<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------
                                    FORM 10-K

{X}     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998
Commission file number     333-57931

                                TUMBLEWEED, INC.
           ----------------------------------------------------------
             (Exact name of registrant as specified in its charter)


          Delaware                                      61-1327945
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

    1900 Mellwood Avenue
    Louisville, Kentucky                                  40206
-------------------------------             ------------------------------------
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code: (502) 893-0323

Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par
  value $.01 per share

Indicated  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____

Indicated 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. {X}

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant on March 12, 1999,  was  approximately  $20,326,020.  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 market value  calculation was
determined  using the $10.00 per share  offering  price of the Company's  Common
Stock in the initial public  offering which closed in January,  1999,  since the
Company's  Common Stock has not yet begun to trade on The Nasdaq Stock  Market's
Over The Counter Bulletin Board.

The number of shares of common stock,  par value of $.01 per share,  outstanding
on March 12, 1999, was 5,881,543.

                       DOCUMENTS INCORPORATED BY REFERENCE


                                        Documents from which portions are
Part of Form 10-K                       incorporated by reference
------------------                      ---------------------------------
     None                                              None


Exhibit Index: Page 31 - 32



                                      - 1 -

<PAGE>



                                 TUMBLEWEED, INC

                                     PART I



ITEM 1. BUSINESS

At December 31, 1998,  the Company  owned,  franchised or licensed 43 Tumbleweed
Southwest Mesquite Grill & Bar ("Tumbleweed") restaurants. The Company owned and
operated 25 Tumbleweed restaurants in Kentucky,  Indiana and Ohio. There were 13
franchised Tumbleweed  restaurants located in Indiana,  Illinois,  Tennessee and
Wisconsin,  and five  restaurants  located outside the United States in Germany,
Jordan and Saudi Arabia.  Tumbleweed  Southwest Mesquite Grill & Bar restaurants
feature  sophisticated  Tex-Mex  and  mesquite  grilled  food served in a casual
dining atmosphere  evoking the American  Southwest.  Tumbleweed  restaurants are
open seven days a week  (excluding  certain  holidays)  for lunch and dinner and
generally offer a full service bar.

THE TUMBLEWEED CONCEPT

Tumbleweed  restaurants feature  sophisticated Tex-Mex and mesquite grilled food
served  in a casual  dining  atmosphere  evoking  the  American  Southwest.  The
Tumbleweed menu offers both distinctively seasoned,  spicier versions of popular
Tex-Mex dishes,  as well as an assortment of grilled  steaks,  ribs, pork chops,
chicken and seafood selections.  The Tumbleweed concept is designed to appeal to
a broad range of customers by offering a wide selection of distinctive  items at
a broad  range  of  price  points  while,  in  management's  view,  providing  a
consistent level of food quality and friendly and efficient  service  comparable
or superior to that of other casual  dining  restaurants.  Use of a  centralized
commissary system enhances  Tumbleweed's  ability to maintain  consistently high
food quality, minimizes restaurant kitchen space and equipment, reduces the need
for skilled cooking personnel,  and simplifies  restaurant  operations.  The key
elements of the Tumbleweed concept include the following:

ONE CONCEPT  OFFERING TWO DISTINCTIVE  MENUS. The Tumbleweed menu is intended to
distinguish  Tumbleweed  from  competing  Mexican and casual dining  concepts by
offering both distinctively seasoned, spicier versions of burritos,  enchiladas,
tacos,  salads,  and other popular Tex-Mex  dishes,  as well as an assortment of
grilled steaks,  ribs, pork chops,  chicken and seafood  selections.  Management
believes  this  approach  appeals  to a broader  segment of the  population  and
encourages customers to visit the restaurants more often.

The Tumbleweed menu features  distinctively seasoned versions of popular Tex-Mex
dishes and mesquite grilled  selections.  Customers receive  complementary chips
and  salsa,  and can  choose  from a  selection  of  appetizers  including  such
Tumbleweed specialties as chile con queso and white chili, as well as guacamole,
nachos,  quesadillas,  buffalo  chicken  strips and stuffed  potato  skins.  The
Tex-Mex menu offers burritos, enchiladas, tacos, tamales, chimichangas and other
items served both individually and in various combination dinners accompanied by
Mexican rice and refried,  baked or black beans.  Customers may also choose from
an assortment of fajitas, ribs, chicken, steak, pork chops, and seafood prepared
over an open gas-fired  mesquite wood grill and served with Texas Toast,  salad,
and a choice of baked  potato,  southwest  or ranch  fries,  Mexican  rice,  and
refried,  baked  or  black  beans.  Mesquite  grilled  items  are  available  as
sandwiches  as well as entrees.  A variety of  specialty  stuffed  potatoes  and
salads  featuring  refried  beans,  seasoned  beef,  shredded or fried strips of
chicken,  mesquite grilled chicken or seafood, and other traditional ingredients
rounds  out the  menu.  The  Company  periodically  introduces  new  items  that
complement its present menu selections.

Tumbleweed  restaurants  typically  contain  full-service  bars  offering a wide
assortment of mixed drinks, wines, domestic and imported beers and featuring the
Tumbleweed  margarita.  Alcoholic beverages accounted for approximately 12.0% of
restaurant sales during 1998.

Tumbleweed's  menu pricing is designed to create a strong perception of value by
consumers.  Prices for Tex-Mex  dishes range from $1.59 for a single  corn-shell
taco to $11.79 for the Tumbleweed  sampler dinner.  Mesquite grilled items range
from $5.79 for a hamburger to $15.99 for an 18 oz. USDA-choice porterhouse steak
dinner. Tumbleweed also offers several daily lunch specials for less than $5.00.
Seasonal  promotions  are  also  used  to  increase  business  during  otherwise
traditionally slow periods.

TARGETED  ATMOSPHERE.  Tumbleweed  restaurants  offer  relaxed  and  comfortable
surroundings  where  guests can enjoy a quality  dining  experience.  Decorative
features  such  as  American  Indian  artifacts,  cowboy  memorabilia,  wildlife
replicas,  rough-hewn  timber and a creek stone  fireplace in larger  stores are
used to evoke the feeling of the Great Southwest.

                                      - 2 -

<PAGE>



MAINTAINING  A  FAVORABLE  PRICE-TO-VALUE  RELATIONSHIP.   Tumbleweed's  pricing
strategy is intended to appeal to value-driven  customers as well as traditional
casual dining customers. Tumbleweed offers a wide selection of distinctive items
at a broad range of price points while, in management's view,  providing a level
of food  quality and  service  comparable  or  superior to that of other  casual
dining  restaurants.  For 1998, the average check at a  full-service  Tumbleweed
restaurant,  including  beverages,  was approximately $8.10 for lunch and $10.20
for dinner.  Management  believes  that this  pricing  approach,  together  with
Tumbleweed's emphasis on variety and quality, creates a favorable price-to-value
perception  that can increase  customer volume and generate more frequent repeat
visits.

ACHIEVING  TOTAL GUEST  SATISFACTION.  The  Company is  committed  to  providing
prompt,  friendly  and  attentive  service and  consistent  food  quality to its
customers.  Tumbleweed employs a quality control  supervisor  independent of its
Operations  division who  evaluates  the  operations  of the  Company-owned  and
franchised  restaurants  on a regular  basis to ensure that each  restaurant  is
following the specified operations procedures.  The Company also uses a "mystery
shopper"  program to compare  actual  performance  of  restaurants to Tumbleweed
standards  and  solicits  comment  cards from  customers  to monitor  and modify
restaurant operations.

OPERATING STRATEGY

The Company uses the following key operating strategies to make certain that the
Company exceeds the expectations of its customers:

TARGET FOR TOTAL GUEST SATISFACTION.  Tumbleweed's organizational and management
philosophy  is  based on seven  core  values  and a  commitment  to Total  Guest
Satisfaction  ("TGS"). The Company's training procedures are intended to instill
in all  managers  and  employees  an  appreciation  of the  core  values  and to
encourage a shared commitment to TGS.

COMMITMENT TO ATTRACTING AND RETAINING QUALITY EMPLOYEES. By providing extensive
training  and  attractive  compensation,  and  by  emphasizing  clearly  defined
organizational  values,  the  Company  fosters a strong  corporate  culture  and
encourages a sense of personal commitment from its employees.  The Company has a
monthly  cash  bonus  program  based  on  attaining  sales  growth  and  related
performance  goals on a  restaurant-by-restaurant  basis  for each  restaurant's
management team.

CONSISTENT HIGH QUALITY FOOD  PREPARATION.  The Company is committed to offering
distinctive Tex-Mex and mesquite grilled foods to customers at reasonable prices
through the use of a commissary-based  system.  Management believes that the use
of a  central  commissary  provides  a  significant  strategic  and  competitive
advantage  to the  Company  by  enhancing  the  Company's  ability  to  maintain
consistently  high  food  quality,   minimizing  restaurant  kitchen  space  and
equipment, and reducing the number of skilled cooking positions. The system also
enables restaurant  managers and kitchen staff to focus on the final preparation
of menu items to Tumbleweed standards.

Whenever  feasible,  the cooked  ingredients used in Tumbleweed menu selections,
such as ground beef, chile con queso, and Mexican beans, are prepared in advance
at the commissary  according to procedures designed to extend shelf life without
the  addition  of  preservatives.  The  kitchen  staff at each  restaurant  uses
commissary-supplied  and other fresh  ingredients  for the final  preparation of
individual  orders.  Management  believes  this system  enhances  the  Company's
ability to maintain  rigorous  operational and food  preparation  procedures and
stringent  product shelf life standards.  The commissary  operates  according to
stringent  quality control  standards and is subject to a daily  inspection by a
USDA inspector on the premises.  The Company  maintains a contingency plan under
which centralized food preparation could be quickly resumed at another company's
facility  should the  commissary  be  rendered  inoperative  by weather or other
disaster.

GROWTH STRATEGY

The Company's  strategy for growth will focus on the further  development of new
and existing  markets by both the Company and  franchisees.  Since acquiring the
Tumbleweed  concept  in 1995,  the  Company  has  added  new  Company-owned  and
franchised restaurants, while developing the infrastructure necessary to support
its growth  strategy.  This  approach has given  management  an  opportunity  to
validate the Tumbleweed  concept,  refine operating systems,  design and develop
prototype   restaurant  buildings  of  different  sizes  and  build  a  team  of
experienced  corporate  managers needed to support future internal and franchise
growth. The following are key elements of the Company's expansion strategy:





                                      - 3 -

<PAGE>

OPENING   RESTAURANTS  IN  TARGET  MARKETS.   The  Company   targets   mid-sized
metropolitan markets,  initially concentrating in the Midwest,  Mid-Atlantic and
Southeast  regions,  where  income  levels  and the  presence  of  shopping  and
entertainment centers,  offices and/or colleges and universities indicate that a
significant  base  of  potential  customers  exists.  Management  considers  the
feasibility of opening  multiple  restaurants  in a target market,  which offers
greater  operating and  advertising  efficiency.  As the Company adds additional
restaurants in a target market,  there may be short-term decreases in same store
sales.  However,  management  believes  this  clustering  strategy  can  enhance
long-term   performance  through  economies  of  scale  and  shared  advertising
expenses.  Management  also views smaller  markets with fewer  competing  casual
dining   restaurants  as  presenting  growth   opportunities  for  the  Company.
Management  believes  that its target  markets are less  competitive  than major
metropolitan  markets  in terms of both site  acquisition  costs  and  number of
casual dining restaurant options.

SELECTING  AND  DEVELOPING  QUALITY  RESTAURANT  SITES.  In selecting  potential
restaurant sites, management analyzes a variety of factors,  including,  but not
limited to, local  market  demographics,  site  visibility,  competition  in the
vicinity, and accessibility and proximity of significant generators of potential
customers such as major retail  centers,  hotels,  universities,  and sports and
entertainment   facilities.   The  acquisition  of  sites  may  involve  leases,
purchases,  and  joint  venture  arrangements,   and  will  require  either  the
construction of new buildings or the conversion of existing buildings.  The site
selection  process is conducted by Company  management and other  employees,  as
well as with the assistance of consultants  when deemed  advisable.  The Company
believes that its site selection strategy and procedures, together with its menu
and pricing  strategies,  its  commitment to quality food products and excellent
service, and its advertising,  marketing and promotional  efforts,  will enhance
its ability to generate its anticipated customer volumes.

FRANCHISING.  The  Company  expects  that  continued  growth  will come from the
further  development  of new and  existing  markets  by  both  the  Company  and
franchisees.  The Company intends to pursue an active  franchising  program with
current and new  franchisees  under  controlled  guidelines.  The Company offers
franchisees  both  rights  to  develop  individual  restaurants  as well as area
development  rights for the establishment of more than one new restaurant over a
defined period of time and in a defined  geographic area. The specific locations
of the restaurants are subsequently designated by the Company and the franchisee
in separate franchise agreements.  Under the standard area development agreement
currently in use, a franchisee  is required to pay at the time the  agreement is
signed a  non-refundable  fee of $5,000 per potential  restaurant in the defined
geographic  area,  to be applied  against the initial  franchise fee payable for
each restaurant.  The Company's current area development agreement also provides
for a franchise  fee of $35,000 for each  restaurant.  The  franchise fee is due
when  the  franchise  agreement  for a  restaurant  is  signed.  Each  franchise
agreement  generally  provides  for  royalties  of  three  to  five  percent  of
restaurant sales,  minimum marketing  expenditures of 2.0% of gross sales, and a
twenty-year  term.  All  franchisees  are required to operate  their  Tumbleweed
restaurants   in  compliance   with  the  Company's   policies,   standards  and
specifications,  including matters such as menu items,  ingredients,  materials,
supplies, services, fixtures,  furnishings,  decor and signs. Under its criteria
for selecting new franchisees,  Tumbleweed  requires that potential  franchisees
have adequate  capital,  experience in the  restaurant  industry,  and access to
locations suitable for development. Except for locations managed directly by the
Company,  the Company  generally  requires  that a  franchisee  have a principal
operator  with at least a ten percent  ownership  interest  who must devote full
time  to  the  restaurant  operation.  In  addition,  the  Company  may  acquire
restaurants from its franchisees from time to time.

MATCHING  INVESTMENT  TO  SALES  POTENTIAL.  When  developing  a new  Tumbleweed
restaurant, the Company generally uses one of three prototype designs management
believes is best suited to a particular  site. The Company's Mini, Midi and Maxi
prototype  restaurants  accommodate  approximately  150,  225,  and 265  guests,
respectively.  Each size restaurant offers full service casual dining and a menu
containing  a wide  assortment  of  Tex-Mex  and  mesquite  grilled  selections.
Management  believes that the use of multiple  prototypes permits the Company to
more closely match the investment in a restaurant site with the site's estimated
sales potential. These factors allow for more efficient utilization of financial
resources by the Company and its franchisees.

During  1998,  the  Company  opened 8 new  Company-owned  restaurants  and 3 new
Franchised restaurants in the following areas:

     COMPANY OWNED                      FRANCHISEE OWNED
     Louisville, KY (2)                 Nashville, TN (2)
     Columbus, OH (3)                   Clarksville,  TN (1)
     Dayton, OH (1)
     Cleveland, OH (1)
     Zanesville, OH (1)


                                      - 4 -

<PAGE>

The Company's  international  licensee also opened four new licensed restaurants
during 1998 in Germany,  Jordan and Saudi Arabia.  During 1998 and subsequent to
December  31,  1998,  a  franchisee   elected  to  close  two   restaurants   in
Murfreesboro,  Tennessee,  and Cookeville,  Tennessee,  which had been converted
from the  Barbwire  Restaurant  concept to the  Tumbleweed  concept.  Management
believes  that  these  two  locations  failed  to  overcome  a  negative  public
perception of the Barbwire concept.

RESTAURANT DESIGN

USING PROTOTYPE  RESTAURANT  DESIGNS.  Tumbleweed full service  restaurants have
historically  proven  successful in several  different  formats and sizes. It is
anticipated  that new units will be full service  restaurants  employing  one of
three basic  prototype  designs.  Management  believes using multiple  prototype
designs allows greater flexibility to match the investment by the Company or its
franchisees  with the revenue  potential of a particular  restaurant  site. Each
prototype  generally  contains a full-service  bar and utilizes the  distinctive
"Old West"  logo and motif that has  characterized  Tumbleweed  restaurants  for
several years.

Management   believes  the  Company's  prototype  designs  can  be  adapted  for
developing  Tumbleweed  restaurants in existing structures.  This capability may
give the Company access to quality sites not otherwise  available and may reduce
the time or expense of development in certain circumstances.

RESTAURANT OPERATIONS

RESTAURANT  MANAGEMENT.  The Company  employs area directors who are responsible
for supervising the operations of Tumbleweed restaurants within their geographic
region  and  the  continuing  development  of  each  restaurant's  managers  and
employees.  Through regular visits to the restaurants, the area directors ensure
that the Tumbleweed  concept,  strategies,  core values and standards of quality
are being observed in all aspects of restaurant  operations.  Area directors are
chiefly responsible for the implementation of the TGS program.

Each of the Company's  restaurants has one general manager,  one kitchen manager
and from one to three  assistant  managers,  based  on  restaurant  volume.  The
general manager of each restaurant has primary responsibility for the day-to-day
operations of the entire restaurant,  including sales, physical plant, financial
controls and  training,  and is  responsible  for  maintaining  the standards of
quality and performance  established by the Company. In selecting managers,  the
Company  generally seeks persons who have  significant  prior  experience in the
restaurant  industry  as well as  employees  who  have  demonstrated  managerial
potential and a commitment to the Tumbleweed concept and philosophy. The Company
seeks to attract  and retain  high  caliber  managers  and hourly  employees  by
providing  them  with  competitive  salaries,  monthly  bonuses  and  a  casual,
entertaining and challenging working environment.

COMPREHENSIVE   TRAINING   AND   DEVELOPMENT.   The  Company  has   developed  a
comprehensive  training program for managers and hourly employees.  Managers are
required to complete an eight-week  initial training course and regular training
programs.  The course  emphasizes  the  Company's  culture,  commitment  to TGS,
operating procedures and standards, and internal controls.

The general  managers and the area directors are  responsible  for selecting and
training  hourly  employees at each  restaurant.  The Company  employs  training
coordinators  to assist with training and  development of employees.  Before the
opening of each new restaurant,  one of the Company's  training managers leads a
team of  experienced  employees  to train and  educate  the new  employees.  The
training period for new employees  includes 10 days of general training prior to
opening and one week of on-the-job supervision at the new Tumbleweed restaurant.
Ongoing employee training remains the  responsibility of the general manager and
training  coordinator  of each  restaurant  under  the  supervision  of the area
director.

RESTAURANT  REPORTING.  The Company closely  monitors  sales,  costs of food and
beverages,  and labor at each of its restaurants.  Management analyzes daily and
weekly  restaurant  operating  results to identify trends at each location,  and
acts  promptly to remedy  negative  trends where  possible.  The Company uses an
accounting  and  management  information  system that operates at the restaurant
level  to  ensure  the   maintenance  of  financial   controls  and  operations.
Administrative  staff prepare daily reports of sales, labor and customer counts.
Cost of sales and condensed  profit and loss statements  compiled  bi-monthly by
store-level  personnel and monthly by the Company's  accounting  department  are
provided to  management  for analysis and  comparison  to past  performance  and
budgets.  The Company uses a specialized  software system to measure theoretical
food  costs  against  actual  costs.   To  improve  its   performance   analysis
capabilities, the Company is upgrading the system to schedule hourly labor based
on projected  sales per  half-hour.  The goal is to ensure the proper  number of
employees to service our guests.


                                      - 5 -

<PAGE>

SUPPORT OPERATIONS

COMMISSARY   OPERATIONS.   Use  of  a  centralized  commissary  system  enhances
Tumbleweed's ability to maintain  consistently high food quality,  minimizes the
kitchen  space and  equipment  needed at each  restaurant,  reduces the need for
highly skilled cooking personnel, and simplifies restaurant operations. Managers
and kitchen  staff at each  restaurant  focus on the final  preparation  of menu
items to Tumbleweed standards.  The Company operates its commissary  principally
to  enhance  food  quality  and  operational  efficiency  of  Company-owned  and
franchised restaurants. Management believes this approach increases Tumbleweed's
ability to offer its  customers a  consistently  high level of food quality at a
moderate price.

