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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

For the fiscal year ended December 28, 2003

O’CHARLEY’S INC.

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

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

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

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $445.9 million. For purposes of this calculation, shares held by non-affiliates excludes only those shares beneficially owned by officers, directors and shareholders beneficially owning 10% or more of the outstanding common stock.

     The number of shares of common stock outstanding on March 5, 2004 was 21,163,149.

DOCUMENTS INCORPORATED BY REFERENCE

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O’CHARLEY’S INC.

PART I

Item 1. Business.

          We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts under the “O’Charley’s,’’ “Ninety Nine Restaurant and Pub’’ and “Stoney River Legendary Steaks’’ trade names. Our two primary concepts, O’Charley’s and Ninety Nine, are leading casual dining concepts in their respective operating markets. At December 28, 2003, we operated 206 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 87 Ninety Nine restaurants in seven Northeastern states, and six Stoney River restaurants in the Southeast and Midwest.

Our Restaurant Concepts

O’Charley’s

          We acquired the original O’Charley’s restaurant in Nashville, Tennessee in May 1984. O’Charley’s is a casual dining restaurant concept whose strategy is to differentiate its restaurants by serving high-quality, freshly prepared food at moderate prices and with attentive customer service. O’Charley’s restaurants are intended to appeal to a broad spectrum of customers from a diverse income base, including mainstream casual dining customers, as well as upscale casual dining and value oriented customers. The O’Charley’s menu is mainstream, but innovative and distinctive in taste. The O’Charley’s menu features approximately 55 items including USDA Choice hand-cut and aged steaks, baby-back ribs basted with our own tangy BBQ sauce, a variety of seafood, fresh-cut salads with special recipe salad dressings and O’Charley’s signature caramel pie. All entrees are cooked to order and feature a selection of side items in addition to our hot, freshly baked yeast rolls. We believe the large number of freshly prepared items on the O’Charley’s menu helps differentiate our O’Charley’s concept from other casual dining restaurants.

          O’Charley’s restaurants are open seven days a week and serve lunch, dinner and Sunday brunch and offer full bar service. Specialty menu items include “limited-time’’ promotions, O’Charley’s Lunch Club, special selections, a special kids menu and a “kids eat free’’ program in selected markets. We are continually developing new menu items for our O’Charley’s restaurants to respond to changing customer tastes and preferences. Lunch entrees range in price from $5.99 to $9.99, with dinner entrees ranging from $6.99 to $16.99. In 2003, the average check per customer, including beverages, was $11.60.

          We seek to create a casual, neighborhood atmosphere in our O’Charley’s restaurants through an open layout and exposed kitchen and by tailoring the decor of our restaurants to the local community. The exterior typically features bright red and green neon borders, multi-colored awnings and attractive landscaping. The interior typically is open, casual and well lighted and features warm woods, exposed brick, color prints and hand-painted murals depicting local history, people, places and events. The prototypical O’Charley’s restaurant is a free-standing building ranging in size from approximately 6,400 to 6,800 square feet with seating for approximately 275 customers, including approximately 60 bar seats. We periodically update the interior and exterior of our restaurants to reflect refinements in the concept and respond to changes in customer tastes and preferences.

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Ninety Nine Restaurant and Pub

          In January 2003, we acquired Ninety Nine Restaurant and Pub, a Woburn, Massachusetts based casual dining concept that began in 1952 with its initial location at 99 State Street in downtown Boston. Ninety Nine restaurants are casual dining restaurants that we believe have earned a reputation for providing generous portions of high-quality food at moderate prices combined with attentive service. Ninety Nine restaurants are intended to appeal to mainstream casual dining and value oriented customers. The Ninety Nine menu features approximately 75 items, including a wide selection of appetizers, soups, salads, sandwiches, burgers, beef, chicken and seafood entrees and desserts. Ninety Nine restaurants offer full bar service, including a wide selection of imported and domestic beers, wine and specialty drinks.

          Ninety Nine restaurants are open seven days a week and serve lunch and dinner. Lunch entrees range in price from $5.99 to $14.99, with dinner entrees ranging from $6.69 to $14.99. In 2003, the average check per customer, including beverages, was $13.78.

          Ninety Nine restaurants seek to provide a warm and friendly neighborhood pub atmosphere. Signature elements of the prototypical Ninety Nine restaurant include an open view kitchen, booth seating, walls decorated with local community memorabilia and a centrally located rectangular bar. The prototypical Ninety Nine restaurant is a free-standing building of approximately 5,800 square feet in size with seating for approximately 190 customers, including approximately 30 bar seats. Ninety Nine has grown through remodeling traditional and non-traditional restaurant locations as well as through developing new restaurants in the style of its prototype restaurant.

Stoney River Legendary Steaks

          We acquired Stoney River in May 2000. Stoney River restaurants are upscale steakhouses that are intended to appeal to both upscale casual dining and fine dining customers by offering the high-quality food and attentive customer service typical of high-end steakhouses at more moderate prices. Stoney River restaurants have an upscale “mountain lodge’’ design with a large stone fireplace, plush sofas and rich woods that is intended to make the interior of the restaurant inviting and comfortable. The Stoney River menu features several offerings of premium midwestern beef, fresh seafood and a variety of other gourmet entrees. An extensive assortment of freshly prepared salads and side dishes is available a la carte. The menu also includes several specialty appetizers and desserts. Stoney River restaurants offer full bar service, including an extensive selection of wines. The price range of entrees is $16.95 to $31.95. In 2003, the average check per customer, including beverages, was $37.42.

          We have established a “managing partner program” for the general managers of our Stoney River restaurants pursuant to which each general manager has acquired, or must acquire in the future, a 6% interest in the subsidiary that owns the restaurant that the general manager manages in exchange for a capital contribution to that subsidiary. We have also entered into a five-year employment agreement with each general manager. During the five-year employment term, each general manager is prohibited from selling or otherwise transferring his or her 6% interest. Upon the fifth anniversary of the general manager’s capital contribution to the subsidiary, we have the option, but not the obligation, to purchase the general manager’s 6% interest for fair market value. In the event the general manager’s employment with us terminates prior to the expiration of the five-year term of his employment agreement, we have the option, but not the obligation, to purchase the general manager’s 6% interest. In addition, the general manager’s 6% interest is subject to forfeiture based on certain events.

Our Operating Strategy

          Protect the Distinctive Culture and Operating Principles of Each of Our Concepts. We believe our three restaurant concepts have distinctive cultures and operating principles that have made them successful. In order to preserve those distinctive cultures and principles, we have established separate, experienced management teams for each concept. The members of the senior management team of each concept have an average of at least 20 years in the restaurant industry. We operate our three concepts separately, but each concept is integrated with our home office for certain administrative and support functions, such as management information systems, procurement and other administrative services. We believe that having different management teams for each concept should enable us to successfully operate and expand each of our concepts by focusing on their distinctive strengths, while capitalizing on the operating strengths and efficiencies of a large, multi-concept company.

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          Provide an Attractive Price-to-Value Relationship. We believe our O’Charley’s and Ninety Nine restaurants are recognized by consumers for offering an attractive value. In 2003, the average check per customer, including beverages, was $11.60 for O’Charley’s and $13.78 for Ninety Nine. At our O’Charley’s restaurants, we believe our high-quality, freshly prepared food appeals to a broad spectrum of customers from a diverse income base, including mainstream casual dining customers, as well as upscale casual dining and value oriented customers. The generous portions and quality of the food at our Ninety Nine restaurants are intended to appeal to casual dining customers and value oriented customers.

          Pursue Disciplined Growth Strategy. We intend to continue to develop new O’Charley’s restaurants in our target markets, primarily in the Southeast and Midwest, and new Ninety Nine restaurants in the Northeast. Our target markets for the O’Charley’s and Ninety Nine concepts include both metropolitan markets and smaller markets in close proximity to metropolitan markets where we have a significant presence. Our strategy is to cluster our new restaurants to enhance supervisory, marketing and distribution efficiencies. Prior to opening a new restaurant, we use cost, demographic and traffic data to analyze prospective restaurant sites. While we prefer to develop new O’Charley’s restaurants based on our prototype restaurants, we from time to time develop new restaurants in existing buildings. Historically, Ninety Nine has opened a significant number of new restaurants by remodeling existing buildings. Our ability to remodel an existing building into an O’Charley’s or Ninety Nine restaurant can permit greater accessibility to quality sites in more developed markets. We opened 26 new O’Charley’s restaurants, closed two O’Charley’s restaurants, opened ten new Ninety Nine restaurants and closed one Ninety Nine restaurant in 2003.

