UNITED STATES
                       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, 1999

                                       or

    { } Transition Report Pursuant to Section 13 or 15 (d) of the Securities
                              Exchange Act of 1934
                For the transition period from ______ to ______

                        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 10, 2000, was approximately $6,019,697. 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 closing  sale price of the  registrant's  common  stock on
March 10, 2000 ($5.13) as reported on The Nasdaq Stock Market's National Market.

The number of shares of common stock,  par value of $.01 per share,  outstanding
on March 10, 2000, was 5,863,930.

                       DOCUMENTS INCORPORATED BY REFERENCE


                             Documents from which portions are
Part of Form 10-K            incorporated by reference
----------------------       ------------------------------------------
        Part III             Proxy statement relating to the registrant's Annual
                             Meeting of Shareholders to be held May 11, 2000

Exhibit Index: Page 42-43
<PAGE>

                                 TUMBLEWEED, INC

                                     PART I



ITEM 1. BUSINESS

At December 31, 1999, we owned,  franchised or licensed 51 Tumbleweed  Southwest
Mesquite  Grill & Bar  ("Tumbleweed")  restaurants.  We owned  and  operated  29
Tumbleweed  restaurants in Kentucky,  Indiana and Ohio. There were 17 franchised
Tumbleweed  restaurants located in Indiana,  Illinois,  Kentucky,  Tennessee and
Wisconsin,  and five licensed  restaurants  located outside the United States in
Germany,  Jordan, Egypt 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

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 12.2% of
restaurant sales during 1999.

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.



                                      - 2 -

<PAGE>



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.

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 1999, the average check at a  full-service  Tumbleweed
restaurant,  including  beverages,  was approximately $8.20 for lunch and $10.33
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.  We are  committed  to  providing  prompt,
friendly and attentive service and consistent food quality to our customers.  We
employ a quality control supervisor  independent of our 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. We also use a "mystery shopper" program to compare actual
performance  of restaurants  to Tumbleweed  standards and solicit  comment cards
from customers to monitor and modify restaurant operations.

OPERATING STRATEGY

We use the following key operating strategies to make certain that we exceed the
expectations of our 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").  Our 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,  we foster a strong  corporate  culture and  encourage a
sense of personal  commitment  from our employees.  We have 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.   We  are  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 by enhancing our 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  our 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.   We  maintain  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

Out  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,  we have  added new  Company-owned  and  franchised
restaurants, while developing the infrastructure necessary to support our 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 our expansion strategy:

                                      - 3 -

<PAGE>
OPENING RESTAURANTS IN TARGET MARKETS. We target 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 we add  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 our management and other employees, as well as
with the assistance of consultants  when deemed  advisable.  We believe that our
site  selection  strategy  and  procedures,  together  with our menu and pricing
strategies,  our commitment to quality food products and excellent service,  and
our advertising,  marketing and promotional efforts, will enhance our ability to
generate our anticipated customer volumes.

FRANCHISING.  We  expect  that  continued  growth  will  come  from the  further
development of new and existing  markets by us and by franchisees.  We intend to
pursue an active  franchising  program  with current and new  franchisees  under
controlled  guidelines.  We offer 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 us 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.  Our 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  our  policies,   standards  and
specifications,  including matters such as menu items,  ingredients,  materials,
supplies, services, fixtures,  furnishings,  decor and signs. Under our 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 us,
we generally require 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,  we may acquire  restaurants  from our franchisees from
time to time.

MATCHING  INVESTMENT  TO  SALES  POTENTIAL.  When  developing  a new  Tumbleweed
restaurant,  we generally use one of three prototype designs management believes
is best  suited  to a  particular  site.  Our  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  us 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 us and
our franchisees.

During 1999,  we opened 4 new  Company-owned  restaurants  and 7 new  Franchised
restaurants in the following areas:

      COMPANY OWNED                          FRANCHISEE OWNED
      -------------                          ----------------
      Ft. Wayne, IN (1)                      Evansville, IN (1)
      Henderson, KY (1)                      Seymour, IN (1)
      Bellefontaine, OH (1)                  Hillview, KY (1)
      Cincinnati, OH (1)                     Glasgow, KY (1)
                                             Medina, OH (1)
                                             Hermitage, TN (1)
                                             New Berlin, WI (1)

                                      - 4 -

<PAGE>



Our international  licensee also opened one new licensed  restaurant during 1999
in Cairo, Egypt. During 1999, a franchisee elected to close three restaurants in
Hendersonville,  Nashville and Cookeville,  Tennessee,  which had been converted
from the  Barbwire  Restaurant  concept to the  Tumbleweed  concept.  Management
believes that these locations failed to overcome a negative public perception of
the Barbwire concept.  During 1999, our international  licensee elected to close
its Erlangen, Germany location.

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

RESTAURANT OPERATIONS

RESTAURANT  MANAGEMENT.  We  employ  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 our  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 us. In selecting managers, we generally seek 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.  We seek 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.  We have  developed  a  comprehensive
training  program for  managers and hourly  employees.  Managers are required to
complete a ten-week initial training course and regular training  programs.  The
course  emphasizes  our 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. We employ training coordinators to
assist with training and  development  of employees.  Before the opening of each
new  restaurant,  one of our  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. We closely monitor sales, costs of food and beverages, and
labor  at  each  of  our  restaurants.  Management  analyzes  daily  and  weekly
restaurant  operating  results to  identify  trends at each  location,  and acts
promptly to remedy  negative  trends where  possible.  We use 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 our  accounting  department  are provided to management
for  analysis  and  comparison  to  past  performance  and  budgets.  We  use  a
specialized  software  system to measure  theoretical  food costs against actual
costs. To improve our performance  analysis  capabilities,  we have upgraded the
system which schedules 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>



SEASONALITY. We consider restaurant operations to be somewhat seasonal in nature
with the second and third quarters being the peak sales periods.