The  commissary  system  operates   principally  to  enhance  food  quality  and
operational  efficiency of Tumbleweed  restaurants.  The  commissary  charges an
amount   approximately   equal  to  its  cost  for  the  items  it  supplies  to
Company-owned and franchised restaurants. The Commissary sometimes contracts for
the production of food products for other  companies,  and has granted the right
to an outside food producer to produce and market in grocery  stores a chili con
queso product  utilizing the "Tumbleweed"  name and recipe for which the Company
receives a royalty based upon production and sales.

DEVELOPMENT AND CONSTRUCTION. The Company maintains an in-house construction and
development  department  to  assist  in  the  site  selection  process,  develop
architectural  and  engineering  plans and  oversee new  construction.  The Vice
President  of  Marketing  and  Development  and the  President  of the  Company,
together  with  Company  management,  analyze  prospective  sites and maintain a
database  of  possible  sites.  Once  a  site  is  selected,   the  Director  of
Construction  oversees the zoning  process,  obtains all  required  governmental
permits,  develops  detailed  building plans and  specifications  and equips the
restaurants.

ADVERTISING AND MARKETING.  The Company uses radio, print, billboard, and direct
mail  advertising in its various markets,  as well as television  advertising in
certain  larger  markets.  The  Company  also  engages  in a  variety  of  other
promotional   activities,   such  as  contributing  goods,  time  and  money  to
charitable,  civic and cultural programs,  in order to increase public awareness
of the  Company's  restaurants.  The  cost  associated  with  these  promotional
activities in 1998 was approximately 2.6% of sales.

RESTAURANT  LOCATIONS

At December 31, 1998, the Company owned and operated 25 Tumbleweed  restaurants.
The following table sets forth the location (including the number of restaurants
at each location) of these 25 restaurants:

                                                NO. OF
STATE             LOCATION                    RESTAURANTS 
-----             --------                    ----------- 
                                                                               
Indiana           Evansville                      1
Indiana           Terre Haute                     1
Kentucky          Bowling Green                   1
Kentucky          Elizabethtown                   1
Kentucky          Florence                        1
Kentucky          Frankfort                       1
Kentucky          Louisville                      7
Kentucky          Owensboro                       1
Ohio              Chillicothe                     1
Ohio              Columbus                        3
Ohio              Hamilton                        1
Ohio              Heath                           1
Ohio              Mason                           1


                                      - 6 -

<PAGE>


                                                NO. OF
STATE             LOCATION                    RESTAURANTS
-----             --------                    -----------
                                             
Ohio              Springdale                      1
Ohio              Springfield                     1
Ohio              Wooster                         1
Ohio              Zanesville                      1
                                                 --
                  TOTAL                          25
                                                 ==

FRANCHISED RESTAURANTS

As of December  31, 1998,  the Company had three  franchisees.  TW-Indiana,  LLC
owned and operated five  franchised  restaurants in New Albany,  Floyd Knobs and
Salem,  Indiana,  and  Lexington,  Kentucky.  Subsequent  to December  31, 1998,
TW-Indiana  opened a  franchised  Tumbleweed  restaurant  in  Seymour,  Indiana.
Diamondback  Management Corp. owned and operated four franchised  restaurants in
Appleton, Milwaukee and Madison, Wisconsin, and Rockford, Illinois. During 1998,
TW-Tennessee,  LLC,  owned and  operated  five  restaurants  in  Hendersonville,
Nashville, Murfreesboro,  Cookeville and Clarksville,  Tennessee, although prior
to  December  31,  1998,  the  franchisee  elected  to close  the  Murfreesboro,
Tennessee restaurant,  and subsequent to December 31, 1998, elected to close the
Cookeville,  Tennessee  restaurant.  Further,  subsequent  to December 31, 1998,
TW-Tennessee,  LLC  opened a  franchised  Tumbleweed  restaurant  in  Hermitage,
Tennessee.

INTERNATIONAL LICENSING AGREEMENT

The Company has entered into a license agreement (the "International Agreement")
with Tumbleweed  International,  LLC  ("International"),  a restaurant developer
based in Brussels,  Belgium,  to develop Tumbleweed  restaurants  outside of the
Western  Hemisphere.  As of December 31, 1998,  International  was operating its
restaurants  in Erlanger,  Frankfort and Vilsek,  Germany,  Amman,  Jordan,  and
Jeddah,  Saudi Arabia as Tumbleweed  restaurants.  See "Certain  Transactions --
Tumbleweed International LLC."

The International Agreement also contains certain provisions relating to quality
control,  restrictions on ownership of and participation in competing businesses
by  International  and its principals.  The  International  Agreement grants the
Company a right of first refusal if International proposes to sell or assign its
rights under the Agreement, or to sell equity interests in International.

SERVICE MARKS

The Company owns various service marks and trademarks that are registered on the
Principal Register of the United States Patent and Trademark Office. The Company
regards its service marks and trademarks as having  significant  value and being
an important factor in the development of the Tumbleweed concept.  The Company's
policy  is to  pursue  and  maintain  registration  of  its  service  marks  and
trademarks  whenever  possible  and to oppose  vigorously  any  infringement  or
dilution of its service marks and trademarks.

GOVERNMENT REGULATION

The  Company  is  subject to a variety of  federal,  state and local  laws.  The
Company's  commissary is licensed and subject to regulation by the USDA. Each of
the Company's restaurants is subject to permitting,  licensing and regulation by
a number  of  government  authorities,  including  alcoholic  beverage  control,
health,  safety,  sanitation,  building  and  fire  agencies  in  the  state  or
municipality  in which the restaurant is located.  Difficulties  in obtaining or
failure to obtain  required  licenses  or  approvals  could delay or prevent the
development of a new restaurant in a particular area.







                                      - 7 -

<PAGE>
Approximately 12.0 % of the Company's  restaurant sales were attributable to the
sale of alcoholic  beverages  for the year ended  December  31, 1998.  Alcoholic
beverage control regulations require each of the Company's  restaurants to apply
to a state authority and, in certain locations,  county or municipal authorities
for a license or permit to sell alcoholic beverages on the premises.  Typically,
licenses  must be renewed  annually and may be revoked or suspended for cause at
any time.  Alcoholic beverage control  regulations relate to numerous aspects of
restaurant operations,  including minimum age of patrons and employees, hours of
operation,  advertising,  wholesale purchasing,  inventory control and handling,
storage and dispensing of alcoholic beverages.

The failure of a restaurant to obtain or retain liquor or food service  licences
would have a material adverse effect on the restaurant's  operations.  To reduce
this risk,  each Company  restaurant is operated in accordance  with  procedures
intended to assure compliance with applicable codes and regulations.

The Federal Americans With Disabilities Act (The "ADA") prohibits discrimination
on the basis of  disability in public  accommodations  and  employment.  The ADA
became  effective  as  to  public  accommodations  in  January  1992  and  as to
employment in July 1992. The Company currently designs its new restaurants to be
accessible to the disabled,  and believes that it is in  substantial  compliance
with all current applicable  regulations  relating to restaurant  accommodations
for the disabled. The Company intends to comply with future regulations relating
to accommodating  the needs of the disabled,  and the Company does not currently
anticipate that such  compliance will require the Company to expend  substantial
funds.

The  Company  is  subject  in  certain  states to "dram  shop"  statutes,  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 Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance,  as well as excess liability
coverage. The Company has never been named as a defendant in a lawsuit involving
"dram shop" liability.

The Company's  restaurant  operations are also subject to federal and state laws
governing such matters as the minimum hourly wage, unemployment tax rates, sales
tax and similar  matters,  over which the  Company  has no control.  Significant
numbers of the Company's service,  food preparation and other personnel are paid
at rates related to the federal  minimum wage, and increases in the minimum wage
could increase the Company's labor costs.

The  development  and  construction  of  additional  restaurants  are subject to
compliance  with  applicable  zoning,   land  use  and  environmental  laws  and
regulations.

EMPLOYEES

As of December 31, 1998, the Company had approximately 2,200 employees,  of whom
43 are executive and  administrative  personnel,  90 are  restaurant  management
personnel,  and the remainder are hourly  restaurant and  commissary  personnel.
Many of the Company's hourly  restaurant  employees work part-time.  None of the
Company's  employees  are  covered by a  collective  bargaining  agreement.  The
Company considers its employee relations to be good.

FORWARD-LOOKING STATEMENTS/RISK FACTORS

We make various  forward-looking  statements  about our business in this report.
When  making  these  forward-looking  statements,  we use words such as expects,
believes,  estimates,  anticipates,  plans and similar  expressions  to identify
them. We also identify important  cautionary factors that could cause our actual
results to differ materially from those projected in forward-looking  statements
made by us. Factors that realistically  could cause results to differ materially
from those projected in the forward-looking  statements include the availability
and cost of  financing  and other  events that affect our  restaurant  expansion
program, changes in food and other costs, changes in national, regional or local
economic  conditions,  changes in consumer tastes,  competitive  factors such as
changes in the number and location of competing restaurants, the availability of
experienced management and hourly employees,  and other factors set forth below.
We do not have any obligation to revise any of these forward-looking  statements
for events occurring after the date of this report or for unanticipated events.

EXPANSION  RISKS.  Since  1995,  the  Company  has grown  while  developing  the
operational systems, internal controls, and management personnel that management
believed was  necessary  to support its plans for  continued  expansion.  In the
course of expanding its business,  the Company will enter new geographic regions
in which it has no previous operating experience. There can be no assurance that
the Tumbleweed  concept will be viable in new  geographic  regions or particular
local markets. In addition,  when feasible, the Company intends to open multiple
restaurants   in  a  target  market  to  achieve   operating   and   advertising
efficiencies.  Although  such  "clustering"  of  restaurants  in  a  market  may
adversely  affect  same  store  sales in the  short  term,  management  believes
clustering can enhance long-term performance.

                                      - 8 -

<PAGE>
The continued  growth of the Company's  business will depend upon its ability to
open and operate additional  restaurants  profitably,  which in turn will depend
upon several factors, many of which are beyond the control of the Company. These
factors include,  among other things, the selection and availability of suitable
locations,  negotiations of acceptable  lease,  purchase and/or financing terms,
the timely  construction of restaurants,  the securing of required  governmental
permits and approvals,  the employment and training of qualified personnel,  and
general economic and business  conditions.  The Company's ability to expand into
new geographic  regions is also  dependent upon the Company's  ability to expand
its existing commissary  facilities or open and successfully  operate additional
commissaries,  as may be necessary to support additional restaurants.  There can
be no assurance  that the Company  will be  successful  in achieving  its growth
plans or managing its  expanding  operations  effectively,  nor can there be any
assurance  that  new  restaurants   opened  by  the  Company  will  be  operated
profitably.

RESTAURANT BASE. The Company currently operates 25 Tumbleweed restaurants,  some
of which  have been open for less  than one  year.  Consequently,  the sales and
earnings achieved to date by these Tumbleweed  restaurants may not be indicative
of future  operating  results.  Moreover,  because of the number of  restaurants
currently  operated by the Company,  poor operating results at a small number of
restaurants could negatively affect the profitability of the entire Company.  An
unsuccessful  new  restaurant  or  unexpected  difficulties  encountered  during
expansion  could  have a greater  adverse  effect on the  Company's  results  of
operations than would be the case in a restaurant company with more restaurants.
In addition, the Company leases certain of its restaurants. Each lease agreement
provides  that the  lessor  may  terminate  the lease  for a number of  reasons,
including  if the  Company  defaults in payment of any rent or taxes or breaches
any covenants or agreements  contained in the lease.  Termination  of any of the
Company's  leases  pursuant to such terms could  adversely  affect the Company's
results of operations.

CHANGES IN FOOD AND OTHER COSTS;  SUPPLY RISKS. The profitability of the Company
is significantly  dependent on its ability to anticipate and react to changes in
food,  labor,  employee benefits and similar costs over which the Company has no
control.  Specifically,  the  Company is  dependent  on frequent  deliveries  of
produce and fresh beef, pork,  chicken and seafood.  As a result, the Company is
subject to the risk of possible  shortages or  interruptions in supply caused by
adverse  weather  or  other   conditions   which  could  adversely   affect  the
availability,  quality and cost of such items.  While in the past management has
been able to  anticipate  and react to changing  costs  through  its  purchasing
practices  or menu  price  adjustments  without  a  material  adverse  effect of
profitability,  there can be no  assurance  that it will be able to do so in the
future.

INDUSTRY  RISKS.  The  restaurant  business  is  affected by changes in consumer
tastes,  national,  regional and local economic conditions,  demographic trends,
traffic patterns and the type, number and location of competing restaurants.  In
addition, factors such as inflation,  increased food, labor, energy and employee
benefit  costs,  fluctuating  insurance  rates,  national,  regional  and  local
regulations,  regional weather  conditions,  and the availability of experienced
management  and  hourly  employees  also may  adversely  affect  the  restaurant
industry in general and the Company's restaurants in particular.

COMPETITION.  The restaurant  industry is intensely  competitive with respect to
price,  service,  location  and food  quality.  The Company  will compete with a
variety of other casual full-service dine-in restaurants, fast food restaurants,
take-out food service companies,  delicatessens,  cafeteria-style  buffets,  and
other food service establishments.  The number of value- oriented, casual dining
restaurants  has  increased  in the  past few  years,  and  competitors  include
national and regional chains,  franchisees of other restaurant chains, and local
owner-operated restaurants. Many competitors have been in existence longer, have
a  more  established  market  presence,  and  substantially  greater  financial,
marketing, and other resources than the Company. A significant change in pricing
or  other  business  strategies  by one or  more of the  Company's  competitors,
including an increase in the number of restaurants in the Company's territories,
could have a materially  adverse  impact on the  Company's  sales,  earnings and
growth.

GOVERNMENT REGULATION. The restaurant business is subject to extensive national,
state, and local laws and regulations  relating to the development and operation
of  restaurants,  including  those  regarding  the sale of alcoholic  beverages,
building  and  zoning  requirements,  the  preparation  and  sale  of  food  and
employer-employee  relationships,  such as minimum wage requirements,  overtime,
working and safety requirements,  and citizenship requirements. In addition, the
Company is subject to regulation by the Federal Trade Commission and must comply
with  certain  state laws that  govern  the  offer,  sale,  and  termination  of
franchises,  the refusal to renew  franchises,  and the scope of  noncompetition
provisions.  The  failure  to obtain  or retain  food or  beverage  licenses  or
approvals to sell franchises,  or an increase in the minimum wage rate, employee
benefits  costs  (including  costs  associated  with mandated  health  insurance
coverage), or other costs associated with employees,  could adversely affect the
Company.

                                      - 9 -

<PAGE>



EXECUTIVE OFFICERS

The following  table lists the executive  officers of the Company,  who serve at
the pleasure of the Board of Directors.  There are no family relationships among
any officers of the Company.


Name                               Age     Position
-----------                        ---     -------------
John A. Butorac, Jr. ........      50      President, Chief Executive Officer,
                                             and Director
James M. Mulrooney ..........      47      Executive Vice President, Chief
                                             Financial Officer, and Director
John Brewer .................      46      Vice President of Operations
Wayne P. Jones ..............      56      Vice President of Marketing and
                                             Development
Gary Snyder..................      44      Vice President - Company Operations
Glennon F. Mattingly.........      47      Vice President - Controller
Gregory A. Compton...........      38      Vice President, Secretary and General
                                             Counsel

John A. Butorac,  Jr. has served as President and Chief Executive Officer of the
Company since it was formed in November  1994, and is a Director of the Company.
From October 1991 to January 1995, Mr. Butorac served in various capacities with
Tumbleweed  Mexican Food Inc.,  including as Director of Operations and Director
of Corporate  Development.  During his association with Tumbleweed,  Mr. Butorac
has been  responsible for developing  Tumbleweed's  business and expansion plans
and for implementing various operational systems needed to support growth. Since
beginning his career in the restaurant  industry in 1971, Mr. Butorac has served
at various times as a senior operations  executive,  consultant,  and restaurant
owner  and  operator  for  such  restaurants  as  KFC,   Zapata/Zantigo  Mexican
Restaurants,  Fuddrucker,  Inc., Chi-Chi's,  Inc., Rib Tavern, Inc. and Two Peso
Mexican Cafes. Mr. Butorac has 28 years of restaurant management experience.

James M. Mulrooney has served as Executive  Vice  President and Chief  Financial
Officer of the Company since it was formed in November  1994,  and is a Director
of the Company. From November 1988 to August 1994, Mr. Mulrooney was Senior Vice
President  of Finance,  Vice  President  and  Treasurer  of NTS  Corporation,  a
regional real estate  development firm  headquartered  in Louisville,  Kentucky.
From May 1982 to June 1988, Mr. Mulrooney held various positions with Chi-Chi's,
Inc.,  including  four  years  as Vice  President  and  Treasurer,  where he was
responsible for developing the company's accounting systems,  public financings,
and  acquisitions.  Before  beginning his career in the  restaurant  industry in
1978, Mr.  Mulrooney  served for four years with the public  accounting  firm of
Alexander Grant & Company.  Mr. Mulrooney has 16 years of restaurant  management
experience.

John Brewer has served as Vice  President of  Operations  for the Company  since
April 1996.  From 1993 to 1996, Mr. Brewer was the President and Chief Executive
Officer of East Side  Restaurants,  LLC,  which  operates  nine  restaurants  in
Phoenix,  Arizona.  Mr.  Brewer  previously  served  for 15 years with Bob Evans
Farms,  Inc.,  where he  served  as Vice  President  and  Regional  Director  of
Restaurant  Operations  with  responsibility  for  developing  new  markets  and
increasing sales and profit in existing markets in a six-state  region,  as well
as in  other  capacities.  Mr.  Brewer  has 22 years  of  restaurant  management
experience.

Wayne P. Jones joined the Company as Vice President of Marketing and Development
in August  1997 after  concluding  four years as  Executive  Director  and Chief
Executive Officer of the Pizza Hut Franchise Association, comprising 3,300 Pizza
Hut restaurants.  Mr. Jones began his career in the restaurant industry in 1969.
At various times, he has served as President of Marcus Restaurants,  Senior Vice
President of Marketing and Development at Chi-Chi's,  Inc., President of General
Mills'  Casa  Gallardo  Mexican  Restaurant  division,  and  Vice  President  of
Marketing  for Kentucky  Fried  Chicken.  Mr.  Jones has also held  positions as
Adjunct    Professor   of   Marketing    and    Entrepreneurship    at   Indiana
University-Southeast  and  the  Barton  School  of  Business  at  Wichita  State
University. Mr. Jones has 29 years of restaurant management experience.

Gary Snyder  joined the Company as Director of Training  and Human  Resources in
June 1996 and was appointed Vice President of Company  Operations in April 1998.
Mr. Snyder  previously  served for 17 years with Bob Evans Farms,  Inc. where he
was responsible for restaurant operations and human resources. Mr. Snyder has 19
years of restaurant management experience.

                                     - 10 -

<PAGE>

Glennon F.  Mattingly  joined the  Company as  Controller  in March 1995 and was
named Vice President-Controller in April 1998. Before coming to Tumbleweed,  Mr.
Mattingly held various  positions with  Chi-Chi's,  Inc.  including six years as
Director of Budgeting and Financial Analysis. Before beginning his career in the
restaurant  industry in 1984, Mr.  Mattingly  served with the public  accounting
firm Deloitte,  Haskins and Sells for two years and taught accounting at Trinity
High School in Louisville,  Kentucky for seven years. Mr. Mattingly has 14 years
of restaurant management experience.

Gregory A. Compton joined the Company in June 1998 as Vice President,  Secretary
and General Counsel.  From March 1992 to June 1998, Mr. Compton served as Senior
Vice  President,  Secretary and General Counsel of NTS  Corporation,  a regional
real estate development firm headquartered in Louisville, Kentucky. Prior to his
employment  with NTS  Corporation,  Mr. Compton  practiced as an attorney in the
Real Estate and Corporate Finance department of Greenebaum,  Doll & McDonald,  a
Louisville,  Kentucky law firm. Mr. Compton has represented and been a principal
of a restaurant franchisee unrelated to the Company for the last four years.

SEGMENT INFORMATION

The  Company  has  three  reportable  segments:   restaurants,   commissary  and
corporate.   The   restaurant   segment   consists  of  the  operations  of  all
Company-owned  restaurants  and  derives  its  revenues  from  the  sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food  products  to Company  owned and  franchised  restaurants.  The
corporate  segment  derives  revenues from sale of franchise  rights,  franchise
royalties and related services used in restaurant  operations,  and contains the
selling, general and administrative activities of the Company.

