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TanCalGal You'll need more than grass. If you want a nice backyard soon, you'll need professional help. Plan a patio area (hardscape) and then grass and shrubs. Get books from library. Talk with neighbors about their yards. Call a few landscapers for estimates. Visit a few garden shops and see if they draw up plans.

drlaurah I also have a house with a very small backyard. I had a small patio built on one end with a wall fountain, a meandering path to a central patio just big enough for a cafe table, and finally the path wanders off to a sturdy rose trellis that has a hammock. No grass at all, just flowers, shrubs and small trees. The plan was drawn up for free by a local landscape company. It is very relaxing to be in my backyard - it feels like a little European courtyard garden.
Also - I would have the soil tested. It really is devoid of vegetation, and you want to make sure that there is not some inherent problem with the soil that is keeping it so bare.

lkrose I have a lot of ideas - no grass is good! First, what is your location?

AMN This one has already been hashed over quite a bit: http://www.houzz.com/discussions/312066/Very-Small-Backyard---Needs-help---

lkrose Does a picnic table sound good? http://www.allpicnictables.com/detail.aspx?ID=5313

Also houzz has a lot of choices for pavers

I'd paint the fence to freshen it up.

leeisonline Maybe groups of 3 pots in a couple areas, of different sizes or have one sitting on something to make it taller. If not sod and on a budget then an oudoor rug that is sold at rv accessory shops.

lkrose Here's the link to the houzz pavers ideas - scroll down the page to the orange chaise lounge chairs. http://www.houzz.com/concrete-pavers

mmilos Looks like it may be too shady to grow grass.

SYNLawn Synthetic grass! Perfect solution. Looks real, no maintenance. http://www.houzz.com/pro/synlawnphilly/synlawn

Susan Cleveland Picture this: Gravel or red wood chips. Create curved walkway with pavers leading to corner with pond. Add waterfall to pond--using natural stones you find on Sunday drives. Use POTTED plants and trees. Add brightly painted 50's metal tulip chairs (or the doubles) or old wooden benches. Surprise with small statuary, hang cute stuff (do you have a theme?) here and there on fence. Put your grill over by the A/C (and for heaven's sake, put an L-shaped wooden fence around part of that A/C!). :)

Aylin Goksu Is there any option to resize the fence? If you can, maybe you can have the look of a more open space. If you can’t, I think you still have enough space to get some relax. If your land is not suitable for grass, you can use potted plants, especially a couple of potted ivy for the fences. And for the other space of the ground you can use natural stone. You can use a birdbath or a small fountain for the sound of water. And lastly you can have a table and some chairs or even a settee like this:

Stacy Johnson I don't think it'd be too expensive for sod. I would do sod, flower bed along perimeter, ans buy some nice, relaxing outdoor furniture!

Aquascape Inc. I agree with Susan Cleveland. A small pond or waterfall would be great for this space, especially if it's shady and you're worried grass might not grow.

Sherri Fitzgerald Here are a few ideas. The first picture has a lot of product tags for plants for shady areas. You didn't say where you live so google the plant zone for your area to see if these plants will grow well there for you. Although some of these gardens are larger than yours you could easily do them on a small scale. I wasn't sure if you wanted grass or not so I threw in a few ideas that could easily be done without grass. Make sure you put your pond in a spot where you can have a nice bench to sit nearby and also locate it so you can look out a window or patio door and admire it from the inside too. If it was my yard I would put a small version of the pond in the first picture and a path and rock garden like in the second picture. It would be a small oasis where you would want to sit and relax.

dbaune Gardeners Supply Company (online and catalog) has some very large planters (pots) that have reservoirs, so you're not watering every day. We use them on the deck at our lake home, and love them. (Most plants can go 10 days in between watering.) The pots are lightweight, and most are large enough t(especially with plants) o help block your air conditioner, fill your corner, etc. You could place some at different heights in the corner, with small trees, to get height and block the fence a bit. The catalog also has raised planter corners you can easily build to create perimeter planters, using treated lumber. BE SURE to leave plenty of room around your air conditioner, so it runs properly.

If you're on a budget and can find an old style picnic table, you can make it VERY cool by cutting out part of the center board, and installing a metal box (e.g. a modified gutter), then using it for either a planter or a cooler. Wine bottles fit perfectly.

If you can't afford to have some grass installed (or don't want it), you could lay down pea rock voer a weed mat (small rounded gravel, like little river stones). If you lay down edging around the rock and keep the shape fluid (curved and irregular), you can place mulch around the perimeter for plants and large pots. A variety of colored pots (that blend with your interior) would really brighten the patio, even in winter.

qbgardener The fence and large trees are probably giving alot of shade. You might consider doing a small woodland type garden with a path and sitting area. Look for shade plants of different heights and interesting containers to add some structure. You could consider a neat wall fountain or living wall to give some height and attract birds etc. A hyrangea might be nice for height and structure.
You really have a blank canvas. I would take out what grass is there and look at getting as much organic matter into the space as possible. Look at lasagna composting to shape your beds and use the first season to feed your soil.
Think colour, form and function and you might be amazed at what you can create.
If you are on a tight budget you would be amazed at how many free plants can come your way if you ask and a little paint can do wonders.
I see you have moss growing naturally on one side. You could take advantage of that as growing moss on things is big these days for an added japanese effect.

brmorgan I had an even smaller space with major obstacles to overcome. The space had an egress window that had to remain a usable escape so we decided to build a deck over the top of it with a removable section that is easily pushed up from underneath. The decking took some ingenuity but in the end the space was completely livable.