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.  We currently operate our 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 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 we receive a royalty based upon production and sales.

DEVELOPMENT  AND  CONSTRUCTION.   We  maintain  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.  We use radio,  print,  billboard,  and direct mail
advertising in our various markets, as well as television advertising in certain
larger  markets.  We also engage 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 our  restaurants.  The cost
associated with these promotional  activities in 1999 was approximately  2.6% of
sales.














                                      - 6 -

<PAGE>



RESTAURANT  LOCATIONS

At December  31,  1999,  we owned and operated 29  Tumbleweed  restaurants.  The
following table sets forth the location  (including the number of restaurants at
each location) of these 29 restaurants:


                                                           NO. OF
STATE                LOCATION                           RESTAURANTS
-----                --------                           -----------
Indiana              Evansville                              1
Indiana              Ft. Wayne                               1
Indiana              Terre Haute                             1
Kentucky             Bowling Green                           1
Kentucky             Elizabethtown                           1
Kentucky             Florence                                1
Kentucky             Frankfort                               1
Kentucky             Henderson                               1
Kentucky             Louisville                              7
Kentucky             Owensboro                               1
Ohio                 Bellefontaine                           1
Ohio                 Chillicothe                             1
Ohio                 Cincinnati                              1
Ohio                 Columbus                                3
Ohio                 Hamilton                                1
Ohio                 Heath                                   1
Ohio                 Mason                                   1
Ohio                 Springdale                              1
Ohio                 Springfield                             1
Ohio                 Wooster                                 1
Ohio                 Zanesville                              1
                                                            --
                     TOTAL                                  29
                                                            ==











                                      - 7 -

<PAGE>



FRANCHISED RESTAURANTS

As of December 31,  1999,  we had eight  franchisees  that owned and operated 17
Tumbleweed  restaurants.  The following  table sets forth the franchisee and the
location ( including  the number of  restaurants  at each  location) of these 17
restaurants:

                                                        No. of       Total By
Franchisee             State        Location          Restaurants    Franchisee
----------             -----        --------          -----------    ----------
TW-Indiana, LLC        Indiana      Floyd Knobs            1
                       Indiana      New Albany             2
                       Indiana      Salem                  1
                       Kentucky     Lexington              1
                                                          ---
                                                                         5
Diamondback
Management Corp.       Illinois     Rockford               1
                       Wisconsin    Appleton               1
                       Wisconsin    Madison                1
                       Wisconsin    Milwaukee              1
                       Wisconsin    New Berlin             1
                                                          ---
                                                                         5
TW-Tennessee, LLC (1)  Tennessee    Clarksville            1
                       Tennessee    Hermitage              1
                                                          ---
                                                                         2
TW-Seymour, LLC        Indiana      Seymour                1
                                                          ---
                                                                         1
TW-Glasgow, Inc.       Kentucky     Glasgow                1
                                                          ---
                                                                         1
TW-Medina, LLC         Ohio         Medina                 1
                                                          ---
                                                                         1
TW-Bullitt, Inc.       Kentucky     Hillview               1
                                                          ---
                                                                         1
TW-Evansville, LLC     Indiana      Evansville             1
                                                          ---
                                                                         1
                                                                        ---
                                                                        17
                                                                        ===

(1) During  1999,  TW-Tennessee,  LLC also  owned and  operated  restaurants  in
Cookeville, Hendersonville and Nashville, Tennessee. Prior to December 31, 1999,
the franchisee elected to close these locations.


                                      - 8 -

<PAGE>



INTERNATIONAL LICENSING AGREEMENT

We have 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.   During  1999,  International  was  operating  its  restaurants  in
Erlanger, Frankfort and Vilsek, Germany, Amman, Jordan, Jeddah, Saudi Arabia and
Cairo,  Egypt  as  Tumbleweed  restaurants.  Prior to  December  31,  1999,  the
franchisee  elected  to close  the  Erlangen,  Germany  restaurant.  See Item 13
"Certain  Relationships  and Related  Transactions"  for additional  information
regarding International.

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 us 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

A  wholly-owned  subsidiary  of the  Company  owns and  licenses  to the Company
various  service  marks and  trademarks  that are  registered  on the  Principal
Register of the United States Patent and Trademark Office. We regard our service
marks and trademarks as having  significant  value and being an important factor
in the  development  of the  Tumbleweed  concept.  Our  policy is to pursue  and
maintain  registration of our service marks and trademarks whenever possible and
to oppose  vigorously  any  infringement  or dilution  of our service  marks and
trademarks.

GOVERNMENT REGULATION

We are subject to a variety of federal,  state and local laws. Our commissary is
licensed  and subject to  regulation  by the USDA.  Each of our  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.

Approximately  12.2 % of our restaurant  sales were  attributable to the sale of
alcoholic  beverages for the year ended  December 31, 1999.  Alcoholic  beverage
control  regulations  require  each  of our  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 of our  restaurants  are 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.  We  currently  design  our  new  restaurants  to be
accessible to the disabled,  and believe that we are in  substantial  compliance
with all current applicable  regulations  relating to restaurant  accommodations
for the  disabled.  We intend to comply  with  future  regulations  relating  to
accommodating the needs of the disabled, and we do not currently anticipate that
such compliance will require us to expend substantial funds.

We are  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. We carry liquor liability  coverage as part of our existing
comprehensive general liability insurance, as well as excess liability coverage.
We have never been  named as a  defendant  in a lawsuit  involving  "dram  shop"
liability.

Our  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 we have no control. Significant numbers of our

                                      - 9 -

<PAGE>



service,  food  preparation and other personnel are paid at rates related to the
federal minimum wage, and increases in the minimum wage could increase our 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, 1999, we had  approximately  2,200 employees,  of whom 45 are
executive and administrative personnel, 117 are restaurant management personnel,
and the remainder are hourly  restaurant and commissary  personnel.  Many of our
hourly restaurant employees work part-time. None of our employees are covered by
a collective  bargaining  agreement.  We consider  our 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, we have grown while  developing  the  operational
systems,  internal controls,  and management  personnel that management believed
was  necessary to support our plans for  continued  expansion.  In the course of
expanding our business, we will enter new geographic regions in which we have 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,  we intend 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.