Generally,  the Company evaluates  performance and allocates  resources based on
net  income.  The  accounting  policies  of the  segments  are the same as those
described in the summary of significant  accounting policies contained in Note 2
to the Company's Financial Statements contained elsewhere herein.

Segment information for the years ended December 31 is as follows:
<TABLE>
<CAPTION>

1996:

                                       Restaurant    Commissary     Corporate      Totals
<S>                                   <C>           <C>            <C>           <C>        
Revenues from external customers      $23,284,007   $ 1,795,529   $   652,187    $25,731,723
Intersegment revenues                          --     2,929,546            --      2,929,546
General and administrative expenses            --            --     1,787,190      1,787,190
Advertising expenses                           --            --       463,637        463,637
Depreciation and amortization             486,799       102,864       641,627      1,231,290
Net interest expense                           --        85,817       117,993        203,810
Segment net income (loss)               2,993,979       195,601    (2,688,264)       501,316
Segment fixed assets                   13,223,329     1,025,949       368,580     14,617,858
Expenditures for long-lived assets      6,216,821         1,325       288,807      6,506,953

1997:

                                       Restaurant     Commissary    Corporate      Totals 
Revenues from external customers      $27,891,128   $ 1,007,011   $   928,110    $29,826,249
Intersegment revenues                          --     2,349,693            --      2,349,693
General and administrative expenses            --            --     2,420,319      2,420,319
Advertising expenses                           --            --       631,421        631,421
Depreciation and amortization             683,266       108,004       180,593        971,863
Net interest expense                           --        85,957       342,641        428,598
Segment net income (loss)               4,351,013       203,458    (2,840,560)     1,713,911
Segment fixed assets                   17,851,495     1,069,434       409,203     19,330,132
Expenditures for long-lived assets      4,847,429       126,493        98,696      5,072,618

                                      
                                     - 11 -
<PAGE>

1998:

                                       Restaurant    Commissary     Corporate      Totals
Revenues from external customers      $40,490,933   $ 1,041,266   $ 1,275,445    $42,807,644
Intersegment revenues                          --     2,429,620            --      2,429,620
General and administrative expenses            --            --     3,098,228      3,098,228
Advertising expenses                           --            --     1,052,075      1,052,075
Depreciation and amortization           1,107,301       116,446       218,264      1,442,011
Net interest expense                           --       161,700       708,012        869,712
Segment net income (loss)               5,853,334       173,361    (4,073,285)     1,953,410
Segment fixed assets                   23,341,248     1,004,373       575,176     24,920,797
Expenditures for long-lived assets      6,733,972        26,388       123,461      6,883,821

</TABLE>

ITEM 2.  PROPERTIES

Of the 25 Company-operated restaurants in operation at December 31, 1998, 12 are
owned by the Company in fee simple while the remainder  are leased.  Four of the
leased  locations are owned by entities whose principals are affiliated with the
Company. Restaurant lease expirations range from 1999 to 2017, with the majority
of the leases providing for an option to renew for additional terms ranging from
five to twenty years. All of the Company's 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, the leases are net
leases  which  require the Company to pay the cost of insurance  and taxes.  The
Company's  executive  offices  and its  commissary  are  located in  Louisville,
Kentucky,  in office,  commissary and warehouse space owned in fee simple by the
Company.

ITEM 3.  LEGAL PROCEEDINGS

The Company is involved in litigation and  proceedings in the ordinary course of
its  business.  The Company does not believe the outcome of any such  litigation
will have a material  adverse  effect  upon the  Company's  business,  financial
condition or results of operations.

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

No  matters  were  submitted  to a vote of the  shareholders  during  the fourth
quarter ended December 31, 1998.

                                     PART II


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

As of March  12,  1999,  5,881,543  shares  of  Common  Stock  were  issued  and
outstanding.  There were approximately 1,010 stockholders,  including beneficial
owners of shares held in nominee name.

On January 11, 1999,  Tumbleweed,  Inc. completed its initial public offering of
common stock.  The Company sold 776,543  shares at the offering price of $10 per
share in a direct offering of its common stock to the public, raising a total of
$7,765,430.

On January 1, 1999, the merger of Tumbleweed,  LLC into Tumbleweed,  Inc. became
effective.  The merger reorganized Tumbleweed,  LLC, which had owned, franchised
or licensed the 43 Tumbleweed Southwest Mesquite Grill & Bar restaurants, into a
corporation  for  purposes of the stock  offering.  In the  reorganization,  the
membership  interests of the approximately 80 former members of Tumbleweed,  LLC
were  converted  into a total of 5,105,000  shares of Company  common stock.  As
required by the Tumbleweed,  LLC operating agreement, the former Class B members
made  additional  cash   contributions   of  $747,500  in  connection  with  the
reorganization.


                                     - 12 -

<PAGE>

The Company  received net proceeds of  approximately  $6,800,000  from the stock
offering.  The Company  used the offering  proceeds,  plus the  additional  cash
contributions  of  $747,500 it  received  in the  reorganization,  to repay bank
indebtedness  totaling  $7,043,366  and  to  pay  offering  expenses.  The  bank
indebtedness was an obligation of the former Class A members of Tumbleweed, LLC,
including certain directors and officers of the Company,  and had been accounted
for as redeemable  members'  equity.  Offering  expenses  totaled  approximately
$1,000,000, none of which were commissions or other underwriting expenses.

The  registration  statement for the stock  offering also included the 5,105,000
shares issued in the reorganization,  which may be sold from time to time in the
future by the former members of Tumbleweed, LLC for their own accounts.

The Company has applied to list its common stock on the Nasdaq National  Market.
Nasdaq has  reserved  the trading  symbol  TWED for the  Company.  Although  the
Company meets the  quantitative  requirements for listing on the Nasdaq National
Market  and has no  reason  to  believe  the  listing  application  will  not be
accepted,  the Company cannot assure that Nasdaq will accept the application for
listing the common stock on the National Market.

Beginning in March 1999, and pending approval of the Nasdaq listing application,
bid and asked  quotations  for  Tumbleweed  shares  will be  reported on the OTC
Bulletin Board under the trading symbol TWED.


ITEM 6. SELECTED FINANCIAL DATA

In the  following  table,  the income  statement  and balance sheet data of: (i)
Tumbleweed  Mexican Food,  Inc. and its affiliates  from which  Tumbleweed,  LLC
acquired the Tumbleweed  concept in 1995 (the  "Predecessor") for the year ended
December  31,  1994 have  been  derived  from the  financial  statements  of the
Predecessor which were audited by the Predecessor's  independent auditors;  (ii)
Tumbleweed,  LLC for the years ended December 31, 1995, 1996, 1997 and 1998 have
been derived from the financial  statements of  Tumbleweed,  LLC which have been
audited by Ernst & Young LLP,  independent  auditors,  whose  report  thereon is
included  elsewhere in this filing.  The  information  set forth below should be
read in conjunction  with, and are qualified in their entirety by, the financial
statements (and the notes thereto),  and other financial  information  appearing
elsewhere  in  this  filing  and  the  information  contained  in  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                                              
                                                             Years Ended December 31,
                                            ---------------------------------------------------------------  
                                            Predecessor                 Tumbleweed, LLC
                                            -----------  --------------------------------------------------
                                                1994        1995         1996         1997         1998
                                                ----        ----         ----         ----         ----
Statement of Income Data:

  Revenues:

<S>                                         <C>          <C>          <C>          <C>          <C>        
        Restaurant sales                    $14,147,124  $17,254,058  $23,284,007  $27,891,128  $40,490,933
        Commissary sales                      1,500,732    1,574,847    1,795,529    1,007,011    1,041,266
        Franchise fees and royaltie             442,122      540,157      474,870      563,056      770,806
        Other revenues                          108,000      177,960      177,317      365,054      504,639
                                             ----------   ----------   ----------   ----------   ----------
      Total revenues                         16,197,978   19,547,022   25,731,723   29,826,249   42,807,644
Operating expenses:

   Restaurant cost of sales                   4,280,691    5,132,549    7,103,357    8,191,928   11,788,578
   Commissary cost of sales                   1,297,045    1,424,077    1,649,502      887,793      905,814
   Operating expenses                         7,133,174    8,896,704   12,386,119   14,035,693   20,881,212
   Selling, general and administr1,682,395    1,962,036    2,250,827    3,051,740    4,150,303
   Depreciation and amortization                563,195    1,033,349    1,231,290      971,863    1,442,011
   Preopening amortization                      175,405      149,138      405,502      544,723      816,604
                                             ----------   ----------   ----------   ----------   ----------
      Total operating expenses               15,131,905   18,597,853   25,026,597   27,683,740   39,984,522
                                             ----------   ----------   ----------   ----------   ----------


                                     - 13 -

<PAGE>
        Income from operations                1,066,073      949,169      705,126    2,142,509    2,823,122
 Interest expense, net                         (270,258)    (266,530)    (203,810)    (428,598)    (869,712)
                                             ----------   ----------   ----------   ----------   ----------
        Net income                          $   795,815  $   682,639  $   501,316  $ 1,713,911  $ 1,953,410
                                             ==========   ==========   ==========   ==========   ==========
 Historical net income                                   $   682,639  $   501,316  $ 1,713,911$ $ 1,953,410
 Pro forma income taxes(1)                                  (245,750)    (180,474)    (617,008)    (703,228)
                                                          ----------   ----------   ----------   ----------
 Pro forma net income                                    $   436,889  $   320,842  $ 1,096,903  $ 1,250,182
                                                          ==========   ==========   ==========   ==========
 Pro forma net income per share
   - basic and diluted                                   $      0.09  $      0.06  $      0.21  $      0.24

Weighted average shares outstanding(2)                     5,105,000    5,105,000    5,105,000    5,105,000
</TABLE>
<TABLE>
<CAPTION>
                                                            

                                                        As of December 31,
                                  ---------------------------------------------------------------------
                                  Predecessor                        Tumbleweed, LLC
                                  -----------   -------------------------------------------------------
                                                                                                 Pro
                                                                                                Forma
                                      1994        1995        1996        1997       1998      1998 (3)
                                      ----        ----        ----        ----       ----      --------
                                                               (In thousands)

Balance Sheet Data:
<S>                                 <C>        <C>         <C>         <C>         <C>         <C>     
Total assets                        $  8,492   $ 17,831    $ 21,262    $ 26,068    $ 33,681    $ 33,681

Long-term debt and capital lease
   obligations, including current
   maturities                          3,947      3,077       5,776       8,542      13,458      13,630

Total liabilities                      4,975      4,132       7,108      10,725      24,103      24,743

Redeemable members' equity                --     16,413      20,233      23,420      18,925          --

Members' equity                           --          7           7           7         354          --

Retained earnings (deficit)               --     (2,721)     (6,085)     (8,083)     (9,701)         --

Stockholders' equity                   3,517         --          --          --          --          --
                                                                                         --       8,938
Pro forma stockholders' equity .          --         --          --          --
-----------
<FN>
  
(1)  Prior to  Reorganization,  the  Company  operated  as a  limited  liability
     company and was not subject to corporate  income taxes through December 31,
     1998.  Pro forma  adjustment  has been made to net income to give effect to
     federal and state  income  taxes as though the Company had been  subject to
     corporate income taxes for the periods presented with an effective tax rate
     of 36%.

(2) Shares  outstanding gives effect to the Reorganization as if it had occurred
    as of January 1, 1995.

(3) Reflects the  establishment of a deferred tax liability of $639,623 assuming
    the  termination of Tumbleweed,  LLC's limited  liability  company status on
    December 31, 1998 and the conversion of Tumbleweed, LLC's members' interests
    into 5,105,000 shares of Company Common Stock.

</FN>
</TABLE>

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

GENERAL

We make various  forward-looking  statements about our business in the following
discussion.  When making these forward- looking statements, we use words such as
expects,  believes,  estimates,  anticipates,  plans and similar  expressions to
identify them. We also identify  important  cautionary  factors that could cause
our actual results to differ materially from those projected in  forward-looking
statements made by us. Factors that realistically  could cause results to differ
materially from those projected in the  forward-looking  statements  include the
availability  and cost of financing and other events that affect our  restaurant
expansion  program,  changes  in food and  other  costs,  changes  in  national,
regional or local economic conditions,  changes in consumer tastes,  competitive
factors such as changes in the number and location of competing

                                     - 14 -

<PAGE>
restaurants,  the availability of experienced  management and hourly  employees,
and other  factors  set  forth  below  and in  "Forward-Looking  Statements/Risk
Factors" beginning on page 8.

Of the 43 Tumbleweed  restaurants as of December 31, 1998, the Company owned and
operated 25 restaurants in Kentucky, Indiana and Ohio, franchised 13 restaurants
in Indiana, Illinois,  Tennessee and Wisconsin, and licensed five restaurants in
Germany,  Jordan and Saudi Arabia. Two additional franchised  restaurants opened
in  Tennessee  and Indiana in January and  February of 1999,  respectively.  The
following table reflects changes in the number of company-owned  restaurants for
the years presented.

        Company Restaurants                          1996   1997  1998
        -------------------                          ----   ----  ----

                In operation, beginning of year        10    15    17
                Restaurants opened                      5     2     8
                Restaurants closed                      0     0     0
                                                      ---   ---   ---
                In operation, end of year              15    17    25
                                                      ---   ---   ---


        Franchise and Licensed Restaurants            1996  1997  1998
        -----------------------------------           ----  ----  ----

                In operation, beginning of year         9     9    12
                Restaurants opened                      0     3     7
                Restaurants closed                      0     0    (1)
                                                      ---   ---   ---
                In operation, end of                    9    12    18
                                                      ---   ---   ---
                    System Total                       24    29    43
                                                      ===   ===   ===

Effective  January 1, 1999,  Tumbleweed,  LLC converted from a limited liability
company  into a C  corporation  by merging  with  Tumbleweed,  Inc.,  a Delaware
corporation  formed on December 17, 1997. As a limited  liability  company,  the
Company  has  been  treated  as a  partnership  for  income  tax  purposes  and,
accordingly,  has  incurred  no  federal  or state  income  tax  liability.  The
discussion  of financial  condition  and results of  operations  included in the
paragraphs  that  follow  reflect a pro forma  adjustment  for federal and state
income taxes that would have been  recorded  during these periods if the Company
had been subject to corporate income taxes for the periods presented.

The following  section  should be read in conjunction  with "Selected  Financial
Data" included elsewhere herein and the Company's  financial  statements and the
related notes thereto included elsewhere in this filing. See "Index to Financial
Statements."

RESULTS OF OPERATIONS

The following table sets forth the percentage  relationship to total revenues of
certain income statement data, except where noted, for the periods indicated.

                                              Year Ended December 31,
                                          1996        1997           1998
                                          ----        ----           ----
Revenues:
  Restaurant sales                         90.5%       93.5%          94.6%
  Commissary sales                          7.0         3.4            2.4
  Franchise fees and royalties              1.8         1.9            1.8
  Other revenues                            0.7         1.2            1.2
                                        -------     -------        -------
      Total revenues                      100.0       100.0          100.0

Operating expenses:
  Restaurant cost of sales(1)              30.5        29.4           29.1
  Commissary cost of sales(2)              91.9        88.2           87.0
  Operating expenses(1)                    53.2        50.3           51.6
  Selling, general and
      administrative                        8.7        10.2            9.7
  Depreciation and amortization             4.8         3.3            3.4
  Preopening amortization                   1.6         1.8            1.9
                                        -------     -------        -------

                                     - 15 -

<PAGE>



      Total operating expenses             97.3        92.8           93.4
                                         ------     -------        -------      
      Income from operations                2.7         7.2            6.6
Interest expense, net                      -0.8        -1.4           -2.0
      Net income                            1.9%        5.8%           4.6%
                                         ======     =======        ======= 

Historic net income                         1.9%        5.8%           4.6%
Unaudited pro forma income taxes (3)       -0.7%       -2.1%          -1.6%
                                         ------     -------        -------
Unaudited pro forma net income              1.2%        3.7%           3.0%
                                         ======     =======        =======


(1)   As percentage of restaurant sales.
(2)   As percentage of commissary sales.
(3)   The unaudited pro forma income taxes reflect the effect of  Reorganization
      on the  historical  net  income  assuming  the  Company  was  taxed as a C
      corporation for income tax purposes with an assumed  combined  federal and
      state effective tax rate of 36%.


COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 and 1997

Total revenues  increased by $12,981,395 or 43.5% for 1998 compared to 1997. The
increase  in  total   revenues   reflects   the  opening  of  eight   additional
Company-owned restaurants in 1998. Restaurant sales at Company-owned restaurants
increased  $12,599,805  or 45.2% for 1998 compared to 1997.  Company-owned  same
store sales increased by 1.5% in 1998.

Commissary sales to franchised  restaurants increased by $34,255 or 3.4% in 1998
compared  to 1997.  In May,  1997,  the Company  made a decision to  discontinue
commissary sales of products not  manufactured by the commissary.  As of result,
commissary sales did not increase  proportionally  to the increase in the number
of franchised stores.

Franchise fees and royalties  increased by $207,750 or 36.9% in 1998 compared to
1997. The increase was due primarily to $105,000 in franchise fees received upon
the opening of three new franchised restaurants in 1998 compared to two in 1997,
$23,250 in territory fees received from international  operations and additional
royalties from three franchised restaurants opened in 1998.

Other  revenues  increased  by  $139,585  or  38.2%  in 1998  compared  to 1997,
primarily  due  to  an  increase  in  volume  related   purchasing   rebates  of
approximately  $141,000  and  monies  from  the Ohio  Bureau  of  Workers'  Comp
representing  a return  of  invested  premiums  by the  State  of Ohio  totaling
approximately $143,000 in 1998. The increases were offset in part by $178,000 in
insurance proceeds received in 1997.

Restaurant  cost of sales  increased by $3,596,650 or 43.9% for 1998 compared to
1997.  The  increase  was  principally  due to the  opening of eight  additional
Company-owned restaurants. Restaurant cost of sales decreased as a percentage of
sales by 0.3% to 29.1% for 1998 compared to 29.4% in 1997. The decrease resulted
primarily  from improved  operating  efficiencies  in the  commissary  and lower
product costs at the restaurant level.

Commissary  cost of sales  increased  $18,021 or 2.0% in 1998  compared to 1997.
Commissary cost of sales did not increase  proportionally to the increase in the
number of franchised  stores due to the  discontinuance of sales of products not
manufactured  by the  commissary.  As a percentage to sales  commissary  cost of
sales decreased 1.2%. This was due to lower  ingredient  costs for products sold
by the commissary.

Restaurant  operating expenses increased by $6,845,519 or 48.8% in 1998 compared
to 1997. The increase reflects the addition of eight Company-owned  restaurants.
Operating  expenses  increased as a percentage of  restaurant  sales to 51.6% in
1998 from 50.3% in 1997  primarily  due to a 1.2% increase in freight and a 0.7%
increase in restaurant level promotional  costs. These costs were offset in part
by a 0.7% decrease in labor costs.

Selling,  general and  administrative  expenses increased by $1,098,563 or 36.0%
for 1998  compared  to 1997.  The  increase  was due in part to the  addition of
management  and staff  personnel  during 1998 to support the growing  restaurant
base.  Because of the  Company's  restaurant  growth  plans  management  expects
selling, general and administrative expenses to continue to increase during 1999
in absolute dollars.

Preopening  amortization  increased $271,881 or 49.9% for 1998 compared to 1997.
The increase is due to the opening of eight additional Company-owned restaurants
in 1998 as compared to two restaurants in 1997.


                                     - 16 -

<PAGE>



Depreciation  and  amortization  expense  increased  $470,148  or 48.4% for 1998
compared  to  1997  due  primarily  to  the  addition  of  eight   Company-owned
restaurants.

Net interest expense increased $441,114 or 102.9% for 1998 compared to 1997. The
increase resulted from increased  borrowings to fund the growth in Company-owned
restaurants.

The pro forma adjustment provides for statutory federal and state tax rates then
in effect as though the Company had been subject to  corporate  income taxes for
1998 and 1997. The combined effective tax rate is 36.0% for 1998 and 1997.

As a result  of the  factors  discussed  above,  pro  forma  net  income in 1998
increased  $153,279 or 14.0%  compared  to 1997.  Pro forma net income per share
increased to $0.24 in 1998 compared to $0.21 in 1997.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 and 1996

Total  revenues  increased  by  $4,094,526  or 15.9% in 1997  compared  to 1996,
primarily  due  to an  increase  in the  number  of  Company-owned  restaurants.
Restaurant sales at Company-owned  restaurants  increased $4,607,121 or 19.8% in
1997  compared to 1996.  This  increase was largely the result of the opening of
two Company-owned  restaurants in 1997 and three Company-owned  restaurants late
in 1996. Company-owned same store sales increased 5.2% in 1997 compared to 1996.

