<PAGE>
                                                                      EXHIBIT 13

                                ABOUT THE COMPANY

         Back Yard Burgers operates and franchises quick-service restaurants
that specialize in charbroiled, freshly prepared, great tasting food. As our
name implies, Back Yard Burgers strives to offer the same high-quality
ingredients and special care typified by outdoor grilling in the 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.

         Our goal for 2002 is to continue to position Back Yard Burgers as a
favored regional premium fast-food restaurant chain. We intend to add more
restaurants to our family and further enhance our existing dine-in facilities.
We will strive to live our vision - "As a team, provide the ultimate restaurant
experience to our guests." We plan to continue to creatively communicate our
points of differentiation - charbroiled 1/3 pound 100% Black Angus beef
hamburgers, charbroiled chicken sandwiches and our unique "Back Yard" favorites.


                              FINANCIAL HIGHLIGHTS
               (in thousands, except per share amounts and units)


<TABLE>
<CAPTION>
                                          DECEMBER 29,     DECEMBER 30,      JANUARY 1,
                                              2001             2000             2000
                                          ------------     ------------     -----------
<S>                                       <C>              <C>              <C>
FOR THE YEAR ENDED:
Restaurant sales                            $ 27,541        $ 26,182        $ 26,480
Total revenues                                31,138          29,260          29,295
Net income (loss)                              1,027             466            (558)
Net income (loss) per share:
    Basic                                       0.22            0.10           (0.12)
    Diluted                                     0.22            0.10           (0.12)
Weighted average shares outstanding:
    Basic                                      4,635           4,632           4,609
    Diluted                                    4,757           4,653           4,609

System-wide sales                           $ 77,706        $ 68,439        $ 65,119
Units in operation:
    Company-owned                                 37              35              35
    Franchised                                    67              58              51
                                            --------        --------        --------
    Total                                        104              93              86
                                            ========        ========        ========
</TABLE>

         [GRAPH]                [GRAPH]                    [GRAPH]
         REVENUES          OPERATING INCOME           SAME-STORE SALES


*  Excludes non-cash charge for impairment of long-lived assets of $1,362,000 in
   fiscal year 1999.

** Depicts percentage increase or decrease over previous
   year's systemwide same-store sales.


<PAGE>


To Our Shareholders:

Welcome to our Back Yard! Fiscal year 2001 was a record year for sales and
profits for Back Yard Burgers, Inc. I could not be more proud of our team and
its accomplishments. We continue to solidify our position as a leading regional
"premium" fast food provider, and we are making significant progress toward
achieving this goal. Our Team continues to focus on building sales and profits.
The switch to Black Angus beef produced positive results in 2001. It is the
"gold" standard of beef. It demonstrates our commitment to "be the best." We
implemented Black Angus system-wide on March 1, 2001.

We continue to strive to be the leader of "premium" fast food and to exploit
what makes Back Yard Burgers better than the rest. Living by our Mission
Statement - "OUR TEAM GUARANTEES THE HIGHEST DEGREE OF SERVICE AND THE BEST
TASTING FOOD IN A PLEASANT ATMOSPHERE, EVERY DAY TO EVERY GUEST." Our team is
working daily to make our product and our people a point of differentiation. We
are serious about the taste of our food, and we are confident that it continues
to build our guest base - they frequently tell us. The positive guest experience
builds the value of our brand.

On January 2, 2002, we entered into an agreement with Tricon to test ten (10)
Back Yard Burgers' restaurants with their concepts. Tricon will open up to ten
Back Yard Burgers in a co-branding relationship with a Taco Bell, KFC, and/or
Pizza Hut with the option to open up to 500 outlets depending on the outcome of
the ten store test. We are proud to be selected as a "partner" with this "major"
quick service restaurant company.

Our on-going strategies for success are as follows:

         FRANCHISING - We will continue to actively promote expansion by seeking
         highly qualified and experienced operators and awarding franchise and
         development territories in core regions and expanding territories as
         well. We believe our strongest growth vehicle is through adding
         franchise locations. Many of our current dedicated franchise owners
         will be adding restaurants in 2002.

         RESTAURANTS OPERATIONS - Our new prototype facility introduced in 2001
         positions Back Yard Burgers as the "upscale" quick service restaurant
         in our category. It provides an attractive exterior and interior
         appearance, as well as the operational efficiencies needed to increase
         thru-put.

         PRODUCTS - We will focus on making our great tasting products even
         better. We are the leader in taste and quality in the quick-service
         restaurant industry. We will not sacrifice quality for price. Our
         system-wide introduction of the "Southern Style Chicken Tenderloins" in
         2002 will build on our arsenal of delicious food.

         MARKETING - Our award winning marketing programs will continue to
         creatively promote our points of differentiation emphasizing what makes
         us better than the rest.

The year 2001 was a challenging year for our Country and our industry. The
events of September 11 certainly made us all more appreciative of our freedom
and our Nation. Our lives and the way we live will be changed forever. We must
never forget the events and we, as a corporate citizen, must be more active in
our communities to make them a better place to live and dine. We are committed
to this goal!

Our achievements in 2001 were significant, but I also realize we must continue
to successfully implement our strategies in order to take advantage of our
tremendous growth opportunities. Our team is committed, experienced, and
passionately working to build a successful restaurant company. The demographic
trends are favorable given the desire for more flavorful, higher quality dining
options. Our points of differentiation deliver a positive opportunity for our
Company, our Guests, and our Shareholders. ENJOY!

Sincerely,



Lattimore M. Michael
Founder, Chairman and CEO



<PAGE>

                           FORWARD-LOOKING INFORMATION

         Certain information included herein may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Forward-looking statements made by the company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
Such forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future and, accordingly,
such results may differ materially from those expressed in any forward-looking
statements by or on behalf of the company. These risks and uncertainties
include, but are not limited to, increased competition within the industry for
customers, qualified labor and desirable locations, increased costs for beef,
chicken or other food products and management decisions relating to restaurant
growth, financing, franchising and new product development, as well as items
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.


                      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 29, 2001 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.

