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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|                                            |  |                                                                                    |  | 
|------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | 
|(Mark One)                                  |  |                                                                                    |  | 
|                                            |  |                                                                                    |  | 
|[X]                                         |  | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934     |  | 
|                                            |  |                                                                                    |  | 
|FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
|                                            |  |                                                                                    |  | 
|or                                         
|                                            |  |                                                                                    |  | 
|[  ]                                        |  | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |  | 

Commission file number 1-12104

BACK YARD BURGERS, INC.

(Name of registrant as specified in its charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 64-0737163         
|(State or other jurisdiction of          |  | (IRS employer      
|incorporation or organization)           |  | identification no.)
|                                         |  |                    
|1657 N. Shelby Oaks Drive, Suite 105     |  |                    
|Memphis, Tennessee                       |  | 38134-7401         
|(Address of principal executive offices) |  | (Zip code)         

(901) 367-0888
(Registrants telephone number)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

|                    |  |                      
|------------------- |  | ---------------------
|                    |  | Name of Each Exchange
|Title of Each Class |  | on Which Registered  
|                    |  |                      
|None                |  | None                 

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

|                             |  |                       
|---------------------------- |  | ----------------------
|                             |  | Name of Each Market   
|Title of Each Class          |  | on Which Listed       
|                             |  |                       
|Common Stock, $.01 par value |  | Nasdaq SmallCap Market

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o

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

Indicate by check mark whether Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No þ

The aggregate market value of common stock held by non-affiliates on March
1, 2003 was approximately $15,550,000.

The number of shares outstanding of the registrants common stock as of
March 1, 2003 was 4,721,723.



---

Certain portions of Part II are incorporated by reference from the
registrants annual report to stockholders for the year ended December 28, 2002
and certain portions of Part III are incorporated by reference from the
registrants proxy statement relating to the annual meeting of stockholders to
be held on May 15, 2003.


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TABLE OF CONTENTS



|                                |  |  |  |  |  |  |  | 
|------------------------------- |  |  |  |  |  |  |  | 
|PART I                         
|PART II                        
|PART III                       
|PART IV                        
|SIGNATURES                     
|SUBSIDIARIES OF THE REGISTRANT 
|CONSENT OF INDEPENDENT AUDITORS
|CERTIFICATION OF CEO           
|CERTIFICATION OF CFO           



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FORWARD-LOOKING STATEMENTS: This Form 10-K contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause our actual results to be
materially different from historical results or from any future results
expressed or implied by such forward-looking statements. 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. You are urged to consider statements that include the
words may, will, would, could, should, believes, estimates,
projects, potential, expects, plans, anticipates, intends,
continues, or the negative or other forms of those words or other comparable
words to be uncertain and forward-looking. This cautionary statement applies
to all forward-looking statements contained in the Form 10-K and oral and other
written statements made by us from time to time. 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 the
Memphis, Kansas City, Little Rock and Nashville markets and other markets
across 17 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 December 28, 2002, our
operations included 42 company-operated restaurants and 77 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:



| |  |  | offering a diverse menu of freshly prepared food items that
are competitive with the everyday prices of the three largest
hamburger chains;                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | utilizing restaurant designs featuring a single drive-thru
concept integrated with an inviting indoor dining area, which
projects a uniform image and creates pleasing curb appeal;
|
| |  |  | serving premium quality, great tasting food comparable to
that of the best full-service casual dining restaurants;                                                                 
|
| |  |  | providing fast and friendly service with emphasis on a positive customer experience; and                                                                                           
|
| |  |  | actively training, supervising and supporting franchised and company-operated restaurants.                                                                                         

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Growth Strategy

During 2003, we will continue to focus on increasing same-store sales by
emphasizing quality food and service. Our growth strategy is to continue to:



| |  |  | set our restaurants apart from fast-food competition by
serving premium fast food, enhancing dine-in facilities and
re-imaging existing facilities with the companys new logo and color
schemes, to ensure the design and feel of the restaurant will match
the standards set by the quality of the food;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | improve the work flow of existing units to improve productivity and throughput;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | develop additional company-operated restaurants in existing markets and fund such development with cash flow from
operations and additional debt or equity financing where warranted. We have three additional company-operated restaurant
openings planned for 2003;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | develop additional franchised restaurants with a committed
and experienced group of franchisees. We have at least 20
additional franchised restaurant openings planned for 2003; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | nurture our relationship with and provide support as needed to our new
business partner, Yum! Brands, Inc. under our multi-brand development agreement
to promote additional unit growth. This agreement was entered on January 2,
2002, and under the terms of the agreement, Back Yard Burgers granted Yum! the
right to use the 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. It is
anticipated that the first ten outlets will be constructed and opened by the
end of 2003, five of which were open as of December 28, 2002. The development
agreement also grants Yum! an option to co-brand up to 500 additional
restaurants within certain geographic areas if the development schedule for the
initial ten outlets is being met. The operating results of the first ten
outlets could be a determining factor in whether or not the option is
exercised.

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Restaurant Operations

Restaurant Locations.The following tables set forth the number of
restaurants located in each market of the companys system at December 28,
2002.

|                     |  |             |    |              |  |                       |  |  |    | 
|-------------------- |  | ----------- | -- | ------------ |  | --------------------- |  |  | -- | 
|Company-operated:    |  |             |    |              |  | Franchised:           |  |  |    | 
|                     |  | Number of   |    |              |  | Number of            
|Core Markets         |  | Restaurants |    | Core Markets |  | Restaurants          
|                     |  |             |    |              |  |                      
|Memphis, TN Area     |  |             | 29 |              |  | Kansas City, MO Area  |  |  | 8  | 
|Little Rock, AR Area |  |             | 7  |              |  | Birmingham, AL Area   |  |  | 5  | 
|Nashville, TN Area   |  |             | 5  |              |  | Hickory, NC Area      |  |  | 4  | 
|Kansas City, MO Area |  |             | 1  |              |  | Knoxville, TN Area    |  |  | 4  | 
|                     |  |             |    |              |  | Evansville, IN Area   |  |  | 3  | 
|                     |  |             | 42 |              |  | Fayetteville, NC Area |  |  | 3  | 
|                     |  |             |    |              |  | Jackson, MS Area      |  |  | 3  | 
|                     |  |             |    |              |  | Louisville, KY Area   |  |  | 3  | 
|                     |  |             |    |              |  | Orlando, FL Area      |  |  | 3  | 
|                     |  |             |    |              |  | Tulsa, OK Area        |  |  | 3  | 
|                     |  |             |    |              |  | Akron, OH Area        |  |  | 2  | 
|                     |  |             |    |              |  | Asheville, NC Area    |  |  | 2  | 
|                     |  |             |    |              |  | Atlanta, GA Area      |  |  | 2  | 
|                     |  |             |    |              |  | Greenville, SC Area   |  |  | 2  | 
|                     |  |             |    |              |  | Lexington, KY Area    |  |  | 2  | 
|                     |  |             |    |              |  | Little Rock, AR Area  |  |  | 2  | 
|                     |  |             |    |              |  | Memphis, TN Area      |  |  | 2  | 
|                     |  |             |    |              |  | Nashville, TN Area    |  |  | 2  | 
|                     |  |             |    |              |  |                       |  |  |    | 
|                     |  |             |    |              |  | Other Markets (1)     |  |  |    | 
|                     |  |             |    |              |  | Mississippi           |  |  | 4  | 
|                     |  |             |    |              |  | Missouri              |  |  | 3  | 
|                     |  |             |    |              |  | Arkansas              |  |  | 2  | 
|                     |  |             |    |              |  | Georgia               |  |  | 2  | 
|                     |  |             |    |              |  | Kentucky              |  |  | 2  | 
|                     |  |             |    |              |  | Louisiana             |  |  | 2  | 
|                     |  |             |    |              |  | North Carolina        |  |  | 2  | 
|                     |  |             |    |              |  | Illinois              |  |  | 1  | 
|                     |  |             |    |              |  | Indiana               |  |  | 1  | 
|                     |  |             |    |              |  | Kansas                |  |  | 1  | 
|                     |  |             |    |              |  | Tennessee             |  |  | 1  | 
|                     |  |             |    |              |  | Texas                 |  |  | 1  | 
|                     |  |             |    |              |  |                       |  |  |    | 
|                     |  |             |    |              |  | Total                 |  |  | 77 | 
|                     |  |             |    |              |  |                       |  |  |    | 

(1)  The Other Markets portion of the table reflects the total number of
restaurants located in such markets by state. Other markets for the
restaurants range from small towns to large cities where franchisees have only
one restaurant.

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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).

|                 |  |                   |        |                   |  |   |        | 
|---------------- |  | ----------------- | ------ | ----------------- |  | - | ------ | 
|                 |  | Year Ended        |        | Year Ended       
|Restaurant Sales |  | December 28, 2002 |        | December 29, 2001
|                 |  |                   |        |                  
|Company-operated |  | $                 | 30,951 |                   |  | $ | 27,541 | 
|Franchised       |  |                   | 54,000 |                   |  |   | 50,165 | 
|                 |  |                   |        |                   |  |   |        | 
|System-wide      |  | $                 | 84,951 |                   |  | $ | 77,706 | 
|                 |  |                   |        |                   |  |   |        | 

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

|                 |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |    |    | 
|---------------- | --------------------------- | ----------------- |  | ------------ | --- | ------------ |  | ------------ | --- | ---------- |  | -- | -- |  |  | -- | -- | 
|                 |                             |                   |  | Year Ended  
|                 |                             |                   |  |             
|                 |                             |                   |  | December 28, |     | December 29, |  | December 30, |     | January 1,
|                 |                             |                   |  | 2002         |     | 2001         |  | 2000         |     | 2000      
|                 |                             |                   |  |              |     |              |  |              |     |           
|Restaurants      |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|Company-operated |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|                 | Open at beginning of period |                   |  | 37           |     |              |  | 35           |     |            |  | 35 |    |  |  | 33 |   
|                 | Opened during period        |                   |  | 5            |     |              |  | 2            |     |            |  | 0  |    |  |  | 5  |   
|                 | Converted to Company        |                   |  | 1            |     |              |  | 0            |     |            |  | 3  |    |  |  | 0  |   
|                 | Converted to Franchise      |                   |  | 0            |     |              |  | 0            |     |            |  | (1 | )  |  |  | (1 | ) 
|                 | Closed during period        |                   |  | (1           | )   |              |  | 0            |     |            |  | (2 | )  |  |  | (2 | ) 
|                 |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|                 | Open at end of period       |                   |  | 42           |     |              |  | 37           |     |            |  | 35 |    |  |  | 35 |   
|                 |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|Franchised (a)   |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|                 | Open at beginning of period |                   |  | 67           |     |              |  | 58           |     |            |  | 51 |    |  |  | 48 |   
|                 | Opened during period        |                   |  | 15           |     |              |  | 13           |     |            |  | 10 |    |  |  | 6  |   
|                 | Converted to Company        |                   |  | (1           | )   |              |  | 0            |     |            |  | (3 | )  |  |  | 0  |   
|                 | Converted to Franchise      |                   |  | 0            |     |              |  | 0            |     |            |  | 1  |    |  |  | 1  |   
|                 | Closed during period        |                   |  | (4           | )   |              |  | (4           | )   |            |  | (1 | )  |  |  | (4 | ) 
|                 |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|                 | Open at end of period       |                   |  | 77           |     |              |  | 67           |     |            |  | 58 |    |  |  | 51 |   
|                 |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   
|                 |                             | Total Restaurants |  |              | 119 |              |  |              | 104 |            |  |    | 93 |  |  |    | 86 | 
|                 |                             |                   |  |              |     |              |  |              |     |            |  |    |    |  |  |   



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|(a) |  | As of March 21, 2003, four franchised restaurants opened
since December 28, 2002, one each in Alabama, Mississippi, Kentucky
and South Carolina and one franchised restaurant closed in North
Carolina.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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 4000 square feet. The
restaurants also include company-approved interior and exterior decor,
equipment, fixtures, furnishings, signs,

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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 December 28, 2002, the number of restaurants with indoor dining was
33 company-operated facilities and 66 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 vice president 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 five franchisees are elected annually by
the franchise association. These franchisees also serve as officers of the
franchise association for the annual 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, 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.

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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
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 20 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
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 December 28, 2002, the company had entered
into franchise agreements and

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area development agreements with certain franchisees that require them to
open or have under construction a minimum of 91 restaurants by the end of May
31, 2012. Of the 77 franchised restaurants as of December 28, 2002, 55 were
being operated under area development agreements by multiple unit franchisees
and 22 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
nine area development agreements, four of which were terminated during 2002,
for lack of performance by multiple unit franchisees with respect to their
projected development schedules. 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.

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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
certain trademarks and service marks (including the name Great Little Burger)
with the United States Patent and Trademark Office. The company has also
registered the name Back Yard Burgers and the kettle and flame design as
service marks. 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 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

8



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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 1, 2003, the company employed approximately 1,000 persons in
its restaurant operations, 30 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 30 corporate employees, 13 are in
management positions and 17 are administrative or office employees.

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ITEM 2. PROPERTIES

Of the 42 company-operated restaurants as of December 28, 2002, the
company has entered into ground leases, as lessee, for 32 restaurants. The
company owns the real property for 9 restaurants. The companys leases are
generally written for a term of five to 15 years with one or more five-year
renewal options. The companys average monthly lease cost for the 14
company-operated restaurants located on leased sites is approximately $3,400
per month. For the 18 restaurants where the company leases the building as
well as the site, the average monthly cost is approximately $5,300 per month.
Most leases are operating leases. Leasehold improvements made by the company
generally become the property of the landlord upon expiration or earlier
termination of the lease; however, in most instances, if the company is not in
default under the lease, modular buildings remain the property of the company
and can be removed from the site upon expiration of the ground lease. With
respect to the buildings and equipment relating to the 42 company-operated
restaurants, management believes that its commercial insurance coverage is
adequate. Also see Business-Restaurant Operations.

The companys executive offices are located in approximately 7,500 square
feet of leased space at 1657 N. Shelby Oaks Drive, Suite 105, Memphis,
Tennessee 38134. The companys lease expires February 28, 2007 and provides
for a minimum annual rent of $80,040. Also, BYB Properties, Inc., a
wholly-owned subsidiary of the company, leases nominal office space at 103
Faulk Road, Suite 200, Wilmington, Delaware 19803. This lease expires on
August 31, 2003, and provides for annual rent of $4,570.

ITEM 3. LITIGATION

The company is involved in certain litigation matters incidental to its
business, including, but not necessarily limited to, claims alleging violations
of federal and state discrimination laws. Such litigation is not presently
considered by management to be material to the financial condition of the
company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

No items are reportable hereunder.