Commissary  sales to  franchised  restaurants  decreased by $788,518 or 43.9% in
1997  compared to 1996.  The decrease was  primarily due to the decision in May,
1997, to discontinue selling products not manufactured by the commissary.

Franchise  fees and  royalties  increased  $88,186 or 18.6% in 1997  compared to
1996. The increase was due to an approximate  $70,000 increase in franchise fees
for two  additional  franchised  restaurants  opened  in 1997 and an  additional
$18,000 in royalties.

Other revenues  increased  $187,737 or 105.9% in 1997 compared to 1996. In 1997,
the Company received proceeds of $178,000 from business  interruption  insurance
as a result of flooding at a Company-owned  restaurant and an increase in rebate
income from suppliers of  approximately  $80,000 in 1997.  These  increases were
offset in part by the gain on the sale of the Company's food court operations of
$71,300 in 1996.

Cost of restaurant sales at Company-owned restaurants increased by $1,088,571 or
15.3% in 1997  compared  to 1996.  The  increase  reflects  the  opening  of two
additional Company-owned restaurants in 1997 and three Company-owned restaurants
late  in 1996  and an  increase  in  Company-owned  same  store  sales.  Cost of
restaurant  sales decreased as a percentage of restaurant sales by 1.1% to 29.4%
in 1997  compared to 30.5% in 1996.  This  decrease  was due  primarily to lower
cheese, beef and produce prices.

Commissary cost of sales  decreased  $761,709 or 46.2% in 1997 compared to 1996.
The decrease  reflects the decision to discontinue  commissary sales of products
not manufactured by the commissary.

Operating expenses at Company-owned restaurants increased $1,649,574 or 13.3% in
1997  compared  to  1996,  principally  due to  the  addition  of  Company-owned
restaurants  and an  increase  in  Company-owned  same  store  sales.  Operating
expenses decreased as a percentage of restaurant sales to 50.3% in 1997 compared
to 53.2% in 1996,  primarily the result of a 1.2%  decrease in restaurant  labor
costs and a 1.5% decrease in restaurant-level promotional expenses.

Selling,  general and administrative  expenses increased by $800,913 or 35.6% in
1997 compared to 1996. The increase reflects growth in the Company's  management
and staff personnel in accounting,  operations,  training and purchasing  during
1997 to support the growing  restaurant base. The percentage to revenue was 1.5%
higher  at  10.2% in 1997  compared  to 8.7% in 1996.  The  increase  was due to
additional  staffing required for new restaurant  openings planned for the first
quarter of 1998.

Depreciation  and  amortization  expense  decreased  $259,427  or  21.1% in 1997
compared to 1996.  Amortization  expense  related to  noncompetition  agreements
decreased by $500,000 in 1997, but was offset in part by increased  depreciation
resulting from additional Company-owned restaurants.

Preopening  amortization  increased  $139,221 or 34.3% in 1997 compared to 1996.
Preopening  expenses for more  Company-owned  restaurants were amortized in 1997
than in 1996.


                                     - 17 -

<PAGE>



Net  interest  expense  increased  $224,788 or 110.3% in 1997  compared to 1996,
primarily the result of growth in the number of restaurants in operation and the
incremental costs associated with such growth.

The pro forma adjustment provides for statutory federal and state tax rates then
in effect as though the Company had been subject to  corporate  income taxes for
1997 and 1996. The combined effective tax rate is 36.0% for 1997 and 1996.

 As a result of the  factors  discussed  above,  pro  forma  net  income in 1997
increased  $776,061 or 241.9%  compared to 1996.  Pro forma net income per share
increased to $0.21 in 1997 compared to $0.06 in 1996.


LIQUIDITY AND CAPITAL RESOURCES

The Company's  ability to expand the number of its restaurants  will depend on a
number  of  factors,   including  the  selection  and  availability  of  quality
restaurant  sites,  the negotiation of acceptable  lease or purchase terms,  the
securing  of  required   governmental   permits  and  approvals,   the  adequate
supervision  of  construction,  the hiring,  training  and  retaining of skilled
management and other personnel, the availability of adequate financing and other
factors,  many of which are beyond the  control of the  Company.  The hiring and
retention of  management  and other  personnel  may be  difficult  given the low
unemployment  rates in the areas in which the Company intends to operate.  There
can be no assurance that the Company will be successful in opening the number of
restaurants  anticipated  in a  timely  manner.  Furthermore,  there  can  be no
assurance  that the Company's  new  restaurants  will generate  sales revenue or
profit margins consistent with those of the Company's existing  restaurants,  or
that these new restaurants will be operated profitably.

The  Company's  principal  capital  needs  arise  from  the  development  of new
restaurants, and to a lesser extent, maintenance and improvement of its existing
facilities.  The principal  sources of capital to fund these  expenditures  were
members'  contributions,  internally  generated cash flow,  bank  borrowings and
lease financing.  The following table provides certain information regarding the
Company's sources and uses of capital for the periods presented:

                                                        Years
                                                  Ended December 31,
                                        --------------------------------------
                                          1996           1997           1998
                                          ----           ----           ----
Net cash provided by operations         $ 1,069,979   $ 3,040,836  $ 3,447,666
Purchases of property and equipment       4,712,962     4,105,089    5,313,575
Proceeds from sale of property and
   equipment                              1,635,815             -            -
Net distributions of
   members' equity                         (45,715)     (525,002)     (328,788)
Net borrowings on long-term debt and
  capital lease obligations                 905,201     1,797,898    3,251,135

Since the acquisition of the Tumbleweed  business,  the Company's single largest
use of funds has been for capital expenditures  consisting of land, building and
equipment  associated  with its restaurant  expansion  program.  The substantial
growth of the Company  over the period has not required  significant  additional
working  capital.  Sales are  predominantly  for cash and the business  does not
require the maintenance of significant receivables or inventories.  In addition,
it is common  within the  restaurant  industry  to receive  trade  credit on the
purchase  of  food,  beverage  and  supplies,  thereby  reducing  the  need  for
incremental working capital to support sales increases.

The  Company  both  owns  and  leases  its  restaurant  facilities.   Management
determines  whether  to  acquire  or lease a  restaurant  facility  based on its
evaluation of the financing alternatives available for a particular site.

The Company  plans to open three  Company-owned  Tumbleweed  restaurants  during
1999, depending on the availability of quality sites, the hiring and training of
sufficiently  skilled management and other personnel,  and other factors.  As of
December  31,  1998,   the  company  had  two   additional   restaurants   under
construction, one of which is expected to open in the first quarter of 1999.


                                     - 18 -

<PAGE>



The Company will utilize mortgage,  sale/leaseback  and landlord  financing,  as
well as equipment leasing and financing,  for a portion of the development costs
of restaurants  opened during 1999. The remaining costs will be financed through
the initial public offering together with available cash reserves, cash provided
from operations and borrowing capacity. Management believes such sources will be
sufficient  to fund the  Company's  expansion  plans  through  1999.  Should the
Company's  actual results of operations  fall short of, or its rate of expansion
significantly  exceed  its plans,  or should  its costs or capital  expenditures
exceed  expectations,  the Company may need to seek additional  financing in the
future.  In  negotiating  such  financing,  there can be no  assurance  that the
Company will be able to raise  additional  capital on terms  satisfactory to the
Company.

The Company has a $5.0 million revolving credit facility with National City Bank
(the "Credit  Facility").  As of December 31, 1998, the Company had  outstanding
borrowings  under the Credit Facility of  approximately  $4,302,000.  The Credit
Facility imposes  restrictions on the Company with respect to the maintenance of
certain  financial ratios,  the incurrence of indebtedness,  the sale of assets,
mergers, capital expenditures and the payment of dividends.

In order to provide  any  additional  funds  necessary  to pursue the  Company's
growth strategy,  the Company may incur, from time to time, additional short and
long-term bank  indebtedness  and may issue, in public or private  transactions,
its equity and debt securities,  the availability and terms of which will depend
upon market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to the Company.

CHANGE IN ACCOUNTING PRINCIPLE

In 1998, the Accounting  Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position,  "REPORTING ON THE
COSTS OF START-UP ACTIVITIES" (the "SOP"), which requires adoption no later than
the beginning of 1999. The Company's initial application of the SOP will require
the write-off of deferred preopening costs ($524,669 as of December 31, 1998) as
of the date of adoption,  which will be reported,  on a net of tax basis, as the
cumulative effect of a change in accounting  principle.  The Company has adopted
this new standard as of January 1, 1999.  It is not  practical to estimate  what
the effect of the change will be on 1999 earnings.

NEW ACCOUNTING PRONOUNCEMENT

In  1998,  the  Company  adopted  the  Financial  Accounting  Standards  Board's
Statement of Financial  Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS
OF  AN  ENTERPRISE  AND  RELATED  INFORMATION  (Statement  131).  Statement  131
superseded FASB Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement 131 establishes standards for the way that public business
enterprises  report  information  about operating  segments in annual  financial
statements and also requires that those enterprises report selected  information
about operating segments in interim financial reports. The adoption of Statement
131 did not have an effect on the  Company's  results of operations or financial
position, but did effect the disclosure of segment information.  (See Note 10 of
the Company's Financial Statements included elsewhere herein.)

IMPACT OF YEAR 2000

The Company  has  scheduled  the  replacement  of certain of its older  computer
systems  with  hardware  and  software  that has been  certified to be Year 2000
compliant.  The Company has also  completed an assessment of its other  computer
systems and will modify or replace portions of its software so that its computer
systems will function  properly with respect to dates in or after the year 2000.
The total Year 2000 project cost is estimated at approximately  $406,000,  which
includes  $370,000 for the  purchase of new  hardware and software  that will be
capitalized  and $36,000 that will be expensed as  incurred.  As of December 31,
1998,  the  Company  had not  incurred  any  expenses  relating to the Year 2000
Project.

The project is estimated to be completed  during August 1999,  which is prior to
any anticipated impact on its operating systems.  The Company believes that as a
result of the  installation  of new  hardware,  the  modifications  to  existing
software  and  conversions  to new  software,  the Year 2000 issue will not pose
significant  operational  problems for its computer  systems.  However,  if such
modifications  and  conversions  are  not  made,  or are not  completed  timely,
inability of its computer  systems to function  accurately could have a material
impact on the operations of the Company.

The Company is in the process of querying its  significant  vendors with respect
to Year 2000 issues.  Based on the responses received from vendors,  the Company
is not aware of any vendors with a Year 2000 issue that would materially  impact
results of operations,  liquidity, or capital resources.  However, the inability
of vendors to complete  their Year 2000  resolution  process in a timely fashion
could   materially   impact  the  Company,   although   the  actual   impact  of
non-compliance by vendors is not determinable.

                                     - 19 -

<PAGE>



The Company is in the process of developing a  contingency  plan in the event it
does not complete all phases of its Year 2000 program.

The costs of the  project  and the date on which the  Company  believes  it will
complete the Year 2000  modifications  are based on management's best estimates,
which  were  based on  numerous  assumptions  of future  events,  including  the
continued  availability of certain resources and other factors.  However,  there
can be no guarantee  that these  estimates  will be achieved and actual  results
could differ  materially  from those  anticipated.  Specific  factors that might
cause  such  material   differences   include,  but  are  not  limited  to,  the
availability  and cost of personnel  trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

IMPACT OF INFLATION

The  impact  of  inflation  on the  cost of  food,  labor,  equipment,  land and
construction costs could adversely affect the Company's  operations.  A majority
of the  Company's  employees  are paid hourly rates related to federal and state
minimum wage laws. As a result of increased competition and the low unemployment
rates in the markets in which the Company's restaurants are located, the Company
has  continued  to  increase  wages and  benefits in order to attract and retain
management  personnel and hourly coworkers.  In addition,  most of the Company's
leases  require the Company to pay taxes,  insurance,  maintenance,  repairs and
utility costs,  and these costs are subject to inflation  through  periodic menu
price  increases,  economies  of  scale in  purchasing  and  cost  controls  and
efficiencies at existing restaurants.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company  does not enter into  derivative  transactions  or  speculate on the
future  direction  of interest  rates.  The Company is exposed to interest  rate
changes  primarily  as a result of its  variable  rate debt  instruments.  As of
December  31,  1998,  approximately  $8.0  million  of the  Company's  debt bore
interest at variable  rates.  The Company  believes that the effect,  if any, of
reasonably  possible  near-term  changes  in  interest  rates  on the  Company's
consolidated  financial position,  results of operations or cash flows would not
be significant.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following  financial  statements of  Tumbleweed,  Inc. and its  predecessor,
Tumbleweed, LLC, are included after Item 14 of this report.

                                INDEX TO FINANCIAL STATEMENTS

                                                                          PAGE

Tumbleweed, Inc.

        Report of Independent Auditors...................................- F-1 -

        Financial Statements

               Balance Sheet as of December 31, 1998.....................- F-2 -

               Notes to the Balance Sheet................................- F-3 -

Tumbleweed, LLC

        Report of Independent Auditors...................................- F-5 -

        Financial Statements

               Statements of Income for the years ended December 31, 
                      1996, 1997 and 1998................................- F-6 -

               Balance Sheets as of December 31, 1997 and 1998...........- F-7 -


                                     - 20 -

<PAGE>



               Statements of Redeemable  Members'  Equity,  Members'
                      Equity and Retained  Earnings  (Deficit) for the
                      years ended December 31, 1996, 1997 and 1998.......- F-9 -

               Statements  of Cash Flows for the years ended  December 
                      31, 1996, 1997 and 1998...........................- F-10 -

               Notes to the Financial Statements........................- F-11 -

SELECTED QUARTERLY DATA (UNAUDITED)

The following is a summary of certain unaudited  quarterly results of operations
for 1997 and 1998.

<TABLE>
<CAPTION>

                      First Quarter   Second Quarter   Third Quarter  Fourth Quarter      Total
                      -------------   --------------   -------------  --------------      -----
Calendar Year 1997

<S>                   <C>            <C>               <C>             <C>            <C>         
Restaurant sales      $    6,538,745 $      6,682,908  $    7,300,641  $   7,368,834  $ 27,891,128
Total revenues             7,109,943        7,126,990       7,721,716      7,867,600    29,826,249
Net income                   229,522          519,997         532,005        432,387     1,713,911
Pro forma net income         146,894          332,798         340,483        276,728     1,096,903
Pro forma net income
  per share
  - basic and diluted            .03              .07             .07            .05           .21
Shares used in
   computing pro forma
   net income per share    5,105,000        5,105,000       5,105,000      5,105,000     5,105,000
Company-owned
   restaurants in
   operation at end of
   quarter                        15               15              16             17            17

Calendar Year 1998

Restaurant sales      $    8,409,122 $     10,138,509  $   10,516,721  $  11,426,581  $ 40,490,933
Total revenues             8,907,877       10,777,335      11,105,504     12,016,928    42,807,644
Net income                   342,147          591,293         613,050        406,920     1,953,410
Pro forma net income         218,974          378,428         392,352        260,428     1,250,182
Pro forma net income
  per share
  - basic and diluted            .04              .07             .08            .05           .24
Shares used in
   computing pro forma
   net income per share    5,105,000        5,105,000       5,105,000      5,105,000     5,105,000
Company-owned
   restaurants in
   operation at end of
   quarter                        21               22              23             25            25

</TABLE>


                                     - 21 -

<PAGE>



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

                                      None.


                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

The following  table lists the executive  officers of the Company,  who serve at
the pleasure of the Board of Directors,  and the  Directors of the Company.  The
term of each  Director  continues  until the Company's  first annual  meeting of
stockholders,  which  is  expected  to be  held in  2000.  There  are no  family
relationships among any officers or Directors of the Company.



Name                     Age  Position
----                     ---  --------
John A. Butorac, Jr. ... 50   President, Chief Executive Officer, and Director
James M. Mulrooney ..... 47   Executive Vice President, Chief Financial Officer,
                              and Director
John Brewer ............ 46   Vice President of Operations
Wayne P. Jones ......... 56   Vice President of Marketing and Development
Gary Snyder............. 44   Vice President - Company Operations
Glennon F. Mattingly.... 47   Vice President - Controller
Gregory A. Compton...... 38   Vice President, Secretary and General Counsel
David M. Roth .......... 48   Director
Minx Auerbach(1) ....... 75   Director
Lewis Bass (2).......... 76   Director
Roger Drury(1)(2) ...... 52   Director
George Keller(1)(2) .... 47   Director
Terrance A. Smith....... 52   Director
-------------------------

(1)Member of the Compensation Committee.
(2)Member of the Audit Committee.

John A.  Butorac,  Jr. has served as President  and Chief  Executive  Officer of
Tumbleweed,  LLC since it was formed in November  1994, and is a Director of the
Company.  From  October  1991 to January  1995,  Mr.  Butorac  served in various
capacities  with  Tumbleweed  Mexican  Food  Inc.,   including  as  Director  of
Operations and Director of Corporate  Development.  During his association  with
Tumbleweed,  Mr.  Butorac  has  been  responsible  for  developing  Tumbleweed's
business and expansion plans and for implementing  various  operational  systems
needed to support growth.  Since beginning his career in the restaurant industry
in 1971,  Mr.  Butorac  has  served  at  various  times  as a senior  operations
executive, consultant, and restaurant owner and operator for such restaurants as
KFC, Zapata/Zantigo Mexican Restaurants,  Fuddrucker, Inc., Chi-Chi's, Inc., Rib
Tavern,  Inc. and Two Peso Mexican Cafes. Mr. Butorac has 28 years of restaurant
management experience.




                                     - 22 -

<PAGE>
James M. Mulrooney has served as Executive  Vice  President and Chief  Financial
Officer  of  Tumbleweed,  LLC since it was  formed in  November  1994,  and is a
Director of the Company.  From November 1988 to August 1994,  Mr.  Mulrooney was
Senior  Vice  President  of  Finance,   Vice  President  and  Treasurer  of  NTS
Corporation,   a  regional  real  estate   development  firm   headquartered  in
Louisville,  Kentucky.  From May 1982 to June 1988,  Mr.  Mulrooney held various
positions  with  Chi-Chi's,  Inc.,  including  four years as Vice  President and
Treasurer,  where he was  responsible  for developing  the company's  accounting
systems, public financings, and acquisitions. Before beginning his career in the
restaurant industry in 1978, Mr. Mulrooney served for four years with the public
accounting  firm of Alexander  Grant & Company.  Mr.  Mulrooney  has 16 years of
restaurant management experience.

John Brewer has served as Vice  President of  Operations  for the Company  since
April 1996.  From 1993 to 1996, Mr. Brewer was the President and Chief Executive
Officer of East Side  Restaurants,  LLC,  which  operates  nine  restaurants  in
Phoenix,  Arizona.  Mr.  Brewer  previously  served  for 15 years with Bob Evans
Farms,  Inc.,  where he  served  as Vice  President  and  Regional  Director  of
Restaurant  Operations  with  responsibility  for  developing  new  markets  and
increasing sales and profit in existing markets in a six-state  region,  as well
as in  other  capacities.  Mr.  Brewer  has 22 years  of  restaurant  management
experience.

Wayne P. Jones joined the Company as Vice President of Marketing and Development
in August  1997 after  concluding  four years as  Executive  Director  and Chief
Executive Officer of the Pizza Hut Franchise Association, comprising 3,300 Pizza
Hut restaurants.  Mr. Jones began his career in the restaurant industry in 1969.
At various times, he has served as President of Marcus Restaurants,  Senior Vice
President of Marketing and Development at Chi-Chi's,  Inc., President of General
Mills'  Casa  Gallardo  Mexican  Restaurant  division,  and  Vice  President  of
Marketing  for Kentucky  Fried  Chicken.  Mr.  Jones has also held  positions as
Adjunct    Professor   of   Marketing    and    Entrepreneurship    at   Indiana
University-Southeast  and  the  Barton  School  of  Business  at  Wichita  State
University. Mr. Jones has 29 years of restaurant management experience.

Gary Snyder  joined the Company as Director of Training  and Human  Resources in
June 1996 and was appointed Vice President of Company  Operations in April 1998.
Mr. Snyder  previously  served for 17 years with Bob Evans Farms,  Inc. where he
was responsible for restaurant operations and human resources. Mr. Snyder has 19
years of restaurant management experience.