          Leverage Our Commissary Operations. We operate an approximately 220,000 square foot commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants and manufacture certain O’Charley’s brand food products for our O’Charley’s restaurants and, to a lesser extent, for sale to other customers, including retail grocery chains, mass merchandisers and wholesale clubs. In addition, our Nashville commissary operates a USDA-approved and inspected facility at which we cut beef for our O’Charley’s and Stoney River restaurants and a production facility at which we manufacture the signature yeast rolls and salad dressings served in our O’Charley’s restaurants. We believe our Nashville commissary has sufficient capacity to meet a substantial majority of the distribution needs of our existing and planned O’Charley’s and Stoney River restaurants for the next several years. We also operate a 20,000 square foot commissary and purchasing operation located in Woburn, Massachusetts through which we purchase and distribute a portion of the food products and supplies for our Ninety Nine restaurants, primarily “center of the plate’’ items including red meat, poultry and seafood. Our Woburn commissary operates a USDA-approved and inspected facility at which we cut beef for our Ninety Nine restaurants and a production facility at which we prepare the soups, sauces and marinades served in our Ninety Nine restaurants. We believe our commissaries enhance restaurant operations by helping to maintain consistent food quality, ensure reliable distribution services to our restaurants, simplify our restaurant managers’ food cost management responsibilities and reduce costs through purchasing volumes and operating efficiencies.

          Provide an Attractive Operating Environment for Our Employees. We believe that a well-trained, highly motivated restaurant management team is critical to achieving our operating objectives. Our training and compensation systems are designed to create accountability at the restaurant management level for the performance of each restaurant. We invest significant resources to train, motivate and educate our restaurant level managers and hourly employees. To instill a sense of ownership, a portion of the compensation of our restaurant level managers is based upon restaurant operating results. Our focus on restaurant level operations is intended to create a “single store mentality’’ among our restaurant managers and provide an incentive for managers to improve sales and operating results.

Support Operations

          Quality Control. We use written customer evaluations, which are available to customers in the restaurants, as a means of monitoring customer satisfaction. We also employ a “mystery shopper” program in our O’Charley’s restaurants to independently monitor quality control in areas such as timeliness of service, atmosphere, cleanliness, employee attitude and food quality. In addition, our customer service department receives calls from customers and, when necessary, routes comments to the appropriate personnel. We have also contracted with a company to provide customer satisfaction surveys for our O’Charley’s concept, whereby customers answer questions regarding their visits to our stores and rank their experience. This program will be rolled out in 2004.

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          Advertising and Marketing. We have an ongoing advertising and marketing plan for the development of television, radio and newspaper advertising for our restaurants and also use point of sale and local restaurant marketing. We focus our marketing efforts on building brand loyalty and emphasizing the distinctiveness of our restaurant atmosphere and menu offerings. We conduct annual studies of changes in customer tastes and preferences and are continually evaluating the quality of our menu offerings. During 2003, our advertising expenses were approximately 3.2% of restaurant sales. In addition to advertising, we encourage unit level personnel to become active in their communities through local charities and other organizations and sponsorships.

          Restaurant Reporting. Our use of technology and management information systems is essential for the management oversight needed to produce strong operating results. We maintain operational and financial controls in each restaurant, including management information systems to monitor sales, inventory, and labor, that provide reports and data to our home office. The management accounting system polls data from our restaurants and generates daily reports of sales, sales mix, customer counts, check average, cash, labor and food cost. Management utilizes this data to monitor the effectiveness of controls and to prepare periodic financial and management reports. We also utilize these systems for financial and budgetary analysis, including analysis of sales by restaurant, product mix and labor utilization.

          Real Estate and Construction. We maintain an in-house construction and real estate department to assist in the site selection process, develop architectural and engineering plans and oversee new construction. We maintain a broad database of possible sites and our management team analyzes prospective sites. Once a site is selected, our real estate department oversees the zoning process, obtains required governmental permits, develops detailed building plans and specifications and equips the restaurants.

          Human Resources. We maintain a human resources department that supports restaurant operations through the design and implementation of policies, programs, procedures and benefits for our employees. The human resources department also includes an employee relations manager and maintains a toll-free number for employee comments and questions. This department also maintains our code of conduct and addresses any compliance issues. We conduct annual “Impact” meetings at our O’Charley’s restaurants that provide a forum for corporate management to receive feedback from restaurant managers and hourly employees. We have had in place for several years a plan to foster diversity throughout our workforce.

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Restaurant Locations

     The following table sets forth the markets in which our O’Charley’s, Ninety Nine and Stoney River restaurants were located at December 28, 2003, including the number of restaurants in each market.

O’Charley’s Restaurants

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Ninety Nine Restaurants

Stoney River Restaurants

Franchising

          We have completed a feasibility study of the potential franchising of the O’Charley’s concept and, based upon the results of this study, are reviewing franchising opportunities. We are seeking to enter into franchising arrangements with restaurant operators for the development of O’Charley’s restaurants in areas that are outside of our current development and growth plans. During December 2003, we entered into an exclusive multi-unit development agreement with a third party franchisee to develop and operate up to 15 new O’Charley’s restaurants in Michigan. We intend to enter into additional development agreements to franchise our O’Charley’s restaurant concept in other areas. Franchisees will be required to comply with our specifications as to restaurant space, design and decor, menu items, principal food ingredients, employee training and day-to-day operations.

Service Marks

          The name “O’Charley’s’’ and its logo, the name “Stoney River Legendary Steaks,’’ and the Ninety Nine Restaurant and Pub logo are registered service marks with the United States Patent and Trademark Office. We also have other service marks that are registered in the states in which we operate. We are aware of names and marks similar to our service marks used by third parties in certain limited geographical areas. Use of our service marks by third parties may prevent us from licensing the use of our service marks for restaurants in those areas. We intend to protect our service marks by appropriate legal action whenever necessary.

Government Regulation

          We are subject to various federal, state and local laws affecting our business. Our commissaries are licensed and subject to regulation by the USDA. In addition, each of our restaurants is subject to licensing and regulation by a

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number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Most municipalities in which our restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. We are also subject to federal and state environmental regulations, but those regulations have not had a material adverse effect on our operations to date.

          Approximately 12% of restaurant sales in 2003 were attributable to the sale of alcoholic beverages. Each restaurant, where permitted by local law, has appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, and in some states or localities to provide service for extended hours and on Sunday. Each restaurant has food service licenses from local health authorities. Similar licenses would be required for each new restaurant. The failure of a restaurant to obtain or retain liquor or food service licenses could adversely affect or, in an extreme case, terminate its operations. We have established standardized procedures for our restaurants designed to assure compliance with applicable codes and regulations.

          We are subject, in most states in which we operate restaurants, to “dram-shop’’ statutes or judicial interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

          The Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We design our restaurants to be accessible to the disabled and believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled.

          The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. Our restaurant operations are also subject to federal and state minimum wage laws and other laws governing matters such as working conditions, citizenship requirements, overtime and tip credits. In the event a proposal is adopted that materially increases the applicable minimum wage, the wage increase would likely result in an increase in payroll and benefits expense.

Employees

          At December 28, 2003, we employed approximately 8,800 full-time and 11,800 part-time employees, including approximately 300 home office management and staff personnel and approximately 150 commissary personnel, with the remainder being restaurant personnel. None of our employees is covered by a collective bargaining agreement. We consider our employee relations to be good.