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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The companys common stock is traded and quoted on The Nasdaq SmallCap
Market under the symbol BYBI. The following table sets forth, for all
periods indicated, the high and low closing bid prices for the common stock as
reported by Nasdaq. Such price information contains inter-dealer prices,
without retail mark-up, mark-down or commissions paid, and may not necessarily
reflect actual transactions.

|                   |  |      |       |     |  |   |      | 
|------------------ |  | ---- | ----- | --- |  | - | ---- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|March 31, 2001     |  | $    | 1.38  |     |  | $ | 0.94 | 
|June 30, 2001      |  | $    | 2.08  |     |  | $ | 1.12 | 
|September 29, 2001 |  | $    | 2.91  |     |  | $ | 1.65 | 
|December 29, 2001  |  | $    | 3.65  |     |  | $ | 2.02 | 
|                   |  |      |       |     |  |   |      | 
|March 30, 2002     |  | $    | 8.61  |     |  | $ | 3.89 | 
|June 29, 2002      |  | $    | 11.25 |     |  | $ | 6.40 | 
|September 28, 2002 |  | $    | 12.00 |     |  | $ | 6.31 | 
|December 28, 2002  |  | $    | 6.10  |     |  | $ | 3.95 | 

At March 21, 2003, the common stock was held of record by approximately
530 record stockholders. On March 21, 2003, the last sale price for the common
stock as reported by NASDAQ was $4.31 per share.

The company has not paid or declared cash distributions or dividends and
does not intend to pay cash dividends on the common stock or its preferred
stock in the foreseeable future. Future cash dividends, if any, will be
determined by the board of directors based on the companys earnings, financial
condition, capital requirements and other relevant factors. The company has a
loan agreement in place which requires the prior written consent of the lending
institution for any dividends paid by the company, which according to the loan
agreement shall not be unreasonably withheld.

ITEM 6. SELECTED FINANCIAL DATA

Incorporated herein by reference from the Financial Supplement.

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Incorporated herein by reference from the Financial Supplement.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated herein by reference from the Financial Supplement.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Incorporated herein by reference from the Financial Supplement.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No items are reportable hereunder.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information required herein is incorporated by reference from the
companys definitive proxy statement for the annual meeting of stockholders to
be held May 15, 2003, to be filed pursuant to Regulation 14A. Set forth below
is certain information regarding the companys directors and executive
officers.

|                        |  |     |    |          |  |                                                       |  | 
|----------------------- |  | --- | -- | -------- |  | ----------------------------------------------------- |  | 
|NAME                    |  | AGE |    | POSITION
|                        |  |     |    |         
|Lattimore M. Michael    |  |     | 59 |          |  | Chairman of the Board and Chief Executive Officer    
|Michael W. Myers        |  |     | 44 |          |  | President and Chief Operating Officer                
|William N. Griffith     |  |     | 40 |          |  | Executive Vice President, Sec./Treasurer and Director
|Michael G. Webb         |  |     | 34 |          |  | Chief Financial Officer                              
|W. Kurt Henke           |  |     | 45 |          |  | Director                                             
|Jim L. Peterson         |  |     | 67 |          |  | Director                                             
|William B. Raiford, III |  |     | 42 |          |  | Director                                             
|Joseph L. Weiss         |  |     | 43 |          |  | Director                                             

Mr. Michaelhas been chairman and chief executive officer of the company
since 1993. From 1987 to 1992, he was the companys president and chief
executive officer. He has been a director since 1987.

Mr. Myershas been chief operating officer since August 1999 and was named
president in April, 2001. From 1995 to 1999, he was a regional vice president
for Whataburger, Inc.

Mr. Griffithhas been executive vice president and secretary/treasurer of
the company since 1993. From 1989 to 1992, he was the companys senior vice
president of operations. He has been a director since 1989.

Mr. Webbhas been chief financial officer since March 1999. From 1995 to
1999, he was the controller for Shepherd Tissue, Inc. From 1993 to 1995, he
was a senior financial analyst for The Promus Companies. Prior to 1993, Mr.
Webb was an auditor for KPMG Peat Marwick.

Mr. Henkehas been a director since 1993. He has been an attorney with
Henke-Bufkin since 1992.

Mr. Petersonis the chairman and CEO of J. P. Family Restaurants Holding
Company. He is also the chairman emeritus for Bojangles Restaurants, Inc.,
and past chairman of Apigent Solutions. From 1994 to 1999, he was
chairman, president and chief executive officer of Bojangles
Restaurants, Inc. Prior to joining Bojangles,
he was president and chief executive officer for Whataburger, Inc. for 20
years.

Mr. Raifordhas been a director since 1993. He has been an attorney with
Merkel & Cocke, P.A. since 1989.

Mr. Weissis currently president of A. Weiss Company, a franchisee of the
company. He was president and chief operating officer of the company from 1993
to 1999. He has been a director since 1989.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 15, 2003, to be
filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 15, 2003, to be
filed pursuant to Regulation 14A.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 15, 2003, to be
filed pursuant to Regulation 14A.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Within the 90 days prior to the filing date of this Annual Report on Form
10-K, the company carried out an evaluation, under the supervision and with
the participation of the companys management, including the companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the companys disclosure controls and procedures
(Disclosure Controls) pursuant to Rules 13a-14(c) and 15d-14(c) under the
Securities and Exchange Act of 1934.

(b) CEO and CFO certifications.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Appearing immediately following the Signatures section of this Form 10-K
there are Certifications of the Chief Executive Officer and the Chief
Financial Officer. The Certifications are required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Form
10-K which you are currently reading is the information concerning the
Evaluation referred to in the above statement and this information should be
read in conjunction with the Certifications for a more complete
understanding of the topics presented.

(c) Limitations of the effectiveness of controls.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The companys management, including Chief Executive Officer and Chief
Financial Officer, does not expect that our Disclosure Controls will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of
fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of
the control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions; over time, control may become
inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.

(d) Conclusions.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based upon the Evaluation, the companys Chief Executive Officer and Chief
Financial Officer concluded that the companys Disclosure Controls were
effective.

(e) Changes in Internal Controls.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There were no significant changes in the companys internal controls or in
other factors that could significantly affect those internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses within the 90 days prior to the date of this report

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Consolidated Financial Statements

The following consolidated financial statements, notes related thereto and
report of independent auditors are referenced in Item 8 of this Form 10-K and
are incorporated herein by reference from the Financial Supplement:



| |  |  | Consolidated Balance Sheets as of December 28, 2002 and
December 29, 2001                                                                   
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated Statements of Operations for the years ended
December 28, 2002 and December 29, 2001 and December 30, 2000                     
|
| |  |  | Consolidated Statements of Changes in Stockholders Equity
for the years ended December 28, 2002 and December 29, 2001 and
December 30, 2000
|
| |  |  | Consolidated Statements of Cash Flows for the years ended
December 28, 2002 and December 29, 2001 and December 30, 2000                     
|
| |  |  | Notes to Consolidated Financial Statements                                                                                                  
|
| |  |  | Report of Independent Accountants                                                                                                           

(a)(2) Consolidated Financial Statement Schedules:

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and therefore have been omitted.

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(a)(3) Exhibits

|        |  |                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                         
|Number  |  | Description                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                         
|3.1     |  | Restated Certificate of Incorporation. (5)                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                         
|3.2     |  | Amended and Restated By-Laws. (2)                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                         
|4.1     |  | Specimen Common Stock Certificate. (2)                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                         
|10.1    |  | Employment Agreement, dated April 15, 1993, between the Registrant and
Lattimore M. Michael. (1)                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|10.2    |  | Form of Employment Agreement executed as of June 6, 1993, between the
Registrant and Joseph L. Weiss. (2)                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                         
|10.3    |  | Form of Employment Agreement executed as of June 6, 1993, between the
Registrant and William N. Griffith. (2)                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                         
|10.4    |  | Form of Incentive Stock Option Plan of 1993. (1)                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|10.5    |  | Lease, dated February 1, 1990, between Trezevant Properties and the
Registrant. (1)                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                         
|10.6    |  | Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture I by
and among William L. Lester, Pattie F. Lester, Patricia B. Litow,
Elizabeth B. Fox and Back Yard Burgers, Inc., dated November 15, 1994. (4)                                                   
|        |  |                                                                                                                                                                                                                                                                         
|10.7    |  | Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture II by
and among William L. Lester, Pattie F. Lester, Patricia B. Litow,
Elizabeth B. Fox, Charles B. Fox, David P. Fox and Back Yard Burgers,
Inc., dated November 15, 1994. (4)                    
|        |  |                                                                                                                                                                                                                                                                         
|10.8    |  | 1995 Employee Stock Purchase Plan of Back Yard Burgers, Inc. (5)                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|10.9    |  | The 1995 Incentive Award Plan of Back Yard Burgers, Inc. (5)                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                         
|10.10   |  | Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture III
by and among Pattie F. Lester, Patricia B. Litow, Elizabeth B. Fox,
Charles B. Fox, David P. Fox, Alexandra B. Litow, Andrew R. Litow and Back
Yard Burgers, Inc., dated September 12, 1995. (5)
|        |  |                                                                                                                                                                                                                                                                         
|10.11   |  | Line of Credit Commitment by and between Trust One Bank and Back Yard
Burgers, Inc. dated December 20, 1995. (6)                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|10.12   |  | Loan commitment by and between Phoenix Leasing Incorporated and Back
Yard Burgers, Inc. dated October 4, 1996. (7)                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                         
|10.13   |  | Loan commitment by and between Trust One Bank and Back Yard Burgers,
Inc. dated January 23, 1997. (7)                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                         
|10.14   |  | Capital Contribution Agreement between Back Yard Burgers, Inc. and BYB
Properties, Inc. dated October 10, 1997. (8)                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                         
|10.15   |  | Trademark Assignment by Back Yard Burgers, Inc. to BYB Properties, Inc.
dated October 10, 1997. (8)                                                                                                                                                                     

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|      |  |                                                                                                                                                                                                                               |  | 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|10.16 |  | Trademark License Agreement between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (8)                                                                                                              |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.17 |  | Revolving Loan Agreement regarding Uncommitted Line of Credit Agreement
from BYB Properties, Inc. to Back Yard Burgers, Inc. dated October 10,
1997. (8)                                                                      |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.18 |  | Promissory Note by and between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (8)                                                                                                                   |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.19 |  | Tax Sharing Agreement between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (8)                                                                                                                    |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.20 |  | Loan Agreement by and between Trust One Bank and Back Yard Burgers, Inc.
dated December 15, 1997. (8)                                                                                                                         |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.21 |  | Promissory Note by and between Trust One Bank and Back Yard Burgers,
Inc. dated December 15, 1997. (8)                                                                                                                        |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.22 |  | Business Loan Agreement by and between Cavalry Banking and Back Yard
Burgers, Inc., dated January 26, 1998. (9)                                                                                                               |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.23 |  | Promissory Note by and between Cavalry Banking and Back Yard Burgers,
Inc., dated January 26, 1998. (9)                                                                                                                       |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.24 |  | Loan Agreement by and between Trust One Bank and Back Yard Burgers,
Inc., dated February 4, 1998. (9)                                                                                                                         |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.25 |  | Promissory Note by and between Trust One Bank and Back Yard Burgers,
Inc., dated February 4, 1998. (9)                                                                                                                        |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.26 |  | Promissory Note by and between Trust One Bank and Back Yard Burgers,
Inc., dated February 4, 1998. (9)                                                                                                                        |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.27 |  | Promissory Note by and between Eagle Bank & Trust Company and Back Yard
Burgers, Inc., dated March 18, 1998. (9)                                                                                                              |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.28 |  | Promissory Note by and between Bank of Mississippi and Back Yard
Burgers, Inc., dated April 20, 1998. (10)                                                                                                                    |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.29 |  | Form of Joint Venture Agreement of Lesters Back Yard Burgers Joint
Venture IV by and among William L. Lester, Pattie F. Lester, Alexandra B.
Litow, Andrew R. Litow and Back Yard Burgers, Inc., dated
August 28, 1998. (11) |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.30 |  | Promissory Note by and between the Bank of Mississippi and Back Yard
Burgers, Inc. dated October 27, 1998. (12)                                                                                                               |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.31 |  | Promissory Note by and between the Bank of Mississippi and Back Yard
Burgers, Inc. dated November 10, 1998. (12)                                                                                                              |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.32 |  | Lease agreement by and between Amplicon, Inc. and Back Yard Burgers,
Inc. dated May 6, 1999. (13)                                                                                                                             |  | 
|      |  |                                                                                                                                                                                                                               |  | 
|10.33 |  | Lease agreement by and between Belz Devco, L.P. and Back Yard Burgers,
Inc. dated November 12, 1999. (14)                                                                                                                     |  | 

16



---



##### Table of Contents



|      |  |                                                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.34 |  | Revolving line of credit promissory note and related loan agreement by
and between First Tennessee Bank and Back Yard Burgers, Inc. dated
November 1, 2000. (15)
|      |  |                                                                                                                                                                 
|10.35 |  | 2002 Equity Incentive Plan of Back Yard Burgers, Inc. (16)                                                                                                      
|      |  |                                                                                                                                                                 
|21*   |  | Subsidiaries of the Registrant.                                                                                                                                 
|      |  |                                                                                                                                                                 
|23.1* |  | Subsidiaries of the Registrant.                                                                                                                                 
|      |  |                                                                                                                                                                 
|99.1* |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, Chairman of the Board and Chief Executive Officer.                                     
|      |  |                                                                                                                                                                 
|99.2* |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, Chief Financial Officer.                                                               

(b) Reports on Form 8-K

None

(c) Exhibits

The exhibits to this report are listed in Item 14(a) (3) above.

(d) Financial Statement Schedule

Not applicable



---

|*   |  | Filed herewith.                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Previously filed with the Securities and Exchange Commission (the
Commission) as an Exhibit to the Registrants Form SB-2 on April 20,
1993 (File No. 33-61356).
|   
|(2) |  | Previously filed with the Commission as an Exhibit to the Registrants
Amendment No. 2 to Form SB-2 on June 25, 1993 (File No. 33-61356).                         
|   
|(3) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K, dated January 1, 1994 and filed on March 30, 1994.                              
|   
|(4) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K, dated December 31, 1994 and filed on March 31, 1995.                            
|   
|(5) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-QSB, dated September 30, 1995 and filed on November 14, 1995.                      
|   
|(6) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K, dated December 30, 1995 and filed on March 29, 1996.                            
|   
|(7) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K, dated December 28, 1996 and filed on March 28, 1997.                            

17



---



##### Table of Contents



|(8)  |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K, dated January 3, 1998 and filed on April 3, 1998.     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|    
|(9)  |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-QSB dated April 4, 1998 and filed on May 19, 1998.       
|    
|(10) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-QSB dated July 4, 1998 and filed on August 14, 1998.     
|    
|(11) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-QSB dated October 3, 1998 and filed on November 17, 1998.
|    
|(12) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-KSB dated January 1, 2000 and filed on April 2, 1999.    
|    
|(13) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-Q dated July 3, 1999 and filed on August 17, 1999.       
|    
|(14) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K dated January 1, 2000 and filed on March 31, 2000.     
|    
|(15) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K dated December 30, 2000 and filed on March 30, 2001.   
|    
|(16) |  | Previously filed with the Commission as an Exhibit to the Registrants
Form 10-K dated December 29, 2001 and filed on March 28, 2002.   