Glennon F.  Mattingly  joined the  Company as  Controller  in March 1995 and was
named Vice President-Controller in April 1998. Before coming to Tumbleweed,  Mr.
Mattingly held various  positions with  Chi-Chi's,  Inc.  including six years as
Director of Budgeting and Financial Analysis. Before beginning his career in the
restaurant  industry in 1984, Mr.  Mattingly  served with the public  accounting
firm Deloitte,  Haskins and Sells for two years and taught accounting at Trinity
High School in Louisville,  Kentucky for seven years. Mr. Mattingly has 14 years
of restaurant management experience.

Gregory A. Compton joined the Company in June 1998 as Vice President,  Secretary
and General Counsel.  From March 1992 to June 1998, Mr. Compton served as Senior
Vice  President,  Secretary and General Counsel of NTS  Corporation,  a regional
real estate development firm headquartered in Louisville, Kentucky. Prior to his
employment  with NTS  Corporation,  Mr. Compton  practiced as an attorney in the
Real Estate and Corporate Finance department of Greenebaum,  Doll & McDonald,  a
Louisville,  Kentucky law firm. Mr. Compton has represented and been a principal
of a restaurant franchisee unrelated to the Company for the last four years.

David M. Roth is a founding  member of Tumbleweed,  LLC, has served on its Board
of Advisors since its inception in 1994,  and is a Director of the Company.  Mr.
Roth is also an investor and member of the  governing  boards of two  Tumbleweed
franchisees and one Tumbleweed licensee--TW-Tennessee, LLC, TW-Indiana, LLC, and
Tumbleweed  International,  LLC. In addition,  Mr. Roth is a founding  member or
shareholder  of  several  companies  involved  in  other  restaurant   concepts,
including  (i) the company which  created The  Oldenberg  Grill (which  recently
merged into the Oldenberg Brewing Company,  a publicly held company of which Mr.
Roth  is  a  director),   (ii)  several  companies  which  are  Texas  Roadhouse
franchisees,  (iii) two companies which are Dooley's Bagelcatessen  franchisees,
(iv) T.M.  Riders,  LLC,  which owns and  operates a Mexican  and  grilled  food
delivery  concept as well as several  Tumbleweed food court units, (v) a company
which is a  developer  of Joe's  "Older  Than  Dirt"  restaurants,  and (vi) two
companies  involved  in the  development  and  franchising  of the  Boston-based
Pizzaria Regina concept or a casual dining Italian restaurant incorporating such
pizza concept. Mr. Roth is currently a principal in the Louisville, Kentucky law
firm of Roth Foley Bryant & Cooper,  PLLC,  the  successor-in-interest  to a law
firm  established by him in January 1993.  From March 1992 to December 1993, Mr.
Roth served as the General  Counsel,  Vice President and Secretary of Analytical
Risk  Management,  Ltd., a company of which he was a founding  partner,  and its
successor-in-interest,  ARM  Financial  Group,  Inc.,  a  Louisville-based  life
insurance  holding  company which  recently  became listed on the New York Stock
Exchange.  From  September  1979 to January  1993,  Mr.  Roth was engaged in the
private  practice  of law  with  the  firm  of  Greenebaum  Doll &  McDonald  in
Louisville, and prior to that time, from 1975 to

                                     - 23 -

<PAGE>

1979, Mr. Roth was an attorney with the Chief  Counsel's  Office of the Internal
Revenue Service, Interpretative Division, in Washington, D.C.

Minx Auerbach has served as a member of the Board of Advisors of Tumbleweed, LLC
since January  1995,  and is a Director of the Company.  From 1975 to 1979,  Ms.
Auerbach  was the  Director  of  Consumer  Affairs  for the City of  Louisville,
Kentucky. From 1979 to 1984, she served as the Executive Assistant to the County
Judge Executive of Jefferson County, Kentucky. Ms. Auerbach has been a member of
the Board of Trustees of the  University  of Louisville  since 1991,  serving as
Chair  from  1996 to 1997.  She has also  served  as Chair  and a member  of the
Louisville  and  Jefferson  County  Planning  Commission  and  as  Chair  of the
Louisville Science Center.

Lewis Bass has served as a member of the Board of  Advisors of  Tumbleweed,  LLC
since  January  1995,  and is a Director of the  Company.  Mr. Bass is currently
retired. From 1952 to 1980, Mr. Bass was President of Bass and Weisberg Realtors
where his  specialties  were  commercial  real estate,  property  management and
marketing.  Prior to that, he was Marketing  Director and partner for Associated
Theatres from 1983 until 1987.  Mr. Bass was an original  stockholder  of Humana
Inc.

Roger Drury has served as a member of the Board of Advisors of  Tumbleweed,  LLC
since  January  1995,  and is a Director  of the  Company.  Mr.  Drury was Chief
Financial  Officer of Humana Inc. from 1992 until 1996 and Senior Vice President
of Finance  from 1988 to 1992.  He joined  Humana,  Inc. in 1979 and became Vice
President-Comptroller in 1983. Mr. Drury served as a certified public accountant
with  Coopers & Lybrand  in New York and  Louisville  from 1971 until  1979.  He
currently  serves on the boards of directors of Bellarmine  College,  Management
Technology Services, The DentalCo, and Health Staffing Solutions.

George  Keller  is the  founder  of  Tumbleweed  and has  served on the Board of
Advisors of Tumbleweed,  LLC since 1995, and is a Director of the Company.  From
1975 to January 1995, Mr. Keller served as Chief Executive Officer of Tumbleweed
Mexican Food, Inc. and Tumbleweed Concepts,  Inc. Mr. Keller currently serves as
the  Managing  Member of First Blue Rock Grill LLC in New  Albany,  Indiana  and
serves  on the  Board  of  Stockyards  Bank,  Inc.  Mr.  Keller  has 22 years of
restaurant management experience.

Terrance A. Smith was  elected as a Director  of the  Company in June 1998.  Mr.
Smith is currently the President of Tumbleweed  International  LLC. From 1988 to
1997, Mr. Smith was the President and CEO of Chi-Chi's International Operations,
Inc. Mr. Smith currently  serves on the Board of Boston  Restaurant  Associates,
Inc., a publicly  traded  company which owns and operates  Italian dinner houses
and limited service pizzerias.  Mr. Smith has 28 years of restaurant  management
experience.

Classification  of  Directors.  Each  director will serve a term expiring at the
Company's first annual meeting of stockholders,  which is expected to be held in
2000, and until his or her successor is elected and qualified.  At that time, it
is anticipated  that the directors will be divided into three classes,  with the
number of directors  in each class as nearly equal as possible.  The term of the
first class of directors expires at the 1999 annual meeting of stockholders, the
term of the second class of directors  expires in 2000 and the term of the third
class of directors  expires in 2001,  provided  that the directors in each class
will hold office until their successors are duly elected and qualified.  At each
annual  meeting of  stockholders,  one class of  directors  will be elected to a
three-year term.

Committees of the Board. The Audit Committee and  Compensation  Committee of the
Board of  Directors  each  consists of three  directors,  none of whom can be an
officer or employee of the  Company.  The duties of the Audit  Committee  are to
recommend to the whole Board of Directors the selection of independent  auditors
to audit annually the books and records of the Company, to review the activities
and report of the independent auditors, and to report the results of such review
to the whole Board of Directors.  The Audit Committee also monitors the internal
audit controls of the Company.  The duties of the Compensation  Committee are to
review the performance of the executive officers of the Company and to recommend
annual  salary and bonus  amounts  for  executive  officers of the  Company.  In
addition, the Compensation Committee reviews the Company's compensation policies
and practices and benefit plans to ensure that they meet corporate objectives.

ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth the cash  compensation  earned for the last three
years by the Company's chief executive officer and its executive  officers whose
total salary and bonus exceeded $100,000 during 1998.


                                     - 24 -

<PAGE>


<TABLE>
<CAPTION>


                                   SUMMARY COMPENSATION TABLE

                                                                    Long-Term
                                        Annual Compensation       Compensation
                               ---------------------------------- ------------
 Name and Principal                                  Other Annual     Stock       All Other
      Position         Year    Salary     Bonus      Compensation   Options#     Compensation
      --------         ----    ------     -----      ------------  ----------    ------------
<S>                    <C>   <C>        <C>          <C>               <C>         <C>     
John A. Butorac, Jr.   1998  $ 200,000  $ 70,000     $   23,777        0           $      0
President and Chief
Executive Officer      1997    159,134    50,872         21,099        0                  0

                       1996    154,050         0         20,111        0                  0


James M. Mulrooney     1998    175,000    61,250         23,122        0                  0
Executive Vice
President and Chief    1997    132,611    42,394         21,016        0                  0
Financial Officer
                       1996    129,461         0         19,463        0                  0


John Brewer            1998    115,500    14,020          3,600    60,000 (1)         7,846 (2)
Vice President of
Operations             1997    109,273    30,946          3,600        0                  0

                       1996     82,500         0          2,100        0              5,787 (2)


Wayne P. Jones         1998    112,291    14,026          3,600    50,000 (1)             0
Vice President of
Marketing and          1997     29,167     5,775          1,500        0             18,978 (2)
Development
                       1996          0         0              0        0                  0
<FN>

(1) Granted subsequent to December 31, 1998, under the Tumbleweed, Inc. 1998 
    Stock Option and Incentive Compensation Plan.
(2) Represents relocation expenses.
</FN>
</TABLE>

INCENTIVE COMPENSATION PLAN. To ensure that an important portion of compensation
is based on performance,  the annual bonus payable to the executive  officers of
the Company is based upon the attainment of targeted performance measurements by
the Company.  All other salaried employees of the Company other than store-level
managers   participate  in  the  bonus  plan.  Each  executive  earns  incentive
compensation  if the  Company  achieves  its stated  performance  goals.  At the
beginning of each fiscal year, the  Compensation  Committee  establishes a bonus
amount expressed as a percentage of salary for each  participant.  The amount of
the bonus earned by a participating  executive is based upon the extent to which
the Company attains or exceeds  attainment of its specified  performance  goals.
The  compensation  committee  has the right to make  adjustments  to the plan as
deemed necessary.

For executive  officers other than Mr. Butorac and Mr.  Mulrooney,  payments are
determined and made to participants on a quarterly  basis. Mr. Butorac's and Mr.
Mulrooney's bonus compensation is calculated and accrued on a quarterly basis in
a similar manner,  however, the incentive  compensation payments is not made for
the year  until  after the fourth  quarter is  determined  and  approved  by the
compensation  committee. In addition, the Company must reach at least 70% of the
net income goal for the entire year in order for Mr.  Butorac and Mr.  Mulrooney
to automatically receive any bonus payment.

                                     - 25 -

<PAGE>
EMPLOYMENT AGREEMENTS.  The Company entered into employment agreements with John
A.  Butorac,  Jr.  and  James M.  Mulrooney  on June 23,  1998  (effective  upon
consummation of the Reorganization), which entitle Mr. Butorac and Mr. Mulrooney
to receive a base  salary of  $200,000  and  $175,000,  respectively,  and bonus
compensation based upon the Incentive  Compensation Plan formula. See "Incentive
Compensation  Plan" above. The agreements have an initial term of five years and
extend automatically each year for one additional year unless both parties agree
to  termination  prior to the end of any term.  If the  Company  terminates  the
employment  agreement  without cause, the executive would be entitled to receive
continued  salary and  benefits  for a twelve month  period.  If the  employment
agreement is terminated by the Company for cause,  the executive is not entitled
to any compensation  following the date of such  termination  other than the pro
rata amount of his then  current  base salary and bonuses  earned  through  such
date. Upon any termination of employment, the terminated executive is prohibited
from competing with the Company for two years. Under the terms of the employment
agreements,  both Mr. Butorac and Mr.  Mulrooney report directly to the Board of
Directors  with Mr.  Butorac  having  primary  responsibility  for  operational,
marketing,  training,  franchising,  purchasing and  commissary  matters and Mr.
Mulrooney  having primary  responsibility  for financial,  banking,  accounting,
legal and construction matters.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

There were no options granted to any officers or employees of the Company during
the fiscal year ended December 31, 1998. No separate stock  appreciation  rights
have ever been granted by the Company.

STOCK  INCENTIVE  PLAN.  The  Tumbleweed,  Inc.  1998 Stock Option and Incentive
Compensation Plan (the "Plan") provides for the granting of any of the following
awards to eligible  employees or directors of the Company and its  subsidiaries:
(i) employee stock options,  including both "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code ("ISOs") and options that do
not qualify as ISOs; (ii) automatic grants of options to nonemployee  directors;
(iii) stock appreciation rights; and (iv) restricted stock and performance stock
awards. The Plan is intended to provide incentives and rewards for employees and
directors to support the  implementation  of the Company's  business plan and to
align the  interests  of employees  and  directors  with those of the  Company's
stockholders.

The Plan will be administered by the  Compensation  Committee.  The Committee is
comprised of two or more independent directors,  who cannot be current employees
of the Company and who do not receive any  remuneration  from the Company in any
capacity  other than as a director.  The  Committee is  authorized,  among other
things,  to  determine  employees to whom grants of awards will be made and take
such action as it deems  necessary or advisable  for the  administration  of the
Plan. The Committee may also construe,  interpret and correct defects, omissions
and inconsistencies in the Plan. The Committee has no discretion with respect to
the terms and  conditions of the options  granted  automatically  to nonemployee
directors under the Plan. See "Director Compensation" below.

The Common Stock subject to the Plan will be authorized  but unissued  shares or
previously  acquired shares.  The number of shares of Common Stock available for
grant of awards under the Plan equals the greater of 635,000  shares,  or 10% of
the number of shares of Common Stock  outstanding  from time to time,  including
100,000  shares  reserved  for  options  automatically  granted  to  nonemployee
directors under the Plan.

As  of  February  15,  1999,  the  Company   granted  options  for  a  total  of
approximately  340,000  shares  to  eligible  employees  and  60,000  shares  to
nonemployee directors. None of the initial grants of options were awarded to Mr.
Butorac or Mr.  Mulrooney.  The  exercise  price of the  options is equal to the
initial public offering price. The exercise price of future grants will be equal
to the market price as of the date of such grant.  Stock  options  granted under
the  Plan  will be  exercisable  for a term  of not  more  than  ten  years,  as
determined by the Committee.  The option grants will become  exercisable for 33%
of the number of shares  subject to the option on each of the first,  second and
third anniversaries of the date of grant.

AGGREGATED OPTION EXERCISES AND YEAR-END VALUE TABLE.

There  were no  exercises  during  1998 by any  officers  of the  Company of any
options to purchase  shares issued by the Company  under the Plan,  nor were any
options issued or outstanding as of December 31, 1998.

DIRECTOR  COMPENSATION.  Nonemployee  directors receive a fee of $1,000 for each
Board of Directors  meeting  attended and receive  $1,000 per committee  meeting
attended  unless  such  committee  meeting  is on the same  day as the  Board of
Directors  meeting.  Committee  chairmen  receive an additional  $1,000 for each
committee meeting. In addition, nonemployee directors will receive annual grants
of options to  purchase  shares of Common  Stock under the Plan.  Subsequent  to
December 31, 1998, each nonemployee director received options to purchase 10,000
shares of common  stock at an  exercise  price of $10 per share (the IPO price).
Each new nonemployee  director will be granted options to purchase 10,000 shares
of Common

                                     - 26 -

<PAGE>



Stock  on the  date of his or her  first  election.  The  Company's  nonemployee
directors  will  automatically  be granted  options to purchase  1,000 shares of
Common Stock each year the director continues to serve on the Board. All options
granted to  directors  are to be granted at the fair market  value of the Common
Stock at the  grant  date and will  become  exercisable  in three  equal  annual
installments,  beginning on the first  anniversary  of the date of grant.  As of
December 31, 1998, there were no options issued or outstanding to any Directors.

LIMITATIONS  OF  LIABILITY  AND  INDEMNIFICATION  MATTERS.  As  permitted by the
Delaware General Corporation Law, the Company has included in its Certificate of
Incorporation  a provision to eliminate the personal  liability of its directors
for monetary  damages for breach or alleged breach of their fiduciary  duties as
directors,  subject to certain  exceptions.  In  addition,  the  Certificate  of
Incorporation  provides  that the Company is required to indemnify  its officers
and directors  under certain  circumstances,  including those  circumstances  in
which  indemnification  would  otherwise  be  discretionary,  and the Company is
required  to advance  expenses  to its  officers  and  directors  as incurred in
connection with proceedings  against them for which they may be indemnified.  At
present,  the Company is not aware of any pending or  threatened  litigation  or
proceeding  involving a director,  officer,  employee or agent of the Company in
which indemnification would be required or permitted.  The Company believes that
its charter  provisions are necessary to attract and retain qualified persons as
directors and officers.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table presents the number of shares of Common Stock  beneficially
owned as of March 12, 1999, by (i) each person we know to beneficially own 5% or
more of the  outstanding  shares of Common  Stock,  (ii) each of our  directors,
(iii) each of our executive officers named in the Summary Compensation Table and
(iv) all of our officers and directors as a group.  A person  beneficially  owns
shares if the person has or shares  voting or  investment  power with respect to
the shares or has the right to  acquire  such  power  within 60 days.  Except as
otherwise  noted,  each person named in the table has sole voting and investment
power with respect to the listed number of shares.


                                                       Amount and Nature
                                                     of Beneficial Ownership
                                                     -----------------------
                     Name and Address of             Number         Percentage
                      Beneficial Owner             of Shares         of Class
                      ----------------             ---------         --------
Non-Directors        TW Funding, LLC               400,000 (1)         6.8 %
                     1900 Mellwood Avenue
                     Louisville, KY 40206

                     Gerald A. Mansbach (2)        498,002 (1)         8.5
                     Mansbach Metal Co.
                     1900 Front Street
                     Ashland, KY 41101

Directors and        John A. Butorac, Jr.        1,716,439 (1)(3)     29.2
Executive            1900 Mellwood Avenue
Officers             Louisville, KY 40206

                     James M. Mulrooney          1,285,574 (1)        21.9
                     1900 Mellwood Avenue
                     Louisville, KY 40206

                     George Keller                 618,501 (5)        10.5
                     4201 Paoli Pike
                     Floyd Knobs, IN 47119

                     David M. Roth                 778,427 (1)(4)     13.2
                     200 South Fifth Street
                     Suite 300S
                     Louisville, KY 40202

                     Minx M. Auerbach              151,420 (6)         2.6


                                     - 27 -

<PAGE>




                     Lewis Bass                     70,001 (8)         1.2

                     W. Roger Drury                 23,868               *

                     Terrance Smith                  3,001               *

                     John Brewer                     4,010 (7)           *

                     Wayne Jones                    20,500 (10)          *
                    
                     All current directors and
                     executive officers as
                     a group (13 persons)        3,848,941 (9)       65.4
----------------
* Indicates less than 1%

(1)     As managers of TW Funding,  LLC, Messrs.  Butorac,  Mulrooney,  Roth and
        Mansbach  share  voting  power with  respect  to the  shares  held by TW
        Funding,  LLC. All of these  shares have been  included in each of their
        respective totals.

(2)     Mr. Mansbach is the brother of Ms. Auerbach, who is a director.

(3)     Mr. Butorac and his wife hold 934,721 shares jointly. Mr. Butorac's wife
        also holds 400,595 of the listed shares as trustee for their children.

(4)     Mr.Roth's wife holds 147,673 of the listed shares. Mr.Roth's shares also
        include 187,736 shares held or beneficially owned by entities controlled
        by members of his family.

(5)     Includes 3,000 shares held by Mr. Keller's wife as trustee under  trusts
        for Mr. Keller and his children, and 1,000 shares  held by Mr. Keller as
        trustee for a personal trust.

(6)     Ms.Auerbach holds 151,419 of these shares as trustee for a family trust.

(7)     Includes 4,000 shares  held by TW Funding,  LLC allocated to  Mr. Brewer
        based on his relative ownership interest in TW Funding, LLC.

(8)     Includes 70,000 shares held in a family trust.

(9)     Shares  held by TW  Funding, LLC  have been included  once in the shares
        beneficially owned by the group.

(10)    Includes 20,000 shares  held by TW Funding, LLC  allocated to  Mr. Jones
        based on his relative ownership interest in TW funding, LLC.

