UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended April 2, 2005

For the transition period from                                          to                                         

Commission file number 1-12104

BACK YARD BURGERS, INC.

1657 Shelby Oaks Dr. N. Ste. 105, Memphis, Tennessee 38134
(Address of principal executive offices)

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class - Common stock, par value $.01 per share

Outstanding at April 30, 2005 - 4,791,677

BACK YARD BURGERS, INC.

INDEX

2

Back Yard Burgers, Inc.

See accompanying notes to unaudited consolidated financial statements

3

Back Yard Burgers, Inc.

See accompanying notes to unaudited consolidated financial statements

4

Back Yard Burgers, Inc.

See accompanying notes to unaudited consolidated financial statements

5

BACK YARD BURGERS, INC.

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Back Yard Burgers, Inc. owns and operates quick-service and fast-casual restaurants and is engaged in the sale of franchises and the collection of royalties based upon related franchise sales. The Company grants franchise rights for the use of “Back Yard Burgers” trade name and other associated trademarks, signs, emblems, logos, slogans and service marks which have been or may be developed.

     The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America. The statements do reflect all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position and results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America. The statements should be read in conjunction with the Notes to Financial Statements for the year ended January 1, 2005 included in the Company’s 2004 Form 10-K.

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

     The results of operations for the current thirteen week period are not necessarily indicative of the results to be expected for the full year.

     The Company maintains its financial records on a 52-53 week fiscal year ending on the Saturday closest to December 31. Both fiscal years 2004 and 2005 are 52 week years.

Other Revenue. Other revenue is primarily comprised of sales of proprietary food products to franchisees and payments by certain vendors of the Company primarily as contributions to the National Advertising Fund based upon purchasing volumes of the our franchisees and other miscellaneous revenues. These purchases by franchisees from vendors have no specific incremental impact to costs of the Company. Revenue from sales of proprietary food products is recognized when the products are shipped. Volume based revenue and contributions from our vendors are recognized throughout the accounting period based on the purchase volumes by our franchisees from these vendors.

Preopening costs. The Company expenses preopening costs as incurred. There were no preopening costs expensed for the thirteen weeks ended April 2, 2005 or the prior period ended April 3, 2004.

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NOTE 2 – STOCK-BASED EMPLOYEE COMPENSATION

     The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant date for awards in the quarters ended April 2, 2005, and April 3, 2004 under the plan consistent with the fair value method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company’s operating results for the quarters ended April 2, 2005, and April 3, 2004 would have been adjusted to the pro forma amounts indicated below (in thousands, except per share data):

     There were no options granted during the first quarter of 2005 or 2004.

     On January 7, 2005, the Company elected, upon the resignation of an officer/director, to extend the maturity date of 113,720 options from 90 days to one year. The income statement reflects an after tax charge of $358,000 related to this modification as re-measured using the intrinsic method, which is added back for purposes of the proforma disclosures. The proforma expense above includes an after tax charge of $9,000 for the modification by measuring the incremental increase in the fair value of the options. The incremental increase in fair value of the options was measured by comparing value immediately before the terms were modified and the value of the modified options. The weighted average assumptions and resulting fair value used in measuring the incremental increase in value were as follows:

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NOTE 3 – RESTATEMENT OF FINANCIAL STATEMENTS

     The Company conducted a review of its accounting policies applicable to leases, leasehold improvements, rent commencement, deferred rent, and related tax effect. This review was prompted in part by a February 7, 2005 letter from the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) to the American Institute of Certified Public Accountants regarding proper accounting for certain operating lease matters under generally accepted accounting principles (“GAAP”). Based on our review, we determined that we incorrectly accounted for certain lease transactions under generally accepted accounting principles. Accordingly, the Company restated its consolidated financial statements for fiscal years and quarters ended prior to January 1, 2005. The effect of the change on the previously reported net income and earnings per share for the thirteen weeks ended April 3, 2004 are reflected in the table below (in thousands, except per share amounts):

NOTE 4 - NET INCOME PER SHARE

     The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share, which requires the presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

COMPUTATION OF INCOME PER SHARE

The calculation of diluted income per share for the thirteen weeks ended April 2, 2005, and April 3, 2004 excluded 27,000 and 20,000 stock options, respectively, as their effect would be anti-dilutive.