The  continued  growth of our business  will depend upon our ability to open and
operate  additional  restaurants  profitably,  which in turn  will  depend  upon
several  factors,  many of which are beyond our control.  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.  Our ability to expand into new  geographic
regions is also  dependent  upon our ability to expand our  existing  commissary
facilities or open and successfully operate additional  commissaries,  as may be
necessary to support additional  restaurants.  There can be no assurance that we
will be  successful  in achieving  our growth  plans or managing  our  expanding
operations  effectively,  nor can there be any assurance that new restaurants we
open will be operated profitably.

RESTAURANT BASE. We currently operate 29 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 we currently
operate,  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 our results of operations than would be the case in a
restaurant company with more restaurants.  In addition,  we lease certain of our
restaurants.  Each lease  agreement  provides  that the lessor may terminate the
lease for a number of reasons, including if we default in payment of any rent or
taxes or breach any covenants or agreements contained in the lease.  Termination
of any of our leases pursuant to such terms could  adversely  affect our results
of operations.

CHANGES  IN  FOOD  AND  OTHER  COSTS;   SUPPLY  RISKS.   Our   profitability  is
significantly  dependent  on our ability to  anticipate  and react to changes in
food, labor,  employee benefits and similar costs over which we have no control.
Specifically, we are dependent on frequent deliveries of produce and fresh beef,
pork, chicken and seafood. As a result, we are subject

                                     - 10 -

<PAGE>



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  we  have  been  able to
anticipate and react to changing costs through our purchasing  practices or menu
price adjustments without a material adverse effect of profitability,  there can
be no assurance that we 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 our restaurants in particular.

COMPETITION.  The restaurant  industry is intensely  competitive with respect to
price,  service,  location and food  quality.  We 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 us. A significant change in pricing or other
business strategies by one or more of our competitors,  including an increase in
the number of restaurants in our  territories,  could have a materially  adverse
impact on our 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, we
are 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 us.

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. .... 51  President, Chief Executive Officer, and Director
James M. Mulrooney ...... 48  Executive Vice President, Chief Financial Officer,
                              and Director
John L. Brewer .......... 47  Vice President of Operations
Wayne P. Jones .......... 57  Vice President of Marketing and Development
Gary T. Snyder........... 45  Vice President - Company Operations
Glennon F. Mattingly..... 48  Vice President - Controller
Gregory A. Compton....... 39  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 1997,  and is a  Director  of the  Company.  Mr.
Butorac also served as President and Chief Executive Officer of Tumbleweed,  LLC
from January 1995 to its merger with the Company in January  1999.  From October
1991 to January 1995, Mr. Butorac served in various  capacities  with Tumbleweed
Mexican  Restaurants  Group,  including  Director of Operations  and Director of
Corporate Development.

                                     - 11 -

<PAGE>



James M. Mulrooney has served as Executive  Vice  President and Chief  Financial
Officer of the  Company  since it was formed in 1997,  and is a Director  of the
Company.  Mr.  Mulrooney  also  served as  Executive  Vice  President  and Chief
Financial  Officer of  Tumbleweed,  LLC from January 1995 to its merger with the
Company in January 1999.  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.

John L. Brewer has served as Vice  President of Operations for the Company since
it was  formed  in  December  1997,  and  for  Tumbleweed,  LLC,  the  Company's
predecessor,  from April 1996 to its merger  with the  Company in January  1999.
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.

Wayne P. Jones has served as Vice President of Marketing and Development for the
Company  since it was formed in December  1997,  and for  Tumbleweed,  LLC,  the
Company's  predecessor,  from  August  1997 to its  merger  with the  Company in
January  1999.  From 1993 to 1997,  he served as  Executive  Director  and Chief
Executive Officer of the Pizza Hut Franchise Association.

Gary T. Snyder joined Tumbleweed, LLC, the Company's predecessor, as Director of
Training and Human  Resources in June 1996 and was appointed  Vice  President of
Company  Operations in April 1998. Mr. Snyder  continues to serve the Company in
that capacity. He previously served for 17 years with Bob Evans Farms, Inc.

Glennon F.  Mattingly  joined  Tumbleweed,  LLC, the Company's  predecessor,  as
Controller in March 1995 and was named Vice  President-Controller in April 1998.
Mr. Mattingly continues to serve the Company in that capacity.  Before coming to
Tumbleweed,  Mr. Mattingly held various positions with Chi-Chi's, Inc. including
six years as Director of Budgeting and Financial Analysis.

Gregory A. Compton joined Tumbleweed,  LLC, the Company's  predecessor,  in June
1998 as Vice President,  Secretary and General  Counsel,  and continues to serve
the Company in that  capacity.  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.

SEGMENT INFORMATION

Segment  information  for the years ended  December 31, 1999,  1998 and 1997 are
presented in Note 12 to our Consolidated  Financial Statements contained in Item
8.

ITEM 2.  PROPERTIES

Of the 29  Company-owned  restaurants  in operation at December 31, 1999, 12 are
owned by us in fee simple  while the  remainder  are  leased.  Two of the leased
locations  are  owned by  entities  whose  principals  are  affiliated  with us.
Restaurant lease  expirations  range from 2005 to 2018, with the majority of the
leases  providing for an option to renew for additional  terms ranging from five
to twenty years.  All of our 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 us to pay the cost of insurance and taxes.  Our executive  offices
and our commissary are located in Louisville,  Kentucky,  in office,  commissary
and warehouse space owned in fee simple by us.

ITEM 3.  LEGAL PROCEEDINGS

We are involved in  litigation  and  proceedings  in the ordinary  course of our
business.  We do not  believe  the  outcome of any such  litigation  will have a
material  adverse  effect upon our 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, 1999.

