire, building and other agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failure to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. The company is subject to federal and state environmental regulations, but these regulations have not had a material effect on the company’s operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay or prevent the development of a new restaurant in a particular area.

     The company is also subject to state and federal labor laws that govern its relationship with its employees, such as minimum wage requirements, overtime and working conditions and citizenship requirements. Significant numbers of the company’s food service and preparation personnel are paid at rates governed by the federal minimum wage. Accordingly, further increases in the minimum wage would increase the company’s labor costs and may have an adverse effect on the company’s operating margins.

Employees

     As of March 16, 2004, the company employed approximately 1,000 persons in its restaurant operations, 31 of whom are corporate personnel, 115 of whom are restaurant management and supervisory personnel and the remainder of whom are hourly restaurant personnel. Of the 31 corporate employees, 13 are in management positions and 18 are administrative or office employees.

Available Information

     The Company maintains an internet website at www.backyardburgers.com. The Company makes available free of charge under the section “Investor Relations” of its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments to any of those reports, as soon as reasonably practicable after providing such reports to the Securities and Exchange Commission.

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