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NOTE 5 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES

     In addition to offering single unit franchise agreements, the Company also promotes franchisees to enter into area development agreements. The area development agreement grants to the franchisee the exclusive right to develop and open a specified number of restaurants within a limited period of time and in a defined geographic territory and thereafter to operate each restaurant in accordance with the terms and conditions of the franchise agreement. The franchise agreement grants an exclusive license at a specified location to operate a restaurant in accordance with the Back Yard Burgers system and to utilize the Company’s trademarks, service marks and other rights of the Company relating to the sale of its menu items. At April 2, 2005 deferred fees received for certain franchise and area development rights, net of commissions paid, include amounts sold during the following years (in thousands):

NOTE 6 - COMMITMENTS AND CONTINGENCIES

     The Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of the ultimate liability with respect to those actions will not have a materially adverse impact on our financial position or results of operations and cash flows.

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Forward-Looking Information

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

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

     As of April 2, 2005, the Back Yard Burgers system included 155 restaurants, of which 42 were Company-operated and 113 were franchised. Unit activity for the thirteen weeks ended April 2, 2005 included eight franchised store openings. Nine franchised stores closed during the thirteen weeks ended April 2, 2005, all of which were co-branded restaurants with Taco Bell. The Company does not expect the closing of these co-branded restaurants to have a material impact on its financial condition or its results of operations for fiscal year 2005.

     The Company’s revenues are derived primarily from Company-operated restaurant sales, franchise and area development fees and royalty fees. Certain expenses (cost of restaurant sales, restaurant operating expenses, depreciation and advertising) relate directly to Company-operated restaurants, while general and administrative expenses relate to both Company-operated restaurants and franchise operations. The Company’s revenues and expenses are affected by the number and timing of the opening of additional restaurants. Sales for new restaurants in the period immediately following their opening tend to be high because of trial by public and promotional activities. As a result, the timing of openings can affect the average volume and other period-to-period comparisons.

Restatement

     As discussed in Note 3 to the unaudited consolidated financial statements of this Form 10-Q filing, the Company conducted a review of its accounting policies applicable to leases, leasehold improvements, rent commencement, deferred rent, and related tax effect. This review was prompted in part by a February 7, 2005 letter from the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) to the American Institute of Certified Public Accountants regarding proper accounting for certain operating lease matters under generally accepted accounting principles (“GAAP”). Based on our review, we determined that we incorrectly accounted for certain lease transactions under generally accepted accounting principles. Accordingly, the Company restated its consolidated financial statements for fiscal years and quarters ended prior to January 1, 2005. The effect of the change on the previously reported net income and earnings per share is reflected in Note 3 to the unaudited consolidated financial statements of this Form 10-Q filing.

10

Results of Operations

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

11

Comparison of the Company’s Results for the Thirteen Weeks Ended April 2, 2005 and April 3, 2004.

     Restaurant sales decreased 2.7% to $8,208,000 during the thirteen weeks ended April 2, 2005, from $8,434,000 for the year-earlier period. This decrease is primarily the result of a decrease of 2.7% in same-store sales at Company-operated restaurants. Restaurants are included in the same-store sales calculation after the completion of eighteen months of operation as sales during the six-month period immediately after the opening tend to be higher due to promotions and trial by public.

     Franchise and area development fees increased by $77,000 to $165,000 for the thirteen weeks ended April 2, 2005, compared with $88,000 in the year-earlier period. Eight new franchise stores opened during the thirteen weeks ended April 2, 2005, compared with five new franchised stores opened during the thirteen weeks ended April 3, 2004.

     Royalty fees increased 41.3% to $931,000 during the thirteen week period ended April 2, 2005, compared with $659,000 during the first quarter of 2004. The change is due to a net increase of twenty franchised stores since April 3, 2004 resulting in increased franchised sales on which royalty fees are based. This increase was partially offset by a 0.3% decrease in same-store sales at franchised restaurants compared with the year-earlier period. Restaurants are included in the same-store sales calculation after the completion of eighteen months of operation as sales during the six-month period immediately after the opening tend to be higher due to promotions and trial by public.