Risk Factors

          Some of the statements we make in this Annual Report on Form 10-K are forward-looking. Forward-looking statements are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend,” “seek” or similar expressions. These forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief, plans or expectations including, but not limited to, the discussions of our operating and growth strategy, projections of revenue, income or loss, information regarding future restaurant openings and capital expenditures, potential increases in food and other operating costs, and our development, expansion and franchising plans and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties include, among others, the risks and uncertainties discussed below. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could prove to be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We do not undertake any obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

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Changing consumer preferences and discretionary spending patterns could force us to modify our concepts and menus and could result in a reduction in our revenues.

          Our O’Charley’s and Ninety Nine restaurants are casual dining restaurants that feature menus intended to appeal to a broad spectrum of customers. Our Stoney River restaurants are upscale steakhouses that feature steaks, fresh seafood and other gourmet entrees. Our continued success depends, in part, upon the popularity of these foods and these styles of dining. Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future operating results. The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and eating and purchasing habits. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. We may be forced to make changes in our concepts and menus in order to respond to changes in consumer tastes or dining patterns. If we change a restaurant concept or menu, we may lose customers who do not prefer the new concept or menu, and may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurant profitable. In addition, consumer preferences could be affected by health concerns about the consumption of beef, the primary item on our Stoney River menu, or by specific events such as E. coli food poisoning or outbreaks of bovine spongiform encephalopathy (mad cow disease) or other diseases.

          Our success is also dependent to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce customer traffic or impose practical limits on pricing, either of which could harm our results of operations.

Same store sales at our O’Charley’s restaurants have declined, and initiatives we have implemented at our O’Charley’s restaurants to improve our same store sales have resulted in increased costs and could continue to adversely affect our results of operations.

          Through the end of 2003, we experienced decreases in our same store sales at our O’Charley’s restaurants during six of the previous seven fiscal quarters. During the third quarter of 2003, we introduced a number of business initiatives, including changes to our menu, designed to increase our customer traffic. These initiatives have resulted in increases in our customer traffic, but have also resulted in a lower average check due to the introduction of a number of promotional items, resulting in continued decreases in same store sales at our O’Charley’s restaurants. These initiatives have also resulted in increased costs. There can be no assurance that these initiatives will result in increased revenues or same store sales at our O’Charley’s restaurants and, as a result, such initiatives may continue to adversely affect our results of operations in future periods. Likewise, we cannot assure you that same store sales at our O’Charley’s restaurants will not continue to decline.

An outbreak of Hepatitis A affecting customers and employees of a Knoxville, Tennessee O’Charley’s restaurant has adversely affected our customer traffic, negatively impacted our results of operations and resulted in litigation against us, and we may be further impacted by another outbreak of Hepatitis A linked to restaurants in Georgia, including two O’Charley’s restaurants.

          In September 2003, we became aware that customers and employees at one of our O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which has resulted in a number of our employees and customers becoming infected. Hepatitis A is a viral infection spread primarily through contaminated food and water. The negative publicity surrounding this incident has significantly reduced customer traffic at our nine O’Charley’s restaurants in the Knoxville market and to a lesser extent in other markets. We are aware of 81 individuals who have contracted the Hepatitis A virus in the Knoxville area, most of whom have been linked to our Knoxville restaurant during the time of the outbreak. As of the date of this report, we are also aware of 31 lawsuits that have been filed against us to date alleging injuries or fear of injuries from the Hepatitis A incident, some of which claim substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages, and some of which seek to be certified as class actions. One of the lawsuits was filed by an individual who contracted the Hepatitis A virus and died following the filing of his lawsuit, and his lawsuit has been amended to allege wrongful death. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization. We anticipate that additional lawsuits will be filed against us relating to this incident.

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          We are also aware of an outbreak of Hepatitis A linked to numerous independent restaurants and restaurant chains located in Georgia, including two of our O’Charley’s restaurants. We have received the preliminary report of the Georgia Division of Public Health indicating that ten persons who contracted the Hepatitis A virus in Georgia stated that they had eaten at the Centerville, Georgia or the Macon, Georgia O’Charley’s restaurant.

          We are not able to predict the extent to which the negative publicity surrounding these incidents will continue to adversely affect our customer traffic, or the outcome of the litigation that has been filed against us or that may be filed against us in the future relating to these incidents or the amounts that we may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against us. We have liability and loss of income insurance; however, we cannot assure you that our insurance carriers will reimburse us for any loss, liability or loss of income we suffer in connection with this incident or that our insurance coverage will be sufficient to cover any loss, liability or loss of income. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover those losses, liabilities or loss of income, there could be a material adverse effect on our results of operations or financial condition. The reduction in our customer traffic as a result of the Knoxville incident adversely affected our results of operations for the period of time following the September 2003 exposure and is continuing to adversely affect our results of operations.

Our continued growth depends on our ability to open new restaurants and operate our new restaurants profitably, which in turn depends upon our continued access to capital.

          A significant portion of our historical growth has been due to opening new restaurants. We opened 24 new O’Charley’s restaurants and three new Stoney River restaurants in 2002. We opened 26 new O’Charley’s restaurants, closed two O’Charley’s restaurants, opened ten new Ninety Nine restaurants and closed one Ninety Nine restaurant in 2003. Our ability to open new restaurants will depend on a number of factors, such as:

	•		the selection and availability of quality restaurant sites;
	•		our ability to negotiate acceptable lease or purchase terms;
	•		our ability to hire, train and retain the skilled management and other personnel necessary to open, manage and operate new restaurants;
	•		our ability to secure the governmental permits and approvals required to open new restaurants;
	•		our ability to manage the amount of time and money required to build and open new restaurants, including the possibility that adverse weather conditions may delay construction and the opening of new restaurants; and
	•		the availability of adequate financing.

          Many of these factors are beyond our control. In addition, we have historically generated insufficient cash flow from operations to fund our working capital and capital expenditures and, accordingly, our ability to open new restaurants and our ability to grow, as well as our ability to meet other anticipated capital needs, is dependent on our continued access to external financing, including borrowings under our credit facility and financing obtained in the capital markets. Our ability to make borrowings under our credit facility will require, among other things, that we comply with certain financial and other covenants, and we cannot assure you that we will be able to do so. Accordingly, we cannot assure you that we will be successful in opening new restaurants in accordance with our current plans or otherwise. Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins consistent with those of our existing restaurants, or that the new restaurants will be operated profitably.

We may not be able to successfully integrate the operations of Ninety Nine Restaurant and Pub, which could adversely affect our business, financial condition and results of operations.

          On January 27, 2003, we acquired Ninety Nine Restaurant and Pub. The acquisition of Ninety Nine was substantially larger than any acquisition we have previously completed, and our management team does not have significant experience integrating the operations of acquired businesses. In addition, our Ninety Nine restaurants are located in markets in which we have not historically operated. Achieving the expected benefits of the Ninety Nine acquisition will depend in large part on our completion of the integration of Ninety Nine’s operations and personnel in a timely and efficient manner. The challenges involved in this integration include the following:

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	•		persuading employees of Ninety Nine that we will maintain Ninety Nine’s distinctive business culture and employee morale;
	•		retaining the senior management team of Ninety Nine, several of whom received significant payments in connection with the acquisition;
	•		maintaining a workforce over expanded geographic locations; and
	•		consolidating certain corporate, commissary, information technology, accounting and administrative infrastructures.

          If we cannot overcome the challenges we face in completing the integration of Ninety Nine, our ability to effectively and profitably manage Ninety Nine’s business could suffer. We cannot assure you that our Ninety Nine restaurants will generate revenues or profit margins consistent with prior years or that these restaurants will not operate at a loss. Moreover, the integration process itself may be disruptive to our business, as it will divert the attention of management from its normal operational responsibilities and duties. We cannot offer any assurance that we will be able to successfully integrate Ninety Nine’s operations or personnel or realize the anticipated benefits of the acquisition. Our failure to successfully complete the integration of Ninety Nine could harm our business, financial condition and results of operations.

Our growth may strain our management and infrastructure, which could slow our development of new restaurants and adversely affect our ability to manage existing restaurants.