TW FUNDING, LLC

The members of TW Funding,  LLC have guaranteed a loan incurred by TW Funding to
finance its  purchase of 400,000  shares of Common  Stock in the initial  public
offering in January  1999.  The shares held by TW Funding,  as well as 1,900,000
shares of Common Stock of which 1,800,000 shares are  beneficially  owned by the
individuals listed below who are directors of the Company,  have been pledged to
secure the loan and their guarantee.  The loan is due on the earlier to occur of
the  date 30 days  after  the sale of any of the  assets  of TW  Funding,  which
consist  entirely of 400,000 shares of Common Stock,  or December 31, 2000. This
pledge totals 2,300,000 shares of Common Stock.


                         Shareholder       Shares Pledged
                     ------------------       ---------
                     John A. Butorac           800,000
                     James M. Mulrooney        800,000
                     David M. Roth             200,000
                                               -------
                           Total             1,800,000


                                     - 28 -

<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Although all of the transactions  described below necessarily  involve conflicts
of interest,  management believes that all of the transactions were entered into
on terms comparable to those obtainable from unrelated third parties, based on a
comparison of terms and  conditions  available  from third  parties.  In August,
1998,  the  Company's  Board  of  Directors  adopted  a policy  that all  future
transactions  between  the  Company  and  its  officers,  directors,   principal
shareholders  and  affiliates  must be approved by the Audit  Committee and by a
majority of the independent members of the Board of Directors who do not have an
interest in the transaction, and generally must be on terms no less favorable to
the Company than those obtainable from unrelated third parties.

LEASES WITH RELATED PARTIES

WEST BROAD DEVELOPMENT, LLC. Prior to September 30, 1998, the Company leased the
facilities  and related real  property for its West Broad Street  restaurant  in
Columbus, Ohio from West Broad Development,  LLC, a limited liability company in
which David M. Roth, a director of the Company, owns a substantial interest. The
restaurant  opened in April 1998.  Under the terms of the lease, the Company was
obligated to renovate restaurant  facilities as specified in approved plans, and
the lessor was obligated to reimburse the Company for construction  expenses not
to exceed  $400,000.  The  lease  provided  for  annual  base rent  equal to the
interest on funds borrowed by the lessor to fund construction  costs from a bank
or  commercial  lending  institution  plus 1%  until  the  restaurant  commences
operations and $10,000 per month thereafter plus 5% of gross sales to the extent
such percentage rent exceeds the base rent. The lease was for a twenty-year term
with  options to renew for two  additional  five-year  terms.  The  Company  was
reimbursed for construction  expenses totaling $400,000 under the lease and paid
rent totaling $57,200 during 1998.

On  September  30, 1998,  the Company  entered into an agreement to purchase the
land and building, including improvements from West Broad Development,  LLC. The
purchase  was  made  at  fair  market  value  as  determined  by an  independent
appraisal.  The Company,  at the time of purchase,  entered into a  modification
agreement  with a local bank to modify an existing  promissory  note on the land
and  building.  In  modifying  the  promissory  note the  principal  amount  was
increased to $1,000,000. At the time of the purchase, the Company terminated its
capital lease obligation to West Broad Development, LLC.

KELLER LLC. The Company  leases the facilities and related real property for its
Springdale,  Ohio  restaurant  from Keller LLC, a limited  liability  company in
which George Keller, a director of the Company,  owns a substantial interest. In
April 1995,  Tumbleweed,  LLC  assigned all of its rights and  obligations  with
respect to the site for the Springdale restaurant, to Keller LLC in exchange for
Keller LLC  agreeing  to  construct  a  restaurant  facility to be leased to the
Company.  The restaurant  opened in November 1995. The lease required Keller LLC
to invest $1,625,000, and the Company to pay annual base rent of $186,689 for an
initial  term of eleven years  through  2006.  In addition,  the Company pays an
amount equal to 5% of the excess,  if any, of the  Company's  gross sales during
such year, over $2,100,000. The lease is for an eleven-year term with options to
renew for four  additional  five-year  terms.  The  Company  paid rent  totaling
$186,689 during 1998.

DOUGLASS  VENTURES.  The Company  subleases  the  facilities  and  related  real
property for its Bowling  Green,  Kentucky  restaurant  from Blue Door - Bowling
Green Joint Venture ("Blue Door") on terms substantially similar to the terms on
which  Blue Door  leases the  facilities  and  related  real  property  from two
co-lessors. The co-lessors are Douglass Ventures, a Kentucky general partnership
and  stockholder  of the  Company  in which  David M. Roth,  a  director  of the
Company,  is a general  partner,  and an unrelated third party. The lease was in
effect at the time the Company  acquired the  Tumbleweed  assets in January 1995
and the  restaurant  opened in July  1995.  Under the  terms of the  lease,  the
Company  pays annual base rent of $104,000  for ten years which will be adjusted
in years  eleven  and  sixteen  for cost of living  increases.  The  lease  also
provides  for  additional  rent equal to the amount,  if any, by which 6% of the
Company's  gross sales exceeds the annual base rent payable.  The lease is for a
twenty-year  term with options to renew by written  agreement.  The Company paid
rent totaling $52,000 during 1998.

TW-DIXIEBASH,  LLC. The Company  leases the facilities and related real property
for its Bardstown Road and Valley Station restaurants from TW-DixieBash,  LLC, a
limited  liability  company  in which  David M.  Roth  and  James M.  Mulrooney,
directors of the Company,  own  substantial  interests.  The Bardstown  Road and
Valley   Station   restaurants   opened  in  November  1997  and  January  1998,
respectively.  Under  the  terms  of  the  Bardstown  Road  and  Valley  Station
subleases,  the Company has built the  restaurant  facilities  as  specified  in
approved  plans,  and the Lessor was  obligated  to  reimburse  the  Company for
construction  expenses not to exceed  $700,000 and $500,000,  respectively.  The
Bardstown Road sublease provides for the assumption of all rent under the ground
lease  agreement  with  Bashford  Manor Mall Joint  Venture.  The sublease  also
provided  for  interest  to be paid  during  the  construction  period  based on
TW-DixieBash's  investment until the restaurant  commenced operations and $7,000
per month thereafter plus 30% of the restaurant's positive net cash flow. The

                                     - 29 -

<PAGE>
lease is for a  twenty-year  term  with no  option to  renew.  The  Company  was
reimbursed for construction  expenses totaling $700,000 under the Bardstown Road
lease and paid rent totaling  $197,500 during 1998. The Valley Station  sublease
provides for the  assumption  of all rent under the Holiday  Station  Associates
Limited  Lease.  The sublease  also  provided for interest to be paid during the
construction  period based on  TW-DixieBash's  investment  until the  restaurant
commenced  operations  and  $5,000  per  month  thereafter,   plus  30%  of  the
restaurant's positive net cash flow. The sublease is for a twenty-year term with
options  to  renew  for  three  additional  five-year  terms.  The  Company  was
reimbursed for construction  expenses totaling $145,000 in 1998 under the Valley
Station sublease. The Company paid rent payments totaling $97,500 during 1998.

OTHER RELATED PARTY TRANSACTIONS

TUMBLEWEED  INTERNATIONAL,  LLC. In August  1997,  the Company  entered into the
International   Agreement  with  Tumbleweed   International  LLC,  a  restaurant
developer based in Brussels, Belgium. The International Agreement grants certain
licensing  and  franchising  rights  to  International  for the  development  of
Tumbleweed    restaurants    outside   of   the    Western    Hemisphere.    See
"Business--International   Licensing  Agreement."  International  is  a  limited
liability  company  owned  by  three  corporations  controlled  by  a  group  of
stockholders  including  Terrance A. Smith,  David M. Roth,  Minx  Auerbach  and
George Keller,  who are directors of the Company.  In 1998,  International  paid
$7,500 in fees to the Company under the International Agreement.

T.M. RIDERS,  LLC. During 1996, the Company sold certain assets of its four food
court restaurants and it's 50% interest in a joint venture which operates a food
court to T.M.  Riders,  LLC (T.M.  Riders).  In exchange for essentially all the
assets of the food  courts and its  interest in the joint  venture,  the Company
received  $100,000 in cash and a note  receivable  for  $500,000,  due in annual
installments  of $100,000  plus  interest  at the rate of 8% per year  beginning
December  1, 1997 over five  years.  The gain on the sale of the food courts and
interest  in the joint  venture of  approximately  $71,300 is  included in other
revenues in 1996.

In  February  1997,  the  Company  invested a nominal  amount in T.M.  Riders in
exchange for a 9.5% interest of the common membership units of T.M. Riders.  The
Managing  Directors  of TM  Riders  include  John  A.  Butorac,  Jr.,  James  M.
Mulrooney,  David M. Roth and George R. Keller, all of whom are directors of the
Company.  After ten stores have opened,  the Company will receive fees from T.M.
Riders based on store openings and royalty fees base on T.M. Riders' system-wide
sales. In September 1998, the Company relinquished its interest in T.M. Riders.

In  December  1998,  the  Company  assigned  the T.M.  Riders'  promissory  note
receivable,  which had an  outstanding  principal  balance of $400,000 as of the
date of assignment,  to the Common Members of the Company, which include Messrs.
Butorac,  Mulrooney and Roth, who are Directors of the Company. In consideration
for the  assignment,  each Common Member assigned to the Company a proportionate
amount  of  their  respective  Common  Member  interests  in the  Company.  This
transaction  has been accounted for as a distribution  to the Common Members and
the number of shares of common  stock  these  members  received  was  reduced by
40,000 shares in the merger of the Company into Tumbleweed, Inc..

In 1998,  the Company  recorded  interest  payments  from T.M.  Riders  totaling
$32,000. The Company also provides accounting services for this entity for which
fees are charged. Such accounting fees and royalties totaled $31,300 in 1998.

TW-TENNESSEE,  LLC. In February 1997,  the Company  invested a nominal amount to
acquire a 9.5% common member  interest in  TW-Tennessee,  LLC  ("TW-Tennessee"),
which was organized to develop and operate  Tumbleweed full service  restaurants
as a franchisee of the Company.  David M. Roth, a director of the Company,  also
owns a membership  interest in TW-Tennessee.  On September 30, 1998, the Company
sold its interest in TW-Tennessee to certain members of the Company for $25,000.

The Company  guaranteed,  on a pro-rata  basis,  renewals of certain  guaranteed
indebtedness and any replacement indebtedness of TW-Tennessee, to the extent and
in the amounts not to exceed the amounts guaranteed as of September 30, 1998. As
of  December  31,  1998,  the  Company  has  guaranteed   certain   TW-Tennessee
obligations  as follows:  a) up to  $1,200,000  under a bank line of credit,  b)
approximately  $1,700,000 of a lease financing agreement and c) equipment leases
with  a  bank  totaling   approximately  $983,400  jointly  and  severally  with
TW-Tennessee common members. In 1998, TW- Tennessee paid royalties and franchise
fees of $223,300  and other fees of $75,000 to the Company  under the  franchise
agreeement.

TW-INDIANA,  LLC.  David M. Roth,  a  director  of the  Company,  is a member in
TW-Indiana,  LLC,  which in April 1998  acquired  the  franchise  rights to five
full-service  Tumbleweed restaurants in Indiana and Kentucky from a third party.
Franchise  royalties  recorded  by the  Company in  relation to this entity were
approximately $242,500 in 1998.

                                     - 30 -

<PAGE>




OTHER  TRANSACTIONS.  David M. Roth is a  principal  in the law firm Roth  Foley
Bryant & Cooper,  PLLC, which provided legal services to the Company during 1998
and may be expected to render  such  services to the Company in the future.  The
Company paid $187,975 in fees for legal services rendered by Roth Foley Bryant &
Cooper, PLLC for 1998.

                                           ITEM IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements: The financial statements of Tumbleweed,
        Inc. and the predecessor, Tumbleweed, LLC are included after this
        Item 14.

    (2) Financial Statement Schedules: Not Applicable

    (3) Listing of Exhibits:

    EXHIBIT
    NUMBER    DESCRIPTION OF DOCUMENT
    -------   -----------------------
    2         Agreement and Plan of Merger, dated as of June 23, 1998, between
              Tumbleweed, LLC and Registrant**

    3.1       Certificate of Incorporation of Tumbleweed, Inc., as amended**

    3.2       Bylaws of Registrant*

    10.1      Revolving Credit Loan Agreement, dated January 24, 1995, between
              Bank One, Kentucky, N.A. (f/k/a Liberty National Bank & Trust
              Company of Kentucky) and Registrant*

    10.2      Revolving  Line of Credit  Note,  dated  August  8,  1996,
              between Tumbleweed, LLC and National City Bank of Kentucky
              and related Loan Agreement*

    10.3      Master International  License Agreement,  dated August 29,
              1997, between Tumbleweed International LLC and Tumbleweed, LLC*

    10.4      Employment Agreement between John A. Butorac, Jr. and Tumbleweed,
              Inc.*

    10.5      Employment Agreement between James M. Mulrooney and Tumbleweed,
              Inc.*

    10.6      Lease Agreement, dated August 28, 1997, between West Broad
              Development, LLC and Tumbleweed, LLC*

    10.7      Lease Agreement between Keller LLC and Tumbleweed, LLC*

    10.8      Agreement and Assignment, dated April 20, 1995, between Keller
              LLC and Tumbleweed, LLC*

    10.9      Lease Agreement, dated April 1, 1995, between Douglass Ventures,
              Abfam, Inc. and Blue Door-Bowling Green Joint Venture*

    10.10     Sublease Agreement, dated June 30, 1995, among Douglass Ventures,
              Abfam, Inc.,  Blue Door-Bowling Green Joint Venture and
              Tumbleweed, LLC*

    10.11     Sublease  Agreement,   dated  February  5,  1997,  between
              TW-Dixie Bash, LLC and Tumbleweed, LLC (for Bardstown Road
              restaurant)*

                                     - 31 -

<PAGE>




    10.12     Sublease  Agreement,   dated  February  5,  1997,  between
              TW-Dixie Bash, LLC and Tumbleweed, LLC (for Valley Station
              restaurant)*

    10.13     Asset Purchase  Agreement,  dated October 1, 1996, between
              Tex-Mex To You, LLC and Tumbleweed, LLC*

    10.14     Commitment Letter, dated June 12, 1997, between CNL Fund
              Advisors, Inc. and TW Tennessee, LLC*

    10.15     Tumbleweed, Inc. 1998 Stock Option and Incentive Compensation
              Plan*

    10.16     Form of Standard Franchise Agreement for Tumbleweed, LLC*

    10.17     Articles of Incorporation of Tumbleweed Marketing Fund, Inc.*

    10.18     By-laws of Tumbleweed Marketing Fund, Inc.*

    10.19     Bonus Compensation Plan for Senior Executives*

    27        Financial Data Schedule

    99        Registration Rights Agreement between Tumbleweed, Inc. and
              Tumbleweed, LLC*
--------------

     *      Incorporated by  reference to exhibits of the same number filed with
            Registration No.  333-57931

     **     Incorporated by  reference to exhibits of the same number filed with
            Form 8-A filed by Tumbleweed, Inc. on February 25, 1999.

(b) During the quarter  ended  December 31,  1998,  the Company did not file any
    Reports on Form 8-K.


















                                     - 32 -

<PAGE>




                          INDEX TO FINANCIAL STATEMENTS

                                                                           PAGE

Tumbleweed, Inc.

        Report of Independent Auditors...................................- F-1 -

        Financial Statements

               Balance Sheet as of December 31, 1998.....................- F-2 -

               Notes to the Balance Sheet................................- F-3 -

Tumbleweed, LLC

        Report of Independent Auditors...................................- F-5 -

        Financial Statements

               Statements of Income for the years ended December 31,
                    1996, 1997 and 1998..................................- F-6 -

               Balance Sheets as of December 31, 1997 and 1998...........- F-7 -

               Statements of Redeemable  Members'  Equity,  Members'
                    Equity and Retained  Earnings  (Deficit) for the
                    years ended December 31, 1996, 1997 and 1998.........- F-9 -

               Statements of Cash Flows for the years ended December
                    31, 1996, 1997 and 1998.............................- F-10 -

               Notes to the Financial Statements........................- F-11 -



<PAGE>



                         Report of Independent Auditors


The Board of Directors and Stockholders
Tumbleweed, Inc.

We have  audited  the  accompanying  balance  sheet of  Tumbleweed,  Inc.  as of
December 31, 1998.  This balance  sheet is the  responsibility  of the Company's
management.  Our  responsibility  is to express an opinion on this balance sheet
based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material  misstatement.  An
audit includes examining,  on a test basis,  evidence supporting the amounts and
disclosures  in  the  balance  sheet.  An  audit  also  includes  assessing  the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation.  We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.

In our opinion,  the balance sheet  referred to above  presents  fairly,  in all
material respects, the financial position of Tumbleweed, Inc. as of December 31,
1998, in conformity with generally accepted accounting principles.


/s/ Ernst & Young, LLP

Louisville, Kentucky
March 1, 1999
















                                            F-1


<PAGE>









<TABLE>

                                Tumbleweed, Inc.

                                  Balance Sheet

                                December 31, 1998

<CAPTION>

Assets
<S>                                                <C>               
     Cash                                          $                1
                                                   ------------------
Total assets                                       $                1
                                                   ==================


Stockholders' equity
     Preferred stock, $.01 par value,
          1,000,000 shares authorized;
          no shares issued and outstanding         $                -
     Common stock, $.01 par value,
          16,500,000 shares authorized;
          13 shares issued and outstanding                          1
     Paid-in capital                                              129
     Retained earnings (deficit)                                 (129)
                                                    -----------------
Total stockholders' equity                         $                1
                                                   ==================
</TABLE>


See accompanying notes.











                                            F-2


<PAGE>








                                Tumbleweed, Inc.

                           Notes to the Balance Sheet

                                December 31, 1998


1. DESCRIPTION OF BUSINESS

Tumbleweed,  Inc.  (the  Company)  was  legally  formed  in  December  1997  and
capitalized  on June 23, 1998 with the  issuance of 13 shares of Company  common
stock at $10 per share.  Effective  January 1, 1999, and as a result of the sale
of  776,543  shares  of  common  stock  in an  initial  public  offering  (IPO),
Tumbleweed,  LLC (Tumbleweed) was merged into the Company.  The interests of the
current members of Tumbleweed were converted into a total of 5,105,000 shares of
Company common stock.  As of December 31, 1998,  Tumbleweed owns and operates 25
restaurants  in Kentucky,  Indiana and Ohio,  and  franchises  an  additional 13
restaurants  in Indiana,  Illinois,  Tennessee and  Wisconsin.  Tumbleweed  also
licenses five restaurants in Germany, Saudi Arabia and Jordan.

2. BASIS OF PRESENTATION

The  Company's  assets at December 31, 1998 consist  solely of cash  received in
connection with the capitalization of the Company. The Company has not conducted
any  operations  and all activities to date have been related to the IPO and the
merger with  Tumbleweed.  During 1998, the Company opened a bank account for the
cash  received  in  connection  with the  capitalization  and,  as a  result  of
maintaining the cash account, the Company incurred expenses totaling $129 during
1998.  All  expenditures  related to the IPO have been  funded and  recorded  by
Tumbleweed.  Accordingly,  statements of  operations,  changes in  stockholders'
equity and cash flows would not  provide  meaningful  information  and have been
omitted.

3. STOCK INCENTIVE PLAN

In June 1998, the Company adopted a Stock Option and Incentive Compensation Plan
(the "Plan").  The Plan provides for the granting of any of the following awards
to eligible  employees  or directors  of the Company and its  subsidiaries:  (i)
employee stock  options,  including both  "incentive  stock options"  within the
meaning of Section 422 of the Internal Revenue Code ("ISOs") and options that do
not qualify as ISOs; (ii) automatic grants of options to nonemployee  directors;
(iii) stock appreciation rights; and (iv) restricted stock and performance stock
awards. The Plan is intended to

                                            F-3


<PAGE>


                                Tumbleweed, Inc.

                     Notes to the Balance Sheet (continued)

3.  STOCK INCENTIVE PLAN (Continued)

provide  incentives  and  rewards for  employees  and  directors  to support the
implementation  of the  Company's  business  plan and to align the  interests of
employees and directors with those of the Company's stockholders.  There were no
awards issued or outstanding under the Plan as of December 31, 1998.

The Plan is administered by the Compensation Committee of the Company's Board of
Directors.  The Committee is comprised of three independent  directors,  who are
not current  employees  of the  Company and who do not receive any  remuneration
from the Company in any  capacity  other than as a director.  The  Committee  is
authorized,  among other things, to determine employees to whom grants of awards
will be made and take such action as it deems  necessary  or  advisable  for the
administration of the Plan.