     Advertising fees increased 47.9% to $244,000 during the thirteen week period ended April 2, 2005, from $165,000 during the first quarter of 2004. The change is due to an increase in franchised restaurant sales, upon which a portion of the fees are based.

     Other revenues, which were $129,000 during the thirteen week period ended April 2, 2005, remained relatively flat compared with $137,000 during the first quarter of 2004.

     Cost of restaurant sales, consisting of food and paper costs, totaled $2,639,000 for the thirteen weeks ended April 2, 2005, and $2,634,000 during the same period in 2004, increasing as a percentage of restaurant sales to 32.2% from 31.2%. The increase in costs as a percentage of sales is due to an 11% increase in the cost of beef, as well as other food cost increases driven primarily by higher fuel costs over the year-earlier period. The margin impact of these cost increases was partially offset by menu price increases of approximately 2% at Company-operated restaurants in June and October 2004.

     Restaurant operating expenses, consisting of labor, supplies, utilities, maintenance, rent and certain other unit level operating expenses, decreased to $3,995,000 for the thirteen weeks ended April 2, 2005, from $4,076,000 in the same prior year period, increasing as a percentage of restaurant sales to 48.7%, from 48.3% for the year-earlier period. The increase is primarily due to higher spending for utilities, rent, property taxes and other miscellaneous operating costs. The increase is partially offset by a decrease in labor costs of 0.8% as a percentage of restaurant sales from the prior year.

     General and administrative costs increased $855,000 to $2,054,000 for the thirteen weeks ended April 2, 2005 from $1,199,000 in the year-earlier period. The increase in costs is primarily due to a $643,000 increase in personnel costs, $511,000 of which was a pre-tax non-cash stock compensation charge relating to the extension of the maturity date of certain stock options upon the resignation of an officer/director on January 7, 2005. This charge was $358,000 on an after-tax basis. Under the original stock option agreements, all of which were originally granted with an exercise price equal to the market value of the stock at the date of grant, the vested options were required to be exercised within 90 days after his resignation. The Company modified the terms for only those options to extend the period in which the former officer/director could exercise these stock options. The modification was to extend the maturity date until the earliest to occur of: (i) the last day of the term of the option as specified in the applicable option grant agreement, and (ii) one year from January 7, 2005. This modification required a re-measurement of the intrinsic value of the stock options as of January 7, 2005, and resulted in a non-cash charge in the form of compensation expense recorded as a general and administrative expense for the Company during the 13-week period ended April

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2, 2005. The former officer/director had been with the Company for approximately 18 years and resigned as an officer and director of the Company to become a franchisee. The Company and the former officer/director entered into agreements for the development of 10 franchised locations in the Austin, Texas, area over the next seven years.

     The Company also incurred an additional $140,000 in professional & consulting fees, including fees associated with the documentation of internal controls over financial reporting related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 which the Company is required to comply with no later than fiscal year 2006. The remainder of the increase is due to increased spending in travel expenses for franchisee support and openings and other miscellaneous general and administrative costs incurred by the Company during the first quarter of 2005.

     Advertising expense which increased to $554,000 for the thirteen weeks ended April 2, 2005, from $514,000 in the same period in 2004, remained relatively flat as a percentage of total revenues at 5.7% compared with 5.4% in the year-earlier period. The Company spent approximately 5% of net restaurant sales at company-operated stores on local store advertising, including media and print advertising in the three markets in which the company-operated restaurants are located during both first quarter 2005 and 2004. In addition, all stores (both company and franchised stores) contribute 1% of each stores net restaurant sales as advertising fees to the Company’s National Advertising Fund (see Note 13 of the Consolidated Financial Statements included in the Company’s 2004 Form 10-K). Of these advertising fees, the Company spends at least 50% of these funds on the creation of marketing tools; however, in some years, the Company spends more than 50% of these fees on advertising related costs. Fluctuations in the advertising spending as a percentage of total revenues is related to the timing of promotions and exact percentage of the advertising fees earned by the Company’s National Advertising Fund that is spent on the creation of marketing tools.