          Our growth has placed significant demands upon our management. We also face the risk that our existing systems and procedures, restaurant management systems, financial controls and information systems will be inadequate to support our planned growth. We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned growth will impose on management and these systems and controls. In May 2000, we acquired Stoney River and, in January 2003, we acquired Ninety Nine. The development of the Stoney River concept and the integration and operation of the Ninety Nine concept will continue to place significant demands on our management. These demands on our management and systems could also adversely affect our ability to manage our existing restaurants. If our management is unable to meet these demands or if we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our growth objectives, our operating results or cash flows could be materially adversely affected.

Unanticipated expenses and market acceptance could affect the results of restaurants we open in new and existing markets.

          As part of our growth plans, we may open new restaurants in areas in which we have little or no operating experience and in which potential customers may not be familiar with our restaurants. As a result, we may have to incur costs related to the opening, operation, supervision and promotion of those new restaurants that are substantially greater than those incurred in other areas. Even though we may incur substantial additional costs with these new restaurants, they may attract fewer customers than our more established restaurants in existing markets. As a result, the results of operations at new restaurants may be inferior to those of our existing restaurants. The new restaurants may even operate at a loss.

          Another part of our growth plan is to open restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of a new restaurant in the existing market could reduce the revenue of our existing restaurants in that market.

We may experience higher operating costs, which would adversely affect our operating results, if we cannot increase menu prices to cover them.

          Our operating results are significantly dependent on our ability to anticipate and react to increases in food, labor, employee benefits and other costs. Various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs or cause a disruption in our supply chain. We cannot predict whether we will be able to anticipate and react to changing

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food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, because the pricing strategy at our O’Charley’s and Ninety Nine restaurants is intended to provide an attractive price-to-value relationship, we may not be able to pass along price increases to our guests.

          We compete with other restaurants for experienced management personnel and hourly employees. Given the low unemployment rates in certain areas in which we operate, we will likely be required to continue to enhance our wage and benefits package in order to attract qualified management and other personnel. For example, in 2003 we began offering expanded medical benefits for our hourly employees at the O’Charley’s concept, which has increased our benefit costs. In addition, any increase in the federal minimum wage rate would likely cause an increase in our labor costs. We cannot assure you that we will be able to offset increased wage and benefit costs through our purchasing and hiring practices or menu price increases, particularly over the short term. As a result, increases in wages and benefits could have a material adverse effect on our business and could decrease the cash available to service our obligations.

          We have completed a feasibility study on franchising our O’Charley’s restaurant concept and have begun marketing the franchise concept. During December 2003, we entered into an exclusive multi-unit development agreement with a third party franchisee to develop and operate up to 15 new O’Charley’s restaurants in Michigan. We intend to enter into additional development agreements to franchise our O’Charley’s restaurant concept. We will continue to experience expenditures and losses in implementing our franchising initiative until such time, if ever, that we generate sufficient franchising revenue to cover these expenditures.

We could face labor shortages that could adversely affect our results of operations.

          Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers, necessary to continue our operations and to keep pace with our growth. Qualified individuals of the requisite caliber and quantity needed to fill these positions are in short supply. Given the low unemployment rates in certain areas in which we operate, we may have difficulty hiring and retaining qualified management and other personnel. Any inability to recruit and retain sufficient qualified individuals may adversely affect operating results at existing restaurants and delay the planned openings of new restaurants. Any delays in opening new restaurants or any material increases in employee turnover rates in existing restaurants could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, we have increased wages and benefits to attract a sufficient number of competent employees, resulting in higher labor costs.

Our restaurants are concentrated geographically; if any one of the regions in which our restaurants are located experiences an economic downturn, adverse weather or other material change, our business results may suffer.

          Our O’Charley’s restaurants are located predominately in the southeastern and midwestern United States. Our Ninety Nine restaurants are located in the northeastern United States. At December 28, 2003, we operated 36 of our 206 O’Charley’s restaurants in Tennessee and 56 of our 87 Ninety Nine restaurants in Massachusetts. As a result, our business and our financial or operating results may be materially adversely affected by adverse economic, weather or business conditions in these markets, as well as in other geographic regions in which we locate restaurants.

Our future performance depends on our senior management who are experienced in restaurant management and who could not easily be replaced with executives of equal experience and capabilities.

          We depend significantly on the services of Gregory L. Burns, our Chief Executive Officer, Steven J. Hislop, our President and Chief Operating Officer, and A. Chad Fitzhugh, our Chief Financial Officer. We also depend significantly on the services of each of our Concept Presidents, William E. Hall, Jr., our Concept President-O’Charley’s, Herman A Moore, Jr., our President, Commissary Operations, and Charles F. Doe, Jr., our Concept President-Ninety Nine Restaurant and Pub. Mr. Doe, who joined our company when we acquired Ninety Nine in January 2003, received significant payments at the time of our acquisition of Ninety Nine, and we do not have an employment agreement with Mr. Doe. In February 2004, we announced that Mr. Doe would transition from concept president of Ninety Nine, responsible for oversight of day-to-day operations, to chairman of an advisory board at Ninety Nine, responsible for the strategic development of the Ninety Nine brand. If we lose the services of any members of our senior management for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our business

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and development. We do not have employment agreements with any of our executive officers and we do not carry key person life insurance on any of our executive officers.

Our restaurants may not be able to compete successfully with other restaurants, which could adversely affect our results of operations.

          The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors with substantially greater financial and other resources than us, including a large number of national and regional restaurant chains. Some of our competitors have been in existence for a substantially longer period than us and may be better established in the markets where our restaurants are or may be located. If our restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected.

          To the extent that we open restaurants in larger cities and metropolitan areas, we expect competition to be more intense in those markets. We also compete with other restaurants for experienced management personnel and hourly employees and with other restaurants and retail establishments for quality sites.

Any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants.

          We operate a commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants. We also operate a commissary in Woburn, Massachusetts, through which we purchase and distribute a portion of the food products and supplies for our Ninety Nine restaurants. If the operations of our commissaries are disrupted, we may not be able to deliver food and supplies to our restaurants. If our commissaries are unable to deliver the food products and supplies required to run our restaurants, we may not be able to find other sources of food or supplies, or, if alternative sources of food or supplies are located, our operating costs may increase. Accordingly, any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants and our results of operations.

We may incur costs or liabilities and lose revenue as the result of government regulation.

          Our restaurants are subject to extensive federal, state and local government regulation, including regulations related to the preparation and sale of food, the sale of alcoholic beverages, zoning and building codes and other health, sanitation and safety matters. All of these regulations impact not only our current restaurant operations but also our ability to open new restaurants. We will be required to comply with applicable state and local regulations in new locations into which we expand. Any difficulties, delays or failures in obtaining licenses, permits or approvals in such new locations could delay or prevent the opening of a restaurant in a particular area or reduce operations at an existing location, either of which would materially and adversely affect our growth and results of operations. In addition, our commissaries are licensed and subject to regulation by the United States Department of Agriculture and are subject to further regulation by state and local agencies. Our failure to obtain or retain federal, state or local licenses for our commissaries or to comply with applicable regulations could adversely affect our commissary operations and disrupt delivery of food and other products to our restaurants. If one or more of our restaurants were unable to serve alcohol or food for even a short time period, we could experience a reduction in our overall revenue.

          The costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations, such as the federal Americans with Disabilities Act, which governs access for the disabled. If any of the above costs increase, we cannot assure you that we will be able to offset the increase by increasing our menu prices or by other means, which would adversely affect our results of operations.

We may incur costs or liabilities as a result of litigation and publicity concerning food quality, health and other issues that can cause customers to avoid our restaurants.

          In addition to the litigation that has been or may in the future be filed concerning the Hepatitis A incidents discussed above, we are sometimes the subject of other complaints or litigation from customers alleging illness, injury or other food quality or health concerns. Litigation or adverse publicity resulting from these allegations may materially

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adversely affect us or our restaurants, regardless of whether the allegations are valid or whether we are liable. In addition, our restaurants are subject in each state in which we operate to “dram shop’’ laws that allow a person to sue us if that person was injured by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A lawsuit under a dram shop law or alleging illness or injury from food may result in a verdict in excess of our liability insurance policy limits, which could result in substantial liability for us and may have a material adverse effect on our results of operations.