18



---



##### Table of Contents






SIGNATURES

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

| |  |       |  |                                                                                   
| |  | ----- |  | ----------------------------------------------------------------------------------
| |  |       |  | BACK YARD BURGERS, INC.                                                           
|
| |  |       |  |                                                                                   
|
| |  | By:   |  | /s/ Lattimore M. MichaelLattimore M. Michael, Chairman
and Chief Executive Officer
|
| |  | Date: |  | March 27, 2003                                                                    

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

|                                                   |  |                                                   |  |               
|-------------------------------------------------- |  | ------------------------------------------------- |  | --------------
|Signature                                          |  | Title                                             |  | Date          
|                                                   |  |                                                   |  |               
|/s/ Lattimore M. MichaelLattimore M. Michael       |  | Chairman of the Board and
Chief Executive Officer |  | March 27, 2003
|                                                  
|/s/ Michael W. MyersMichael W. Myers               |  | President and Chief Operating Officer             |  | March 27, 2003
|                                                  
|/s/ William N. GriffithWilliam N. Griffith         |  | Executive Vice President and Director             |  | March 27, 2003
|                                                  
|/s/ Michael G. WebbMichael G. Webb                 |  | Chief Financial Officer                           |  | March 27, 2003
|                                                  
|/s/ W. Kurt HenkeW. Kurt Henke                     |  | Director                                          |  | March 27, 2003
|                                                  
|/s/ Jim PetersonJim Peterson                       |  | Director                                          |  | March 27, 2003
|                                                  
|/s/ William B. Raiford, IIIWilliam B. Raiford, III |  | Director                                          |  | March 27, 2003
|                                                  
|/s/ Joseph L. WeissJoseph L. Weiss                 |  | Director                                          |  | March 27, 2003

19



---



##### Table of Contents



Annual Certification of Chief Executive Officer of Back Yard Burgers, Inc.

This certification is provided pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, and accompanies the annual report on Form 10-K (the
Form 10-K) for the year ended December 28, 2002 of Back Yard Burgers, Inc.

I, Lattimore M. Michael, certify that:

1.     I have reviewed this annual report on Form 10-K of Back Yard Burgers,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                                                                    |  | 
|----------------------------------------------------------------------------------- |  | 
|                                                                                    |  | 
|                                                                                   
|/s/ Lattimore M. MichaelLattimore M. Michael
Chief Executive Officer
March 27, 2003 |  | 

20



---



##### Table of Contents



Annual Certification of Chief Financial Officer Of Back Yard Burgers, Inc.

This certification is provided pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, and accompanies the annual report on Form 10-K (the
Form 10-K) for the quarter ended September 28, 2002 of Back Yard Burgers,
Inc.

I, Michael G. Webb, certify that:

1.     I have reviewed this annual report on Form 10-K of Back Yard Burgers,
Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                                                                          |  | 
|------------------------------------------------------------------------- |  | 
|                                                                          |  | 
|                                                                         
|/s/ Michael G. WebbMichael G. Webb
Chief Financial Officer
March 27, 2003 |  | 

21



---



##### Table of Contents



INDEX TO FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 28, 2002

PageSelected Consolidated Financial Data
        
        
        F-1Managements Discussion And Analysis
of Financial Condition And Results Of Operations
        
        
        F-4Consolidated Balance Sheets
as of December 28, 2002 and December 29, 2001
        
        
        F-13Consolidated Statements of Operations
for the years ended December 28, 2002 and December 29, 2001 and December 30, 2000
        
        
        F-14Consolidated Statements of Changes in Stockholders Equity
for the years ended December 28, 2002 and December 29, 2001 and December 30, 2000
        
        
        F-15Consolidated Statements of Cash Flows
For the years ended December 28, 2002 and December 29, 2001 and December 30, 2000
        
        
        F-16Notes to the Consolidated Financial Statements
        
        
        F-17Report Of Independent Accountants
        
        
        F-29Managements Statement Of Responsibility For Financial Statements
        
        
        F-29






---



##### Table of Contents



Selected Consolidated Financial Data
(in thousands, except per share data)

The selected consolidated financial data presented below for each of the
years in the five-year period ended December 28, 2002 was derived from the
companys audited Consolidated Financial Statements. The selected consolidated
financial data should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto included elsewhere herein.

December 28,
        
        December 29,
        
        December 30,
        
        January 1,
        
        January 2,2002
        
        2001
        
        2000
        
        2000
        
        1999OPERATIONSRestaurant Sales
        
        $
        30,951
        
        
        $
        27,541
        
        
        $
        26,182
        
        
        $
        26,480
        
        
        $
        25,082Total revenues
        
        
        34,687
        
        
        
        31,138
        
        
        
        29,260
        
        
        
        29,295
        
        
        
        27,364Income (loss) before
income taxes
        
        
        2,203
        
        
        
        1,579
        
        
        
        728
        
        
        
        (930
        )(1)
        
        
        820Net income (loss)
        
        
        1,477
        
        
        
        1,027
        
        
        
        466
        
        
        
        (558
        )
        
        
        1,171
        (2)FINANCIAL POSITIONTotal assets
        
        $
        22,067
        
        
        $
        19,508
        
        
        $
        17,779
        
        
        $
        18,340
        
        
        $
        16,948Property and equipment, net
        
        
        17,247
        
        
        
        14,176
        
        
        
        12,569
        
        
        
        13,211
        
        
        
        13,365Debt
        
        
        5,925
        
        
        
        5,772
        
        
        
        5,403
        
        
        
        6,178
        
        
        
        5,458Shareholders equity
        
        
        12,284
        
        
        
        10,591
        
        
        
        9,555
        
        
        
        9,058
        
        
        
        9,586PER SHARE DATANet income (loss)  basic
        
        $
        0.31
        
        
        $
        0.22
        
        
        $
        0.10
        
        
        $
        (0.12
        )
        
        $
        0.26Net income (loss)  diluted
        
        $
        0.29
        
        
        $
        0.22
        
        
        $
        0.10
        
        
        $
        (0.12
        )
        
        $
        0.25Dividends
        
        
        0.00
        
        
        
        0.00
        
        
        
        0.00
        
        
        
        0.00
        
        
        
        0.00Market price at year end
        
        
        4.00
        
        
        
        3.70
        
        
        
        0.66
        
        
        
        1.50
        
        
        
        1.94OTHER DATASystem-wide sales
        
        $
        84,951
        
        
        $
        77,706
        
        
        $
        68,439
        
        
        $
        65,119
        
        
        $
        59,564Capital expenditures
        
        
        4,861
        
        
        
        2,791
        
        
        
        1,063
        
        
        
        2,679
        
        
        
        4,983




| |  | (1) The company incurred a non-cash charge for impairment of long lived
assets of $1,362,000 during the year ended January 1, 2000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | (2) During 1998, the company released a valuation allowance of $351,000
established for deferred income tax benefits.
| |  | ---------------------------------------------------------------------------------------------------------------------

F-1



---



##### Table of Contents



The selected consolidated financial data presented below is a summary of the
unaudited quarterly results of operations for the year ended December 28,
2002:

Year Ended December 28, 20021st
        
        2nd
        
        3rd
        
        4thQuarter
        
        Quarter
        
        Quarter
        
        QuarterIncome Statement Data:Company-operated restaurant sales
        
        $
        7,311
        
        
        $
        8,279
        
        
        $
        7,823
        
        
        $
        7,538Other
        
        
        868
        
        
        
        917
        
        
        
        953
        
        
        
        998Total Revenues
        
        
        8,179
        
        
        
        9,196
        
        
        
        8,776
        
        
        
        8,536Company-operated restaurant
operating expenses
        
        
        5,761
        
        
        
        6,334
        
        
        
        6,120
        
        
        
        5,879General and administrative
        
        
        1,066
        
        
        
        1,040
        
        
        
        1,047
        
        
        
        1,282Advertising
        
        
        460
        
        
        
        525
        
        
        
        499
        
        
        
        501Depreciation and amortization
        
        
        325
        
        
        
        345
        
        
        
        363
        
        
        
        346Total expenses
        
        
        7,612
        
        
        
        8,244
        
        
        
        8,029
        
        
        
        8,008Operating income
        
        
        567
        
        
        
        952
        
        
        
        747
        
        
        
        528Interest expense, net
        
        
        (128
        )
        
        
        (113
        )
        
        
        (129
        )
        
        
        (133
        )Other, net
        
        
        (79
        )
        
        
        14
        
        
        
        (15
        )
        
        
        (8
        )Income before income taxes
        
        
        360
        
        
        
        853
        
        
        
        603
        
        
        
        387Income tax expense
        
        
        133
        
        
        
        316
        
        
        
        217
        
        
        
        60Net Income
        
        
        227
        
        
        
        537
        
        
        
        386
        
        
        
        327Income per share:Basic
        
        
        0.05
        
        
        
        0.11
        
        
        
        0.08
        
        
        
        0.07Diluted
        
        
        0.04
        
        
        
        0.11
        
        
        
        0.08
        
        
        
        0.07Weighted average number of
common shares and common
equivalent shares outstanding:Basic
        
        
        4,691
        
        
        
        4,713
        
        
        
        4,717
        
        
        
        4,718Diluted
        
        
        5,111
        
        
        
        5,097
        
        
        
        5,088
        
        
        
        4,990


F-2



---



##### Table of Contents



The selected consolidated financial data presented below is a summary of the
unaudited quarterly results of operations for the year ended December 29,
2001:

Year Ended December 29, 20011st
        
        2nd
        
        3rd
        
        4thQuarter
        
        Quarter
        
        Quarter
        
        Quarter(1)Income Statement Data:Company-operated restaurant sales
        
        $
        6,331
        
        
        $
        7,387
        
        
        $
        7,040
        
        
        $
        6,783Other
        
        
        803
        
        
        
        956
        
        
        
        882
        
        
        
        956Total Revenues
        
        
        7,134
        
        
        
        8,343
        
        
        
        7,922
        
        
        
        7,739Company-operated restaurant
operating expenses
        
        
        5,123
        
        
        
        5,767
        
        
        
        5,601
        
        
        
        5,333General and administrative
        
        
        816
        
        
        
        978
        
        
        
        945
        
        
        
        1,196Advertising
        
        
        455
        
        
        
        503
        
        
        
        453
        
        
        
        413Depreciation and amortization
        
        
        331
        
        
        
        336
        
        
        
        346
        
        
        
        370Total expenses
        
        
        6,725
        
        
        
        7,584
        
        
        
        7,345
        
        
        
        7,312Operating income
        
        
        409
        
        
        
        759
        
        
        
        577
        
        
        
        427Interest expense, net
        
        
        (140
        )
        
        
        (123
        )
        
        
        (125
        )
        
        
        (156
        )Other, net
        
        
        (21
        )
        
        
        (17
        )
        
        
        (17
        )
        
        
        6Income before income taxes
        
        
        248
        
        
        
        619
        
        
        
        435
        
        
        
        277Income tax expense
        
        
        92
        
        
        
        254
        
        
        
        160
        
        
        
        46Net Income
        
        
        156
        
        
        
        365
        
        
        
        275
        
        
        
        231Income per share:Basic
        
        
        0.03
        
        
        
        0.08
        
        
        
        0.06
        
        
        
        0.05Diluted
        
        
        0.03
        
        
        
        0.08
        
        
        
        0.06
        
        
        
        0.05Weighted average number of
common shares and common
equivalent shares outstanding:Basic
        
        
        4,632
        
        
        
        4,630
        
        
        
        4,636
        
        
        
        4,643Diluted
        
        
        4,708
        
        
        
        4,753
        
        
        
        4,771
        
        
        
        4,795




|(1) |  | Pre-tax income for the fourth quarter of 2001, was reduced by $111,000
for a reserve on a note receivable from a former franchisee and $70,000
for a land lease reserve relating to a restaurant building the company
assumed as collateral under the provisions of the note.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-3



---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion and analysis should be read in conjunction with
the companys consolidated financial statements and notes thereto, included
elsewhere in this annual report.

As of December 28, 2002, the Back Yard Burgers system included 119
restaurants, of which 42 were company-operated and 77 were franchised. The
companys revenues are derived primarily from company-operated restaurant
sales, franchise and area development fees and royalty fees. Certain expenses
(cost of restaurant sales, restaurant operating expenses, depreciation,
amortization and advertising) relate directly to company-operated restaurants,
while general and administrative expenses relate to both company-operated
restaurants and franchise operations. The companys revenues and expenses are
affected by the number and timing of the opening of additional restaurants.
Sales for new restaurants in the period immediately following their opening
tend to be high because of trial by public and promotional activities. As a
result, the timing of openings can affect the average volume and other
period-to-period comparisons.

Results of Operations

The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the
companys historical operations and operating data for the periods indicated.

For the Years EndedDecember 28,
        
        December 29,
        
        December 30,2002
        
        2001
        
        2000RevenuesRestaurant sales
        
        
        89.2
        %
        
        
        88.5
        %
        
        
        89.5
        %Franchise and area development fees
        
        
        0.6
        
        
        
        1.0
        
        
        
        0.7Royalty fees
        
        
        6.3
        
        
        
        6.4
        
        
        
        5.6Advertising fees
        
        
        1.6
        
        
        
        1.6
        
        
        
        1.6Other operating revenue
        
        
        2.3
        
        
        
        2.5
        
        
        
        2.6Total revenue
        
        
        100.0
        %
        
        
        100.0
        %
        
        
        100.0
        %Costs and ExpensesCost of restaurant sales (1)
        
        
        30.9
        %
        
        
        31.9
        %
        
        
        32.4
        %Restaurant operating expenses(1)
        
        
        47.0
        
        
        
        47.3
        
        
        
        49.7General and administrative
        
        
        12.8
        
        
        
        12.6
        
        
        
        12.1Advertising
        
        
        5.7
        
        
        
        5.9
        
        
        
        6.0Depreciation and amortization
        
        
        4.0
        
        
        
        4.4
        
        
        
        4.7Operating income
        
        
        8.1
        
        
        
        7.0
        
        
        
        3.8Interest income
        
        
        0.1
        
        
        
        0.1
        
        
        
        0.1Interest expense
        
        
        (1.5
        )
        
        
        (1.8
        )
        
        
        (2.0
        )Other, net
        
        
        (0.3
        )
        
        
        (0.2
        )
        
        
        0.6Income before taxes
        
        
        6.4
        
        
        
        5.1
        
        
        
        2.5Income tax expense(2)
        
        
        33.0
        
        
        
        35.0
        
        
        
        36.0Net Income
        
        
        4.3
        
        
        
        3.3
        
        
        
        1.6




|(1) |  | As a percentage of restaurant sales.   
|--- |  | ---------------------------------------
|   
|(2) |  | As a percentage of income before taxes.