     Depreciation expense increased by $39,000 to $563,000 for the thirteen weeks ended April 2, 2005, from $524,000 in the same period in 2004 due primarily to the addition of approximately $1.9 million in fixed assets since April 3, 2004.

     Interest expense decreased 14.3% to $108,000 for the thirteen weeks ended April 2, 2005, from $126,000 in the year-earlier period. Since April 3, 2004, long-term debt decreased by $747,000, or 13.7%, to $4,708,000 as of April 2, 2005.

     Other, net expense was $21,000 for the thirteen weeks ended April 2, 2005, remaining relatively flat compared with a net expense of $22,000 in the year-earlier period. Included in this category is other miscellaneous income and expenses, and these income and expense categories were relatively consistent during the thirteen weeks ended April 2, 2005, and the year-earlier period.

Impairment of Long-Lived Assets

     The Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets, at the beginning of 2002. We assess the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At each balance sheet date, the Company assesses whether there has been impairment in the value of all long-lived assets by determining whether projected undiscounted future cash flows from operations for each restaurant, as defined in SFAS No. 144, exceed its net book value as of the assessment date. A new cost basis is established for impaired assets based on the fair value of these assets as of the date the assets are determined to be impaired.

     No impairment charges were recorded by the Company during the thirteen weeks ended April 2, 2005 or the year-earlier period; however, management has identified three company-operated stores which are currently performing at levels which, if improvements in cash flows are not made, may result in management revising its projected undiscounted future cash flows for these restaurants. This, in turn, may result in an impairment of value. Management intends to address these issues through increased local marketing efforts for these locations and will continue to monitor their performance.

13

     The Company had no reserves for closed properties as of April 2, 2005 and $58,000 in reserves as of April 3, 2004. No lease payments were incurred and charged against this reserve during the thirteen weeks ended April 2, 2005 and $23,000 in lease payments were incurred and charged against the reserve during the thirteen weeks ended April 3, 2004.

Off-Balance Sheet Arrangements

     At April 2, 2005, the Company had a guarantee of a franchisee loan relating to the acquisition of a parcel of land and the construction of a building that is currently being operated as a Back Yard Burgers franchised location. The original loan balance was $655,000 and the balance as of April 2, 2005, was approximately $477,000.

Liquidity and Capital Resources

     Capital expenditures totaled $132,000 for the thirteen weeks ended April 2, 2005 and $428,000 for the year-earlier period. Generally, the Company constructs its restaurant buildings on leased properties for Company-operated restaurants. The average monthly lease cost for the 13 Company-operated restaurants on leased sites at April 2, 2005 is approximately $3,500 per month. For the 21 restaurants where the Company leases the building as well as the site, the average monthly lease cost is approximately $5,300.

     Cash from operations for the Company is primarily affected by net earnings adjusted for deferred franchise fees and non-cash expenses which consist primarily of depreciation. Depreciation totaled $563,000 for the thirteen weeks ended April 2, 2005 and $524,000 for the year-earlier period.

     Cash provided by operations for the thirteen week period ended April 2, 2005, was $647,000 compared with $894,000 in the year-earlier period. In recent history, cash from operations and debt have been used for the addition of new restaurants and equipment.

     As of April 2, 2005, the Company had total long-term debt of $4,708,000 and unused lines of credit and loan commitments of potential additional borrowings of $2,500,000. No long-term debt commitments or loan draws were made by the Company during the thirteen weeks ended April 2, 2005 or the thirteen weeks ended April 3, 2004.

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

     In January 2001, the Company’s board of directors adopted a stock repurchase plan that allows the Company to repurchase up to 500,000 shares of its outstanding common stock. As of April 2, 2005, the Company had repurchased 25,000 shares of common stock under the plan. No further purchases are anticipated in the near term.

     The Company has budgeted capital expenditures of approximately $6.0 million in fiscal year 2005, excluding potential acquisitions and share repurchases. These capital expenditures primarily relate to the development of four additional Company-operated restaurants, store equipment upgrades, and enhancements to existing financial and operating information systems. As of April 2, 2005, the Company had spent approximately $132,000 of these budgeted capital expenditures. The Company expects to fund these capital expenditures through cash flow from operations and borrowings under the loan agreement entered in February of 2003; however, additional financing may be required to fund these expenditures.