Restaurant companies have been the target of class actions and other lawsuits alleging, among other things, violations of federal and state law.

          We are subject to the risk that our results of operations may be adversely affected by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time and we are also the defendant in a number of pending lawsuits in connection with the Knoxville Hepatitis A incident discussed above under “- An outbreak of Hepatitis A affecting customers and employees of a Knoxville, Tennessee O’Charley’s restaurant has adversely affected our customer traffic, negatively impacted our results of operations and resulted in litigation against us, and we may be further impacted by another outbreak of Hepatitis A linked to restaurants in Georgia, including two O’Charley’s restaurants.’’ Accordingly, we cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

          Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and Nasdaq Stock Market rules, has required an increased amount of management attention and external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment has resulted in and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

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Executive Officers of the Registrant

          Our executive officers are elected by the board of directors and serve at the pleasure of the board of directors. The following table sets forth certain information regarding our executive officers.

          The following is a brief summary of the business experience of each of our executive officers.

          Gregory L. Burns has served as Chairman of the Board and Chief Executive Officer since February 1994. Mr. Burns, a director since 1990, served as President from September 1996 to May 1999 and from May 1993 to February 1994, as Chief Financial Officer from October 1983 to September 1996, and as Executive Vice President and Secretary from October 1983 to May 1993.

          Steven J. Hislop has served as President since May 1999, as Chief Operating Officer since March 1997 and as a director since March 1998. From March 1997 until May 1999, Mr. Hislop served as an Executive Vice President of our company. Mr. Hislop served as Senior Vice President – Operations from January 1993 to March 1997, and as Vice President – Operations from April 1990 to January 1993.

          A. Chad Fitzhugh has served as Chief Financial Officer since September 1996, as Secretary since May 1993, and as Treasurer since April 1990. He served as our Controller from 1987 until his appointment as Chief Financial Officer. Mr. Fitzhugh is a certified public accountant.

          William E. Hall, Jr. has served as Concept President-O’Charley’s since December 2002. Mr. Hall served as Executive Vice President, Operations from September 1999 to December 2002. Mr. Hall served as Vice President, Operations from March 1997 to September 1999, as Director of Operations from December 1996 to March 1997, as a Regional Director from July 1992 to December 1996, and as an Area Supervisor from May 1991 to July 1992.

          Herman A. Moore, Jr. has served as President, Commissary Operations since December 2002. Mr. Moore served as Vice President, Commissary Operations from January 1996 to December 2002. Mr. Moore served as Director of Commissary Operations from 1988 to January 1996.

          Charles F. Doe, Jr. has served as Concept President-Ninety Nine Restaurant and Pub since February 2003. Mr. Doe served as President of Ninety Nine Restaurant and Pub from 1991 until we acquired Ninety Nine Restaurant and Pub. Mr. Doe served in various capacities in the Operations and Real Estate departments for Ninety Nine Restaurant and Pub prior to 1991.

          Suzanne M. Osterberg has served as Chief Support Officer since December 2002. Mrs. Osterberg served as Vice President of Human Resources, Training and Development from December 2001 to December 2002. Mrs.

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Osterberg served as Vice President of Human Resources and Development from December 2000 to December 2001. Mrs. Osterberg served as Vice President of Training and Management Development from 1999 to 2001. Mrs. Osterberg served in various capacities in the Operations and Training departments for O’Charley’s prior to 1999.

          R. Jeffrey Williams has served as Controller since February 2003. Mr. Williams served as Controller for the O’Charley’s Concept from July 2001 to February 2003. Mr. Williams served as Controller of The Krystal Company from July 2000 to July 2001. Mr. Williams served as a Director of Financial Planning and Analysis for Cracker Barrel Old Country Store from July 1999 to July 2000 and as Accounting Manager for Cracker Barrel Old Country Store from November 1996 to July 1999. Mr. Williams is a certified public accountant.

Available Information

          The Company’s internet website address is http://www.ocharleys.com. The Company makes available free of charge through its website the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after it electronically files or furnishes such materials to the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.

Item 2. Properties.

          At December 28, 2003, we operated 206 O’Charley’s restaurants, 87 Ninety Nine restaurants and six Stoney River Legendary Steak restaurants. As of that date, we owned the land and building at 95 of our O’Charley’s restaurants, leased the land and building at eight of our O’Charley’s restaurants and leased the land only at 103 of our O’Charley’s restaurants. We lease the land and building at 71 of our Ninety Nine restaurants and lease the land only at 16 of our Ninety Nine restaurants. We own the land and building at three of our Stoney River restaurants and lease the land only at our other three Stoney River restaurants. See “Restaurant Locations” in Item 1 above for a list of the markets in which our restaurants were located at December 28, 2003. Restaurant lease expirations range from 2004 to 2025, with the majority of the leases providing for an option to renew for additional terms ranging from five to 20 years. All of our restaurant leases provide for a specified annual rental, and some leases call for additional rental based on sales volume at the particular location over specified minimum levels. Generally, our restaurant leases are net leases, which require us to pay the cost of insurance and taxes.

          Our home office and Nashville commissary are located in Nashville, Tennessee in approximately 290,000 square feet of office and warehouse space. We own these facilities. We also have administrative offices in Woburn, Massachusetts and a commissary located in approximately 20,000 square feet of space. We lease these facilities.

Item 3. Legal Proceedings.

          In September 2003, we became aware that customers and employees at one of our O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of our employees and customers becoming infected. We have worked closely with the Knox County Health Department and the Centers for Disease Control and Prevention since we became aware of this incident and have cooperated fully with their directives and recommendations. We are aware of 81 individuals who have contracted the Hepatitis A virus, most of whom have been linked to our Knoxville restaurant during the time of the outbreak. As of the date of this report, we are also aware of 31 lawsuits that have been filed against us, all of which have been filed in the circuit court for Knox County, Tennessee, that allege injuries or fear of injuries from the Hepatitis A incident. A number of these suits seek substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages, and some of which seek to be certified as class actions. One of the lawsuits was filed by an individual who contracted Hepatitis A and died following the filing of his lawsuit. This suit has been amended to seek compensatory damages not to exceed $7.5 million and punitive damages not to exceed $10.0 million alleging wrongful death. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization. The Company has filed a motion to consolidate the cases claiming injury for discovery purposes only.

          We are also aware of an outbreak of Hepatitis A linked to numerous independent restaurants and restaurant chains located in Georgia, including two of our O’Charley’s restaurants. We have received the preliminary report of the Georgia Division of Public Health indicating that ten persons who contracted the Hepatitis A virus in Georgia stated that

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they had eaten at the Centerville, Georgia or the Macon, Georgia O’Charley’s restaurant. Each of the Knox County Health Department, the Georgia Division of Public Health, the Centers for Disease Control and Prevention and the Food and Drug Administration have tentatively associated the recent outbreaks of the Hepatitis A virus affecting a number of restaurants, including O’Charley’s, to eating green onions (scallions).

          While we intend to vigorously defend the litigation that has been filed against us, we are not able to predict the outcome of the litigation that has been filed against us or that may be filed against us in the future relating to the Hepatitis A outbreak or the amounts that we may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against us. We have liability insurance; however, we cannot assure you that our insurance carriers will reimburse us for any loss or liability we suffer in connection with this incident or that our insurance will be sufficient to cover any loss or liability. If we suffer losses or liabilities in excess of our insurance coverage or if our insurance does not cover those losses or liabilities, there could be a material adverse effect on our results of operations and financial condition.

          The Company has a foodborne illness policy that reimburses the Company for certain lost profits associated with this type of incident. The Company is currently developing supporting documentation for the claim associated with this incident. The Company has not recognized any recoveries under its foodborne illness policy. At this time, the Company cannot reasonably estimate the amount or timing of the settlement of this claim.