                                     - 12 -

<PAGE>



                                     PART II


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

As of March  10,  2000,  5,863,930  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. We sold 776,630 shares at the offering price of $10 per share in a
direct  offering  of our  common  stock  to  the  public,  raising  a  total  of
$7,766,300.

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 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.

We received net proceeds of approximately $6,800,000 from the stock offering. We
used the offering  proceeds,  plus the additional cash contributions of $747,500
we  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.

Our common stock trades on the Nasdaq Stock Market's  National  Market under the
symbol "TWED." The following  table shows  quarterly high and low closing prices
for the Common Stock during 1999 for the periods  indicated,  as reported by the
Nasdaq National Market.


                                       High                Low
                                       ----                ---
     First Quarter (1)                $12.00             $ 8.50
     Second Quarter                    11.25               7.50
     Third Quarter                      9.87               7.00
     Fourth Quarter                     8.50               5.00

(1) Beginning in March 1999, bid and asked quotations for Tumbleweed shares were
reported on the OTC Bulletin  Board under the trading  symbol TWED. On March 29,
1999,  our common  stock began  trading on the Nasdaq  Stock  Market's  National
Market.

We have never paid a dividend on our Common Stock nor do we expect to pay a cash
dividend in the  foreseeable  future.  We currently  intend to retain any future
earnings to finance the development of additional  restaurants and the growth of
our business  generally.  We are also prohibited from paying dividends under the
terms of our credit facility with National City Bank.

ITEM 6. SELECTED FINANCIAL DATA

Effective January 1, 1999, Tumbleweed, LLC was merged into Tumbleweed, Inc. as a
result of the sale of common stock in an initial  public  offering.  Tumbleweed,
Inc. had not  conducted  any  operations  prior to the merger.  In the following
table,  the income  statement and balance sheet data of Tumbleweed,  LLC for the
years ended December 31, 1998, 1997, 1996 and 1995 and Tumbleweed,  Inc. for the
year ended December 31, 1999 have been derived from

                                     - 13 -

<PAGE>



financial  statements 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
                                          ---------------------------------------------------------------------
                                           Tumbleweed,                        Tumbleweed,
                                               Inc.                              LLC
                                          -------------  ------------------------------------------------------
                                               1999           1998          1997         1996          1995
                                               ----           ----          ----         ----          ----
Statement of Income Data:
  Revenues:
<S>                                      <C>            <C>           <C>           <C>          <C>
    Restaurant Sales                     $   48,578,123 $  40,490,933 $  27,891,128 $ 23,284,007 $   17,254,058
    Commissary sales                          1,168,836     1,041,266     1,007,011    1,795,529      1,574,847
    Franchise fees and royalties              1,064,952       770,806       563,056      474,870        540,157
    Other revenues                              532,976       504,639       365,054      177,317        177,960
                                          -------------  ------------  ------------  -----------  -------------
      Total Revenues                         51,344,887    42,807,644    29,826,249   25,731,723     19,547,022
  Operating expenses:
    Restaurant cost of sales                 14,232,564    11,788,578     8,191,928    7,103,357      5,132,549
    Commissary cost of sales                  1,053,083       905,814       887,793    1,649,502      1,424,077
    Operating expenses                       24,377,631    20,881,212    14,035,693   12,386,119      8,896,704
    Selling, general and administrative       4,981,721     4,150,303     3,051,740    2,250,827      1,962,036
    Preopening expenses                         395,768
    Depreciation and amortization             1,804,757     1,442,011       971,863    1,231,290      1,033,349
                                          -------------  ------------  ------------  -----------  -------------
      Total operating expenses               46,845,524    39,984,522    27,683,740   25,026,597     18,597,853
                                          -------------  ------------  ------------  -----------  -------------
      Income from operations                  4,499,363     2,823,122     2,142,509      705,126        949,169
  Interest expense, net                      (1,128,906)     (869,712)     (428,598)    (203,810)     (266,530)
                                          -------------  ------------  ------------  -----------  -------------
  Income before income taxes and
    cumulative effect of a change in
    accounting principle                      3,370,457     1,953,410     1,713,911      501,316        682,639
  Provision for income taxes:
    Current and deferred                     (1,179,659)      -             -             -             -
    Deferred taxes related to change in
      tax status (3)                           (639,623)      -             -             -             -
                                          -------------  ------------  ------------  -----------  -------------
  Total provision  for income taxes          (1,819,282)      -             -             -             -
                                          -------------  ------------  ------------  -----------  -------------
   Income before cumulative effect of a
    change in accounting principle            1,551,175     1,953,410     1,713,911      501,316        682,639
   Cumulative effect of a change in
     accounting principle, net of tax          (341,035)      -             -             -             -
                                          -------------  ------------  ------------  -----------  -------------
   Net income                            $    1,210,140 $   1,953,410 $   1,713,911 $    501,316 $      682,639
                                          =============  ============  ============  ===========  =============
Basic and diluted earnings per share:
   Income before cumulative effect of a
     change in accounting principle      $         0.27
   Cumulative effect of a change in
     accounting principle, net of tax             (0.06)
                                          -------------
   Net income                            $         0.21
                                          =============