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For the Years EndedDecember 28,
        
        December 29,
        
        December 30,2002
        
        2001
        
        2000Operating dataRestaurant sales (000s)Company-operated
        
        $
        30,951
        
        
        $
        27,541
        
        
        $
        26,182Franchised
        
        
        54,000
        
        
        
        50,165
        
        
        
        42,257Total
        
        $
        84,951
        
        
        $
        77,706
        
        
        $
        68,439Average annual sales per restaurant open
for a full year(1)Company-operated
        
        $
        778,000
        
        
        $
        777,000
        
        
        $
        740,000Franchised
        
        
        810,000
        
        
        
        790,000
        
        
        
        754,000System-wide
        
        
        797,000
        
        
        
        784,000
        
        
        
        748,000Number of restaurants(2)Company-operated
        
        
        42
        
        
        
        37
        
        
        
        35Franchised
        
        
        77
        
        
        
        67
        
        
        
        58Total
        
        
        119
        
        
        
        104
        
        
        
        93




|(1) |  | Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the completion
of six months of operations, as sales during the period immediately after
opening tend to be higher due to promotions and trial by public.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | As of March 21, 2003, four
franchised restaurants opened and one franchised restaurant closed
since December 28, 2002.                                                                                                                                                                  

COMPARISON OF FISCAL YEAR 2002
TO FISCAL YEAR 2001

Restaurant salesat company-operated restaurants increased 12.4% to
$30,951,000 during 2002 from $27,541,000 during 2001. This increase is
primarily the result of a net increase in company-operated restaurants of five
stores since December 29, 2001, and a 4% price increase taken by the company in
December 2001, offset by the impact of competitive discounting occurring in the
last half of 2002.

Franchise and area development feeswere $227,000 during 2002, a decrease
of 29.1% from $320,000 in 2001. Fifteen new franchised restaurants were opened
in 2002, compared to thirteen new franchised units opened in 2001. A portion
of the decline in fees is attributable to the company recording $65,000 in fees
for the cancellation of franchise and area development agreements in 2001
compared with $18,000 in 2002. The remaining decline is due to the fact that
five of the openings in 2002 were co-branded franchised stores under the
companys Multi-Brand Development Agreement with YUM! Brands, Inc., and the
fees for these units are lower than traditional stand-alone franchised
restaurants.

Royalty feesincreased 9.5% to $2,172,000 during 2002 compared with
$1,984,000 during 2001. The increase is the result of an increase in
franchised sales upon which the fees are based. The increase in franchised
restaurant sales was due to a net unit growth of ten franchised stores. The
increase is partially offset by a decrease of 1.8% in same-store sales for
franchised units during 2002.

Advertising feesincreased 9.2% to $548,000 for 2002 compared with
$502,000 during 2001. The increase is primarily due to the increase in
franchised restaurant sales, upon which the fees are based.

Cost of restaurant sales, consisting of food, beverage and paper costs,
totaled $9,558,000 during 2002 compared to $8,797,000 during 2001, decreasing
to 30.9% as a percentage of restaurant sales during 2002 from 31.9% for 2001.
Product costs remained relatively flat throughout 2002. The decrease in cost
of restaurant sales as a percentage of sales is attributable to a 4% menu price
increase taken by the company in December of 2001.

Restaurant operating expenses,consisting of labor, supplies, utilities,
rent, insurance and certain other unit level operating expenses, increased to
$14,536,000 for 2002 from $13,027,000 during 2001, decreasing as a percentage
of restaurant sales to 47.0% from 47.3% in 2001. Labor costs as a percentage
of restaurant sales decreased by 0.8%; however this decrease was offset by
increased spending for insurance, utilities and property taxes.

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General and administrative costsincreased $498,000 to $4,435,000 during
2002 from $3,935,000 in 2001, increasing as a percentage of total revenue to
12.8% from 12.6% during 2001. $187,000 of the increase was personnel related,
including increased spending on recruiting, training and benefit costs.
Preopening expenses also increased by $62,000 due to the expenditures related
to the opening of five company-operated restaurants during 2002. The remaining
cost increases were related to general increases in spending in the areas of
marketing, operations training, information technology and franchisee
recruiting during 2002.

Advertising expense, which increased to $1,985,000 for 2002 from
$1,824,000 during 2001, remained relatively flat as a percentage of total
revenues at 5.7% in 2002 compared with 5.9% in 2001.

Depreciation and amortizationexpense was $1,379,000 during 2002 compared
with $1,383,000 during 2001. The company recorded $158,000 in goodwill
amortization in 2001 compared with zero amortization in 2002 due to the
adoption of the Statement of Financial Accounting Standards No. 142, Goodwill
and other Intangible Assets effective January 1, 2002. This decrease in
amortization expense was offset by additional depreciation expense recorded
during 2002 for the purchase of additional property and equipment since the
prior year.

Interest expensedecreased 7.8% to $520,000 for the year ended December
28, 2002 from $564,000 in the year-earlier period. While debt outstanding as
of December 28, 2002 was $5,925,000, an increase of $153,000 on the balance
outstanding as of December 29, 2001, the company was able to renegotiate
interest rates downward by 1.7% to 2.4% on approximately 45% of its outstanding
debt during the fourth quarter of 2001 resulting in the decrease in interest
expense for the company in 2002.

Other,
netexpense was $88,000 in 2002 compared with $49,000 in expense for
the year ended December 29, 2001. The increase is due to a write-off of
$23,000 of deferred loan costs incurred by the company as well as a net loss on
the disposal of assets of $19,000 compared with a net loss of $1,000 recognized
in the year-earlier period. Also included in this category is other
miscellaneous income and expenses, including franchise tax expense and these
income and expense categories were relatively consistent during fiscal year
2002 and 2001.

Income tax expense, which increased by $174,000 to $726,000 from $552,000
in 2001, decreased as a percentage of pre-tax income at 33.0% in 2002 compared
with 35.0% in 2001. The decrease in income tax expense as a percentage of
pre-tax income is primarily a result of the difference between book and tax for intangible amortization due to the issuance
of FAS 142 and a deferred tax rate change.

COMPARISON OF FISCAL YEAR 2001
TO FISCAL YEAR 2000

Restaurant salesat company-operated restaurants increased 5.2% to
$27,541,000 during 2001 from $26,182,000 during 2000. This increase is
primarily the result of an increase in same-store sales at restaurants open for
more than one year of 3.3% as well as the opening of two new corporate stores
in 2001.

Franchise and area development feeswere $320,000 during 2001, an increase
of 58.4% from $202,000 in 2000. Thirteen new franchised restaurants were
opened in 2001, compared to ten new franchised units opened in 2000. During
2001, the company also recorded $65,000 in fees relating to the cancellation of
two franchise agreements and an area development agreement for five stores due
to non-compliance with the required development schedules under the agreements.

Royalty feesincreased 19.7% to $1,984,000 during 2001 compared with
$1,658,000 during 2000. The increase is the result of an increase in
franchised sales upon which the fees are based. The increase in franchised
restaurant sales was due to a net unit growth of nine franchised stores, as
well as an increase of 0.5% in same-store sales for franchised units.

Advertising feesincreased 7.5% to $502,000 for 2001 compared with
$467,000 during 2000. The increase is primarily due to the increase in
franchised restaurant sales, upon which the fees are based. The increase is
partially offset by a $59,000 decrease in direct mail program fees, due to an
elimination of a company-sponsored program at the beginning of 2001.

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Other revenuesincreased 5.3% to $791,000 for 2001 compared with $751,000
during 2000. The increase is due to increases in vendor rebates and is
partially offset by a $44,000 decrease in revenues generated from
sub-contractor vending sales, which began in March of 1999.

Cost of restaurant sales, consisting of food, beverage and paper costs,
totaled $8,797,000 during 2001 compared to $8,476,000 during 2000, decreasing
to 31.9% as a percentage of restaurant sales during 2001 from 32.4% for 2000.
The decrease is primarily attributable to the implementation of the companys
new 100% Black Angus beef hamburgers in the fourth quarter of 2000, which
resulted in improved margins on hamburger sales.

Restaurant operating expenses,consisting of labor, supplies, utilities,
rent and certain other unit level operating expenses, increased to $13,027,000
for 2001 from $13,007,000 during 2000, decreasing as a percentage of restaurant
sales to 47.3% from 49.7% in 2000. The decrease is primarily due to a 1.4%
decrease in labor as a percentage of restaurant sales over the year-earlier
period and a 1.0% decrease in other unit level operating expenses as a
percentage of sales.

General and administrative costsincreased $404,000 to $3,935,000 during
2001 from $3,531,000 in 2000. The increase is due in part to the company
recording a $111,000 reserve on a note receivable from a former franchisee and
a $70,000 charge for a land lease relating to a restaurant building and
equipment the company assumed as collateral under the provisions of the note
during 2001. The company also incurred $89,000 in pre-opening expenses in
2001, for which there were no comparable costs in 2000. The remaining cost
increases were related to general increases in spending in the areas of
marketing, operations training, information technology and franchisee
recruiting during 2001.

Advertising expense, which increased to $1,824,000 for 2001 from
$1,760,000 during 2000, remained relatively flat as a percentage of total
revenues at 5.9% in 2001 compared with 6.0% in 2000.

Interest expensedecreased 5.1% to $564,000 for the year ended December
29, 2001 from $594,000 in the year-earlier period. While debt outstanding as
of December 29, 2001 was $5,772,000, which is 6.8% more debt than the
$5,403,000 outstanding as of December 30, 2000, the company was able to
renegotiate interest rates downward by 1.7% to 2.4% on approximately 45% of its
outstanding debt during the fourth quarter of 2001. This resulted in interest
savings of approximately $13,000 over the prior year.

Other, netexpense was $49,000 in 2001 compared with $186,000 in income
for the year ended December 30, 2000. This change is primarily due to the
recognition of $256,000 in net gains on the sale of assets during fiscal year
2000 compared with a $1,000 net loss on the sale of assets during 2001. Also
included in this category is other miscellaneous income and expenses, including
franchise tax expense and these income and expense categories were relatively
consistent during fiscal year 2000 and 2001.

Income tax expense, which increased by $290,000 to $552,000 from $262,000
in 2000, remained relatively flat as a percentage of pre-tax income at 35.0% in
2001 compared with 36.0% in 2000.

Impairment of Long-Lived Assets

The company adopted Statement of Financial Accounting Standard (SFAS)
No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets,at
the beginning of 2002. At each balance sheet date, the company assesses
whether there has been impairment in the value of all long-lived assets by
determining whether projected undiscounted future cash flows from operations
for each restaurant, as defined in SFAS No. 144, exceed its net book value as
of the assessment date. A new cost basis is established for impaired assets
based on the fair value of these assets as of the date the assets are
determined to be impaired.

No impairment charges were recorded in fiscal years 2002, 2001 or 2000;
however, in the past, the company incurred non-cash charges for the effect of
company-operated restaurant closings and impaired assets at company-operated
restaurants. Also, related accruals for future lease payments of closed
stores, net of estimated sub-lease income, were previously recorded.

Lease payments of $22,000 in 2002 and $16,000 in 2001 were incurred for
these closed stores and charged against this reserve. The company also
sub-leased a closed property during 2002 and reduced the reserve previously
recorded for that store by $17,000 based on revised estimated sub-lease income.
As of December 28, 2002, the companys remaining accrual for all future lease
obligations discussed above was $61,000, which is net of estimated sub-lease
income.

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Liquidity and Capital Resources

Capital expenditures totaled $4,861,000 in 2002 and $2,791,000 in 2001.
Generally, the company constructs its restaurant buildings on leased properties
for its company-operated restaurants. The average monthly lease cost for the
14 company-operated restaurants on leased sites at December 28, 2002 is
approximately $3,400 per month. For the 18 restaurants where the company
leases the building as well as the site, the average monthly lease cost is
approximately $5,300.

Cash from operations for the company is primarily affected by net earnings
adjusted for deferred franchise fees and non-cash expenses which consist
primarily of depreciation and amortization. Depreciation and amortization
totaled $1,379,000 in 2002 and $1,383,000 in 2001.

Cash provided by operations in 2002 was $3,842,000 compared with
$2,996,000 in 2001. In recent history, cash from operations and debt have been
used for the addition of new restaurants and equipment as well as the
re-imaging of existing restaurants to reflect the companys new logo and
related color scheme.

As of December 28, 2002, the company had total long-term debt of
$5,925,000 and unused lines of credit and loan commitments of potential
additional borrowings of $1,626,000. During the third quarter of 2002, the
company secured a capital lease agreement with an effective interest rate of
7.9% to finance the acquisition of $250,000 of restaurant equipment. The
company also secured a capital lease with an effective interest rate of
approximately 8.7% to finance $490,000 in construction costs for a new company
restaurant during the third quarter of 2002. No additional debt commitments
were made by the company during 2002.

On January 2, 2001, the companys board of directors adopted a stock
repurchase plan that allows the company to repurchase up to 500,000 shares of
its outstanding common stock. As of December 28, 2002, the company had
repurchased 28,000 shares of common stock under the plan. The company expects
to finance the cost to repurchase shares under the stock buyback program with
existing cash on hand as well as internally generated funds.

The company is budgeting capital expenditures of approximately $3.3
million in fiscal year 2003, excluding potential acquisitions and share
repurchases. These capital expenditures primarily relate to the development of
additional company-operated restaurants, the re-imaging of existing restaurants
to reflect the companys new logo and related color scheme, store equipment
upgrades, and enhancements to existing financial and operating information
systems.

On February 11, 2003, the company entered a loan agreement with a
financial institution in the amount of $5,000,000. The loan agreement
comprised the following three components: (1) a $2,500,000 five-year loan with
a fixed rate of 5.2%. The funds from the five-year term loan were used to
refinance approximately $2.3 million of existing term loans with an average
interest rate of 6.8% and maturity dates ranging from one to two years, (2) a
$2.0 million draw down line for future expansion with a variable rate of
interest equal to the one month LIBOR rate plus a spread not to exceed 3% that
is calculated based on certain financial covenants and (3) a $500,000 revolver
line with a variable rate of interest equal to the one month LIBOR rate plus a
spread not to exceed 3% that is calculated based on certain financial
covenants. This revolver line replaced the $750,000 line of credit that was in
place as of December 28, 2002.

The company expects to fund fiscal year 2003 capital expenditures with
cash flow from operations and borrowings under the new loan agreement entered
in February of 2003. The company believes that existing cash and funds
generated from internal operations, as well as borrowings under the new credit
facility will meet the companys needs for the foreseeable future.