          In addition, we are defendants from time to time in various other legal proceedings arising in the ordinary course of our business, including claims relating to workplace and employment matters, discrimination and similar matters, claims resulting from “slip and fall” accidents and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. We do not believe that any of the other legal proceedings pending against us as of the date of this report will have a material adverse effect on our operating results, liquidity or financial condition. In addition, we may incur or accrue expenses relating to legal proceedings, which may materially adversely affect our results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

          No matters were submitted to a vote of shareholders during the fourth quarter ended December 28, 2003.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

          Our common stock trades on the NASDAQ National Market under the symbol “CHUX.” As of March 5, 2004, there were approximately 2,600 shareholders of record of our common stock. The following table shows quarterly high and low bid prices for our common stock for the periods indicated, as reported by the NASDAQ National Market.

          We have never paid a cash dividend on our common stock and we presently intend to retain our cash to finance the growth and development of our business. Our revolving credit facility prohibits the payment of cash dividends on our common stock without the consent of the participating banks.

          On January 27, 2003, we issued 941,176 shares of common stock to the former owners of Ninety Nine Restaurant and Pub as part of the purchase price of the acquisition of Ninety Nine. The Company issued an additional 390,586 shares in January 2004 and is required to issue an additional 407,843 shares on each of the second and third anniversaries of the closing of the acquisition and 94,118 shares on each of the fourth and fifth anniversaries of the closing. The issuance of the shares to the former owners of Ninety Nine was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933.

Item 6. Selected Financial Data.

          The selected financial data presented below under the captions “Statement of Earnings Data” and “Balance Sheet Data” for, and as of the end of, each of the fiscal years in the five-year period ended December 28, 2003, were derived from the consolidated financial statements of O’Charley’s Inc. and subsidiaries, which consolidated financial statements have been audited by KPMG LLP, independent auditors. The selected data should be read in conjunction with the consolidated financial statements for the year ended December 28, 2003, and the related notes thereto.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

          We are a leading casual dining restaurant company operating 206 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 87 Ninety Nine restaurants in seven Northeastern states, and six Stoney River restaurants in the Southeast and Midwest.

          Historically, we have grown the O’Charley’s concept by a combination of opening new stores and same store sales growth. The growth in new stores has typically been in the 15% - 20% range year over year. During 2003, we opened 26 new stores and closed two stores. This represents an approximate 13% increase over 2002. In 2004, we expect to open 15 O’Charley’s restaurants, a growth rate of approximately 8%. We reduced our growth rate for 2004 in order to better focus on our sales building initiatives in our existing restaurants as well as focusing on brand development in new expansion markets. As we have expanded into new markets outside of our core operating areas, we have experienced sales levels lower than in our core markets. We believe these lower sales levels are due to a lack of brand awareness and we are taking steps to improve awareness, which we believe will improve our sales and profitability in these new markets. We are currently strategically evaluating the appropriate level of new unit growth for the O’Charley’s concept that will allow us to maximize long-term shareholder value.

          According to an industry survey, the casual dining segment within the full-service restaurant segment of the U.S. restaurant industry, of which both O’Charley’s and Ninety Nine are a part, reported average customer visit and same restaurant sales increases during 2003. Our O’Charley’s restaurants reported declining customer visits of 2.3% and same restaurant sales decreases of 2.5% in 2003. The lower same restaurant sales at the O’Charley’s restaurants, combined with costs associated with the O’Charley’s restaurants sales-building initiatives and higher overall labor costs, resulted in lower than expected financial results during 2003. While fiscal 2003 was clearly a year that did not meet our sales and earnings objectives, there were several significant events that occurred. We took significant steps to reverse the declining trend in customer visits at O’Charley’s restaurants; we acquired the Ninety Nine Restaurant and Pub concept; we restructured our balance sheet providing a more flexible, long-term capital structure; and we announced the signing of our first O’Charley’s franchisee. Following is an overview of these important events to facilitate a better understanding of the discussion and analysis that follows.

O’Charley’s Sales-Building Plan

          Prior to 2002, we consistently reported annual increases in same restaurant sales and customer visits at O’Charley’s. In the second fiscal quarter of 2002, we began to experience decreases in customer visits at our O’Charley’s restaurants, which eventually led to declines in same restaurant sales. The decrease in customer visits at O’Charley’s continued through the first two quarters of fiscal 2003. Based on our analysis of marketing research, impact meetings with co-workers and customer focus group results, we believe the customer visit declines occurred in part because our price to value relationship diminished for our value-conscious customers, and certain service initiatives introduced during 2001 negatively impacted our customers’ experience.

          During the third fiscal quarter of 2003, we initiated a three phase plan intended to increase our sales and customer visits at our O’Charley’s restaurants. During the first phase, we improved the price-value relationship with a new multi-colored menu, introducing the “Pick Two” and “Pick Three” combo promotions and a price decrease on certain menu items. Additionally, we made improvements to our store atmosphere and increased our service levels. Each of these actions significantly increased customer visits but adversely affected operating margins due primarily to the better than expected customer response to the lower margin combo promotions. During phase two, which occurred during the fourth fiscal quarter of 2003, we introduced certain higher margin items to the menu and increased the prices on the “Pick Two” and “Pick Three” combos. Prior to implementing these two phases, customer visits were down on average 4.0% to 4.5% as compared to the same prior-year period. Subsequent to implementing these initiatives, customer visits increased on average approximately 1.0% through the end of fiscal 2003 over the same prior-year period. While customer visits improved, the overall check average declined approximately 3.0% to 3.5% during the same period, resulting in same restaurant sales at O’Charley’s declining 2.0% to 2.5% during the period of these sales-building initiatives. In addition, these initiatives negatively impacted our margins in the third and fourth quarters of 2003.

          During the first quarter of 2004, we have introduced the third phase of our sales-building initiatives which is designed to maintain the customer visit momentum established in 2003, while improving the overall check average and same restaurant sales. We expect phase three to be longer in term and broader in scope than the prior two phases, which lasted approximately four months. We believe the third phase will broaden our customer base, appeal to core customers and improve our margins. While these initiatives are currently meeting our expectations, there can be no assurance they will result in a sustained improvement in customer visits or in same restaurant sales.

Acquisition of Ninety Nine

          We believe the intense competitive nature of the restaurant business has been, and will continue to be, an impetus for industry consolidation. We believe multi-concept operators with significant financial and physical resources will be better positioned to leverage advertising and support services, fully penetrate and establish brand dominance in specific geographic regions and reduce profit variations during weak economic times. In January 2003, we completed the acquisition of Ninety Nine Restaurant and Pub, a Woburn, Massachusetts based casual dining concept with 78 locations

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in seven Northeastern states. We acquired Ninety Nine for $116 million in cash and approximately 2.34 million shares of common stock, plus the assumption of certain liabilities. While the acquisition of Ninety Nine was substantially larger than any we have previously completed, we met our overall financial, operational and integration goals at Ninety Nine during 2003. See “Note 2 to the Notes to the Consolidated Financial Statements” included elsewhere in this report for additional information regarding the acquisition of Ninety Nine.

Financing Arrangements

          In conjunction with the acquisition of Ninety Nine, we entered into a $300 million senior secured credit facility, comprised of a $200 million revolving credit facility and a $100 million term loan. This credit facility remained in place through the first four weeks of the fourth fiscal quarter of 2003, at which time we refinanced our capital structure in order to reduce our balance sheet leverage, reduce our exposure to interest rate risk and provide a more flexible, long-term capital structure to support our overall business strategy. To that end, during the fourth quarter we amended and restated our credit facility to a $125 million revolving credit facility and issued $125 million of unsecured, senior subordinated notes due 2013. The proceeds from the notes offering were used to repay the $95 million term loan balance and to repay a portion of the revolving credit loan. In addition, during the fourth quarter of 2003 and the first quarter of 2004, we repaid certain amounts outstanding under our revolving credit facility with proceeds from the sale and lease-back of 34 O’Charley’s restaurant properties. See “Liquidity and Capital Resources” for additional information regarding these arrangements.

O’Charley’s Franchising

          During December 2003, we entered into an exclusive multi-unit development agreement with Meritage Hospitality Group to develop and operate up to 15 new O’Charley’s restaurants in Michigan. Meritage Hospitality appointed Roger Zingle, a 25 year veteran of the restaurant industry, as its President and Chief Operating Officer of O’Charley’s of Michigan. We intend to enter into additional development agreements to franchise our O’Charley’s concept in other areas. We will continue to experience expenditures and losses in implementing our franchising initiative until such time, if ever, that we generate sufficient franchising revenue to cover these expenditures.