<TABLE>
<CAPTION>
                                        DECEMBER 29,     DECEMBER 30,      JANUARY 1,           JANUARY 2,          JANUARY 3,
                                            2001             2000             2000                 1999                1998
                                        ------------     ------------      ----------           ----------          ----------
<S>                                     <C>              <C>               <C>                  <C>                 <C>
OPERATIONS
Restaurant Sales                          $ 27,541         $ 26,182         $ 26,480             $ 25,082            $ 24,150
Total revenues                              31,138           29,260           29,295               27,364              26,034
Income (loss) before income taxes            1,579              728             (930)(1)              820                 162(3)
Net income (loss)                            1,027              466             (558)               1,171(2)              162

FINANCIAL POSITION
Total assets                              $ 19,508         $ 17,779         $ 18,340             $ 16,948            $ 13,155
Property and equipment, net                 14,176           12,569           13,211               13,365               9,451
Debt                                         5,772            5,403            6,178                5,458               3,081
Shareholders' equity                        10,591            9,555            9,058                9,586               8,298

OTHER DATA
Systemwide sales                          $ 77,706         $ 68,439         $ 65,119             $ 59,564            $ 55,798
Capital expenditures                         2,791            1,063            2,679                4,983               2,758

PER SHARE DATA
Net income (loss) - basic                 $   0.22         $   0.10         $  (0.12)            $   0.26            $   0.04
Net income (loss) - diluted               $   0.22         $   0.10         $  (0.12)            $   0.25            $   0.04
Dividends                                     0.00             0.00             0.00                 0.00                0.00
Market price at year end                      3.70             0.66             1.50                 1.94                3.00
</TABLE>

(1)      The company incurred a non-cash charge for impairment of long lived
assets of $1,362,000 during fiscal year 1999.

(2)      During 1998, the company released a valuation allowance of $351,000
established for deferred income tax benefits established during 1995. The
release of this valuation allowance was based on management's conclusion that
sufficient positive evidence, as defined by SFAS 109, existed regarding the
realization of certain tax carryforward items.

(3)      The company incurred a non-cash charge for impairment of long lived
assets of $377,000 during fiscal year 1997.



                                       2
<PAGE>

                      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 29, 2001, the Back Yard Burgers system included 104
restaurants, of which 37 were company-operated and 67 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.

<TABLE>
<CAPTION>
                                                                                FOR THE YEARS ENDED
                                                                  ---------------------------------------------
                                                                  DECEMBER 29,    DECEMBER 30,       JANUARY 1,
                                                                     2001             2000              1999
                                                                  ------------    ------------       ----------
     <S>                                                          <C>             <C>                <C>
     REVENUES
       Restaurant sales                                              88.5%            89.5%             90.4%
       Franchise and area development fees                            1.0              0.7               0.5
       Royalty fees                                                   6.4              5.6               5.1
       Advertising fees                                               1.6              1.6               1.9
       Other operating revenue                                        2.5              2.6               2.1
                                                                    -----            -----             -----
          Total revenue                                             100.0%           100.0%            100.0%
                                                                    =====            =====             =====
</TABLE>


<TABLE>
<CAPTION>
                                                                                FOR THE YEARS ENDED
                                                                  ---------------------------------------------
                                                                  DECEMBER 29,    DECEMBER 30,       JANUARY 1,
                                                                     2001             2000              1999
                                                                  ------------    ------------       ----------
     <S>                                                          <C>             <C>                <C>
     REVENUES
     COSTS AND EXPENSES
       Cost of restaurant sales (1)                                  31.9%            32.4%             33.8%
       Restaurant operating expenses (1)                             47.3             49.7              48.0
       General and administrative                                    12.6             12.1              12.4
       Advertising                                                    5.9              6.0               5.8
       Depreciation and amortization                                  4.4              4.7               4.6
       Impairment of long-lived assets                                 --               --               4.6
       Operating income                                               7.0              3.8              (1.3)
       Interest income                                                0.1              0.1               0.1
       Interest expense                                              (1.8)            (2.0)             (1.9)
       Other, net                                                    (0.2)             0.6                --
       Income before taxes                                            5.1              2.5              (3.2)
       Income tax expense/(benefit) (2)                              35.0             36.0             (40.0)
       Net Income                                                     3.3              1.6              (1.9)
</TABLE>

(1)      As a percentage of restaurant sales.

(2)      As a percentage of income before taxes.



                                       3
<PAGE>


<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED
                                                 ---------------------------------------------
                                                 DECEMBER 29,    DECEMBER 30,       JANUARY 1,
                                                    2001             2000              1999
                                                 ------------    ------------       ----------
<S>                                              <C>             <C>                <C>
OPERATING DATA
     Restaurant sales (000's)
     Company-operated                            $  27,541         $  26,182         $  26,480
     Franchised                                     50,165            42,257            38,639
                                                 ---------         ---------         ---------
       Total                                     $  77,706         $  68,439         $  65,119
                                                 =========         =========         =========

AVERAGE ANNUAL SALES PER RESTAURANT OPEN
FOR A FULL YEAR (1)
     Company-operated                            $ 777,000         $ 740,000         $ 769,000
     Franchised                                    790,000           754,000           779,000
     Systemwide                                    784,000           748,000           775,000

NUMBER OF RESTAURANTS (2)
     Company-operated                                   37                35                35
     Franchised                                         67                58                51
                                                 ---------         ---------         ---------
       Total                                           104                93                86
                                                 =========         =========         =========
</TABLE>

(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)      Subsequent to December 29, 2001, one franchised restaurant and two
company-operated restaurants were opened and two franchised restaurants were
closed.


COMPARISON OF FISCAL YEAR 2001
TO FISCAL YEAR 2000

         RESTAURANT SALES 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 FEES were $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 FEES increased 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 FEES increased 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.

         OTHER REVENUES increased 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 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.


                                       4
<PAGE>

         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 COSTS increased $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 EXPENSE decreased 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, NET expense 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.


COMPARISON OF FISCAL YEAR 2000
TO FISCAL YEAR 1999

         RESTAURANT SALES decreased 1.1% to $26,182,000 during 2000 compared
with $26,480,000 during 1999. This decrease is primarily the result of a
decrease in same-store sales at restaurants open for more than one year of 5.6%.
The decrease in same-store sales was partially offset by the acquisition of
three higher volume units and the sale of one and closing of two lower volume
units.

         FRANCHISE AND AREA DEVELOPMENT FEES were $202,000 during 2000, an
increase of 53.0% from $132,000 in 1999. Ten new franchised restaurants were
opened in 2000, compared to six new franchised units opened in 1999.