The company has contractual obligations and commercial commitments
including long-term debt, land lease obligations for company-operated
restaurants and office space for corporate operations. The table below
presents our future scheduled principal repayments of long-term debt and lease
obligations adjusted for the February 2003 refinancing transaction discussed
above (in thousands):

Operating
        
        TotalLong-term
        
        Lease
        
        ContractualDebt
        
        Obligations
        
        Cash Obligations2003
        
        $
        774
        
        
        $
        1,231
        
        
        $
        2,0052004
        
        
        940
        
        
        
        1,084
        
        
        
        2,0242005
        
        
        794
        
        
        
        971
        
        
        
        1,7652006
        
        
        722
        
        
        
        804
        
        
        
        1,5262007
        
        
        748
        
        
        
        482
        
        
        
        1,230Thereafter
        
        
        2,148
        
        
        
        1,319
        
        
        
        3,467$
        6,126
        
        
        $
        5,891
        
        
        $
        12,017


Qualitative and Quantitative Disclosure about Market Risk

The company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates on variable rate debt and the
repricing of fixed rate debt at maturity. Management monitors interest rate
fluctuations as an

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integral part of the companys overall risk management
program, which recognizes the unpredictability of financial markets and seeks
to reduce the potential adverse effect on our results. The effect of interest
rate fluctuations historically has been small relative to other factors
affecting operating results, such as food, labor and occupancy costs.

Approximately 50% of the companys debt portfolio as of December 28, 2002,
had variable rates or had maturity dates of less than two years. With every 25
basis point increase in interest rates, the company could be subject to
additional interest expense of approximately $8,000 annually, depending on the
timing of the rate changes and debt maturities.

The company has considered the use of hedging instruments to minimize
interest rate fluctuation risk, but based on the debt portfolio structure
described above, no hedging program has been deemed necessary for the company
at this time.

Seasonality and Inflation

While the company does not believe that seasonality affects its operations
in a materially adverse manner, first quarter results will generally be lower
than other quarters due to seasonal climate conditions in the locations of many
of its restaurants. Management does not believe that inflation has had a
material effect on income during 2002. Increases in food, labor or other
operating costs could adversely affect the companys operations. In the past,
however, the company generally has been able to increase menu prices or modify
its operating procedures to substantially offset increases in its operating
costs.

Conversion of Preferred Stock

In accordance with the provisions of the companys Restated Certificate of
Incorporation regarding preferred stock, as a result of the companys having
attained after-tax net income in excess of $600,000 during 1994, each share of
preferred stock is convertible into one share of common stock, at the option of
the holder. The company has notified preferred stockholders of their right to
convert preferred stock to common stock and anticipates that all shares of
preferred stock will be converted. Such conversion began on April 5, 1995, at
which time there were 1,199,979 shares of preferred stock outstanding. As of
December 28, 2002, only 19,617 shares have yet to be converted.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. On an annual
basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The company adopted SFAS No. 141 on December 30,
2001, with no material effect on the companys consolidated financial position
or results of operations.

The company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and other Intangible Assets (SFAS No. 142) effective January 1,
2002. SFAS No. 142 changed the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. No impairment to the recorded value of the companys
indefinite-lived assets was found to exist as a result of the required testing.
The company ceased amortization of goodwill in 2002 under the provisions of
this statement. Expenses for the fifty-two weeks ended December 29, 2001
included amortization of $158,000. If SFAS No. 142 had been in effect during
2001 and amortization had not been recorded, net income for the fifty-two weeks
ended December 29, 2001 would have been approximately $103,000 (tax effected)
greater than the reported total of $1,027,000 and diluted earnings per share
would have been $0.24 compared to the reported total of $0.22.

Statement of Financial Accounting Standards (SFAS) No. 143, Accounting
for Asset Retirement Obligations, was issued in June 2001. SFAS No. 143
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. The company will adopt SFAS No. 143 on December 29, 2002.
The company has evaluated the effects of adopting this statement and have
determined that it will not have a material effect on its results of operations
or financial position.

In October 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets effective for years beginning after December
15, 2001. This Statement supersedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but retains the
fundamental provision of SFAS 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The statement requires that whenever
events or changes in circumstances indicate that a long-lived assets carrying
value may not be recoverable, the asset should be tested for recoverability.
The statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost
to sell. The company adopted SFAS 144 on December 30, 2001, with no material
impact on the companys consolidated financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, requiring that gains and
losses from the extinguishment of debt be classified as extraordinary
items only if certain criteria are met. SFAS 145 also amends SFAS No. 13,
Accounting for Leases, and the required accounting for sale-leaseback
transactions and certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS 145 is effective for the
company on January 1, 2003.

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In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized initially at fair value when the liability is
incurred. SFAS 146 is effective for the company on January 1, 2003 and will be
applied on a prospective basis.

SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, an Amendment of FASB Statement No. 123, was issued in December
2002. The Statement amends FASB No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The company has adopted FASB No. 148, however, implementation did not have a
material effect on its results of operations or financial position.

FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, was issued in November 2002. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company
will adopt FIN 45 on December 31, 2002 and does not expect such adoption to
have a material effect on its results of operations or financial position.

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities
(VIEs), an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to improve financial reporting of special
purpose and other entities. In accordance with the interpretation, business
enterprises that represent the primary beneficiary of another entity by
retaining a controlling financial interest in that entitys assets,
liabilities, and results of operating activities must consolidate the entity in
their financial statements. Prior to the issuance of FIN 46, consolidation
generally occurred when an enterprise controlled another entity through voting
interests. Certain VIEs that are qualifying special purpose entities (QSPEs)
subject to the reporting requirements of SFAS 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities, will not
be required to be consolidated under the provisions of FIN 46. The
consolidation provisions of FIN 46 apply to VIEs created or entered into after
January 31, 2003, and for pre-existing VIEs in the first reporting period
beginning after June 15, 2003. If applicable, transition rules allow the
restatement of financial statements or prospective application with a
cumulative effect adjustment. In addition, FIN 46 expands the disclosure
requirements for the beneficiary of a significant or a majority of the variable
interests to provide information regarding the nature, purpose and financial
characteristics of the entities. The company does not believe that the
adoption of FIN 46 will have a material adverse impact on the companys
financial statements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.

On an on-going basis, management evaluates company estimates, including
those related to bad debts, carrying value of investments in property and
equipment, goodwill, income taxes, contingencies and litigation. Management
bases company estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

Management believes the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements.

Revenue Recognition:

Revenue recognition at Company-operated restaurants is straightforward as
customers pay for products at the time of sale. The earnings reporting process
is covered by the companys system of internal controls and generally does not
require significant management judgments and estimates. The company calculates
royalty income each week based upon amounts reported by franchisees and
provides for estimated losses for revenues that are not likely to be collected.
The company maintains these allowances for doubtful accounts for estimated
losses resulting from the inability of our franchisees and other borrowers to
make required payments. If the financial conditions of our customers or other
borrowers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.

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Franchise fees are recognized as revenue when substantially all of the
initial services required of the company have been performed, which generally
coincides with the opening of the franchises. Such services include training
and assistance with site location, equipment vendors, structural design and
operating policies. Area development fees arise when franchisees are awarded
the right to develop, own and operate additional Back Yard Burgers restaurants
in specific geographical areas pursuant to the terms of an Area Development
Agreement. Such fees are based on the number of restaurants the franchisee
expects to develop. These fees are included as revenue in accordance with the
franchise fee recognition policy as each additional restaurant is opened.
Under the terms of the franchise and area development agreements, the fees are
non-refundable and may be recognized as revenue should the franchisee fail to
perform as agreed. Commission costs associated with the sales of franchise and
area development rights are expensed when related revenues are recognized.

The company has also collected funds from certain vendors relating to
future purchases by the company. The company deferred this amount as other
deferred income. These funds are recorded as income in a proportionate manner
with respective future purchases. Under the terms of signed contracts, the
company is required to purchase specific volumes in future years. If these
purchase volumes are not met, the funds related to the volume shortages will be
refunded to the vendors.

Long-Lived Assets:

The restaurant industry is capital intensive. The company has
approximately 78% of its total assets invested in property and equipment. The
company capitalizes only those costs that meet the definition of capital assets
under generally accepted accounting principles. Accordingly, repairs and
maintenance costs that do not extend the useful life of the asset are expensed
as incurred.

The depreciation of our capital assets over their estimated useful lives,
and the determination of any salvage values, requires management to make
judgments about future events. Because the company utilizes many of its
capital assets over relatively long periods, the company periodically evaluates
whether adjustments to our estimated lives or salvage values are necessary.
The accuracy of these estimates affects the amount of depreciation expense
recognized in a period and, ultimately, the gain or loss on the disposal of the
asset. Historically, gains and losses on the disposition of assets have not
been significant. However, such amounts may differ materially in the future
based on restaurant performance, technological obsolescence, regulatory
requirements and other factors beyond our control.

Due to the fact that the company invests a significant amount in the
construction or acquisition of new restaurants, the company has risks that
these assets will not provide an acceptable return on our investment and an
impairment of these assets may occur. The accounting test for whether an asset
held for use is impaired involves first comparing the carrying value of the
asset with its estimated future undiscounted cash flows. If these cash flows
do not exceed the carrying value, the asset must be adjusted to its current
fair value. The company periodically performs this test on each of our
restaurants to evaluate whether impairment exists. Factors influencing our
judgment include the age of the restaurant (new restaurants have significant
start up costs which impede a reliable measure of cash flow), estimation of
future restaurant performance and estimation of restaurant fair value. Due to
the fact that the management can specifically evaluate impairment on a
restaurant by restaurant basis, the company has historically been able to
identify impaired restaurants and record the appropriate adjustment.

The company has approximately $1.8 million of goodwill on our balance
sheet resulting from the acquisition of businesses. New accounting standards
adopted in 2002 require that we review goodwill for impairment on an annual
basis and cease all goodwill amortization. The adoption of these new rules did
not result in an impairment of our recorded goodwill. The annual evaluation of
goodwill impairment requires a two-step test in which the market value of the
company is compared to the recorded book value. If the market value is less
than the book value, goodwill impairment is recorded. Once an impairment of
goodwill has been recorded, it cannot be reversed.

Deferred Income Taxes:

The company records income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or liability is
recognized whenever there are future tax effects from existing temporary
differences and operating loss and tax credit carryforwards. The company
records a valuation allowance to reduce deferred tax assets to the balance that
is more likely than not to be realized. In evaluating the need for a valuation
allowance, management must make judgments and estimates on future taxable
income, feasible tax planning strategies and existing facts and circumstances.
When management determines that deferred tax assets could be realized in
greater or less amounts than recorded, the asset balance and income statement
reflect the change in the period such determination is made. Based on
managements estimates, there is presently a $432,000 valuation allowance
recorded on the companys deferred tax assets. However, changes in facts and
circumstances that affect our judgments or estimates in determining the proper
deferred tax assets or liabilities could materially affect the recorded
amounts.

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Known Trends and Uncertainties

Labor will continue to be a critical factor in the foreseeable future. In
most areas where the company operates restaurants, there is a shortage of
suitable labor. This, in itself, could result in higher wages as the
competition for employees intensifies, not only in the restaurant industry, but
in practically all retail and service industries. It is crucial for the
company to develop and maintain programs to attract and retain quality
employees.

During 2002, the price of beef, the largest single component of the cost
of restaurant sales was relatively stable, although there were minor price
adjustments throughout the year. Management of the company believes it is
likely that beef prices will increase in the long term and that it could be
difficult to raise menu prices to fully cover these anticipated increases due
to the competitive state of the quick-service restaurant industry. Additional
margin improvements would have to be made through operational improvements,
equipment advances and increased volumes to help offset these potential
increases.

Due to the competitive nature of the restaurant industry, site selection
continues to be challenging as the number of businesses vying for locations
with similar characteristics increases. This will likely result in higher
occupancy costs for prime locations.

System-wide same-store sales decreased 1.1% during 2002 compared with a
1.7% increase in 2001. Company-operated same-store sales increased 0.1% during
2002 compared with a 3.3% increase in 2001. Management attributes the 0.1%
increase in 2002 to a 4% price increase taken by the company in December 2001
offset by a decline in guest counts due to price discounting by the companys
competitors occurring during 2002 and continuing into the first quarter of
2003. Management anticipates that same-store sales will decrease during the
first quarter of 2003 and continue to be negatively impacted by declines in
guest counts for as long as such competitive discounting continues. Management
will continue its strategy of further positioning the company as a premium fast
food chain in 2003.

The future success of the company will be determined, to a great extent,
by the ability to positively address these issues.

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BACK YARD BURGERS, INC.
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)

December 28,
        
        December 29,2002
        
        2001ASSETSCash and cash equivalents
        
        $
        1,406
        
        
        $
        1,657Receivables, less allowance for doubtful accounts of
$80 and $129
        
        
        495
        
        
        
        582Inventories
        
        
        276
        
        
        
        229Income taxes receivable
        
        
        296
        
        
        
        38Current deferred tax asset
        
        
        170
        
        
        
        186Prepaid expenses and other current assets
        
        
        53
        
        
        
        50Total current assets
        
        
        2,696
        
        
        
        2,742Property and equipment, at depreciated cost
        
        
        17,247
        
        
        
        14,176Goodwill
        
        
        1,751
        
        
        
        1,751Noncurrent deferred tax asset
        
        
        12
        
        
        
        419Notes receivable
        
        
        110
        
        
        
        134Other assets
        
        
        251
        
        
        
        286$
        22,067
        
        
        $
        19,508LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
        
        $
        1,479
        
        
        $
        994Accrued expenses
        
        
        1,483
        
        
        
        1,368Reserve for closed stores
        
        
        61
        
        
        
        100Current installments of long-term debt
        
        
        825
        
        
        
        570Total current liabilities
        
        
        3,848
        
        
        
        3,032Long-term debt, less current installments
        
        
        5,100
        
        
        
        5,202Deferred franchise and area development fees
        
        
        504
        
        
        
        285Other deferred income
        
        
        272
        
        
        
        341Other deferred liabilities
        
        
        59
        
        
        
        57Total liabilities
        
        
        9,783
        
        
        
        8,917Commitments and contingencies (Note 16)Stockholders equityPreferred stock, $.01 par value; 2,000,000 shares authorized;
19,617 and 19,763 shares issued and outstanding
        
        
        
        
        
        
        Common stock, $.01 par value; 12,000,000 shares authorized;
4,720,739 and 4,645,019 shares issued and outstanding
        
        
        48
        
        
        
        47Paid-in capital
        
        
        10,410
        
        
        
        10,195Treasury stock, at cost, 25,000 shares
        
        
        (28
        )
        
        
        (28
        )Retained earnings
        
        
        1,854
        
        
        
        377Total stockholders equity
        
        
        12,284
        
        
        
        10,591Total liabilities and stockholders equity
        
        $
        22,067
        
        
        $
        19,508


See accompanying notes to consolidated financial statements.