                                     - 14 -

<PAGE>



Pro forma income data (unaudited):
   Income before income taxes
     and cumulative effect of a change
     in accounting principle as reported $    3,370,457 $   1,953,410 $   1,713,911 $    501,316 $      682,639
   Pro forma income taxes (1)                (1,179,659)     (683,693)     (599,896)    (175,461)      (238,924)
                                          -------------  ------------  ------------  -----------  -------------
   Pro forma income before cumulative
     effect of a change in accounting
     principle                                2,190,798     1,269,717     1,114,015      325,855        443,715
   Cumulative effect of a change in
     accounting principle, net of tax          (341,035)      -             -             -             -
                                          -------------  ------------  ------------  -----------  -------------
Pro forma net income                     $    1,849,763 $   1,269,717 $   1,114,015 $    325,855 $      443,715
                                          =============  ============  ============  ===========  =============
Pro forma basic and diluted earnings
 per share:
   Pro forma income before cumulative
     effect of a change in accounting
     principle                           $         0.37 $        0.25 $        0.22 $       0.06 $         0.09
   Cumulative effect of a change in
     accounting principle, net of tax             (0.06)      -             -             -             -
                                          -------------  ------------  ------------  -----------  -------------
  Pro forma net income                   $         0.31 $        0.25 $        0.22 $       0.06 $         0.09
                                          =============  ============  ============  ===========  =============

</TABLE>
<TABLE>
<CAPTION>



                                                                    As of December 31
                                         ----------------------------------------------------------------------
                                         Tumbleweed,                          Tumbleweed,
                                             Inc.                                 LLC
                                         ----------- ----------------------------------------------------------
                                                          Pro
                                                         Forma
                                             1999      1998 (3)      1998         1997        1996       1995
                                             ----      --------      ----         ----        ----       ----
                                                                 (In thousand)
Balance Sheet Data:
<S>                                      <C>         <C>         <C>         <C>         <C>         <C>
Total assets                             $    36,579 $    33,681 $   33,681  $    26,068 $    21,262 $   17,831
Long-term debt and capital lease
  obligations, including current
  maturities                                  15,145      13,363     13,363        8,542       5,776      3,077
Total liabilities                             19,016      24,743     24,103       10,725       7,108      4,132
Redeemable members' equity                    -            -         18,925       23,420      20,233     16,413
Members' equity                               -            -            354            7           7          7
Members' retained earnings (deficit)          -            -         (9,701)      (8,083)     (6,085)    (2,721)
Stockholders' equity                          17,563       -          -           -           -            -
Pro forma stockholders' equity                -            8,938      -           -           -            -
<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 35%.

(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 related
      to the termination of Tumbleweed,  LLC's limited  liability company status
      and the conversion of Tumbleweed,  LLC's members' interests into 5,105,000
      shares of Company common stock effective January 1,1999.
</FN>
</TABLE>




                                     - 15 -

<PAGE>



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 restaurants, the
availability of experienced  management and hourly employees,  and other factors
set forth  below and in  "Forward-Looking  Statements/Risk  Factors"  in Item 1.
Business.

Of the 51 Tumbleweed  restaurants as of December 31, 1999, we owned and operated
29  restaurants  in Kentucky,  Indiana and Ohio,  franchised 17  restaurants  in
Indiana,  Illinois,   Kentucky,  Tennessee  and  Wisconsin,  and  licensed  five
restaurants  in Germany,  Jordan,  Egypt and Saudi Arabia.  The following  table
reflects  changes  in the  number  of  company-owned  restaurants  for the years
presented.

       Company Restaurants                     1999       1998      1997
       -------------------                     ----       ----      ----

         In operation, beginning of year        25         17        15
         Restaurants opened                      4          8         2
         Restaurants closed                      0          0         0
                                                ---        ---       ---
         In operation, end of year              29         25        17
                                                ---        ---       ---


         Franchise and Licensed Restaurants

           In operation, beginning of year      18         12         9
           Restaurants opened                    8          7         3
           Restaurants closed                   (4)        (1)        0
                                                ---        ---       ---
           In operation, end of year            22         18        12
                                                ---        ---       ---
                           System total         51         43        29
                                                ===        ===       ===

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,  we had
been treated as a  partnership  for income tax purposes  and,  accordingly,  had
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 years if we had been subject to corporate income
taxes for the years presented.

The following  section  should be read in conjunction  with "Selected  Financial
Data"  included  above in Item 6 and our  financial  statements  and the related
notes included below in Item 8.











                                     - 16 -

<PAGE>



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.
<TABLE>
<CAPTION>

                                                    Years Ended December 31

                                                   1999       1998      1997
                                                 -----------------------------
Revenues:
<S>                                                   <C>       <C>       <C>
   Restaurant sales                                   94.6%     94.6  %   93.5 %
   Commissary sales                                    2.3       2.4       3.4
   Franchisee fees and royalties                       2.1       1.8       1.9
   Other revenues                                      1.0       1.2       1.2
                                                 -----------------------------
          Total revenues                             100.0     100.0     100.0
Operating expenses:
   Restaurant cost of sales (1)                       29.3      29.1      29.4
   Commissary cost of sales (2)                       90.1      87.0      88.2
   Operating expenses (1)                             50.2      51.6      50.3
   Selling, general and administrative                 9.7       9.7      10.2
   Preopening expenses                                 0.8       1.9       1.8
   Depreciation and amortization                       3.5       3.4       3.3
   Total operating expenses                           91.2      93.4      92.8
                                                 -----------------------------
   Income from operations                              8.8       6.6       7.2
Interest expense, net                                 (2.2)     (2.0)     (1.4)
                                                 -----------------------------
Income before income taxes and cumulative
   effect of a change in accounting
   principle                                           6.6       4.6       5.8
Provision for income taxes:
   Current and deferred                               (2.3)    -          -
   Deferred taxes related to a change
    in tax status                                     (1.3)    -          -
                                                  -----------------------------
Total provision for income taxes                      (3.6)    -          -
                                                  -----------------------------
Income before cumulative effect
   of a change in accounting principle                 3.0       4.6       5.8
Cumulative effect of a change in
   accounting principle, net of tax                   (0.7)    -             -
                                                  -----------------------------
Net income                                             2.3%      4.6%      5.8%
                                                  =============================
Pro forma income data (unaudited):
   Income before income taxes and
     cumulative effect of a change in
     accounting principle as reported                  6.6%      4.6%      5.8%
   Pro forma income taxes (3)                         (2.3)     (1.6)     (2.1)
                                                  -----------------------------
   Pro forma income before cumulative
     effect of a change in accounting
     principle                                         4.3       3.0       3.7
   Cumulative effect of a change in
     accounting principle, net of tax                 (0.7)    -             -
                                                  -----------------------------
   Pro forma net income                                3.6%      3.0%      3.7%
                                                  =============================
<FN>

(1)    As percentage of restaurant sales.
(2)    As percentage of commissary sales.
(3)    The  pro  forma  income  taxes   reflect  the  effect  of  the  corporate
       reorganization  on the  historical  net income  assuming  the Company was
       taxed as a C  corporation  for income tax purposes  throughout  the years
       presented with an assumed  combined  federal and state effective tax rate
       of 35%.