         ROYALTY FEES increased 9.9% to $1,658,000 during 2000 compared with
$1,508,000 during 1999. 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 seven new franchised stores, offset by a
decrease of 4.5% in same-store sales for franchised units.

         ADVERTISING FEES decreased 17.8% to $467,000 for 2000 compared with
$568,000 during 1999. The decrease is primarily due to a change in the number of
franchisee direct mail program participants from forty in 1999 to twelve in
2000. Direct mail program fees represent a portion of the overall advertising
fees. This decrease was partially offset by the increase in franchised
restaurant sales, upon which the fees are based.

         OTHER REVENUES increased 23.7% to $751,000 for 2000 compared with
$607,000 during 1999. The increase is due to increases in vendor rebates as well
as revenues generated from sub-contractor vending sales, which began in March of
1999.

         COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$8,476,000 during 2000 compared to $8,943,000 during 1999, decreasing to 32.4%
as a percentage of restaurant sales during 2000 from 33.8% for 1999. This
percentage decrease is partially the result of a decrease in coupons and
discounts. The decrease is also attributable to the testing of the company's new
100% Black Angus beef hamburgers that began in August 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
$13,007,000 for 2000 from $12,709,000 during 1999, increasing as a percentage of


                                       5
<PAGE>

restaurant sales to 49.7% from 48.0% in 1999. The increase is primarily due to a
2.1% increase in labor as a percentage of sales over the year-earlier period due
to management's efforts to increase staffing at certain locations to improve
customer service and enhance the overall guest experience. The remainder of the
increase, due to increases in property taxes, was partially offset by a decrease
in repair and maintenance costs.

         GENERAL AND ADMINISTRATIVE COSTS decreased $88,000 to $3,531,000 during
2000 from $3,619,000 in 1999. The company incurred $165,000 in consulting
expenditures for a strategic study of system operations and facility design
during 1999, for which there are no comparable costs in 2000. The decrease was
partially offset by increased travel spending due to the opening of more new
franchised restaurants than the year-earlier period, and an increased effort to
support those openings as well as the existing franchisees through training and
marketing.

         ADVERTISING EXPENSE, which increased to $1,760,000 for 2000 from
$1,701,000 during 1999, increased as a percentage of total revenues to 6.0% from
5.8%. This is the result of an increase in company-operated local store
advertising of 1.0% beginning in the second quarter of 2000. This increase is
partially offset by a decrease in company-operated same-store sales of 5.6% for
the year ended December 30, 2000.

         INTEREST EXPENSE increased 4.9% to $594,000 for the year ended December
30, 2000 from $566,000 in the year-earlier period. While debt outstanding as of
December 30, 2000 was $5,403,000, which is 12.5% less debt than the $6,178,000
outstanding as of January 1, 2000, the company had approximately 6.0% more debt
outstanding during the first nine months of 2000 compared with the year-earlier
period.

         OTHER, NET was $186,000 for the year ended December 30, 2000. This is
primarily due to the recognition of $256,000 in net gains on the sale of assets
during fiscal year 2000. Also included in this category is other miscellaneous
income and expenses, including franchise tax expense. During 1999, gains on
asset sales and miscellaneous income were entirely offset by franchise tax
expense.

         INCOME TAX EXPENSE was $262,000 in 2000 compared with an income tax
benefit of $372,000 in 1999. The company earned $728,000 in pre-tax income
during 2000, resulting in the $262,000 income tax expense. The 1999 benefit was
related to the company's pre-tax loss of $930,000 after impairment charges of
$1,362,000 taken during the year.

IMPAIRMENT OF LONG-LIVED ASSETS

         At each balance sheet date, the company assesses whether there has been
an impairment in the value of all long-lived assets (including intangibles) by
determining whether projected undiscounted future cash flows from operations for
each restaurant, as defined in Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To be Disposed Of, 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.

         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 $16,000 in 2001 and $49,000 in 2000 were incurred for
these closed stores and charged against this reserve. A $70,000 charge was taken
during 2001 for a land lease relating to a restaurant building and equipment the
company assumed as collateral due to the default on a note receivable from a
former franchisee. The company intends on selling the assets and has classified
them as assets held for sale with a carrying value of $55,000. As of December
29, 2001, the company's remaining accrual for future lease obligations was
$100,000, net of estimated sub-lease income.

LIQUIDITY AND CAPITAL RESOURCES

         Capital expenditures totaled $2,791,000 in 2001 and $1,063,000 in 2000.
Generally, the company constructs its restaurant buildings on leased properties
for its company-operated restaurants. The average monthly lease cost for the 15
company-operated restaurants on leased sites at December 29, 2001 is
approximately $3,900 per month. For the 13 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 $1,383,000 in 2001 and $1,384,000 in 2000.

         Cash provided by operations in 2001 was $2,996,000 compared with
$1,415,000 in 2000. In recent history, cash from operations and debt have been
used for the addition of dining rooms to certain existing double drive-thru
restaurants, new restaurants and equipment.

         As of December 29, 2001, the company had total long-term debt of
$5,772,000 and unused lines of credit and loan commitments of potential
additional borrowings of $1,626,000. During 2001, the company secured capital
lease agreements with effective interest rates of approximately 9.4% to finance
the acquisition of $222,000 of


                                       6
<PAGE>

restaurant equipment, as well as two capital lease agreements for an aggregate
amount of $950,000 with effective interest rates of approximately 8.9% to
finance the construction of two restaurant buildings.

         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 29, 2001, the company had
repurchased 25,000 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
million in fiscal year 2002, excluding potential acquisitions and share
repurchases. These capital expenditures primarily relate to the development of
additional company-operated restaurants, store equipment upgrades, and
enhancements to existing financial and operating information systems, including
enhancements to our point-of-sale system. The company expects to fund these
capital expenditures through borrowings under its existing line of credit and
cash flow from operations. The company believes that existing cash and funds
generated from internal operations, as well as borrowings under the line of
credit, 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,
as of December 29, 2001, our future scheduled principal repayments of long-term
debt and lease obligations (in thousands):

<TABLE>
<CAPTION>
                                                                                           TOTAL
                                              LONG-TERM             LEASE               CONTRACTUAL
                                                DEBT             OBLIGATIONS         CASH OBLIGATIONS
                                               -------           -----------         ----------------
        <S>                                   <C>                <C>                 <C>
        2002                                   $   570             $ 1,486              $   2,056
        2003                                       763               1,345                  2,108
        2004                                     2,285               1,163                  3,448
        2005                                       229               1,029                  1,258
        2006                                       123                 839                    962
        Thereafter                               1,802               2,578                  4,380
                                               -------             -------               --------
                                               $ 5,772             $ 8,440               $ 14,212
                                               =======             =======               ========
</TABLE>


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 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 of 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.