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##### Table of Contents



BACK YARD BURGERS, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)

Years EndedDecember 28,
        
        December 29,
        
        December 30,2002
        
        2001
        
        2000Revenues:Restaurant sales
        
        $
        30,951
        
        
        $
        27,541
        
        
        $
        26,182Franchise and area development fees
        
        
        227
        
        
        
        320
        
        
        
        202Royalty fees
        
        
        2,172
        
        
        
        1,984
        
        
        
        1,658Advertising fees
        
        
        548
        
        
        
        502
        
        
        
        467Other
        
        
        789
        
        
        
        791
        
        
        
        751Total revenues
        
        
        34,687
        
        
        
        31,138
        
        
        
        29,260Expenses:Cost of restaurant sales
        
        
        9,558
        
        
        
        8,797
        
        
        
        8,476Restaurant operating expenses
        
        
        14,536
        
        
        
        13,027
        
        
        
        13,007General and administrative
        
        
        4,435
        
        
        
        3,935
        
        
        
        3,531Advertising
        
        
        1,985
        
        
        
        1,824
        
        
        
        1,760Depreciation and amortization
        
        
        1,379
        
        
        
        1,383
        
        
        
        1,384Total expenses
        
        
        31,893
        
        
        
        28,966
        
        
        
        28,158Operating income
        
        
        2,794
        
        
        
        2,172
        
        
        
        1,102Interest income
        
        
        17
        
        
        
        20
        
        
        
        34Interest expense
        
        
        (520
        )
        
        
        (564
        )
        
        
        (594
        )Other, net
        
        
        (88
        )
        
        
        (49
        )
        
        
        186Income before income taxes
        
        
        2,203
        
        
        
        1,579
        
        
        
        728Income tax expense
        
        
        726
        
        
        
        552
        
        
        
        262Net income
        
        $
        1,477
        
        
        $
        1,027
        
        
        $
        466Income per share:Basic
        
        $
        0.31
        
        
        $
        0.22
        
        
        $
        0.10Diluted
        
        $
        0.29
        
        
        $
        0.22
        
        
        $
        0.10Weighted average number of common shares and
common equivalent shares outstanding:Basic
        
        
        4,709
        
        
        
        4,635
        
        
        
        4,632Diluted
        
        
        5,058
        
        
        
        4,757
        
        
        
        4,653


See accompanying notes to consolidated financial statements.

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##### Table of Contents



BACK YARD BURGERS, INC.
Consolidated Statements of Changes in Stockholders Equity
(in thousands, except for number of shares)

Preferred Stock
        
        Common Stock
        
        Treasury Stock
        
        
        
        RetainedPaid-in
        
        Earnings/Shares
        
        Amount
        
        Shares
        
        Amount
        
        Shares
        
        Amount
        
        Capital
        
        (Deficit)
        
        TotalBalance at
January 1, 2000
        
        
        19,763
        
        
        $
        
        
        
        
        4,618,377
        
        
        $
        46
        
        
        
        
        
        
        $
        
        
        
        $
        10,128
        
        
        $
        (1,116
        )
        
        $
        9,058Employee stock
purchases
        
        
        
        
        
        
        
        
        
        
        27,726
        
        
        
        1
        
        
        
        
        
        
        
        
        
        
        
        30
        
        
        
        
        
        
        
        31Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        466
        
        
        
        466Balance at
December 30,
2000
        
        
        19,763
        
        
        
        
        
        
        
        4,646,103
        
        
        
        47
        
        
        
        
        
        
        
        
        
        
        
        10,158
        
        
        
        (650
        )
        
        
        9,555Employee stock
purchases
        
        
        
        
        
        
        
        
        
        
        17,776
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        26
        
        
        
        
        
        
        
        26Treasury stock
purchases
        
        
        
        
        
        
        
        
        
        
        (25,000
        )
        
        
        
        
        
        
        25,000
        
        
        
        (28
        )
        
        
        
        
        
        
        
        
        
        
        (28
        )Exercise of stock
options
        
        
        
        
        
        
        
        
        
        
        6,140
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        11
        
        
        
        
        
        
        
        11Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,027
        
        
        
        1,027Balance at
December 29,
2001
        
        
        19,763
        
        
        
        
        
        
        
        4,645,019
        
        
        
        47
        
        
        
        25,000
        
        
        
        (28
        )
        
        
        10,195
        
        
        
        377
        
        
        
        10,591Conversion of
preferred stock
        
        
        (146
        )
        
        
        
        
        
        
        146Employee stock
purchases
        
        
        
        
        
        
        
        
        
        
        6,558
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        29
        
        
        
        
        
        
        
        29Exercise of stock
options
        
        
        
        
        
        
        
        
        
        
        69,016
        
        
        
        1
        
        
        
        
        
        
        
        
        
        
        
        186
        
        
        
        
        
        
        
        187Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,477
        
        
        
        1,477Balance at
December 28,
2002
        
        
        19,617
        
        
        $
        
        
        
        
        4,720,739
        
        
        $
        48
        
        
        
        25,000
        
        
        $
        (28
        )
        
        $
        10,410
        
        
        $
        1,854
        
        
        $
        12,284


See accompanying notes to consolidated financial statements.

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##### Table of Contents



BACK YARD BURGERS, INC.
Consolidated Statements of Cash Flows
(in thousands)

Years EndedDecember 28,
        
        December 29,
        
        December 30,2002
        
        2001
        
        2000Cash flows from operating activities:Net income
        
        $
        1,477
        
        
        $
        1,027
        
        
        $
        466Adjustments to reconcile net income to net cash
Provided by operating activities:Depreciation of property and equipment
        
        
        1,379
        
        
        
        1,225
        
        
        
        1,245Deferred income taxes
        
        
        423
        
        
        
        359
        
        
        
        121Amortization of intangible assets
        
        
        
        
        
        
        158
        
        
        
        139Provision for losses on receivables
        
        
        (49
        )
        
        
        291
        
        
        
        147(Gain)/loss on sale of assets
        
        
        19
        
        
        
        1
        
        
        
        (256
        )Other deferred income
        
        
        (69
        )
        
        
        (116
        )
        
        
        (176
        )Changes in assets and liabilities:Receivables
        
        
        136
        
        
        
        (321
        )
        
        
        (289
        )Inventories
        
        
        (47
        )
        
        
        (21
        )
        
        
        (44
        )Prepaid expenses and other current assets
        
        
        (3
        )
        
        
        8
        
        
        
        21Other assets
        
        
        35
        
        
        
        (17
        )
        
        
        (31
        )Accounts payable and accrued expenses
        
        
        600
        
        
        
        600
        
        
        
        121Reserve for closed stores
        
        
        (22
        )
        
        
        54
        
        
        
        (49
        )Income taxes payable/receivable
        
        
        (258
        )
        
        
        (67
        )
        
        
        (60
        )Other deferred liabilities
        
        
        2
        
        
        
        (11
        )
        
        
        (7
        )Deferred franchise and area development fees
        
        
        219
        
        
        
        (174
        )
        
        
        67Net cash provided by operating activities
        
        
        3,842
        
        
        
        2,996
        
        
        
        1,415Cash flows from investing activities:Additions to property and equipment
        
        
        (4,861
        )
        
        
        (2,791
        )
        
        
        (1,063
        )Proceeds from sale of property and equipment
        
        
        375
        
        
        
        13
        
        
        
        565Goodwill acquisition cost
        
        
        
        
        
        
        
        
        
        
        (229
        )Proceeds on notes receivable
        
        
        24
        
        
        
        20
        
        
        
        Net cash used in investing activities
        
        
        (4,462
        )
        
        
        (2,758
        )
        
        
        (727
        )Cash flows from financing activities:Issuance of stock
        
        
        216
        
        
        
        37
        
        
        
        31Principal payments on long-term debt
        
        
        (587
        )
        
        
        (803
        )
        
        
        (1,375
        )Proceeds from issuance of long-term debt
        
        
        740
        
        
        
        1,172
        
        
        
        Treasury stock purchases
        
        
        
        
        
        
        (28
        )
        
        
        Net cash provided (used) by financing activities
        
        
        369
        
        
        
        378
        
        
        
        (1,344
        )Net increase (decrease) in cash and cash equivalents
        
        
        (251
        )
        
        
        616
        
        
        
        (656
        )Cash and cash equivalents:Beginning of year
        
        
        1,657
        
        
        
        1,041
        
        
        
        1,697End of year
        
        $
        1,406
        
        
        $
        1,657
        
        
        $
        1,041Supplemental disclosure of cash flow information:Income taxes paid
        
        $
        561
        
        
        $
        260
        
        
        $
        201Interest paid
        
        $
        531
        
        
        $
        560
        
        
        $
        577Noncash investing and financing activitiesProperty and equipment sold for a note receivable
        
        $
        
        
        
        $
        
        
        
        $
        119Goodwill acquired with note payable
        
        $
        
        
        
        $
        
        
        
        $
        600Assumption of collateral underlying note receivable
        
        $
        
        
        
        $
        55
        
        
        $
        


See accompanying notes to consolidated financial statements.

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##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activity.Back Yard Burgers, Inc. (the company) owns and operates
quick-service and fast-casual restaurants and is engaged in the sale of
franchises in Back Yard Burgers and the collection of royalties based upon
related franchise sales. The company grants franchise rights for the use of
Back Yard Burgers, BYB or BY Burgers trade names and other associated
trademarks, signs, emblems, logos, slogans and service marks which have been or
may be developed. At December 28, 2002, the company operated 42 restaurants in
four states (Missouri, Mississippi, Arkansas and Tennessee) and franchised 77
restaurants in 17 states.

Consolidation Policy.The financial statements include the accounts of Back
Yard Burgers, Inc. and its wholly owned subsidiaries, Little Rock Back Yard
Burgers, Inc., BYB Properties, Inc. and Atlanta Burgers BYB Corporation, as
well as Back Yard Burgers National Advertising Fund. All significant
intercompany transactions have been eliminated.

Fiscal Year.The company maintains its financial records on a 52-53 week
fiscal year ending on the Saturday closest to December 31. The years ended
December 28, 2002, December 29, 2001, and December 30, 2000 were all 52 week
years.

Use of Estimates.The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents.The company considers cash on hand, deposits in
banks and short-term investments with an original maturity of less than three
months when purchased as cash and cash equivalents.

Inventories.Inventories primarily consist of food and beverage products and
are valued at the lower of cost or market; cost is determined by the first-in,
first-out (FIFO) method.

Income Taxes.Deferred income taxes are provided for the tax effects of
temporary differences between the financial reporting basis and the income tax
basis of the companys assets and liabilities.

Other Deferred Income.During 1999, the company received $800,750 from certain
vendors relating to future purchases by the company. The company deferred this
amount as other deferred income. These funds are recorded as income in a
proportionate manner with respective future purchases. Under the terms of
signed contracts, the company is required to purchase specific volumes in
future years. If these purchase volumes are not met, the funds related to the
volume shortages will be refunded to the vendors.

Franchise and Area Development Fee Income.Franchise fees are recognized as
revenue when substantially all of the initial services required of the company
have been performed, which generally coincides with the opening of the
franchises. Such services include training and assistance with site location,
equipment vendors, structural design and operating policies. Area development
fees arise when franchisees are awarded the right to develop, own and operate
additional Back Yard Burgers restaurants in specific geographical areas
pursuant to the terms of an Area Development Agreement. Such fees are based on
the number of restaurants the franchisee expects to develop. These fees are
included as revenue in accordance with the franchise fee recognition policy as
each additional restaurant is opened.

Under the terms of the franchise and area development agreements, the fees are
non-refundable and may be recognized as revenue should the franchisee fail to
perform as agreed. Commission costs associated with the sales of franchise and
area development rights are expensed when related revenues are recognized.

Royalty and Advertising Fee Income.As part of its franchise agreements, the
company receives a percentage of each units gross sales (generally 4%). The
franchise agreements also provide that franchisees are required to pay an
additional 1% of gross sales to the National Advertising Fund (see Note 13).
These fees are recorded on the accrual basis of accounting.

Restaurant Operating Expenses.Restaurant operating expenses include all costs
associated with the operation of the restaurant except corporate overhead,
advertising, depreciation and amortization.

Property and Equipment.Property and equipment is recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Leasehold costs and improvements are
amortized over the lesser of their estimated useful lives or the remaining
lease term. The average depreciable lives are as follows: buildings and
building and site improvements  15 to 25 years; fixtures and equipment  3 to
7 years; and transportation vehicles  3 to 5 years.

F-17



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##### Table of Contents



Advertising Costs.Advertising costs, including production costs, are charged
to expense as incurred on the first date of the advertising period.

Intangible assets.As of January 1, 2002, the company adopted Statement of
Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible
Assets. Under SFAS 142, goodwill is no longer amortized but is tested for
impairment using a fair value approach, at the reporting unit level. A
reporting unit is the operating segment, or a business one level below that
operating segment (the component level) if discrete financial information is
prepared and regularly reviewed by management at the component level. The
company has determined that it operates as one segment and one reporting unit
because the operations of the restaurants are homogeneous and discrete
financial information of different segments or reporting units is not prepared
and regularly reviewed by management.

SFAS 142 requires a two-step process for testing impairment. First, the fair
value the company is compared to its carrying value to determine whether an
indication of impairment exists. Market capitalization is used to determine
the fair value of the company. If an impairment is indicated, then the fair
value of the goodwill is determined by allocation of the companys fair value
to its assets and liabilities (including any unrecognized intangible assets) as
if the company had been acquired in a business combination. The amount of
impairment for goodwill and other intangible assets is measured as the excess
of its carrying value over its fair value. As required by SFAS No. 142, the
company completed a transitional impairment test for goodwill and as of January
1, 2002 and also an impairment test as of December 29, 2002. As a result of
these tests the company did not record any impairment of our goodwill.

The company has no intangible assets other than goodwill.

Before January 1, 2002, the company amortized goodwill over its estimated
period of benefit on a straight-line basis not to exceed 40 years. When an
intangible assets carrying value exceeded associated expected operating cash
flows, we considered it to be impaired and wrote it down to fair value, which
we determined based on either discounted future cash flows or appraised values.
In accordance with SFAS 142, The company ceased amortization of goodwill in
2002. Accumulated amortization of goodwill totaled $908,000 prior to the
cessation of goodwill amortization.

Impairment of Long-Lived Assets.The company adopted Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for the Impairment and
Disposal of Long-Lived Assets,at the beginning of 2002. At each balance sheet
date, the company assesses whether there has been impairment in the value of
all long-lived assets by determining whether projected undiscounted future cash
flows from operations for each restaurant, as defined in SFAS No. 144, exceed
its net book value as of the assessment date. A new cost basis is established
for impaired assets based on the fair value of these assets as of the date the
assets are determined to be impaired. No impairment charges were recorded in
fiscal years 2002, 2001 or 2000.