</FN>
</TABLE>

                                     - 17 -

<PAGE>



COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 and 1998

Total  revenues  increased  by  $8,537,243  or  19.9% in 1999  compared  to 1998
primarily as a result of the following:

Restaurant  sales increased by $8,087,190 or 20.0% in 1999 compared to 1998. The
increase is due  primarily  to the  addition of four  Company-owned  restaurants
during 1999 and an increase in same store sales of 1.3%.

Commissary  sales to  franchised  restaurants  increased by $127,570 or 12.3% in
1999  compared to 1998.  The  increase is due  primarily to the addition of four
additional franchised or licensed restaurants during 1999.

Franchise fees and royalties  increased by $294,146 or 38.2% in 1999 compared to
1998.  The increase was due primarily to a $140,000  increase in franchise  fees
received  upon the  opening  of seven new  franchised  restaurants  during  1999
compared  to  three  during  1998.   Additionally,   royalty  income   increased
approximately  $177,000  during 1999 compared to 1998 as a result of an increase
in  franchised  restaurants.  The  increase in franchise  fees and  royalties is
partially offset by an approximately $23,000 decrease in international territory
fees.

  Other revenues increased by $28,337 or 5.6% in 1999 compared to 1998 primarily
due to an increase in volume related purchasing rebates.

Restaurant  cost of sales  increased by  $2,443,986 or 20.7% in 1999 compared to
1998.  The  increase  was  principally  due to the  opening  of four  additional
Company-owned  restaurants during 1999.  Restaurant cost of sales increased as a
percentage of sales by 0.2% to 29.3% for 1999 compared to 29.1% for 1998.

Commissary  cost of sales  increased  by $147,269  or 16.2% in 1999  compared to
1998.  The increase in commissary  cost of sales is due to increased  commissary
sales in 1999 compared to 1998 and increased  overhead costs. As a percentage to
sales, commissary cost of sales increased 3.1%.

Restaurant  operating expenses increased by $3,496,419 or 16.7% in 1999 compared
to 1998. The increase  reflects the addition of four  Company-owned  restaurants
during 1999. Operating expenses decreased as a percentage of restaurant sales to
50.2% for 1999 from 51.6% for 1998  primarily  due to a 1.1%  decrease  in labor
costs and a 0.3% decrease in restaurant level promotional costs.

Selling,  general and administrative  expenses increased by $831,418 or 20.0% in
1999  compared  to  1998.  The  increase  was  due in part  to the  addition  of
management  and staff  personnel  during 1999 to support the growing  restaurant
base and  additional  advertising  costs.  Because of the  Company's  restaurant
growth plans, management expects selling, general and administrative expenses to
continue to increase during 2000 in absolute  dollars.  As a percentage to total
revenues,  selling, general and administrative expenses were 9.7% of revenues in
1999 and 1998.

Preopening  expenses were  $395,768 in 1999 versus  preopening  amortization  of
$816,604 in 1998. See Note 2 of the consolidated  financial statements regarding
the  adoption of  Statement  of Position  (SOP)  98-5,  "Reporting  the Costs of
Start-Up  Activities."  As a result of the  adoption  of SOP 98-5 on  January 1,
1999,  the  Company  recorded  a  charge  to  income,  net of tax,  of  $341,035
representing the write-off of deferred preopening costs as of December 31, 1998.
The  charge  is  reported  net of taxes as a  cumulative  effect  of a change in
accounting principle.

Depreciation  and  amortization  expense  increased by $362,746 or 25.1% in 1999
compared to 1998 due primarily to the addition of four Company-owned restaurants
during 1999.

Net interest  expense  increased by $259,194 or 29.8% in 1999  compared to 1998.
The  increase  resulted  from  increased   borrowings  to  fund  the  growth  in
Company-owned restaurants and increases in the prime interest rate during 1999.

The combined  effective  federal and state income tax rate was approximately 35%
for 1999  (excluding  the  charge  related  to change in tax  status,  discussed
below). The pro forma adjustments presented for 1998 provide for income taxes as
though we had been  subject  to  corporate  income  taxes  throughout  the years
presented.  Additionally,  as a result of a change in tax status  from a limited
liability  corporation to a C corporation effective January 1, 1999, we recorded
a net deferred income tax liability and income tax expense of $639,623 in 1999.


                                     - 18 -

<PAGE>



The  Company's  pro  forma  income  before  cumulative  effect  of a  change  in
accounting  principle  increased $921,081 or 72.5% in 1999 compared to 1998. Pro
forma basic and diluted earnings per share before  cumulative effect of a change
in accounting principle increased to $0.37 in 1999 compared to $0.25 in 1998.

COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 and 1997

Total  revenues  increased  by  $12,981,395  or 43.5% in 1998  compared  to 1997
primarily as a result of the following:

 Restaurant  sales  increased by  $12,599,805 or 45.2% in 1998 compared to 1997.
The increase is due primarily to the addition of eight Company-owned restaurants
during 1998 and an increase in same stores sales of 1.5%.