         Less than 25% of the company's debt portfolio as of December 29, 2001,
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 $4,000 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 2001. 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 29, 2001, only 19,763 shares have yet to be converted.


                                       7
<PAGE>

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. Goodwill and
certain intangible assets will remain on the balance sheet and not be amortized.
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 implemented SFAS No. 141 on July 1,
2001 and does not expect this statement to have a material effect on the
company's consolidated financial position or results of operations.

         In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets will cease upon adoption of this statement. The company is
required to implement SFAS No. 142 on January 1, 2002 and it has not determined
the impact that this statement will have on the company's consolidated financial
position or results of operations.

         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. Management has not completed its evaluation of the potential impact of
this statement on the company's consolidated financial position or results of
operations.

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.

         The company maintains 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.

         The company records an impairment charge when management believes
long-lived assets including goodwill have been impaired such that future
undiscounted cash flows would not recover their book value. Future adverse
changes in market conditions or poor operating results of underlying restaurants
could result in losses or an inability to recover their carrying value, thereby
requiring an impairment charge in the future.

         The company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. Management has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance. Should management
determine that company will not be able to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the periods such determination was made.

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.


                                       8
<PAGE>

         During 2001, 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 expects beef prices
to potentially 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.

         Company-operated same-store sales increased 3.3% during 2001 compared
with a 5.6% decrease in 2000. Management attributes this increase to efforts in
enhancing product quality by introducing 100% Black Angus beef products in all
of its company-operated stores during the fourth quarter of 2000. Management
will continue its strategy of further positioning the company as a premium
fast-food chain in 2002.

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



                                       9
<PAGE>

BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                     DECEMBER 29,       DECEMBER 30,
                                                                        2001                2000
                                                                     ------------       ------------
<S>                                                                  <C>                <C>
                                ASSETS
Cash and cash equivalents                                             $   1,657          $   1,041
Receivables, less allowance for doubtful accounts of
$129 ($218 in 2000)                                                         582                402
Inventories                                                                 229                208
Income taxes receivable                                                      38                 --
Current deferred tax asset                                                  186                140
Prepaid expenses and other current assets                                    50                 58
                                                                      ---------          ---------
    Total current assets                                                  2,742              1,849
Property and equipment, at depreciated cost                              14,176             12,569
Intangible assets                                                         1,751              1,901
Noncurrent deferred tax asset                                               419                824
Notes receivable                                                            134                359
Other assets                                                                286                277
                                                                      ---------          ---------
                                                                      $  19,508          $  17,779
                                                                      ---------          ---------

                 LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable                                                      $     994          $     775
Accrued expenses                                                          1,368                987
Reserve for closed stores                                                   100                 46
Income taxes payable                                                         --                 29
Current installments of long-term debt                                      570                747
                                                                      ---------          ---------
    Total current liabilities                                             3,032              2,584
Long-term debt, less current installments                                 5,202              4,656
Deferred franchise and area development fees                                285                459
Other deferred income                                                       341                457
Other deferred liabilities                                                   57                 68
                                                                      ---------          ---------
    Total liabilities                                                     8,917              8,224
                                                                      ---------          ---------

Commitments and contingencies (Note 13)

Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized;
19,763 shares issued and outstanding                                         --                 --
Common stock, $.01 par value; 12,000,000 shares authorized;
4,645,019 shares issued and outstanding (4,646,103 in 2000)                  47                 47
Paid-in capital                                                          10,195             10,158
Treasury stock, at cost, 25,000 shares (zero shares in 2000)                (28)                --
Retained earnings / (deficit)                                               377               (650)
                                                                      ---------          ---------
    Total stockholders' equity                                           10,591              9,555
                                                                      ---------          ---------
    Total liabilities and stockholders' equity                        $  19,508          $  17,779
                                                                      =========          =========
</TABLE>



                                       10
<PAGE>

BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                       YEARS ENDED
                                                     ----------------------------------------------
                                                     DECEMBER 29,      DECEMBER 30,       JANUARY 1,
                                                         2001              2000              2000
                                                     -----------       ----------         ---------
<S>                                                  <C>               <C>                <C>
Revenues:
    Restaurant Sales                                  $  27,541         $  26,182                 $
                                                                                             26,480
    Franchise and area development fees                     320               202               132
    Royalty fees                                          1,984             1,658             1,508
    Advertising fees                                        502               467               568
    Other                                                   791               751               607
                                                      ---------         ---------         ---------
        Total revenues                                   31,138            29,260            29,295
                                                      ---------         ---------         ---------

Expenses:
    Cost of restaurant sales                              8,797             8,476             8,943
    Restaurant operating expenses                        13,027            13,007            12,709
    General and administrative                            3,935             3,531             3,619
    Advertising                                           1,824             1,760             1,701
    Depreciation and amortization                         1,383             1,384             1,355
    Impairment of long-lived assets                          --                --             1,362
                                                      ---------         ---------         ---------
        Total expenses                                   28,966            28,158            29,689
                                                      ---------         ---------         ---------
        Operating income (loss)                           2,172             1,102              (394)

    Interest income                                          20                34                30
    Interest expense                                       (564)             (594)             (566)
    Other, net                                              (49)              186                --
                                                      ---------         ---------         ---------
        Income before income taxes                        1,579               728              (930)

    Income tax benefit/(expense)                           (552)             (262)              372
                                                      ---------         ---------         ---------
    Net income (loss)                                 $   1,027         $     466         $    (558)
                                                      =========         =========         =========

    Income per share:
        Basic                                         $    0.22         $    0.10         $   (0.12)
                                                      =========         =========         =========
        Diluted                                       $    0.22         $    0.10         $   (0.12)
                                                      =========         =========         =========

    Weighted average number of common shares
    and common equivalent shares outstanding:
        Basic                                             4,635             4,632             4,609
                                                      =========         =========         =========
        Diluted                                           4,757             4,653             4,609
                                                      =========         =========         =========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       11
<PAGE>

BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
                                   PREFERRED STOCK           COMMON STOCK         TREASURY STOCK                RETAINED
                                 -------------------     --------------------    ----------------     PAID-IN   EARNINGS/
                                  SHARES      AMOUNT        SHARES     AMOUNT    SHARES    AMOUNT     CAPITAL   (DEFICIT)    TOTAL
                                 -------     -------     ----------    ------    ------    ------     -------   ---------   -------
<S>                              <C>         <C>         <C>           <C>       <C>       <C>        <C>       <C>         <C>
Balance at January 2, 1999        23,123     $    --      4,596,471     $  46        --    $   --     $10,098    $  (558)   $ 9,586

Conversion of preferred stock     (3,360)         --          3,360        --                                                    --
Employee stock purchases                                     18,546        --                              30                    30
Net loss                                                                                       --                   (558)      (558)
                                 -------     -------     ----------     -----    ------    ------     -------    -------    -------
Balance at January 1, 2000        19,763          --      4,618,377        46        --        --      10,128     (1,116)     9,058

Employee stock purchases              --          --         27,726         1                              30                    31
Net income                                                                                     --                    466        466
                                 -------     -------     ----------     -----    ------    ------     -------    -------    -------
Balance at December 30, 2000      19,763          --      4,646,103        47        --        --      10,158       (650)     9,555

Employee stock purchases              --          --         17,776        --                              26                    26
Treasury stock purchases              --          --        (25,000)       --    25,000       (28)                              (28)
Exercise of stock options             --          --          6,140        --                              11                    11
Net income                                                                                                         1,027      1,027
                                 -------     -------     ----------     -----    ------    ------     -------    -------    -------
Balance at December 29, 2001      19,763     $    --      4,645,019     $  47    25,000    $  (28)    $10,195    $   377    $10,591
                                 -------     -------     ----------     -----    ------    ------     -------    -------    -------
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       12
<PAGE>

BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   YEARS ENDED
                                                                  ---------------------------------------------
                                                                  DECEMBER 29,     DECEMBER 30,      JANUARY 1,
                                                                      2001             2000             2000
                                                                  ------------     ------------      ----------
<S>                                                               <C>              <C>               <C>
Cash flows from operating activities:
 Net income (loss)                                                  $  1,027         $    466         $   (558)
 Adjustments to reconcile net income to net cash
 Provided by operating activities:
    Depreciation of property and equipment                             1,225            1,245            1,251
    Impairment of long-lived assets                                       --               --            1,362
    Deferred income taxes                                                359              121             (529)
    Amortization of intangible assets                                    158              139              104
    Provision for losses on receivables                                  291              147              154
    Gain on sale of assets                                                 1             (256)              (2)
    Other deferred income                                               (116)            (176)             633
  (Increase) decrease in assets:
    Receivables                                                         (321)            (289)            (199)
    Inventories                                                          (21)             (44)              16
    Prepaid expenses and other current assets                              8               21               17
    Other assets                                                         (17)             (31)              (3)
 Increase (decrease) in liabilities:
    Accounts payable and accrued expenses                                600              121              250
    Reserve for closed stores                                             54              (49)             (29)
    Income taxes payable/receivable                                      (67)             (60)            (116)
    Other deferred liabilities                                           (11)              (7)              14
    Deferred franchise and area development fees                        (174)              67              138
                                                                    --------         --------         --------
        Net cash provided by operating activities                      2,996            1,415            2,503
                                                                    --------         --------         --------

Cash flows from investing activities:
    Additions to property and equipment                               (2,791)          (1,063)          (2,679)
    Proceeds from sale of property and equipment                          13              565              274
    Goodwill acquisition cost                                             --             (229)              --
    Proceeds on notes receivable                                          20               --               34
                                                                    --------         --------         --------
        Net cash used in investing activities                         (2,758)            (727)          (2,371)
                                                                    --------         --------         --------

Cash flows from financing activities:
    Issuance of stock                                                     37               31               30
    Principal payments on long-term debt                                (803)          (1,375)            (498)
    Proceeds from issuance of long-term debt                           1,172               --            1,218
    Treasury stock purchases                                             (28)              --               --
                                                                    --------         --------         --------
        Net cash provided (used) by financing activities                 378           (1,344)             750
                                                                    --------         --------         --------
        Net increase (decrease) in cash and cash equivalents             616             (656)             882
Cash and cash equivalents:
    Beginning of year                                                  1,041            1,697              815
                                                                    --------         --------         --------
    End of year                                                     $  1,657         $  1,041         $  1,697
                                                                    ========         ========         ========

Supplemental disclosure of cash flow information:
    Income taxes paid                                               $    260         $    201         $    273
                                                                    ========         ========         ========
    Interest paid                                                   $    560         $    577         $    566
                                                                    ========         ========         ========
 Noncash investing and financing activities
    Property and equipment sold for a note receivable               $     --         $    119         $     --
                                                                    ========         ========         ========
    Goodwill acquired with note payable                             $     --         $    600         $     --
                                                                    ========         ========         ========
    Assumption of collateral underlying note receivable             $     55         $     --         $     --
                                                                    ========         ========         ========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       13
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 29, 2001, the Company operated 37 restaurants in
three states (Mississippi, Arkansas and Tennessee) and franchised 67 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 year ended December 29,
2001, December 30, 2000 and January 1, 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 operation 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 10).
These fees are recorded on the accrual basis of accounting.



                                       14
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

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

INTANGIBLE ASSETS. Intangible assets consist of the excess of the cost of
acquired companies and assets over the values assigned to net tangible assets.
These intangibles are being amortized by the straight-line method over an 18
year period. Accumulated amortization totaled $908,000 at December 29, 2001 and
$758,000 at December 30, 2000.

IMPAIRMENT OF LONG-LIVED ASSETS. At each balance sheet date, the Company
assesses whether there has been an impairment in the value of all long-lived
assets (including intangibles) by determining whether projected undiscounted
future cash flows from operations for each restaurant, as defined in Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
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.

During the fourth quarter of 1999, the company incurred a non-cash charge for
the effect of three company-operated restaurant closings and impaired assets at
three underperforming company-operated restaurants. While some of the fixed
assets at the locations were utilized by other stores, certain assets were fixed
to the site and were unrecoverable. Based on an analysis of projected
undiscounted cash flows for these locations, the company determined in 1999 that
the carrying value of certain long-lived assets necessitated a write-down. The
Company recorded a charge to write these assets down to their fair value in the
amount of $1,114,000 and a related accrual for future lease payments net of
estimated sub-lease income of $248,000 was recorded.