Lease payments of $22,000 in 2002 and $16,000 in 2001 were incurred for these
closed stores and charged against this reserve. The company also sub-leased a
closed property during 2002 and reduced the reserve previously recorded for
that store by $17,000 based on revised estimated sub-lease income. As of
December 28, 2002, the companys remaining accrual for all future lease
obligations discussed above was $61,000, which is net of estimated sub-lease
income.

Preferred Stock.In accordance with the provisions of the companys Restated
Certificate of Incorporation regarding preferred stock, each share of preferred
stock is convertible into one share of common stock, at the option of the
holder. As of December 28, 2002, all but 19,617 shares of preferred stock had
been converted to common stock.

Earnings Per Share.The company calculates earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, Earnings per Share,
which requires the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common

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stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity (Note
15).

Stock-Based Employee Compensation.The company applies Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees,and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation. Had compensation
cost for the companys stock option plan been determined based on the fair
value at the grant date for awards in 2002, 2001 and 2000 under the plan
consistent with the fair value method prescribed by SFAS No. 123, Accounting
for Stock-Based Compensation,the companys operating results for 2002, 2001
and 2000 would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):

2002
        
        2001
        
        2000Net income:As reported
        
        $
        1,477
        
        
        $
        1,027
        
        
        $
        466Pro forma
        
        
        1,225
        
        
        
        954
        
        
        
        380Basic earnings per share:As reported
        
        
        0.31
        
        
        
        0.22
        
        
        
        0.10Pro forma
        
        
        0.26
        
        
        
        0.21
        
        
        
        0.08Diluted earnings per share:As reported
        
        
        0.29
        
        
        
        0.22
        
        
        
        0.10Pro forma
        
        
        0.24
        
        
        
        0.20
        
        
        
        0.08


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions using grants in 2002, 2001 and 2000, respectively:

2002
        
        2001
        
        2000Average expected life (years)
        
        
        5.0
        
        
        
        5.0
        
        
        
        4.4Average expected volatility
        
        
        74.7
        %
        
        
        62.2
        %
        
        
        63.0
        %Risk-free interest rates
        
        
        4.6
        %
        
        
        5.0
        %
        
        
        6.5
        %Dividend yield
        
        
        0.0
        %
        
        
        0.0
        %
        
        
        0.0
        %


The pro forma results reported above will not be representative of the effect
on operating results for future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.

Fair Value of Financial Instruments.At December 28, 2002, the company did not
have outstanding any financial derivative instruments. The carrying amounts of
cash and receivables approximate fair value because of the short maturity of
those instruments. The fair value of the companys long-term debt is estimated
based on the current borrowing rates available to the company for bank loans
with similar terms and average maturities. At December 28, 2002, the fair
value was approximately $6.5 million.

NOTE 2  RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. On an annual
basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The company adopted SFAS No. 141 on December 30,
2001, with no material effect on the companys consolidated financial position
or results of operations.

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The company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and other Intangible Assets (SFAS No. 142) effective January 1,
2002. SFAS No. 142 changed the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. No impairment to the recorded value of the companys
indefinite-lived assets was found to exist as a result of the required testing.
The company ceased amortization of goodwill in 2002 under the provisions of
this statement. Expenses for the fifty-two weeks ended December 29, 2001
included amortization of $158,000. If SFAS No. 142 had been in effect during
2001 and amortization had not been recorded, net income for the fifty-two weeks
ended December 29, 2001 would have been approximately $103,000 (tax effected)
greater than the reported total of $1,027,000 and diluted earnings per share
would have been $0.24 compared to the reported total of $0.22.

Statement of Financial Accounting Standards (SFAS) No. 143, Accounting
for Asset Retirement Obligations, was issued in June 2001. SFAS No. 143
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. The company will adopt SFAS No. 143 on December 29, 2002.
The company has evaluated the effects of adopting this statement and have
determined that it will not have a material effect on its results of operations
or financial position.

In October 2001, the FASB issued SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets effective for years beginning after December
15, 2001. This Statement supersedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but retains the
fundamental provision of SFAS 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The statement requires that whenever
events or changes in circumstances indicate that a long-lived assets carrying
value may not be recoverable, the asset should be tested for recoverability.
The statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost
to sell. The company adopted SFAS 144 on December 30, 2001, with no material
impact on the companys consolidated financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, requiring that gains and
losses from the extinguishment of debt be classified as extraordinary
items only if certain criteria are met. SFAS 145 also amends SFAS No. 13,
Accounting for Leases, and the required accounting for sale-leaseback
transactions and certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS 145 is effective for the
company on January 1, 2003.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized initially at fair value when the liability is
incurred. SFAS 146 is effective for the company on January 1, 2003 and will be
applied on a prospective basis.

SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, an Amendment of FASB Statement No. 123, was issued in December
2002. The Statement amends FASB No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The company has adopted FASB No. 148, however, implementation did not have a
material effect on its results of operations or financial position.

FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, was issued in November 2002. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company
will adopt FIN 45 on December 31, 2002 and does not expect such adoption to
have a material effect on its results of operations or financial position.

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities
(VIEs), an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to improve financial reporting of special
purpose and other entities. In accordance with the interpretation, business
enterprises that represent the primary beneficiary of another entity by
retaining a controlling financial interest in that entitys assets,
liabilities, and results of operating activities must consolidate the entity in
their financial statements. Prior to the issuance of FIN 46, consolidation
generally occurred when an enterprise controlled another entity through voting
interests. Certain VIEs that are qualifying special purpose entities (QSPEs)
subject to the reporting requirements of SFAS 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities, will not
be required to be consolidated under the

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provisions of FIN 46. The
consolidation provisions of FIN 46 apply to VIEs created or entered into after
January 31, 2003, and for pre-existing VIEs in the first reporting period
beginning after June 15, 2003. If applicable, transition rules allow the
restatement of financial statements or prospective application with a
cumulative effect adjustment. In addition, FIN 46 expands the disclosure
requirements for the beneficiary of a significant or a majority of the variable
interests to provide information regarding the nature, purpose and financial
characteristics of the entities. The company does not believe that the
adoption of FIN 46 will have a material adverse impact on the companys
financial statements.

NOTE 3  ACCOUNTS RECEIVABLE

Corporate receivables and National Advertising Fund receivables represent
amounts due from franchisees for contractual obligations and for product
purchases. A summary of accounts receivable follows:

December 28,
        
        December 29,2002
        
        2001(in thousands)Corporate receivables
        
        $
        204
        
        
        $
        264National Advertising Fund receivables
        
        
        66
        
        
        
        98Credit card receivables
        
        
        30
        
        
        
        22Rebate receivables
        
        
        201
        
        
        
        201Other
        
        
        74
        
        
        
        126575
        
        
        
        711Allowance for doubtful receivables
        
        
        (80
        )
        
        
        (129
        )$
        495
        
        
        $
        582


NOTE 4  PROPERTY AND EQUIPMENT

Summaries of property and equipment follow:

December 28,
        
        December 29,2002
        
        2001(in thousands)Land
        
        $
        3,856
        
        
        $
        3,784Buildings
        
        
        9,712
        
        
        
        7,547Building and site improvements
        
        
        3,135
        
        
        
        3,011Fixtures and equipment
        
        
        9,234
        
        
        
        7,344Transportation Vehicles
        
        
        303
        
        
        
        247Assets held for sale
        
        
        
        
        
        
        5526,240
        
        
        
        21,988Accumulated depreciation and amortization
        
        
        (8,993
        )
        
        
        (7,812
        )$
        17,247
        
        
        $
        14,176


NOTE 5  INVESTMENT IN JOINT VENTURES

The company has invested a total of $200,000 for 23%-25% interests in four
joint ventures for the purpose of operating Back Yard Burgers restaurants.
Two of the joint ventures purchased the building and land from the company.
No gain or loss was recorded by the company in connection with these sales.
Two joint ventures purchased land from a third party and built a building.
The company then entered into a long-term lease with each joint venture.
Three of the leases are accounted for as financing leases and the fixed
assets are recorded on the companys balance sheet along with the present
value of the future lease commitments. The remaining lease is accounted for
as an operating lease. The company has guaranteed 23%-25% of the long-term
debt obtained by the joint ventures to finance the construction of the
restaurants. At December 28, 2002, approximately $253,000 of such debt is
guaranteed by the company.

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Each of the above investments is recorded at cost as there is no material
difference between the cost and equity method of accounting for any of these
investments.

NOTE 6  ACCRUED EXPENSES

Summaries of accrued expenses follow:

December 28,
        
        December 29,2002
        
        2001(in thousands)Payroll related
        
        $
        895
        
        
        $
        582Sales taxes
        
        
        240
        
        
        
        203Property taxes
        
        
        146
        
        
        
        170Interest
        
        
        44
        
        
        
        55Utilities
        
        
        40
        
        
        
        37Professional services
        
        
        24
        
        
        
        45Insurance
        
        
        20
        
        
        
        20Equipment
        
        
        3
        
        
        
        140Other miscellaneous accruals
        
        
        71
        
        
        
        116$
        1,483
        
        
        $
        1,368


NOTE 7  DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES

At December 28, 2002, deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands):

2002
        
        $
        309Previous years
        
        
        195$
        504


NOTE 8  INDEBTEDNESS

Long-term debt is collateralized by property and equipment with a net book
value aggregating $6,751,000 and a portion is guaranteed by the personal
endorsements of certain stockholders. The balances consist of the
following:

December 28,
        
        December 29,2002
        
        2001Notes payable to financial institutions, payable in monthly installments
Ranging from $2,605 to $9,174, including interest ranging from 6.0% to
9.6%
        
        $
        2,412
        
        
        $
        2,685Financing lease transactions, payable in monthly installments ranging
from $4,645 to $5,049, and effective interest rates ranging from 7.9%
to 9.4%
        
        
        1,753
        
        
        
        1,107Financing lease transactions to Lesters Back Yard Burgers Joint
Venture I, II and IV (See Note 4), payable in monthly installments
ranging from $5,450 to $7,900 and effective interest rates ranging from
12.0% to 12.5%
        
        
        1,257
        
        
        
        1,317Notes payable to a leasing company, payable in monthly installments
ranging from $1,122 to $5,643 including interest of 14.1%
        
        
        503
        
        
        
        6635,925
        
        
        
        5,772Less current installments
        
        
        (825
        )
        
        
        (570
        )Total
        
        $
        5,100
        
        
        $
        5,202


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The principal maturities of all long-term debt outstanding as of December 28,
2002 are as follows: $825,000 in 2003, $2,340,000 in 2004, $299,000 in 2005,
$200,000 in 2006, $198,000 in 2007 and $2,063,000 thereafter.

The company has a line of credit with a financial institution for $750,000. The line of credit is collateralized by real property. There were no borrowings
outstanding under the agreement at December 28, 2002 or December 29, 2001.

On October 4, 1996, the company received a commitment (the Commitment) from a
leasing company for a loan transaction. The Commitment provides the company
with up to $2,000,000 and bears interest of approximately 14.1%. The
Commitment is secured by certain real and personal property to be constructed
and/or acquired with the commitment proceeds. As of December 28, 2002,
borrowings outstanding under the commitment are $503,000, and $876,000 is
available under the commitment.

On February 11, 2003, the company entered a loan agreement with a financial
institution in the amount of $5,000,000. The loan agreement comprised the
following three components: (1) a $2,500,000 five-year loan with a fixed rate
of 5.2%. The funds from the five-year term loan were used to refinance
approximately $2.3 million of existing notes payable to
financial institutions  with an average interest rate
of 6.8% and maturity dates ranging from one to two years, (2) a $2.0 million
draw down line for future expansion with a variable rate of interest equal to
the one month LIBOR rate plus a spread not to exceed 3% that is calculated
based on certain financial covenants and (3) a $500,000 revolver line with a
variable rate of interest equal to the one month LIBOR rate plus a spread not
to exceed 3% that is calculated based on certain financial covenants. This
revolver line replaced the $750,000 line of credit that was in place as of
December 28, 2002.

NOTE 9  OPERATING LEASES

Operating leases relate to leased land sites for company-operated restaurants
and office space for corporate operations. All leases contain renewal options.
The future minimum rental payments under operating lease agreements as of
December 28, 2002 are as follows (in thousands):

2003
        
        $
        1,2312004
        
        
        1,0842005
        
        
        9712006
        
        
        8042007
        
        
        482Thereafter
        
        
        1,319$
        5,891


Rent expense was $1,358,000, $1,255,000 and $1,202,000 in 2002, 2001 and 2000,
respectively.

NOTE 10  RELATED PARTY TRANSACTIONS

In July of 2002, the company entered into a financing transaction for a new
restaurant site and building with certain officers and directors of the
company. The total value of the transaction was $840,000. The company
recorded $490,000 as a capital lease for the construction of the building and
$350,000 as an operating lease for the land on which the building is located.
The effective interest rate of the transaction was approximately 8.7%. The
transaction was reviewed and approved by the companys board of
directors.

NOTE 11  GOODWILL

There was no change in the carrying amount of goodwill during the year ended
December 28, 2002.

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The following schedule adjusts reported net income to exclude amortization
expense (net of income taxes) related to goodwill (in thousands):

Year's EndedDecember 28,
        
        December 29,
        
        December 30,2002
        
        2001
        
        2000Net incomeReported net income
        
        $
        1,477
        
        
        $
        1,027
        
        
        $
        466Add back: Goodwill amortization
        
        
        
        
        
        
        103
        
        
        
        89Adjusted net income
        
        $
        1,477
        
        
        $
        1,130
        
        
        $
        555Basic earnings per share:Reported net income
        
        $
        0.31
        
        
        $
        0.22
        
        
        $
        0.10Goodwill amortization
        
        
        
        
        
        
        0.02
        
        
        
        0.02Adjusted net income
        
        $
        0.31
        
        
        $
        0.24
        
        
        $
        0.12Diluted earnings per share:Reported net income
        
        $
        0.29
        
        
        $
        0.22
        
        
        $
        0.10Goodwill amortization
        
        
        
        
        
        
        0.02
        
        
        
        0.02Adjusted net income
        
        $
        0.29
        
        
        $
        0.24
        
        
        $
        0.12


NOTE 12  INCOME TAXES

Income tax expense for the following tax years is comprised of (in thousands):

2002
        
        2001
        
        2000Amount
        
        Amount
        
        AmountFederal, Current
        
        $
        303
        
        
        $
        193
        
        
        $
        141Federal, Deferred
        
        
        423
        
        
        
        359
        
        
        
        121$
        726
        
        
        $
        552
        
        
        $
        262


Deferred income taxes are provided in recognition of the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.