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Seasonality and Inflation

     While the Company does not believe that seasonality affects its operations in a materially adverse manner, first quarter results are generally lower than other quarters due to seasonal climate conditions in the locations of many of its restaurants. Although results were negatively impacted during the first quarter of 2005 due to a 11% increase in the cost of beef, management does not believe that inflation has had a material effect on income during the thirteen weeks ended April 2, 2005. Increases in food, labor or other operating costs could adversely affect the Company’s operations. In the past, however, the Company generally has been able to increase menu prices or modify its operating procedures to substantially offset increases in its operating costs.

Conversion of Preferred Stock

     In accordance with the provisions of the Company’s Certificate of Incorporation regarding preferred stock, as a result of the Company’s having attained after tax net income in excess of $600,000 during 1994, each share of preferred stock is convertible into one share of common stock, at the option of the holder. The Company notified preferred stockholders of their right to convert preferred stock to common stock, and anticipates that all shares of preferred stock will eventually be converted. Such conversion began on April 5, 1995, at which time there were 1,199,979 shares of preferred stock outstanding. As of April 2, 2005, only 19,269 shares have yet to be converted.

Known Trends and Uncertainties

     During the thirteen weeks ended April 2, 2005, the cost of beef increased approximately 11% over the prior year while the cost of chicken was relatively stable. In light of what appeared to be a sustained period of increased beef costs, the Company implemented menu price increases of approximately 2% effective in June 2004 and October 2004 in order to partially offset these increased costs. It may be difficult to raise menu prices to fully cover any future cost increases, but to the extent permitted by competition, we may implement additional menu price increases if deemed necessary. Additional margin improvements may have to be made through operational improvements, equipment advances and increased volumes to help offset these cost increases, due to the competitive state of the quick-service restaurant industry.

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

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

     We assess the potential impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Management has identified three company-operated stores which are currently performing at levels which, if improvements in cash flows are not made, may result in management revising its projected undiscounted future cash flows for these restaurants. This, in turn, may result in an impairment of value. Management intends to address these issues through increased local marketing efforts for these locations and will continue to monitor their performance.

     Company-operated same-store sales decreased 2.7% and franchised same-store sales decreased 0.3% during the thirteen weeks ended April 2, 2005. Same-store sales for both Company-operated and franchised restaurants were negatively impacted by approximately 0.4% due to the fact that Easter Sunday occurred during the first quarter of 2005 and during the second quarter of 2004. Average per-store annual unit sales volumes (‘Average Unit Volumes”) were $822,000 at Company-operated stores and $810,000 at franchised stores as of April 2, 2005. The Company will continue with its marketing strategy of enhancing the Company’s points of differentiation and further positioning the Company as a premium fast-food provider. Management intends to continue testing new, bold-flavored premium product offerings in order to drive positive trends for same-store sales and average unit volumes, both of which are key performance indicators in our industry. The Company will also continue to explore potentially extending operational hours at both Company-operated and franchised stores to accomplish these goals as well. By continuing to improve in these areas, it will also help to offset some of the potential negative financial impacts of the other trends and uncertainties listed above.

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

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Critical Accounting Policies and Estimates

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

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

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

Revenue Recognition:

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

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

     The Company also earns income from certain vendors based on purchases made by our franchisees from those vendors. The Company records this income as other revenues in its statement of operations.

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Long-Lived Assets:

     The restaurant industry is capital intensive. The Company has approximately 70% of its total assets invested in property and equipment. The Company capitalizes only those costs that meet the definition of capital assets under generally accepted accounting principles. Accordingly, repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

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

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

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

Deferred Income Taxes:

     The Company records income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. The Company records a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized. In evaluating the need for a valuation allowance, management must make judgments and estimates on future taxable income, feasible tax planning strategies and existing facts and circumstances. When management determines that deferred tax assets could be realized in greater or less amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Based on management’s estimates, there is presently a $388,000 valuation allowance recorded on the Company’s deferred tax assets. However, changes in facts and circumstances that affect our judgments or estimates in determining the proper deferred tax assets or liabilities could materially affect the recorded amounts.