Commissary sales to franchised  restaurants increased by $34,255 or 3.4% in 1998
compared  to 1997.  In May 1997,  we made a  decision  to  discontinue  sales of
product not  manufactured by the commissary.  As a result,  commissary sales did
not increase proportionately 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  franchised  restaurants  in 1998  compared to two in 1997,
$23,250 in territory fees received from international  operations and additional
royalties from franchised restaurants opened in 1998 and 1997.

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.  The increase in other  revenues from 1997 to 1998 is also a result of
approximately  $140,000  received from the Ohio Bureau of Worker's  Compensation
which  represented  a return of  invested  premiums  by the  State of Ohio.  The
increases in other  revenues were  partially  offset by the fact that 1997 other
revenues includes  approximately  $178,000 of insurance  proceeds.  There was no
similar income in 1998.

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.

Preopening  expenses  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.

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.


                                     - 19 -

<PAGE>



The pro forma  adjustment  provides for income taxes and state tax rates then in
effect as though we had been  subject  to  corporate  income  taxes for 1998 and
1997. The combined effective tax rate was 35% for 1998 and 1997.

The  Company's  pro  forma  income  before  cumulative  effect  of a  change  in
accounting  principle  increased $155,702 or 14.0% in 1998 compared to 1997. Pro
forma basic and diluted earnings per share before  cumulative effect of a change
in accounting principle increased to $0.25 in 1998 compared to $0.22 in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Our  ability  to expand  our number of  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 our control.  The hiring and retention of management and other  personnel
may be  difficult  given  the low  unemployment  rates in the  areas in which we
intend to  operate.  There can be no  assurance  that we will be  successful  in
opening the number of restaurants  anticipated in a timely manner.  Furthermore,
there can be no assurance that our new  restaurants  will generate sales revenue
or profit margins  consistent  with those of our existing  restaurants,  or that
these new restaurants will be operated profitably.

Our principal  capital needs arise from the development of new restaurants,  and
to a lesser extent,  maintenance  and  improvement of existing  facilities.  The
principal   sources  of  capital  to  fund  these   expenditures  were  members'
contributions  (prior to January 1, 1999),  internally generated cash flow, bank
borrowings, lease financing and an equity offering. The following table provides
certain  information  regarding  our  sources  and uses of capital for the years
presented:


                                                          Years
                                                    Ended December 31
                                                    -----------------
                                             1999           1998          1997
                                             ----           ----          ----
Net cash provided by operations         $  3,592,419  $  3,447,666 $  3,040,836
Purchases of property and equipment        6,915,544     5,313,575    4,105,089
Proceeds from common stock offering        7,766,300         -            -
Net distributions of
   members' equity                             -          (328,788)    (525,002)
Net borrowings of  long-term debt and
   capital lease obligations               1,781,865     3,251,135    1,797,898
Payment on short-term borrowings          (6,990,348)        -            -

Our single largest use of funds has been for capital expenditures  consisting of
land, building and equipment  associated with our restaurant  expansion program.
The  substantial  growth  of  the  Company  over  the  years  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.

We both own and lease our restaurant  facilities.  Management determines whether
to  acquire  or  lease a  restaurant  facility  based on our  evaluation  of the
financing alternatives available for a particular site.

We plan to open five  Company-owned  restaurants  during 2000,  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, 1999, the

                                     - 20 -

<PAGE>



Company had one additional  restaurant under construction,  which is expected to
open in the second quarter of 2000. We 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 2000. The remaining  costs
will be funded by available  cash  reserves,  cash provided from  operations and
borrowing capacity.  Management believes such sources will be sufficient to fund
our expansion  plans through 2000.  Should our actual results of operations fall
short of, or our rate of expansion  significantly  exceed  plans,  or should our
costs  or  capital  expenditures  exceed  expectations,  we  may  need  to  seek
additional financing in the future. In negotiating such financing,  there can be
no  assurance  that  we  will  be able to  raise  additional  capital  on  terms
satisfactory to us.

In order to  provide  any  additional  funds  necessary  to  pursue  our  growth
strategy,  we may incur, from time to time,  additional short and long-term bank
indebtedness  and may issue, in public or private  transactions,  our 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 us.

We have a  $6,500,000  revolving  line of credit  with  National  City Bank (the
"Credit Facility"). As of December 31, 1999, we had outstanding borrowings under
the Credit  Facility of  $5,242,148.  The note bears  interest at the prime rate
plus .25% (8.75% at December  31,1999) and is due December 31, 2002.  The Credit
Facility  imposes  restrictions on us 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.

CHANGE IN ACCOUNTING PRINCIPLE

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 was effective  beginning January 1,1999 and requires that start-up costs
capitalized prior to January 1,1999 be written-off and any future start-up costs
be expensed as incurred.  Prior to 1999, we  capitalized  our  preopening  costs
incurred in connection  with opening new restaurant  locations.  The unamortized
balance of our deferred  preopening costs ($524,669 as of December 31,1998) were
written-off  (net of income  taxes of  $183,634)  as a  cumulative  effect of an
accounting change on January 1,1999.

YEAR 2000

We  experienced  no disruptions to our business as a result of the conversion to
the Year 2000.  The total Year 2000  project  cost was  approximately  $400,000,
which  includes the purchase of new hardware and software that was  capitalized.
The project was funded by cash flow from  operations.  We do not  anticipate any
significant additional  expenditures for Year 2000 compliance.  We will continue
to monitor our mission critical computer applications and those of our suppliers
and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

IMPACT OF INFLATION

The  impact  of  inflation  on the  cost of  food,  labor,  equipment,  land and
construction  costs could  adversely  affect our  operations.  A majority of our
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 our  restaurants  are  located,  we have  continued to increase
wages and  benefits  in order to attract  and retain  management  personnel  and
hourly  workers.  In  addition,  most of our  leases  require  us to pay  taxes,
insurance,  maintenance,  repairs and utility costs, and these costs are subject
to  inflationary  pressures.  Most of the leases  provide for  increases in rent
based on increases in the Consumer  Price Index when the leases are renewed.  We
may  attempt to offset  the  effect of  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

We do not  enter  into  derivative  transactions  or  speculate  on  the  future
direction of interest rates.  We are exposed to interest rate changes  primarily
as a result of our  variable  rate debt  instruments.  As of December  31, 1999,
approximately  $10.8  million of our debt bore  interest at variable  rates.  We
believe that the effect,  if any, of reasonably  possible  near-term  changes in
interest  rates on our financial  position,  results of operations or cash flows
would not be significant.