The deferred tax assets (liabilities) comprise the following:

December 28,
        
        December 29,2002
        
        2001(in thousands)CurrentCurrent deferred tax assets:Allowance for doubtful receivable
        
        $
        27
        
        
        $
        44Accrued expenses
        
        
        128
        
        
        
        61Other
        
        
        15
        
        
        
        89170
        
        
        
        194Current deferred tax liabilities
        
        
        
        
        
        
        (8
        )Net current deferred tax asset
        
        $
        170
        
        
        $
        186


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NoncurrentNoncurrent deferred tax assets:Franchise fees
        
        $
        71
        
        
        $
        32Net operating loss carryforwards
        
        
        432
        
        
        
        192Alternative minimum tax credit carryforwards
        
        
        
        
        
        
        119Goodwill amortization
        
        
        111
        
        
        
        186Other deferred income
        
        
        93
        
        
        
        131Other
        
        
        129
        
        
        
        90Gross noncurrent deferred tax assets
        
        
        836
        
        
        
        750Noncurrent deferred tax liabilities:Depreciation
        
        
        (392
        )
        
        
        (139
        )Gross noncurrent deferred tax liabilities
        
        
        (392
        )
        
        
        (139
        )Net noncurrent deferred tax assets
        
        
        444
        
        
        
        611Deferred tax asset valuation allowance
        
        
        (432
        )
        
        
        (192
        )$
        12
        
        
        $
        419


The ultimate realization of these assets is dependent upon the generation of
future taxable income sufficient to offset the related deductions and loss
carryforwards within the applicable carryforward period. The company evaluates
the need for a valuation allowance and, based on the weight of available
evidence, has determined that it is more likely than not that certain deferred
tax assets will eventually be realized. The valuation allowance reflected
above is based on managements conclusion that it is more likely than not that
certain state tax carryforward items will expire unused.

A reconciliation of the statutory Federal income tax rate to the income tax
provision is as follows:

2002
        
        2001
        
        2000Amount
        
        %
        
        Amount
        
        %
        
        Amount
        
        %Computed expected tax
        
        $
        771
        
        
        
        35.0
        
        
        $
        552
        
        
        
        35.0
        
        
        $
        255
        
        
        
        35.0Goodwill amortization
        
        
        
        
        
        
        0.0
        
        
        
        15
        
        
        
        1.0
        
        
        
        15
        
        
        
        2.0Other
        
        
        (45
        )
        
        
        (2.0
        )
        
        
        (15
        )
        
        
        (1.0
        )
        
        
        (8
        )
        
        
        (1.0
        )$
        726
        
        
        
        33.0
        
        
        $
        552
        
        
        
        35.0
        
        
        $
        262
        
        
        
        36.0


As of December 28, 2002, the company has net operating loss carryforwards
available for state income tax reporting purposes on a consolidated basis of
approximately $5.6 million. These net operating loss carryforwards expire
between 2004 and 2016.

NOTE 13  NATIONAL ADVERTISING FUND

As part of the standard franchise agreement, each operating unit contributes 1%
of its sales to a National Advertising Fund. Under the terms of the agreement,
at least 50% of these funds must be spent on the creation of marketing tools,
such as advertising copy for use on local radio and television and other
collateral material for the operating units. As a general rule, the funds are
not used for the purchase and placement of media advertising. The remaining
funds are available for use by the company on such items as testing and
development of new products, investigating improvements in operating methods,
or other purposes that the company shall deem to be in the interest of
improving operations and earnings of the company and its franchisees.

NOTE 14  STOCK OPTION AND BENEFIT PLANS

In 1992, the Board of Directors of the company and the shareholders authorized
the adoption of an Incentive Stock Option Plan (ISOP) for the companys
employees. As amended in 1993, an aggregate of 176,969 shares of common stock
may be granted under the ISOP. Options granted under the ISOP may not be
granted at a price less than the fair market value of the common stock on the
date of grant (or 110% of fair market value in the case of persons holding 10%
or more of the voting stock of the company). The aggregate fair market value
of shares for which options are granted to any employee during any calendar
year may not exceed $100,000. The options expire ten years from the date of
grant.

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In May 1995, the Board of Directors of the company and the shareholders
authorized the adoption of an Incentive Award Plan (IAP) for the companys
employees. An aggregate of 450,000 shares of common stock may be granted under
the IAP, as amended in May 1997. Options granted under the IAP may be
designated by the Compensation Committee of the Board of Directors as Incentive
Stock Options or Non-Qualified Stock Options. Non-Qualified Stock Options
granted under the IAP may not be granted at a price less than par value of the
common stock. Incentive Stock Options granted under the IAP may not be granted
at a price less than the fair market value of the common stock on the date of
grant (or 110% of fair market value in the case of persons holding 10% or more
of the voting stock of the company). The aggregate fair market value of shares
for which options are granted to any employee during any calendar year may not
exceed $100,000. The term of the options shall be set by the Compensation
Committee of the Board of Directors and no term shall exceed a reasonable time
period. In the case of Incentive Stock Options, the term shall not be more
than ten years from the date of grant. During 2002, the company granted
options for an aggregate of 131,000 shares of common stock at exercise prices
ranging from $3.98 to $11.14 per share, which equaled fair market value at
grant date.

A summary of activity in the above two option plans for the years ended
December 28, 2002, December 29, 2001, and December 30, 2000 follows:

2002
        
        2001
        
        2000Weighted
        
        
        
        Weighted
        
        
        
        WeightedAverage
        
        
        
        Average
        
        
        
        AverageExercise
        
        
        
        Exercise
        
        
        
        ExerciseOptions
        
        Price
        
        Options
        
        Price
        
        Options
        
        PriceOutstanding at beginning
of year
        
        
        440,967
        
        
        $
        1.86
        
        
        
        346,635
        
        
        $
        2.32
        
        
        
        268,358
        
        
        $
        2.82Granted
        
        
        131,000
        
        
        
        5.03
        
        
        
        146,000
        
        
        
        0.86
        
        
        
        142,400
        
        
        
        1.34Exercised
        
        
        (69,016
        )
        
        
        2.59
        
        
        
        (6,140
        )
        
        
        1.78
        
        
        
        
        
        
        
        Canceled
        
        
        (3,990
        )
        
        
        2.52
        
        
        
        (45,528
        )
        
        
        2.19
        
        
        
        (64,123
        )
        
        
        2.28Outstanding at end of year
        
        
        498,961
        
        
        
        2.58
        
        
        
        440,967
        
        
        
        1.86
        
        
        
        346,635
        
        
        
        2.32Exercisable at end of year
        
        
        383,461
        
        
        
        2.50
        
        
        
        313,844
        
        
        
        2.22
        
        
        
        274,243
        
        
        
        2.56


A summary of information about the companys stock options outstanding at
December 28, 2002 follows:

Weighted
        
        
        
        
        
        Weightedaverage
        
        Weighted
        
        
        
        Average
        
        WeightedRange of
        
        
        
        remaining
        
        average
        
        
        
        remaining
        
        Averageexercise
        
        Options
        
        contractual
        
        exercise
        
        Options
        
        contractual
        
        Exerciseprices
        
        Outstanding
        
        life
        
        price
        
        exercisable
        
        Life
        
        Price$0.50-$1.00
        
        
        125,000
        
        
        
        8.0
        
        
        $
        0.67
        
        
        
        83,750
        
        
        
        8.0
        
        
        $
        0.67$1.00-$2.00
        
        
        179,266
        
        
        
        6.7
        
        
        
        1.53
        
        
        
        179,266
        
        
        
        6.7
        
        
        
        1.53$2.00-$3.00
        
        
        14,791
        
        
        
        4.9
        
        
        
        2.27
        
        
        
        14,791
        
        
        
        4.9
        
        
        
        2.27$3.00-$4.00
        
        
        104,200
        
        
        
        8.1
        
        
        
        3.85
        
        
        
        46,450
        
        
        
        7.1
        
        
        
        3.70$4.00-$5.00
        
        
        25,000
        
        
        
        9.0
        
        
        
        4.38
        
        
        
        8,500
        
        
        
        9.0
        
        
        
        4.38$5.00-$6.00
        
        
        30,704
        
        
        
        0.7
        
        
        
        5.84
        
        
        
        30,704
        
        
        
        0.7
        
        
        
        5.84$10.00-$12.00
        
        
        20,000
        
        
        
        9.4
        
        
        
        10.38
        
        
        
        20,000
        
        
        
        9.4
        
        
        
        10.38$0.50-$12.00
        
        
        498,961
        
        
        
        7.1
        
        
        $
        2.58
        
        
        
        383,461
        
        
        
        6.7
        
        
        $
        2.50


Under the IAP, the Compensation Committee of the Board of Directors may award
Restricted Stock and/or a Performance Award to selected employees. A
Performance Award shall mean cash bonus, stock bonus or other performance or
incentive award that is paid in cash, stock or a combination of both. The
company has not issued any Restricted Stock or Performance Awards.

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In May 2002, the Board of Directors of the company and the shareholders
authorized the adoption of an Equity Incentive Plan (EIP) for the companys
employees and directors. An aggregate of 225,000 shares of common stock may be
granted under the EIP. Options granted under the EIP may be designated by the
Compensation Committee of the Board of Directors as Incentive Stock Options or
Non-Qualified Stock Options. Non-Qualified Stock Options granted under the EIP
may be granted at a price less than fair market value of the common stock on
the grant date. Incentive Stock Options granted under the EIP may not be
granted at a price less than the fair market value of the common stock on the
date of grant (or 110% of fair market value in the case of persons holding 10%
or more of the voting stock of the company). The aggregate number of shares
for which Awards are granted to any employee during any calendar year may not
exceed 35,000. The term of the options shall be set by the Compensation
Committee of the Board of Directors and shall not be more than ten years from
the date of grant. There were no options issued or outstanding under the EIP
for the year ended December 28, 2002.

Additionally, under the EIP, the Compensation Committee of the Board of
Directors may award Restricted Stock and/or stock appreciation rights (SARs) to
selected employees. The company has not issued any Restricted Stock or SARs.

In May 1995, the Board of Directors of the company and the shareholders
authorized the adoption of an Employee Stock Purchase Plan (ESPP) for the
companys employees. An aggregate of 225,000 shares of common stock may be
issued under the ESPP. Shares purchased under the ESPP shall be sold to
participants at 85% of the reported price and the maximum number of shares that
can be purchased by a participant is 1,000 shares per quarter. The ESPP shall
continue in effect through May 31, 2005. During 2002, 2001 and 2000, 6,558,
17,776 and 27,726 shares were purchased, respectively, under the ESPP. As of
December 28, 2002, a total of 113,903 shares have been purchased under the ESPP
since its inception in May 1995.

NOTE 15  EARNINGS PER SHARE

A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):

2002
        
        2001
        
        2000Per-Share
        
        
        
        
        
        Per-Share
        
        
        
        
        
        Per-ShareIncome
        
        Shares
        
        Amount
        
        Income
        
        Shares
        
        Amount
        
        Income
        
        Shares
        
        AmountBasic EPSIncome available to
common stockholders
        
        $
        1,477
        
        
        
        4,709
        
        
        $
        0.31
        
        
        $
        1,027
        
        
        
        4,635
        
        
        $
        0.22
        
        
        $
        466
        
        
        
        4,632
        
        
        $
        0.10Effect of Dilutive
SecuritiesConvertible preferred
stock
        
        
        
        
        
        
        20
        
        
        
        
        
        
        
        
        
        
        
        20
        
        
        
        
        
        
        
        
        
        
        
        20Stock options
        
        
        
        
        
        
        329
        
        
        
        
        
        
        
        
        
        
        
        102
        
        
        
        
        
        
        
        
        
        
        
        1Diluted EPSIncome available to
common stockholders
plus assumed
Conversions
        
        $
        1,477
        
        
        
        5,058
        
        
        $
        0.29
        
        
        $
        1,027
        
        
        
        4,757
        
        
        $
        0.22
        
        
        $
        466
        
        
        
        4,653
        
        
        $
        0.10


Options to purchase shares of the companys common stock in addition to the
stock options reflected in the calculation above were outstanding during the
years 2002, 2001 and 2000, but were not included in the computation of diluted
EPS because the exercise price was greater than the average market price of
common shares. The options were still outstanding as of December 28, 2002.
Income available to common stockholders for each year presented above has not
been affected by preferred dividends because the company has not declared any
dividends on its preferred shares.

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NOTE 16  COMMITMENTS AND CONTINGENCIES

Concentration of Risk.Financial instruments which could subject the company
to concentration of credit risk are primarily cash and cash equivalents and
receivables. The company places its cash and cash equivalents in insured
depository institutions and attempts to limit the amount of credit exposure to
any one institution. At December 28, 2002, the companys uninsured cash
balance totaled $895,000. The company performs ongoing credit evaluations of
its franchisees and when necessary maintains reserves for potential credit
losses on receivables, which are not collateralized.

Litigation.The company is party to certain pending legal proceedings and
claims in the normal course of business. Although the outcome of the
proceedings and claims cannot be determined with certainty, management of the
company is of the opinion that it is unlikely that these proceedings and claims
will have a material effect on the results of operations or the financial
condition of the company.

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##### Table of Contents



[PRICEWATERHOUSECOOPERS LOGO]

Report of Independent Accountants

To the Board of Directors and Stockholders of
Back Yard Burgers, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders equity and
of cash flows present fairly, in all material respects, the financial position
of Back Yard Burgers, Inc. and its subsidiaries at December 28, 2002, and
December 29, 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 28, 2002, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the companys management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 1 to the financial statements, Back Yard Burgers, Inc.
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.

PricewaterhouseCoopers, LLP
Memphis, Tennessee
February 20, 2003

Managements Statement of Responsibility for Financial Statements

The management of Back Yard Burgers, Inc. has the primary responsibility
for the preparation and integrity of the consolidated financial statements and
other financial information contained in the Annual Report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles consistently applied in all material respects and reflect
estimates and judgments by management where necessary. Financial information
included throughout this annual report is consistent with the consolidated
financial statements.

The company maintains a system of internal accounting control that is
adequate to provide reasonable assurance that assets are safeguarded and
transactions are executed and recorded in accordance with managements
authorization. The adequacy of the companys internal accounting controls are
under the general oversight of the audit committee of the board of directors,
consisting of three outside directors. The committee reviews with the independent auditors the scope and
results of the annual audit.

The 2002 consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. PricewaterhouseCoopers LLP was
recommended by the audit committee of the board of directors, selected by the
board of directors and ratified by the companys stockholders. The independent
accountants develop and maintain an understanding of the companys systems and
procedures and perform such tests and other procedures, including tests of the
internal accounting controls, as they deem necessary to enable them to express
an opinion on the fairness of the consolidated financial statements. Such
opinion, based upon their audits of the consolidated financial statements, is
contained in this Annual Report.

/s/ Lattimore M. Michael
        
        /s/ Michael G. WebbLattimore M. Michael
        
        Michael G. WebbFounder, Chairman and Chief Executive Officer
        
        Chief Financial Officer


F-29