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Leases:

     When determining the lease term for purposes of recording depreciation and rent or for evaluating whether a lease is capital or operating, the Company includes option periods for which failure to renew the lease imposes an economic penalty on the Company of such an amount that a renewal appears, at the inception of the lease, to be reasonably assured.

     For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as rent expense on a straight line basis over the lease term as that term is defined in SFAS No. 13, as amended, including any option periods considered in the lease term and any periods during which the Company has use of the property but is not charged rent by a landlord (“rent holiday”). Contingent rentals are generally based on either a percentage of restaurant sales or as a percentage of restaurant sales in excess of stipulated amounts, and thus are not included in minimum lease payments but are included in rent expense when incurred. The Company has received no leasehold improvement incentives by a landlord. No individual lease is material to the Company.

Stock-Based Compensation:

     SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages but does not require a fair value based method of accounting for employee stock options or similar equity instruments. SFAS No. 123 allows an entity to continue to measure compensation costs under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” but requires pro forma disclosure of net earnings as if the fair value based method of accounting had been applied. The Company elected to follow APB No. 25 and related interpretations in accounting for our employee stock options.

     In December 2004, the FASB issued SFAS 123 (Revised), “Share-Based Payment”, a revision of SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 123R requires the fair value measurement of all stock-based payments to employees, including grants of employee stock options, and recognition of those expenses in the statement of operations. SFAS 123R is effective for annual reporting periods beginning after June 15, 2005. The Company will continue to account for stock-based compensation using the intrinsic value method until adoption of SFAS 123R on January 1, 2006. Historically, the compensation expense recognized related to stock options under this APB No. 25 has been minimal. As a result, adoption of the provisions of SFAS 123R is expected to have a significant impact to reported net income and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

     The Company is exposed to certain financial market risks, the most predominant being fluctuations in the re-pricing of fixed rate debt at maturity. Management monitors interest rate fluctuations as an integral part of the Company’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potential adverse effect on our results. The effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as food, labor and occupancy costs.

     The Company’s entire long-term debt portfolio is financed with fixed rate debt. Less than 10% of the Company’s debt portfolio as of April 2, 2005, had maturity dates of less than two years. With every 25 basis point increase in interest rates, the Company could be subject to additional interest expense of approximately $1,500 annually, depending on the timing of the rate changes and debt maturities.

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

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Commodity Price Risk

     We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements on certain products; however, the cost the Company pays for beef fluctuates weekly based on beef commodity prices. The Company does not currently manage this risk with commodity future and option contracts.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

     The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by the report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of April 2, 2005.

Changes in Internal Control Over Financial Reporting

     In our annual report on Form 10-K for the fiscal year ended January 1, 2005, we identified and disclosed a material weakness in our internal control over financial reporting related to the way we previously accounted for leases. To remediate the weakness, we changed our accounting policies regarding the review, analysis and recording of new and current leases, including the selection and monitoring of appropriate assumptions and guidelines. Management believes the above measures have addressed the material weakness described in our annual report on Form 10-K for the year ended January 1, 2005. The Audit Committee and management will continue to monitor the effectiveness of our internal controls and procedures on an ongoing basis and will take further action as appropriate. During the thirteen weeks ended April 2, 2005, there were no other significant changes in the Company’s internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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Part II OTHER INFORMATION

     Item 1 Legal Proceedings

     The Company is subject to legal proceedings, claims and liabilities which arise in the ordinary course of business and are generally covered by insurance. In the opinion of management, the amount of the ultimate liability with respect to those actions will not have a materially adverse impact on our financial position or results of operations and cash flows.

     Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

          None

     Item 3 Defaults Upon Senior Securities

          Not Applicable

     Item 4 Submission of Matters to a Vote of Security Holders

          None

     Item 5 Other Information

          None

     Item 6 Exhibits

	31.1	Certification by the Chief Executive Officer
	31.2	Certification by the Chief Financial Officer
	32.1	Certification by the Chief Executive Officer
	32.2	Certification by the Chief Financial Officer

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SIGNATURES

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

BACK YARD BURGERS, INC.

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