Lease payments of $16,000 in 2001 and $49,000 in 2000 were incurred for these
closed stores and charged against this reserve. A $70,000 reserve was taken
during 2001 for a land lease relating to a restaurant building and equipment the
company assumed as collateral due to the default on a note receivable from a
former franchisee. The company intends on selling the assets and has classified
them as assets held for sale with a carrying value of $55,000. As of December
29, 2001, the company's remaining accrual for future lease obligations was
$100,000, 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 29, 2001, all but 19,763 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 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 13).


                                       15
<PAGE>


BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FAIR VALUE OF FINANCIAL INSTRUMENTS. At December 29, 2001, 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 29, 2001, and December
30, 2000, the fair value was approximately $6.2 million and $5.4 million,
respectively.

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. Goodwill and certain intangible
assets will remain on the balance sheet and not be amortized. 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 implemented SFAS No. 141 on July 1,
2001 and does not expect this statement to have a material effect on the
company's consolidated financial position or results of operations.

 In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets will cease upon adoption of this statement. The company is
required to implement SFAS No. 142 on January 1, 2002 and it has not determined
the impact that this statement will have on the company's consolidated financial
position or results of operations.

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. Management has not completed its evaluation of the potential impact of
this statement on the company's consolidated financial position or results of
operations.

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:

<TABLE>
<CAPTION>
                                           DECEMBER 29,    DECEMBER 30,
                                               2001           2000
                                           ------------    ------------
                                                  (IN THOUSANDS)
<S>                                        <C>             <C>
Corporate receivables                        $   264         $   303
National Advertising Fund receivables             98             163
Credit card receivables                           22              --
Rebate receivables                               201              61
Other                                            126              93
                                             -------         -------
                                                 711             620
Allowance for doubtful receivables              (129)           (218)
                                             -------         -------
                                             $   582         $   402
                                             -------         -------
</TABLE>



                                       16
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - PROPERTY AND EQUIPMENT

Summaries of property and equipment follow:

<TABLE>
<CAPTION>
                                               DECEMBER 29,     DECEMBER 30,
                                                   2001             2000
                                               ------------     ------------
                                                  (IN THOUSANDS)
<S>                                            <C>              <C>
Land                                             $   3,784         $   3,452
Buildings                                            7,547             6,552
Building and site improvements                       3,011             2,926
Fixtures and equipment                               7,344             6,026
Transportation Vehicles                                247               229
Assets held for sale                                    55                --
                                                 ---------         ---------
                                                    21,988            19,185
Accumulated depreciation and amortization           (7,812)           (6,616)
                                                 ---------         ---------
                                                 $  14,176         $  12,569
                                                 ---------         ---------
</TABLE>


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 29, 2001,
approximately $300,000 of such debt is guaranteed by the Company.

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 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES

At December 29, 2001, deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands):

<TABLE>
                  <S>                          <C>
                  2001                         $   52
                  Previous years                  233
                                               ------
                                               $  285
                                               ======
</TABLE>


                                       17
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 - INDEBTEDNESS

Long-term debt is collateralized by property and equipment with a net book value
aggregating $7,408,000 and a portion is guaranteed by the personal endorsements
of certain stockholders. The balances consist of the following:

<TABLE>
<CAPTION>
                                                                              DECEMBER 29,      DECEMBER 30,
                                                                                  2001              2000
                                                                              ------------     -------------
<S>                                                                           <C>              <C>
Notes payable to financial institutions, payable in monthly installments
Ranging from $3,250 to $9,154, including interest ranging from 6.0% to
9.6%                                                                            $  2,685         $  2,926

Financing lease transactions, payable in monthly installments ranging
from $4,645 to $4,850, and effective interest rates ranging from 8.9%
to 9.4%                                                                            1,107               --

Note payable to franchisee related to 2000 acquisition, payable
In quarterly installments of $150,000 plus interest of prime plus 1.0%                --              300

Financing 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%                                                                     1,317            1,376

Notes payable to a leasing company, payable in monthly installments
ranging from $1,122 to $5,643 including interest of 14.1%                            663              801
                                                                                --------         --------
                                                                                   5,772            5,403
Less current installments                                                           (570)            (747)
                                                                                --------         --------
    Total                                                                       $  5,202         $  4,656
                                                                                ========         ========
</TABLE>

The principal maturities of all long-term debt subsequent to 2001 are as
follows: $570,000 in 2002, $763,000 in 2003, $2,285,000 in 2004, $229,000 in
2005, $123,000 in 2006 and $1,802,000 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 29, 2001 and December 30, 2000.

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 29, 2001, borrowings outstanding
under the commitment are $663,000, and $876,000 is available under the note
payable.



                                       18
<PAGE>


BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - 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 29, 2001 are as follows (in thousands):

<TABLE>
      <S>                              <C>
      2002                             $ 1,486
      2003                               1,345
      2004                               1,163
      2005                               1,029
      2006                                 839
      Thereafter                         2,578
                                       -------
                                       $ 8,440
                                       -------
</TABLE>

Rent expense was $1,255,000, $1,202,000 and $1,128,000 in 2001, 2000 and 1999,
respectively.

NOTE 9 - RELATED PARTY TRANSACTIONS

On October 3, 1999, the Company sold a company-operated restaurant, along with
future development rights for a specified area contiguous to the restaurant, to
a former officer of the company and a current member of the board of directors
of the Company. The restaurant was sold at book value and will continue to be
operated as a franchised restaurant.