Following is an explanation of certain items in the Company’s consolidated statement of earnings:

          Revenues consist of restaurant sales and, to a lesser extent, commissary sales. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes. Commissary sales represent sales to outside parties consisting primarily of sales of O’Charley’s branded food items, primarily salad dressings, to retail grocery chains, mass merchandisers and wholesale clubs.

          Cost of Food and Beverage primarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages. We believe our menus offer a broad selection of menu items and as a result there is not a high concentration of our food costs in any one product category. Generally, temporary increases in these costs are not passed on to customers; however, we have in the past generally adjusted menu prices to compensate for increased costs of a more permanent nature.

          Payroll and Benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for restaurant level employees, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have an incentive bonus plan that compensates restaurant management for achieving and exceeding certain restaurant level financial targets and performance goals.

          Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. Supplies, rent, supervisory salaries, bonuses and related expenses, management training salaries, general liability and property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category.

          Advertising, General and Administrative Expenses include all advertising and home office administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Advertising, executive management and support staff salaries, bonuses and related expenses, data processing, legal and accounting expenses and office expenses account for the major expenses in this category.

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          Depreciation and Amortization primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets. For periods prior to December 31, 2001, depreciation and amortization also includes amortization of goodwill, which related primarily to the acquisition of the Stoney River concept. In accordance with SFAS No. 142, beginning December 31, 2001, we no longer amortize goodwill.

          Preopening Costs include operating costs and expenses incurred prior to a new restaurant opening. The amount of preopening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our preopening costs may vary significantly from quarter to quarter primarily due to the timing of restaurant openings.

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          The following information should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere herein. The following table reflects our operating results for 2003, 2002, and 2001 as a percentage of total revenues unless otherwise indicated. All fiscal years presented were comprised of 52 weeks.

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          The following tables set forth certain unaudited financial and other restaurant data relating to Company restaurants:

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Fiscal Year 2003 Compared with Fiscal Year 2002

Revenues

          During 2003, total revenues increased $259.1 million, or 51.8%, primarily related to the inclusion of $205.5 million of sales from the operations of Ninety Nine restaurants since we acquired that concept on January 27, 2003. Excluding the revenues of the Ninety Nine restaurants, revenues increased $53.6 million, or 10.7%.

          O’Charley’s restaurant sales increased $47.0 million, or 9.8%, as a result of the net addition of 24 restaurants during 2003, comprised of 26 new restaurants opened and the closure of two restaurants. Same restaurant sales for the O’Charley’s restaurants decreased 2.5% in 2003 as compared to 2002, due principally to a 2.3% decline in the number of customer visits. During the third fiscal quarter of 2003, we implemented sales-building initiatives that improved customer visits at the O’Charley’s restaurants during the third and fourth quarters of 2003 but adversely affected operating margins. Sales at our O’Charley’s restaurants were negatively affected in fiscal 2003 when customers and employees at one of our O’Charley’s restaurants were exposed to the Hepatitis A virus. See “Legal Proceedings.” We believe that the Hepatitis A incident adversely affected sales at our nine Knoxville, Tennessee area restaurants during the fourth quarter of 2003 by approximately 20% as compared to the same prior-year period and adversely affected O’Charley’s same restaurant sales and customer visits for the fourth quarter by approximately 100 basis points. Although comparable sales at our Knoxville area restaurants have improved sequentially since the outbreak was first publicized, we expect the negative publicity surrounding the Hepatitis A incident will continue to adversely affect sales at our O’Charley’s restaurants in 2004.

          Ninety Nine restaurant sales were $205.5 million for the period since its acquisition on January 27, 2003. Same restaurant sales for Ninety Nine restaurants were up 1.1% for 2003, compared with 2002.

          Stoney River restaurant sales increased $6.1 million, or 38.9%, due primarily to full year effect of the three new restaurants opened in 2002, same restaurant sales increases of 1.6% in 2003 as compared to 2002 and higher sales volumes at new restaurants.

Cost of Food and Beverage

          Beginning in the second quarter of 2003 and continuing through the end of 2003, cost of food and beverage increased as a percentage of restaurant sales compared to the same prior-year period as commodity costs, primarily the cost of red meat, poultry and lettuce, increased as compared to the same prior-year period. In addition to the higher commodity costs, the sales-building initiatives we implemented during the third fiscal quarter of 2003 at our O’Charley’s restaurants included promotions of lower priced items, and a price reduction on certain menu items, both of which increased our food cost as a percentage of restaurant sales.

          More recently, the cost of red meat has become erratic as bovine spongiform encephalopathy (BSE) was confirmed in a dairy cow in Washington in December 2003. It appears that domestic consumer reaction was muted from this event and consumer beef demand has remained relatively strong. Overall beef costs have declined since the discovery of BSE due to various factors including the reduction in beef exports. Following the BSE discovery, avian influenza (AI) in broiler flocks has been reported in a number of Asian countries. Some international consumers reacted to the finding of AI by increasing imports of U.S. poultry products after banning imports from these Asian countries. This change in U.S. poultry export demand drove prices sharply higher. However, more recently there were broiler flocks in the United States that tested positive for AI, causing the higher prices to moderate as a number of major importers have placed bans on imports from the United States pending additional test results of these flocks. We are unable to predict the repercussions of the BSE and AI discoveries on consumer demand and commodity costs.

          During the first quarter of 2004, we expect commodity costs will average 3% to 4% higher compared to the same prior-year period due principally to higher poultry and red meat costs. For fiscal 2004, however, we expect commodity costs to moderate to average 0% to 1% higher compared to the same prior-year period due principally to higher poultry costs, offset by flat to slightly lower red meat costs. Various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability, recalls of food products and seasonality, may affect our commodity costs. We also expect to continue to realize improvements in our meat yields of approximately 4% at our new commissary meat facility that has been in operation since the third quarter of 2003. We believe our expected yield improvement for 2004 equates to an estimated red meat cost savings of approximately $1.0 million.

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Payroll and Benefits

          During 2003, we improved the insurance benefits offered to O’Charley’s and Stoney River hourly employees to enable us to attract and retain the most qualified candidates available. These improvements resulted in a $2.6 million, or 50 basis point, increase in our payroll and benefits costs and expenses in 2003. In addition to the improved insurance benefits, payroll and benefit costs increased as a percent of restaurant sales in 2003 as a result of the higher average wage rates for the Ninety Nine managers and hourly co-workers, lower average weekly sales at O’Charley’s, which increased the percentage of fixed payroll costs, and increased service levels we introduced with the sales-building plan at O’Charley’s. Partially offsetting these increases was a decrease in restaurant level bonus expense. Restaurant management compensation is based, in part, on restaurant sales and profitability, and since both were below our annual targets we paid less bonus compensation during 2003.

Restaurant Operating Costs

          Restaurant operating costs increased in 2003 primarily due to the higher base of restaurants that are leased by Ninety Nine, and to higher utility costs, primarily natural gas from increased usage due to inclement winter weather in the first quarter of 2003 and rate increases through the year. These increases were partially offset by lower supervisory bonus expense in 2003 compared to the same prior-year period. Restaurant supervisor compensation is based, in part, on restaurant sales and profitability, and since both were below our annual targets we paid less bonus compensation during 2003.

          During 2003, we completed sale and lease-back transactions pursuant to which we sold 28 O’Charley’s restaurant properties for aggregate gross proceeds of approximately $59.1 million. During the first quarter of 2004, we completed transactions involving the sale of six additional O’Charley’s restaurant properties for aggregate gross proceeds of approximately $12.1 million. The leases that we have entered into in connection with the $71.2 million sale and lease-back transactions will require us to expense on a straight-line basis approximately $4.9 million annually, including the amortization of the $16.9 million deferred gain, over the 20-year lease term.