The Common Stock subject to the Plan will be authorized  but unissued  shares or
previously  acquired shares.  The number of shares of Common Stock available for
grant of awards under the Plan equals the greater of 635,000  shares,  or 10% of
the number of shares of Common Stock  outstanding  from time to time,  including
100,000  shares  reserved  for  options  automatically  granted  to  nonemployee
directors under the Plan.

As  of  February  15,  1999,  the  Company   granted  options  for  a  total  of
approximately  340,000  shares  to  eligible  employees  and  60,000  shares  to
nonemployee directors. The exercise price of the options is equal to the initial
public offering price of $10 per share. The exercise price of future grants will
be equal to the  market  price as of the  dates of such  grants.  Stock  options
granted  under  the Plan  will be  exercisable  for a term of not more  than ten
years, as determined by the Committee. The option grants will become exercisable
for 33% of the  number of shares  subject  to the  option on each of the  first,
second  and third  anniversaries  of the date of grant and expire ten years from
the date of grant.

4. SUBSEQUENT EVENTS

In February 1999, the Company entered into a secured mortgage  arrangement for a
restaurant location in an amount totaling approximately $1,060,000.

                                            F-4


<PAGE>



                         Report of Independent Auditors

The Members
Tumbleweed, LLC

We have  audited  the  accompanying  balance  sheets  of  Tumbleweed,  LLC as of
December 31, 1997 and 1998,  and the related  statements  of income,  redeemable
members= equity,  members= equity and retained earnings (deficit) and cash flows
for each of three years in the period ended December 31, 1998.  These  financial
statements   are  the   responsibility   of  the   Company=s   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Tumbleweed, LLC at December 31,
1997 and 1998,  and the results of its operations and its cash flows for each of
the three years in the period  ended  December  31,  1998,  in  conformity  with
generally accepted accounting principles.


/s/ Ernst & Young, LLP

Louisville, Kentucky
March 1, 1999

                                     - F5 -

<PAGE>

<TABLE>


                                               Tumbleweed, LLC

                                            Statements of Income


<CAPTION>
                                                                        Years ended December 31
                                                                  1996           1997            1998
                                                             --------------------------------------------

Revenues:
<S>                                                          <C>             <C>             <C>         
   Restaurant sales                                          $ 23,284,007    $ 27,891,128    $ 40,490,933
   Commissary sales                                             1,795,529       1,007,011       1,041,266
   Franchise fees and royalties                                   474,870         563,056         770,806
   Other revenues                                                 177,317         365,054         504,639
                                                             -------------   ------------     ------------
                                                                                             
Total revenues                                                 25,731,723      29,826,249      42,807,644

Operating expenses:
   Restaurant cost of sales                                     7,103,357       8,191,928      11,788,578
   Commissary cost of sales                                     1,649,502         887,793         905,814
   Operating expenses                                          12,386,119      14,035,693      20,881,212
   Selling, general and administrative expenses                 2,250,827       3,051,740       4,150,303
   Preopening amortization                                        405,502         544,723         816,604
   Depreciation and amortization                                1,231,290         971,863       1,442,011
                                                             -------------   ------------    ------------
                                                                                             
Total operating expenses                                       25,026,597      27,683,740      39,984,522
                                                             -------------   ------------    ------------
                                                                                             

Income from operations                                            705,126       2,142,509       2,823,122

Other income (expense):
   Interest income                                                 18,313          62,120          61,759
   Interest expense                                              (222,123)       (490,718)       (931,471)
                                                             -------------   ------------    ------------ 
                                                                                             
Total other expense                                              (203,810)       (428,598)       (869,712)
                                                             -------------   ------------    ------------ 
                                                                                             


Net income                                                   $    501,316    $  1,713,911    $  1,953,410
                                                             ============    ============    ============
                                                                                             


Pro forma income data (unaudited):
   Net income as reported                                    $    501,316    $  1,713,911    $  1,953,410
   Pro forma income taxes                                        (180,474)       (617,008)       (703,228)
                                                             ------------    ------------    ------------ 
                                                                                            

   Pro forma net income                                      $    320,842    $  1,096,903    $  1,250,182
                                                             ============    ============    ============
                                                                                            

   Pro forma net income per share-basic and diluted          $       0.06    $       0.21    $       0.24
                                                             ============    ============    ============
                                                                                            

   Shares used in computing pro forma net income per share      5,105,000       5,105,000       5,105,000
                                                             ============    ============    ============
                                                                                            
</TABLE>

See accompanying notes.


                                       F-6

<PAGE>
<TABLE>

                                 Tumbleweed, LLC
                                 Balance Sheets
<CAPTION>

                                                                                            Pro forma
                                                        December 31                        December 31
                                                    1997           1998                        1998
                                               -------------------------------            ---------------
                                                                                           (Unaudited)
Assets
Current assets:
<S>                                               <C>             <C>                        <C>        
   Cash and cash equivalents                      $ 1,228,867     $ 1,898,973                $ 1,898,973
   Accounts receivable                                346,700         433,872                    433,872
   Note receivable from affiliate                     100,000               -                          -
   Inventories                                        825,029       1,333,591                  1,333,591
   Deferred preopening expenses                       267,100         524,669                    524,669
   Prepaid expenses                                   282,590         330,439                    330,439
                                                  ----------------------------               ------------
Total current assets                                3,050,286       4,521,544                  4,521,544

Property and equipment, net                        19,330,132      24,920,797                 24,920,797

Note receivable from affiliate                        300,000               -                          -

Goodwill, net of accumulated amortization of
   $329,442 in 1997 and $440,242 in 1998            2,944,504       2,833,704                  2,833,704

Other assets                                          443,559       1,404,861                  1,404,861


















                                                  ----------------------------              -------------
Total assets                                     $ 26,068,481    $ 33,680,906               $ 33,680,906
                                                  ============================              =============

</TABLE>

See accompanying notes.










                                       F-7
<PAGE>
<TABLE>


<CAPTION>

                                                                                       Pro forma
                                                       December 31                    December 31
                                                   1997            1998                  1998
                                              -------------------------------       ----------------
                                                                                      (Unaudited)
Liabilities, Redeemable Members' Equity,
   Members' Equity and Retained Earnings (Deficit)
Current liabilities:
<S>                                           <C>                <C>                <C>        
   Short-term borrowings                      $             -    $ 6,990,348        $     6,990,348
   Accounts payable                                 1,174,645      1,781,418              1,781,418
   Accrued liabilities                                890,255      1,873,651              1,873,651
   Deferred income taxes                                    -              -                467,420
   Current maturities on long-term
     debt and capital leases                          509,779        895,310                895,310
                                              -------------------------------       ----------------
Total current liabilities                           2,574,679     11,540,727             12,008,147

Long-term debt, less current maturities             5,750,841      9,180,358              9,180,358
Capital lease obligations, less current
  maturities                                        2,280,964      3,287,296              3,287,296
Deferred income taxes                                       -              -                172,203
Other liabilities                                     118,584         94,838                 94,838
                                              -------------------------------       ----------------
Total long-term liabilities                         8,150,389     12,562,492             12,734,695
                                              -------------------------------       ----------------

Total liabilities                                  10,725,068     24,103,219             24,742,842

Redeemable members' equity                         23,419,738     18,924,688                      -

Members' equity                                         6,959        354,459                      -

Retained earnings (deficit)                        (8,083,284)    (9,701,460)                     -

Pro forma stockholders' equity:
   Preferred stock, $.01 par value, 1,000,000
     shares authorized; no shares issued
     and outstanding
   Common stock, $.01 par value,16,500,000
     shares authorized; 5,105,000 shares
     issued and outstanding                                                                  51,050
   Paid-in capital                                                                        8,887,014
                                              -------------------------------       ----------------
     Total pro forma stockholders' equity                   -              -              8,938,064
                                              -------------------------------       ----------------

Total liabilities, redeemable members'
  equity, members' equity and retained
  earnings (deficit)                          $     26,068,481   $33,680,906        $    33,680,906
                                              ===============================       ================

</TABLE>

See accompanying notes.










                                                
                                       F-8
<PAGE>
<TABLE>



                                                      Tumbleweed, LLC

                    Statements of Redeemable Members' Equity, Members' Equity and Retained Earnings (Deficit)

                                         Years ended December 31, 1996, 1997 and 1998

                                                                                                    
                                                    
<CAPTION>
                                                    Redeemable       Members' Equity (Deficiency)           
                                                     Members     ------------------------------------------     Retained
                                                  Equity-Class A    Common      Class B   Class C               Earnings
                                                     Members        Members     Members   Member     Total      (Deficit)
                                                  --------------------------------------------------------------------------
                                                                                                                                  
                                               

<S>                                               <C>            <C>          <C>        <C>       <C>        <C>          
Balance at January 1, 1996                        $  16,413,197  $     6,000  $      459 $    500  $    6,959 $ (2,721,253)
Proceeds from issuance of members' equity               582,962            -           -        -           -            -
Distributions of members' equity                       (628,677)           -           -        -           -            -
Net income                                                    -            -           -        -           -      501,316
Accretion of redeemable members' equity               3,865,037            -           -        -           -   (3,865,037)
                                                  ---------------------------------------------------------------------------
                                                     20,232,519        6,000         459      500       6,959   (6,084,974)
Balance at December 31, 1996
Proceeds from issuance of members' equity                50,958            -           -        -           -            -
Distributions of members' equity                       (575,960)           -           -        -           -            -
Net income                                                    -            -           -        -           -    1,713,911
Accretion of redeemable members' equity               3,712,221            -           -        -           -   (3,712,221)
                                                  ---------------------------------------------------------------------------
Balance at December 31, 1997                         23,419,738        6,000         459      500       6,959   (8,083,284)
Capital contribution                                          -            -     747,500        -     747,500            -
Distributions of members' equity                     (1,076,288)    (400,000)          -        -    (400,000)           -
Assumption of members' line of credit                (6,990,348)           -           -        -           -            -
Net income                                                    -            -           -        -           -    1,953,410
Accretion of redeemable members' equity               3,571,586            -           -        -           -   (3,571,586)
                                                  ---------------------------------------------------------------------------

Balance at December 31, 1998                      $  18,924,688  $  (394,000) $  747,959 $    500  $  354,459 $ (9,701,460)
                                                  ===========================================================================
</TABLE>

See accompanying notes.

                                      F-9
<PAGE>

<TABLE>

                                       Tumbleweed, LLC

                                   Statements of Cash Flows
<CAPTION>

                                                               Years ended December 31
                                                            1996         1997         1998
                                                        ----------------------------------------
Operating activities:
<S>                                                       <C>        <C>           <C>        
   Net income                                             $ 501,316  $ 1,713,911   $ 1,953,410
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Depreciation                                         604,534      829,250     1,285,833
       Amortization                                         626,756      142,613       156,178
       Preopening amortization                              405,502      544,723       816,604
       Gain on sale of food courts                          (71,298)           -             -
       Loss on disposition of property and equipment          2,732       13,499         7,324
       Changes in operating assets and liabilities:
         Accounts receivable                                 87,382      (50,091)      (87,172)
         Inventories                                       (307,900)    (126,573)     (508,562)
         Deferred preopening expenses                      (726,601)    (316,822)   (1,074,173)
         Prepaid expenses                                   (62,063)      19,062       (51,466)
         Other assets                                      (207,125)     (98,042)     (114,550)
         Accounts payable                                   124,097       31,938       104,590
         Accrued liabilities                                 92,647      258,784       983,396
         Other liabilities                                        -       78,584       (23,746)
                                                       ----------------------------------------
Net cash provided by operating activities                 1,069,979    3,040,836     3,447,666

Investing activities:
   Purchases of property and equipment                   (4,712,962)  (4,105,089)   (5,313,575)
   Proceeds from sale of property and equipment           1,635,815            -             -
   Proceeds from sale of food courts, net of
     cash relinquished                                       96,100      100,000             -
                                                       ----------------------------------------
Net cash used in investing activities                    (2,981,047)  (4,005,089)   (5,313,575)

Financing activities:
   Capital contribution from Class B members                      -            -       747,500
   Proceeds from issuance of members' equity                582,962       50,958             -
   Distribution of members' equity                         (628,677)    (575,960)   (1,076,288)
   Proceeds from issuance of long-term debt               5,437,311    3,452,361     5,580,463
   Payments on long-term debt and capital lease
     obligations                                         (4,532,110)  (1,654,463)   (2,329,328)
   Payment of public offering costs                               -     (111,485)     (386,332)
                                                       ----------------------------------------
Net cash provided by financing activities                   859,486    1,161,411     2,536,015
                                                       ----------------------------------------

Net increase (decrease) in cash and cash equivalents     (1,051,582)     197,158       670,106

Cash and cash equivalents at beginning of year            2,083,291    1,031,709     1,228,867
                                                       ----------------------------------------
Cash and cash equivalents at end of year                $ 1,031,709  $ 1,228,867   $ 1,898,973
                                                       ========================================

Supplemental cash flow information:
   Cash paid for interest, net of amount capitalized    $   222,123  $   473,055   $   947,674
                                                       ========================================

Noncash investing and financing activities:
   Property and equipment acquired by seller
     financing and capital lease obligations            $ 1,793,991  $   967,529   $ 1,570,246
                                                       ========================================
   Public offering costs not paid at year-end           $         -  $         -   $   502,183
                                                       ========================================
</TABLE>

See accompanying notes.


                                             F-10


<PAGE>




                                
                                 Tumbleweed, LLC

                          Notes to Financial Statements
                                      



1. ORGANIZATIONAL MATTERS

The Company operates and franchises  Tumbleweed Southwest Mesquite Grill and Bar
full service  restaurants.  Following is a summary of the number of  restaurants
open at the end of each year:

                                                 December 31
                                        1996        1997        1998
                                  ------------------------------------------

Company owned                             15          17          25
Franchised and licensed                    9          12          18
                                         ---          --          --
     Total                                24          29          43
                                          ==          ==          ==

The restaurant  facilities  are located in Kentucky,  Indiana,  Ohio,  Illinois,
Wisconsin, Tennessee and five overseas restaurants are located in Germany, Saudi
Arabia and Jordan.

Effective January 1, 1999, the Company merged into Tumbleweed, Inc. as discussed
below.  Prior to the  merger,  the  Company  and its owners  (Members)  operated
pursuant to an Operating  Agreement  dated  September  19, 1994.  Members of the
Company  consisted  of Common  Members,  Class A Members,  Class B Members and a
Class C Member. Certain Common Members acted as the Managers of the Company and,
acting unanimously, generally had voting control of the Company.

Class A Members of the Company  had,  in  addition to their cash  contributions,
provided  financing which was accounted for as redeemable  members' equity prior
to the  Company's  assumption of the debt on December 31, 1998 (see Note 7). The
capital  accounts  of  the  Common,  Class  B  and  Class  C  Members,  totaling
$(394,000),  $747,959 and $500,  respectively,  at December  31, 1998  represent
these members' equity investment in the Company.

IPO REGISTRATION AND REORGANIZATION

Tumbleweed,  Inc. was incorporated in December 1997 and capitalized in June 1998
in  anticipation  of an initial public  offering in 1998.  Effective  January 1,
1999,  and as a result of the sale of 776,543  shares of common stock at $10 per
share in the IPO, the Company was merged into Tumbleweed,  Inc. The interests of
the current  members of the Company  were  converted  into a total of  5,105,000
shares of Tumbleweed, Inc. common stock.


                                      F-11

<PAGE>
                                Tumbleweed, LLC

                          Notes to Financial Statements
                                 

1. ORGANIZATIONAL MATTERS (CONTINUED)

PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

Pursuant to the rules and regulations of the Securities and Exchange Commission,
the  accompanying  pro forma  balance sheet as of December 31, 1998 reflects the
change  in  capitalization  attributable  to the  conversion  of  the  Company's
members' interests into 5,105,000 shares of Tumbleweed,  Inc. common stock as if
the IPO had closed on December 31, 1998  (excluding  the effects of the offering
proceeds). The pro forma balance sheet also reflects the deferred tax effects of
the  Company  changing  from a limited  liability  company  (which is taxed as a
partnership) to a regular  corporate  taxable status.  Such deferred tax effects
will be included in income on January 1, 1999, the date the change in tax status
occurred.

Additionally, pro forma net income in the accompanying pro forma income data for
the year ended  December 31, 1998 reflects a pro forma  adjustment to historical
net income for federal and state  income taxes at an assumed  effective  rate of
36%. Pro forma net income per share is computed  based upon pro forma net income
and the weighted average number of shares of common stock outstanding during the
year assuming the  conversion of the Company's  members'  interests  into common
stock as of the beginning of the year.

2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  amounts  reported in these  financial  statements  and  accompanying
notes. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash  and  cash  equivalents  include  cash on hand and  deposits  at  financial
institutions with maturities of less than three months when purchased.

INVENTORIES

Inventories,  which consist of  smallwares,  food,  beverages and supplies,  are
stated at the lower of average cost or market.

                                      F-12
<PAGE>


                                Tumbleweed, LLC

                          Notes to Financial Statements
                                 

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED PREOPENING EXPENSES

Deferred preopening expenses include the direct costs typically  associated with
opening a new  restaurant.  These costs consist  primarily of costs  incurred to
develop the new  restaurant  management  team,  marketing  and  training.  These
expenses are  amortized on a  straight-line  method over twelve  months from the
restaurant opening date.

In April 1998, the American  Institute of Certified  Public  Accountants  issued
Statement of Position  (SOP) 98-5,  Reporting the Costs of Start-Up  Activities.
The SOP is effective  beginning on January 1, 1999,  and requires  that start-up
costs  capitalized  prior to  January  1,  1999 be  written-off  and any  future
start-up  costs to be  expensed  as  incurred.  The  unamortized  balance of the
Company's  deferred  preopening costs ($524,669 as of December 31, 1998) will be
written-off (net of income taxes) as a cumulative effect of an accounting change
on January 1,  1999.  It is not  practical  to  estimate  what the effect of the
change will be on 1999 earnings.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and  depreciated on the  straight-line
method.  Buildings and leasehold  improvements  are amortized over the lesser of
the terms of the leases,  including  renewal  options,  or the estimated  useful
lives  of the  assets,  which  range  from ten to  thirty  years.  Equipment  is
depreciated over the estimated useful lives of the assets, which range from five
to ten years.  Maintenance  and  repairs  which do not  enhance  the value of or
increase the life of the assets are charged to costs and expenses as incurred.

CONSTRUCTION IN PROGRESS

The Company  capitalizes  all direct costs incurred in the  construction  of new
restaurants.  Upon opening, these costs are depreciated or amortized and charged
to expense based upon their property classification.

GOODWILL

Goodwill is amortized on the straight-line method over thirty years.

                                      F-13

<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

OTHER ASSETS

Other assets  include costs  incurred in connection  with the Company's  initial
public offering.  These costs which total approximately  $111,000 and $1,000,000
as of December 31 1997 and 1998, respectively,  will be funded from the proceeds
of the offering  when  received in January  1999.  Amortization  expense in 1996
includes $500,000 related to a non-compete agreement which expired in 1996.

LONG-LIVED ASSETS

The carrying amount of long-lived  assets,  including  goodwill,  is reviewed if
facts  and  circumstances  suggest  that  it may be  impaired.  If  this  review
indicates that long-lived assets will not be recoverable, as determined based on
the  estimated   undiscounted  cash  flows  of  the  asset  over  the  remaining
amortization  period, the carrying amount of long-lived assets is reduced by the
estimated  shortfall of cash flows. The Company assesses  long-lived  assets for
impairment  under  Financial  Accounting  Standards  Board  Statement  No.  121,
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be Disposed Of.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments approximate their fair value.

REVENUE RECOGNITION

Franchise  fees  are  recognized  when all  material  services,  primarily  site
approval and management and staff training, have been substantially performed by
the Company and the restaurant has opened for business.  Fees received  pursuant
to  development   agreements  which  grant  the  right  to  develop   franchised
restaurants  in future  periods in specific  geographic  areas are  deferred and
recognized  on a pro rata  basis as the  franchised  restaurants  subject to the
development agreements begin operations. Franchise royalties, which are based on
a percentage  of monthly  sales,  are  recognized  as income when earned.  Costs
associated with franchise operations are expensed as incurred.