NOTE 10 - INCOME TAXES

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

<TABLE>
<CAPTION>
                           2001        2000          1999
                          AMOUNT      AMOUNT        AMOUNT
                         -------     -------       -------
<S>                      <C>         <C>           <C>
Federal, Current         $   193     $   141       $   157
Federal, Deferred            359         121          (529)
State, Current                --          --            --
State, Deferred               --          --            --
                         -------     -------       -------
                         $   552     $   262       $  (372)
                         -------     -------       -------
</TABLE>

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:

<TABLE>
<CAPTION>
                                                         DECEMBER 29,     DECEMBER 30,
                                                            2001             2000
                                                         -----------      -----------
                                                                (IN THOUSANDS)
<S>                                                      <C>              <C>
Current
Current deferred tax assets:
    Allowance for doubtful receivable                           44              112
    Accrued expenses                                            61               31
    Other                                                       89               --
                                                          --------         --------
                                                               194              143
Current deferred tax liabilities                                (8)              (3)
                                                          --------         --------
Net current deferred tax asset                                 186              140
                                                          ========         ========
</TABLE>



                                       19
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                           <C>              <C>
Noncurrent
Noncurrent deferred tax assets:
    Franchise fees                                                  32               88
    Net operating loss carryforwards                               192              130
    Alternative minimum tax credit carryforwards                   119              283
    Goodwill amortization                                          186              228
    Other deferred income                                          131              155
    Other                                                           90              145
                                                              --------         --------
        Gross noncurrent deferred tax assets                       750            1,029
                                                              --------         --------

Noncurrent deferred tax liabilities:
    Depreciation                                                  (139)             (75)
                                                                               --------
        Gross noncurrent deferred tax liabilities                 (139)             (75)
                                                              --------         --------

    Net noncurrent deferred tax assets                             611              954
    Deferred tax asset valuation allowance                        (192)            (130)
                                                              --------         --------
                                                                   419              824
                                                              ========         ========
</TABLE>


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:

<TABLE>
<CAPTION>
                                               2001                       2000                        1999
                                      ----------------------     ----------------------      -----------------------
                                        AMOUNT          %          AMOUNT          %           AMOUNT          %
                                      ---------      -------     ---------      -------      ---------      --------
<S>                                   <C>            <C>         <C>            <C>          <C>            <C>
Computed "expected" tax               $     552         35.0     $     255         35.0      $    (325)       (35.0)
State income taxes, net of federal
 income tax effect                           --           --            --           --             --           --
Goodwill amortization                        15          1.0            15          2.0              7          1.0
Other                                       (15)        (1.0)           (8)        (1.0)           (54)        (6.0)
                                      ---------      -------     ---------      -------      ---------      -------
                                      $     552         35.0     $     262         36.0      $    (372)       (40.0)
                                      ---------      -------     ---------      -------      ---------      -------
</TABLE>

As of December 29, 2001, the Company has net operating loss carryforwards
available for state income tax reporting purposes on a consolidated basis of
approximately $4.7 million. These net operating loss carryforwards expire
between 2004 and 2016.



                                       20
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - 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 12 - 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.

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 2001, the Company granted options for
an aggregate of 146,000 shares of common stock at exercise prices of $0.66 and
$3.70 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
29, 2001, December 30, 2000 and January 1, 2000 follows:

<TABLE>
<CAPTION>
                                               2001                              2000                              1999
                                     -------------------------         ------------------------          ------------------------
                                                    WEIGHTED                           WEIGHTED                          WEIGHTED
                                                     AVERAGE                            AVERAGE                          AVERAGE
                                                     EXERCISE                          EXERCISE                          EXERCISE
                                     OPTIONS          PRICE            OPTIONS          PRICE            OPTIONS           PRICE
                                     -------        ---------          -------         --------          -------         --------
<S>                                  <C>            <C>               <C>              <C>              <C>              <C>
Outstanding at beginning of          346,635         $   2.32          268,358         $   2.82          297,127         $   3.03
Granted                              146,000             0.86          142,400             1.34          100,281             1.77
Exercised                             (6,140)            1.78               --               --               --               --
Canceled                             (45,528)            2.19          (64,123)            2.28         (129,050)            2.47
                                    --------                          --------                          --------
Outstanding at end of year           440,967             1.86          346,635             2.32          268,358             2.82
                                    --------                          --------                          --------
Exercisable at end of year           313,844             2.22          274,243             2.56          227,439             3.01
                                    ========                          ========                          ========
</TABLE>



                                       21
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


A summary of information about the Company's stock options outstanding at
December 29, 2001 follows:

<TABLE>
<CAPTION>
                                        WEIGHTED                                      WEIGHTED
                                        AVERAGE         WEIGHTED                       AVERAGE         WEIGHTED
   RANGE OF                            REMAINING         AVERAGE                      REMAINING         AVERAGE
   EXERCISE            OPTIONS        CONTRACTUAL       EXERCISE      OPTIONS        CONTRACTUAL       EXERCISE
    PRICES           OUTSTANDING          LIFE            PRICE      EXERCISABLE        LIFE             PRICE
---------------      -----------      -----------       --------     ----------      -----------       --------
<S>                  <C>              <C>               <C>          <C>             <C>               <C>
  $0.50 - $1.00         130,000           9.0           $  0.67          44,200           9.0          $  0.67
  $1.00 - $2.00         214,971           7.6              1.54         177,747           7.4             1.58
  $2.00 - $3.00          23,448           6.4              2.36          21,329           6.1             2.31
  $3.00 - $4.00          28,870           4.3              3.17          26,890           3.9             3.14
  $5.00 - $6.00          43,678           1.7              5.79          43,678           1.7             5.79
---------------        --------        ------           -------       ---------        ------          -------
  $0.50 - $6.00         440,967           7.1           $  1.86         313,844           6.5          $  2.22
---------------        --------        ------           -------       ---------        ------          -------
</TABLE>

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
2001, 2000 and 1999 under the plan consistent with the method prescribed by SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's operating
results for 2001, 2000 and 1999 would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                      2001             2000             1999
                                   ---------        ---------        ---------
<S>                                <C>              <C>              <C>
Net income:
    As reported                    $   1,027        $     466        $    (558)
    Pro forma                            954              380             (623)

Basic earnings per share:               0.22             0.10            (0.12)
    As reported                         0.21             0.08            (0.14)
    Pro forma

Diluted earnings per share:
    As reported                         0.22             0.10            (0.12)
    Pro forma                           0.20             0.08            (0.14)
</TABLE>

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 2001, 2000 and 1999, respectively:

<TABLE>
<CAPTION>
                                     2001         2000         1999
                                     ----         ----         ----
<S>                                  <C>          <C>          <C>
Average expected life (years)         5.0          4.4          7.0
Average expected volatility          62.2%        63.0%        63.3%
Risk-free interest rates              5.0%         6.5%         5.6%
Dividend yield                        0.0%         0.0%         0.0%
</TABLE>

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.


                                       22
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Additionally, 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.