          We may enter into an additional sale and lease-back transaction before the end of the first fiscal quarter of 2004 pursuant to which we may sell and lease-back up to seven O’Charley’s restaurant properties for estimated aggregate gross proceeds of $13.8 million. We cannot assure you, however, that this proposed sale and lease-back transaction will be completed or, if we do complete this transaction, that the terms will not differ, perhaps significantly, from those reflected in this report. We expect the recently completed $71.2 million of sale and lease-back transactions and, if completed, the proposed $13.8 million sale and lease-back transaction will increase rent expense by approximately $6.0 million on an annual basis, including the amortization of the related deferred gain over the lease term. For the first fiscal quarter of 2004, we expect to have approximately $1.8 million of additional net rent expense from these sale and lease-back transactions.

Advertising, General and Administrative Expenses

          In 2003, advertising expenditures increased 43.6% to $24.4 million from $17.0 million in 2002 and, as a percentage of total revenues, declined to 3.2% in 2003 from 3.4% in 2002. The increase in advertising was primarily due to the acquisition of Ninety Nine and as part of the sales-building initiatives at O’Charley’s. Advertising expenditures were lower, as a percentage of revenues, as Ninety Nine spends less on advertising as a percent of restaurant sales compared to O’Charley’s restaurants. General and administrative expenses increased 40.7% to $29.1 million in 2003 from $20.7 million in 2002, and as a percentage of total revenues decreased to 3.8% in 2003 from 4.1% in 2002. During the first fiscal quarter of 2003, we adopted a deferred compensation plan for the senior management of Ninety Nine that increased general and administrative costs. In addition, we incurred incremental costs, primarily in salaries and related expenses, associated with operating multiple concepts, which increased general and administrative expenses. These increases were offset primarily by a decrease in bonus expense. Executive and senior management compensation is based, in part, on Company sales and profitability, and since both were below our annual targets we paid less bonus compensation during 2003.

Depreciation and Amortization

          The decrease in depreciation and amortization expense as a percentage of total revenues in 2003 was primarily attributable to the acquisition of Ninety Nine, which leases all of its restaurants. During 2004, we will have less depreciation expense as a result of no longer depreciating the 28 O’Charley’s properties included in the recently

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completed $71.2 million sale and lease-back transactions and, if completed, the approximately seven O’Charley’s properties included in the proposed $13.8 million sale and lease-back transaction.

Preopening Costs

          In 2003, preopening costs declined as a percentage of total revenues due primarily to lower average cost for each new restaurant opening in 2003 as compared to 2002. Currently, we incur average preopening costs of approximately $200,000 for each new O’Charley’s and Stoney River restaurant and approximately $130,000 for each new Ninety Nine restaurant.

Interest Expense

          Interest expense increased in 2003 primarily due to increased borrowings incurred to finance the acquisition of Ninety Nine coupled with higher average interest rates under our credit facility.

Income Taxes

          Our income tax rate in 2003 was 32.2% which is lower than the 34.8% income tax rate in the previous two years. This income tax rate reduction occurred primarily because of higher income tax credits, primarily FICA tip credits, relative to the lower than expected earnings. The tax credits increased as expected in 2003 while pre-tax earnings decreased in 2003. For the first quarter of 2004, we currently expect the income tax rate to be in the mid- to high-32% range.

Diluted Weighted Shares

          The increase in diluted weighted shares relates primarily to the shares issued and committed to be issued in connection with the acquisition of Ninety Nine. We issued approximately 941,000 shares at the closing of the acquisition, 390,586 shares on the first anniversary and will issue the remaining approximately 1.4 million shares over the next five years. Since the remaining shares to be issued are not contingent on any future event other than the passage of time, they are included in the weighted share calculations.

Fiscal Year 2002 Compared with Fiscal Year 2001

Revenues

          Total revenues increased $55.0 million, or 12.4%, primarily as a result of an increase in restaurant sales of $54.2 million, or 12.3%. The increase in restaurant sales was attributable to the net addition of 21 O’Charley’s restaurants, three new Stoney River restaurants opened in 2002 and a 0.6% same restaurant sales increase for the Stoney River concept, partially offset by a 0.1% same restaurant sales decline at our O’Charley’s restaurants. The overall check average for the O’Charley’s concept was $11.59 in 2002 compared to $11.28 in 2001. Customer visits at our O’Charley’s restaurants decreased approximately 2.6% during fiscal 2002. During the second quarter of 2001, we implemented a value menu promotion at O’Charley’s in response to the slowing economy, which lowered the price of certain entrees. We believe this promotion generated positive customer visits and lowered our average check in 2001. We believe our customer visits were lower in 2002, in part, as a result of not having a similar value promotion in 2002. During the third quarter of 2002, we increased menu prices by approximately 3.1% in approximately two-thirds of our O’Charley’s restaurants. During the fourth quarter of 2002, we introduced a new menu in all of our O’Charley’s restaurants that included a menu price increase of approximately 3.1% for the remaining one-third of our restaurants that had not taken the menu price increase during the third quarter of 2002. We believe the increase in our check average was the result of the combination of the menu price increase taken in 2002 and the absence of a value promotion in 2002 similar to the one in 2001. The increase in same restaurant sales at our Stoney River restaurants resulted from an increase in check average, partially offset by a decrease in customer visits.

Cost of Food and Beverage

          During 2002, cost of food and beverage decreased as a percent of restaurant sales primarily related to an overall reduction in the cost of certain food items and continued improvements in operating efficiencies at our restaurants and commissary. We experienced lower costs in red meat, pork, poultry and dairy costs, partially offset by increases in certain produce costs.

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Payroll and Benefits

          Payroll and benefits expense in 2002 declined slightly as a percent of restaurant sales compared to 2001, due to lower restaurant level bonuses and workers compensation expenses, offset by a modest increase in hourly wage rates and increased salaries for restaurant management in 2002.

Restaurant Operating Costs

          Restaurant operating costs remained relatively flat as a percent of restaurant sales in 2002. In 2002, we experienced higher overall restaurant occupancy and operating costs due primarily to increases in repair and maintenance cost, general liability insurance and credit card fees partially offset by lower utility costs compared to 2001. We also experienced a decrease in supervisory expenses in 2002 as a percentage of total restaurant sales due primarily to lower management training salaries.

Advertising, General and Administrative Expenses

          Advertising expenditures increased 28.1% to $17.0 million in 2002 from $13.3 million in 2001 and, as a percentage of total revenues, increased to 3.4% in 2002 from 3.0% in 2001. The increase in advertising expenditures was in response to the continued weakness of the U.S. economy. An increase in television costs represented the primary share of the overall increase in advertising expenditures. General and administrative expenses increased 23.9% to $20.7 million in 2002 from $16.7 million in 2001, and as a percentage of total revenues increased to 4.1% in 2002 from 3.8% in 2001. The increase in general and administrative expenses was primarily due to increased bonus expenses and integration costs associated with the 2003 acquisition of Ninety Nine partially offset by lower legal costs.

Depreciation and Amortization

          As a percentage of total revenues, depreciation and amortization increased slightly in 2002, due primarily to new restaurants opened in 2002 and capital expenditures for improvements to existing restaurants, which offset the lack of goodwill amortization in 2002.

Preopening Costs

          The decline in preopening costs in 2002 as a percent of total revenues was primarily attributable to lower average cost per restaurant opening in 2002 compared to 2001.

Interest Expense

          Interest expense decreased in 2002 as a result of overall lower interest rates. The weighted average interest rate on our revolving credit facility decreased to 3.7% in 2002 as compared with 5.2% in 2001 due to lower short-term LIBOR rates in 2002.

          In 2002, we recorded a non-cash pre-tax charge of $9.9 million ($6.1 million net of tax or $0.31 per diluted share) as a cumulative effect of a change in accounting principle as a result of our evaluation of the goodwill carrying value of the Stoney River reporting unit.

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Quarterly Financial and Restaurant Operating Data

          The following is a summary of certain unaudited quarterly results of operations data for each of the last three fiscal years. For accounting purposes, the first quarter consists of 16 weeks and the second, third and fourth quarters each consist of 12 weeks. As a result, some of the variations reflected in the following table are attributable to the different lengths of the fiscal quarters.