                                      F-14

<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

Advertising  costs  include  Company-owned   restaurant   contributions  to  the
Tumbleweed  Marketing  Fund,  Inc.  ("the  Marketing  Fund") and  developing and
conducting  advertising  activities,  including the placement of electronic  and
print  materials  developed by the Marketing  Fund. All  advertising and related
costs are expensed as incurred.  Contributions by  Company-owned  and franchised
restaurants  to the  Marketing  Fund are based on an  established  percentage of
monthly  restaurant  revenues.   The  Marketing  Fund  is  responsible  for  the
development  of marketing  and  advertising  materials  for use  throughout  the
Company's  system.  The Marketing  Fund is accounted for  separately  and is not
included  in the  financial  statements  of the  Company.  Contributions  to the
Marketing  Fund for the  years  ended  December  31,  1996,  1997 and 1998  were
$50,657, $66,488 and $95,674, respectively.  Advertising expense, which includes
contributions to the Marketing Fund, for the years ended December 31, 1996, 1997
and 1998 were $463,637, $631,421 and $1,052,075, respectively.

INCOME TAXES

Through December 31, 1998, the Company was a limited  liability company which is
taxed as a partnership  for federal and state income tax purposes.  Accordingly,
any tax  liability  related to income  would be  reported  by the Members of the
Company.  Subsequent to the merger discussed in Note 1, Tumbleweed, Inc. will be
taxed as a corporation.

RECENTLY ISSUED ACCOUNTING STANDARD

Effective  January  1,  1998,  the  Company  adopted  the  Financial  Accounting
Standards  Board's  Statement  of  Financial   Accounting   Standards  No.  131,
Disclosures about Segments of an Enterprise and Related  Information  (Statement
131).  Statement 131 superseded FASB Statement No. 14,  Financial  Reporting for
Segments of a Business Enterprise.  Statement 131 establishes  standards for the
way that public business enterprises report information about operating segments
in annual financial  statements and also requires that those enterprises  report
selected  information about operating segments in interim financial reports. The
adoption of  Statement  131 did not have an effect on the  Company's  results of
operations  or  financial  position,  but did effect the  disclosure  of segment
information (see Note 10).

                                      F-15

<PAGE>
                                Tumbleweed, LLC

                          Notes to Financial Statements



3. PROPERTY AND EQUIPMENT

Property and equipment consist of:

                                                            December 31
                                                       1997             1998
                                                   ----------------------------

Land and land improvements                         $  4,926,744    $  6,869,638
Buildings and improvements                            6,427,063       9,999,830
Leasehold improvements                                1,831,734       2,318,396
Equipment                                             2,953,802       3,986,928
Building and equipment under capital leases           2,664,838       4,249,458
Construction in progress                              2,297,135         536,324
                                                   ---------------------------- 
                                                     21,101,316      27,960,574
Less accumulated depreciation and amortization       (1,771,184)     (3,039,777)
                                                   ---------------------------- 
                                                   $ 19,330,132    $ 24,920,797
                                                   ============================

4. ACCRUED LIABILITIES

Accrued liabilities consist of:

                                                            December 31
                                                       1997            1998
                                                   ----------------------------

Accrued payroll and related taxes                  $    416,066    $    792,809
Accrued insurance and fees                              120,800         284,270
Accrued taxes, other than income and payroll            157,693         393,593
Gift certificate liability                              127,922         275,743
Other                                                    67,774         127,236
                                                   ----------------------------
                                                   $    890,255    $  1,873,651
                                                   ============================

                                      F-16

<PAGE>
                                Tumbleweed, LLC

                          Notes to Financial Statements

5. LONG-TERM DEBT

Long-term debt consists of:

                                                          December 31
                                                   1997                 1998
                                                --------------------------------

 Secured $5,000,000 mortgage revolving        
  line of credit note, bearing interest
  at prime rate plus .25% (8.0% at December
  31, 1998), due December 31, 2000              $  3,260,391       $  4,302,148

 Secured mortgage note payable, bearing
  interest at 8.5%, payable in monthly
  installments through February 15, 2008                   -            991,396

 Secured mortgage note payable,  bearing
  interest at prime plus 1.25% (9.0% at
  December 31, 1998), payable in monthly
  installments, due November 27, 2016                709,375            671,875

 Secured mortgage note payable, bearing
  interest at commercial paper rate plus
  3% (8.1% at December 31, 1998), due
  January 1, 2005                                  1,200,000          1,111,928

 Secured mortgage note payable, bearing
  interest at prime rate plus 1% (8.75%
  at December 31, 1998), payable in monthly
  installments through October 1, 2017               133,937          1,084,274

 Secured mortgage note payable, bearing
  interest at commercial paper rate plus
  3.1% (8.2% at December 31, 1998), due
  May 1, 2005                                              -            695,230

 Other installment notes payable                     733,280            750,595
                                                --------------------------------
                                                   6,036,983          9,607,446
 Less current maturities                             286,142            427,088
                                                --------------------------------
 Long-term debt                                 $  5,750,841       $  9,180,358
                                                ================================

Property and equipment  with a net book value of  approximately  $14,515,000  at
December 31, 1998 collateralize the Company's long-term debt.

                                      F-17

<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements


5. LONG-TERM DEBT (CONTINUED)

The aggregate  annual  maturities of long-term debt for the years  subsequent to
December 31, 1998 are as follows:

                            1999              $  427,088
                            2000               4,708,098
                            2001                 418,951
                            2002                 369,778
                            2003                 276,893
                            Thereafter         3,406,638
                                              ----------
                            Total             $9,607,446
                                              ==========

The terms of certain loan agreements  include various  provisions  which require
the Company to (i) maintain  defined net worth and coverage  ratios,  (ii) limit
the incurrence of certain liens or  encumbrances  in excess of defined  amounts,
(iii)  maintain  defined  leverage  ratios  and (iv)  prohibit  the  payment  of
dividends.  Management  does not believe that  compliance  with the credit terms
will adversely impact the Company's future operations.

Interest costs  capitalized  during the construction  period of restaurants were
$157,286 in 1996, $103,488 in 1997 and $104,231 in 1998.


                                      F-18
<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements
6. LEASES

The  Company  leases  certain   buildings  and  equipment  under  capital  lease
agreements  with related and third  parties.  The equipment  leases have five to
seven year terms.  The building  leases expire in 2016 and 2017.  Future minimum
lease  payments under the capital leases and the net present value of the future
minimum lease payments at December 31, 1998 were as follows:

                                Related Party       Other
                                    Lease           Leases          Total
                               -------------------------------------------------

1999                           $       84,000 $      690,849  $      774,849
2000                                   84,000        690,849         774,849
2001                                   84,000        690,849         774,849
2002                                   84,000        575,393         659,393
2003                                   84,000        457,248         541,248
Thereafter                          1,176,000      1,316,394       2,492,394
                               -------------------------------------------------
Total minimum lease payments   $    1,596,000 $    4,421,582       6,017,582
                               ================================
Less amount representing
 interest at 7.9% to 12.0%                                        (2,262,064)
                                                              ------------------
Net present value of lease payments                                3,755,518
Less current maturities                                              468,222
                                                              ------------------
Long-term portion of capital leases                           $    3,287,296
                                                              ==================




                                      F-19


<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements



6. LEASES (CONTINUED)

The Company leases certain  restaurants  and equipment  under  operating  leases
having terms expiring  between 1999 and 2017.  Most of the  restaurant  facility
leases have renewal clauses of five to twenty years exercisable at the option of
the  Company and some of the leases are with  related  parties.  Certain  leases
require  the  payment  of  contingent  rentals  based on a  percentage  of gross
revenues. Future minimum lease payments on operating leases at December 31, 1998
were as follows:

                  Related Party        Other
                     Leases            Leases            Total
                -----------------------------------------------------

1999            $        298,689 $      1,117,331  $      1,416,020
2000                     298,689        1,017,331         1,316,020
2001                     298,689        1,016,411         1,315,100
2002                     298,689        1,014,857         1,313,546
2003                     298,689        1,030,257         1,328,946
Thereafter             1,952,843        8,065,599        10,018,442
                -----------------------------------------------------
                $      3,446,288 $     13,261,786  $     16,708,074
                =====================================================

Total rental expense was  approximately  $801,800 in 1996,  $975,300 in 1997 and
$1,455,500  in 1998 and included  contingent  rent of  approximately  $16,800 in
1996, $30,700 in 1997 and $178,700 in 1998. Rental expense for the related party
leases was  approximately  $237,700 in 1996,  $282,000  in 1997 and  $436,200 in
1998.

7. REDEEMABLE CLASS A MEMBER UNITS AND BANK LINE OF CREDIT

As of December 31, 1998, the Company had a $7,500,000 line of credit with a bank
for  borrowing  at the bank's prime rate plus 1/4%.  Under a related  assumption
agreement,  the Class A Members  directly  assumed the total  liability on a pro
rata basis until  December 31, 1998 at which time the Company  assumed the total
liability of $6,990,348.  (The Company had drawn down  $7,024,717 and $6,990,348
at December 31, 1997 and 1998, respectively, under this line of credit which was
to expire on January  11,  1999.)  Prior to the  Company  assuming  this line of
credit,  the  amounts  borrowed  under  the line of  credit  were,  in the first
instance,  obligations of the Class A Members and,  accordingly,  were accounted
for as redeemable  members' equity,  and any interest and other related costs on
the debt funded by the Company were accounted for as  distributions to the Class
A Members.

                                      F-20

<PAGE>


                                Tumbleweed, LLC

                          Notes to Financial Statements


7. REDEEMABLE CLASS A MEMBER UNITS AND BANK LINE OF CREDIT (CONTINUED)

The  $6,990,348  borrowed  under the line of credit as of December  31, 1998 was
repaid on  January  5, 1999 out of the gross  proceeds  of  $7,765,430  from the
Company's IPO (see Note 1). If an IPO had not  occurred,  any Class A Member had
the right to sell to the Company their interest in the Company at any time after
the fifth  anniversary  of the date that a Class A Member  was  admitted  to the
Company  (generally  2000).  The  selling  price  was  to be  the  sum  of  cash
contributed  by the Class A Member and an amount equal to an annual 30% internal
rate of return on the Class A Member's cash  contributions  and pro rata assumed
principal  portion  of the  line  of  credit,  taking  into  account  all  prior
distributions to such Class A Member. The total Class A Members' interests which
would have been  required  to be  purchased  by the  Company in any one year was
limited and would have been payable in equal installments over a five-year term,
with interest.  Redeemable  members' equity in the  accompanying  balance sheets
includes the accretion of the annual 30% internal rate of return.

Through  December 31, 1998,  capital  contributions  by the Class A Members were
limited to their initial cash contributions in 1995 which amounted to $7,034,375
and borrowings under the line of credit assumed by the Class A Members.

8. RELATED PARTY TRANSACTIONS

During 1996, the Company sold certain assets of its four food court  restaurants
and it's 50%  interest in a joint  venture  which  operates a food court to T.M.
Riders,  LLC (T.M.  Riders).  In exchange for  essentially all the assets of the
food courts and its interest in the joint venture, the Company received $100,000
in cash and a note  receivable  for  $500,000,  due in  annual  installments  of
$100,000  plus  interest at the rate of 8% per year  beginning  December 1, 1997
over five  years.  The gain on the sale of the food  courts and  interest in the
joint venture of approximately $71,300 is included in other revenues in 1996.

In  February  1997,  the  Company  invested a nominal  amount in T.M.  Riders in
exchange for a 9.5% common member  interest.  After ten stores have opened,  the
Company will receive fees from T.M.  Riders based on store  openings and royalty
fees based on T.M.  Riders'  system-wide  sales.  In September 1998, the Company
relinquished its interest in T.M. Riders.


                                      F-21

<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements


8. RELATED PARTY TRANSACTIONS (CONTINUED)

In December  1998,  the  Company  assigned  the T. M.  Riders'  promissory  note
receivable,  which had an  outstanding  principal  balance of $400,000 as of the
date of assignment,  to the Common Members of the Company.  In consideration for
the  assignment,  each Common  Member  assigned  to the Company a  proportionate
amount  of  their  respective  Common  Member  interests  in the  Company.  This
transaction  has been accounted for as a distribution  to the Common Members and
the number of shares of common  stock  these  members  received  was  reduced by
40,000 shares in the merger of the Company into Tumbleweed, Inc.

In February 1997, the Company  invested a nominal  amount in  TW-Tennessee,  LLC
(TW-Tennessee),  a newly formed Tennessee limited liability company, in exchange
for a 9.5% common member  interest.  On September 30, 1998, the Company sold its
interest  in  TW-Tennessee  to  certain  members  of the  Company  for  $25,000.
TW-Tennessee  was  organized  to  open  and  operate   Tumbleweed  full  service
restaurants as a franchisee of the Company.

The Company  guaranteed,  on a pro-rata  basis,  renewals of certain  guaranteed
indebtedness and any replacement indebtedness of TW-Tennessee, to the extent and
in the amounts not to exceed the amounts guaranteed as of September 30, 1998. As
of  December  31,  1998,  the  Company  has  guaranteed   certain   TW-Tennessee
obligations  as follows:  a) up to  $1,200,000  under a bank line of credit,  b)
approximately  $1,700,000 of a lease financing agreement and c) equipment leases
with  a  bank  totaling   approximately  $983,400  jointly  and  severally  with
TW-Tennessee common members.

TW-Tennessee and T.M. Riders are governed and managed by Boards, some members of
which are also  members of the  Company's  Board and  investors  in the Company.
Certain of these individuals are also investors in TW-Tennessee and T.M. Riders.



                                      F-22

<PAGE>

                                Tumbleweed, LLC

                          Notes to Financial Statements


8. RELATED PARTY TRANSACTIONS (CONTINUED)

The Company accounted for its investments in TW-Tennessee and T.M. Riders on the
equity method prior to their  disposition.  Amounts in the financial  statements
related to the  Company's  investments  in these  entities  for the years  ended
December 31, 1997 and 1998 were not  significant.  Franchise  fees and royalties
recorded by the Company in relation to these entities were $17,000,  $79,000 and
$225,600  in 1996,  1997 and  1998,  respectively.  The  Company  also  provides
management  and  accounting  services  for these  entities  for  which  fees are
charged.  Such management and accounting fees recorded in other revenues related
to these entities totaled approximately  $15,500,  $57,600 and $104,000 in 1996,
1997 and 1998, respectively.

In August  1997,  the Company  entered  into the  International  Agreement  with
Tumbleweed  International LLC  (International),  a restaurant developer based in
Brussels,  Belgium.  The  International  Agreement grants certain  licensing and
franchising   rights  to   International   for  the  development  of  Tumbleweed
restaurants  outside  of the  Western  Hemisphere.  International  is a  limited
liability  company owned by three  corporations  which are controlled by certain
Members of the Company. In 1997 and 1998, International paid $15,750 and $7,500,
respectively, in fees to the Company under the International Agreement.

Two Common  Members of the Company  (both of which are now common  stockholders,
and one of which  is also a  Director,  of  Tumbleweed,  Inc.)  are  members  in
TW-Indiana,  LLC,  which in April 1998  acquired  the  franchise  rights to five
full-service Tumbleweed restaurants in Indiana and Kentucky from a third party.
Franchise  royalties  recorded  by the  Company in  relation to this entity were
approximately $242,500 in 1998.

In September  1998,  the Company  entered into an agreement to purchase the land
and  building,  including  improvements,  located  in  Columbus,  Ohio which was
formerly leased from West Broad  Development LLC. Certain members of the Company
(all of which are now common stockholders,  and one of which is also a Director,
of  Tumbleweed,  Inc.) are members in West Broad  Development  LLC. The purchase
price of $1,250,000  was at fair market value as  determined  by an  independent
appraisal. The Company, at the time of purchase,  entered into an agreement with
a bank  modifying  an  existing  promissory  note on the  land and  building  by
increasing the principal amount to $1,000,000.


                                      F-23

<PAGE>


                                Tumbleweed, LLC

                          Notes to Financial Statements


9. COMMITMENTS

At December 31, 1998, the Company had  commitments of  approximately  $1,016,000
for the completion of the  construction of two  restaurants,  for which landlord
financing has been secured.

10. SEGMENT INFORMATION

The  Company  has  three  reportable  segments:   restaurants,   commissary  and
corporate.   The   restaurant   segment   consists  of  the  operations  of  all
company-owned  restaurants  and  derives  its  revenues  from  the  sale of food
products to the general public. The commissary segment derives its revenues from
the sale of food products to  corporate-owned  and franchised  restaurants.  The
corporate  segment  derives  revenues from sale of franchise  rights,  franchise
royalties and related services used in restaurant  operations,  and contains the
selling, general and administrative activities of the Company.

Generally,  the Company evaluates  performance and allocates  resources based on
net  income.  The  accounting  policies  of the  segments  are the same as those
described in the summary of significant accounting policies.

Segment information for the years ended December 31 is as follows:

1996:
                              Restaurant    Commissary   Corporate     Totals
                             ---------------------------------------------------
Revenues from external
  customers                  $ 23,284,007  $ 1,795,529  $  652,187  $ 25,731,723
Intersegment revenues                   -    2,929,546           -     2,929,546
General and administrative
  expenses                              -            -   1,787,190     1,787,190
Advertising expenses                    -            -     463,637       463,637
Depreciation and
  amoritzation                    486,799      102,864     641,627     1,231,290
Net interest expense                    -       85,817     117,993       203,810
Segment net income (loss)       2,993,979      195,601  (2,688,264)      501,316
Segment fixed assets           13,223,329    1,025,949     368,580    14,617,858
Expenditures for long-lived
  assets                        6,216,821        1,325     288,807     6,506,953


                                      F-24

<PAGE>
                                Tumbleweed, LLC

                          Notes to Financial Statements

10. SEGMENT INFORMATION (CONTINUED)

1997:
                              Restaurant    Commissary   Corporate     Totals
                             ---------------------------------------------------
Revenues from external
  customers                  $ 27,891,128  $ 1,007,011  $  928,110  $ 29,826,249
Intersegment revenues                   -    2,349,693           -     2,349,693
General and administrative
  expenses                              -            -   2,420,319     2,420,319
Advertising expenses                    -            -     631,421       631,421
Depreciation and
  amortization                    683,266      108,004     180,593       971,863
Net interest expense                    -       85,957     342,641       428,598
Segment net income (loss)       4,351,013      203,458  (2,840,560)    1,713,911
Segment fixed assets           17,851,495    1,069,434     409,203    19,330,132
Expenditures for long-lived
  assets                        4,847,429      126,493      98,696     5,072,618


1998:
                              Restaurant    Commissary   Corporate     Totals
                             ---------------------------------------------------
Revenues from external
  customers                  $ 40,490,933  $ 1,041,266  $1,275,445  $ 42,807,644
Intersegment revenues                   -    2,429,620           -     2,429,620
General and administrative
  expenses                              -            -   3,098,228     3,098,228
Advertising expenses                    -            -   1,052,075     1,052,075
Depreciation and
  amortization                  1,107,301      116,446     218,264     1,442,011
Net interest expense                    -      161,700     708,012       869,712
Segment net income (loss)       5,853,334      173,361  (4,073,285)    1,953,410
Segment fixed assets           23,341,248    1,004,373     575,176    24,920,797
Expenditures for long-lived
  assets                        6,733,972       26,388     123,461     6,883,821


                                      F-25
<PAGE>


SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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, in the City of Louisville,
State of Kentucky.

                                  TUMBLEWEED, INC.

Date: March 24, 1999           By:   /s/ John A. Butorac, Jr.
                                  ----------------------------------------------
                                  John A. Butorac, Jr.
                                  President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has  been  signed  by the  following  persons  in  capacities  and on the  dates
indicated.
                                   Title                             Date

/s/ John A. Butorac, Jr.       
---------------------------
John A. Butorac, Jr.       President and Chief                 March 24, 1999
                           Executive Officer and Director

/s/ James M. Mulrooney
---------------------------
James M. Mulrooney         Chief Financial Officer,            March 24, 1999
                           Treasurer, and Executive Vice
                           President and Director(Principal
                           Accounting Officer)
/s/ David M. Roth
---------------------------
David M. Roth              Director                            March 24, 1999

/s/ Minx Auerbach
---------------------------
Minx Auerbach              Director                            March 24, 1999

/s/ Lewis Bass
---------------------------
Lewis Bass                 Director                            March 24, 1999

/s/ Roger Drury
---------------------------
Roger Drury                Director                            March 24, 1999

/s/ George Keller
---------------------------
George Keller              Director                            March 24, 1999

/s/ Terrance A. Smith
---------------------------
Terrance A. Smith          Director                            March 24, 1999