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 2001, 2000 and 1999, 17,776,
27,726 and 18,546 shares were purchased, respectively, under the ESPP. As of
December 29, 2001, a total of 108,651 shares have been purchased under the ESPP
since its inception in May 1995.


NOTE 13 - EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                        2001                          2000                         1999
                             --------------------------    ---------------------------   --------------------------
                                              PER-SHARE                      PER-SHARE                    PER-SHARE
                             INCOME   SHARES    AMOUNT     INCOME   SHARES    AMOUNT     INCOME   SHARES   AMOUNT
<S>                          <C>      <C>     <C>          <C>      <C>      <C>         <C>      <C>     <C>
BASIC EPS
Income available to
common stockholders          $1,027    4,635    0.22        $ 466    4,632     0.10      $(558)    4,609    (0.12)

EFFECT OF DILUTIVE
SECURITIES
Convertible preferred
stock                                     20                            20                            --
Stock options                            102                             1                            --
                             ------    -----    ----        -----    -----     ----      -----     -----    -----
DILUTED EPS
Income available to
common stockholders
plus assumed
Conversions                 $1,027    4,757    0.22        $ 466    4,653     0.10      $(558)    4,609    (0.12)
                            ======    =====    ====        =====    =====     ====      =====     =====    =====
</TABLE>


Options to purchase shares of the Company's common stock were outstanding during
the years 2001, 2000 and 1999, 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 29, 2001.
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. The convertible preferred stock and stock
options are anti-dilutive and thus are not considered in the calculation of
diluted earnings per share in 1999.


NOTE 14 - COMMITMENTS AND CONTINGENCIES

CONCENTRATION OF RISK. Financial instruments which potentially 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



                                       23
<PAGE>

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 29, 2001, the Company's uninsured cash balance
totaled $1,283,000. The Company performs ongoing credit evaluations of its
customers 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.


NOTE 15 - SUBSEQUENT EVENTS

On January 2, 2002, the company entered a Development Agreement with Tricon
Global Restaurants, Inc. Under the terms of the Development Agreement, Back Yard
Burgers granted Tricon Global Restaurants, Inc. the right to use the Back Yard
Burgers trademarks in the United States 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 at least
six of the first ten outlets will be constructed and opened in 2002 with the
remaining four to be constructed and opened by no later than 2003. The initial
site has been selected in Shepherdsville, Kentucky and is an existing Taco Bell
that is being converted into a Taco Bell-Back Yard Burgers co-branded
restaurant. The opening for this co-branded restaurant is expected to be on or
around March 27, 2002. No other sites for development under this agreement have
been finalized at this point.

The Development Agreement also grants to Tricon Global Restaurants, Inc. an
option to co-brand up to 500 restaurants within certain geographic areas if the
development schedule for the initial ten outlets is being met.


                                       24
<PAGE>
                                                  [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 29, 2001, and December
30, 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 29, 2001, 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.


Memphis, Tennessee
February 15, 2002


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 two outside directors and one director who is an employee of the
company. The committee reviews with the independent auditors the scope and
results of the annual audit.

         The 2001 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.



Lattimore M. Michael                                  Michael G. Webb
Founder, Chairman and Chief Executive Officer          Chief Financial Officer


                                       25
<PAGE>

                             DIRECTORS AND OFFICERS


BOARD OF DIRECTORS

Lattimore M. Michael
  Chairman and Chief Executive Officer

William N. Griffith
  Executive Vice President
    And Secretary-Treasurer

W. Kurt Henke
  Partner
  Henke-Bufkin
  (attorneys-at-law)

Jim L. Peterson
  Bojangles Restaurants, Inc. -
    Chairman Emeritus

William B. Raiford, III
  Of Counsel
   Merkel & Cocke
  (attorneys-at-law)

Joseph L. Weiss
  President, A. Weiss Company
  (franchisee)



OFFICERS

Lattimore M. Michael
  Chairman and Chief Executive Officer

Michael W. Myers
  President and Chief Operating Officer

William N. Griffith
 Executive Vice President and Secretary-Treasurer

Michael G. Webb
  Chief Financial Officer


                                       26
<PAGE>

                              CORPORATE INFORMATION


CORPORATE OFFICES
1657 N. Shelby Oaks Dr., Suite 105
Memphis, TN 38134
901-367-0888

TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ  07016
800-368-5948

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Memphis, Tennessee

GENERAL COUNSEL
Henke-Bufkin
Professional Corporation
Clarksdale, Mississippi

SECURITIES COUNSEL
Kutak Rock, LLP
Little Rock, Arkansas

ANNUAL MEETING OF STOCKHOLDERS
The company will hold its annual meeting of stockholders on May 16, 2002, at
10:00 a.m. local time, at The Ridgeway Inn, 5679 Poplar Avenue, in Memphis,
Tennessee. Stockholders of record as of March 22, 2002, are invited to attend
this meeting.

ANNUAL REPORT ON FORM 10-K
A copy of the company's Annual Report on Form 10-K for the year ended December
29, 2001, as filed with the Securities and Exchange Commission, may be obtained
by stockholders of record without charge upon request to the company.

STOCKHOLDER ACCOUNT ASSISTANCE
For address changes, registration changes, lost stock certificates, or if you
are receiving duplicate copies of the Annual Report, please contact Registrar
and Transfer Company at the address or number listed above.

STOCK MARKET INFORMATION
The company's common stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol BYBI. At March 22, 2002, the company had
approximately 4,400 stockholders, including beneficial owners holding shares in
nominee or "street" name.

Back Yard Burgers completed its initial public offering of common stock in June
1993 and began public trading on June 25, 1993. The table below sets forth the
high and low closing bid prices for the two-year period ended December 29, 2001:

<TABLE>
<CAPTION>
QUARTER ENDED:              HIGH           LOW
<S>                        <C>            <C>
April 1, 2000              $ 1.56         $ 1.19
July 1, 2000               $ 1.44         $ 1.06
September 30, 2000         $ 1.38         $ 1.13
December 30, 2000          $ 1.25         $ 0.59

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
</TABLE>


The company currently anticipates that it will retain all of its earnings to
support its operations and the development of its business. Therefore, the
company does not pay any cash dividends on its outstanding common stock. Future
cash dividends, if any, will be at the discretion of the company's board of
directors and will depend upon, among other things, future operations and
earnings, capital requirements, general financial conditions, contractual
restrictions, stock repurchases and other factors that the board may consider
relevant.


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