                                     - 21 -

<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
   Report of Independent Auditors                                            23

   Consolidated Statements of Income for the years ended
     December 31, 1999, 1998 and 1997                                        24

   Consolidated Balance Sheets as of December 31, 1999 and 1998              25

   Statements of Redeemable  Members' Equity,  Members'  Equity,  Members'
     Retained Earnings (Deficit) and Stockholders' Equity for the years
     ended December 31, 1999, 1998 and 1997                                  26

   Consolidated Statements of Cash Flows for the years ended
     December 31, 1999, 1998 and 1997                                        27

   Notes to Consolidated Financial Statements                                28







































                                     - 22 -

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Tumbleweed, Inc.


We have audited the accompanying consolidated balance sheets of Tumbleweed, Inc.
as of December 31, 1999 and 1998,  and the related  consolidated  statements  of
income,  redeemable members' equity, members' equity, members' retained earnings
(deficit) and stockholders' equity and cash flows for each of the three years in
the  period  ended  December  31,  1999.  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 auditing standards generally accepted
in the United States. 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 consolidated  financial position of Tumbleweed,  Inc.
at December 31, 1999 and 1998 and the consolidated results of its operations and
its cash flows for each of the three  years in the  period  ended  December  31,
1999, in conformity with accounting  principles generally accepted in the United
States.

As discussed in Note 2 to the  consolidated  financial  statements,  in 1999 the
Company  changed its method of accounting  for  pre-opening  and other  start-up
costs by adopting  the  American  Institute  of  Certified  Public  Accountants'
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities".



/s/ Ernst & Young, LLP
Louisville, Kentucky
March 3, 2000






















                                     - 23 -

<PAGE>
<TABLE>
<CAPTION>
                                Tumbleweed, Inc.

                        Consolidated Statements of Income

                                                                                      Years Ended December 31
                                                                              1999            1998            1997
                                                                           ------------------------------------------
Revenues:
<S>                                                                       <C>            <C>             <C>             <C>
   Restaurant sales                                                       $48,578,123    $ 40,490,933    $ 27,891,128    $
   Commissary sales                                                         1,168,836       1,041,266       1,007,011
   Franchise fees and royalties                                             1,064,952         770,806         563,056
   Other revenues                                                             532,976         504,639         365,054
                                                                           ------------------------------------------
Total revenues                                                             51,344,887      42,807,644      29,826,249

Operating expenses:
   Restaurant cost of sales                                                14,232,564      11,788,578       8,191,928
   Commissary cost of sales                                                 1,053,083         905,814         887,793
   Operating expenses                                                      24,377,631      20,881,212      14,035,693
   Selling, general and administrative expenses                             4,981,721       4,150,303       3,051,740
   Preopening expenses                                                        395,768         816,604         544,723
   Depreciation and amortization                                            1,804,757       1,442,011         971,863
                                                                           ------------------------------------------
Total operating expenses                                                   46,845,524      39,984,522      27,683,740
                                                                           ------------------------------------------
Income from operations                                                      4,499,363       2,823,122       2,142,509

Other income (expense):
   Interest income                                                             40,684          61,759          62,120
   Interest expense                                                        (1,169,590)       (931,471)       (490,718)
                                                                           ------------------------------------------
Total other expense                                                        (1,128,906)       (869,712)       (428,598)
                                                                           ------------------------------------------

Income before income taxes and cumulative effect of a
   change in accounting principle                                           3,370,457       1,953,410       1,713,911

Provision for income taxes:
   Current and deferred                                                    (1,179,659)              -               -
   Deferred taxes related to change in tax status                            (639,623)              -               -
                                                                           ------------------------------------------
Total provision for income taxes                                           (1,819,282)              -               -
                                                                           ------------------------------------------

Income before cumulative effect of a change
   in accounting principle                                                  1,551,175       1,953,410       1,713,911

Cumulative effect of a change in accounting principle, net
   of tax                                                                    (341,035)              -               -
                                                                           ------------------------------------------

Net income                                                                $ 1,210,140    $  1,953,410    $  1,713,911
                                                                           ==========================================

Basic and diluted earnings per share:
   Income before cumulative effect of a change in accounting principle    $      0.27    $          -    $         -
   Cumulative effect of a change in accounting principle, net of tax            (0.06)              -              -
                                                                           ------------------------------------------
   Net income                                                             $      0.21    $          -    $         -
                                                                           ==========================================
Pro forma income data (unaudited):
   Income before income taxes and cumulative effect of a
     change in accounting principle as reported                           $ 3,370,457    $  1,953,410    $  1,713,911
   Pro forma income taxes                                                   1,179,659)       (683,693)       (599,896)
                                                                           -------------------------------------------
   Pro forma income before cumulative effect of a change
     in accounting principle                                                2,190,798       1,269,717       1,114,015
   Cumulative effect of a change in accounting principle,
     net of tax                                                              (341,035)              -               -
                                                                           -------------------------------------------

   Pro forma net income                                                   $ 1,849,763    $  1,269,717    $  1,114,015
                                                                           ===========================================
Pro forma basic and diluted earnings per share:
   Pro forma income before cumulative effect of a change
     in accounting principle                                              $      0.37    $       0.25    $       0.22
   Cumulative effect of a change in accounting principle,
     net of tax                                                                 (0.06)              -               -
                                                                           -------------------------------------------

   Pro forma net income                                                   $      0.31    $       0.25    $       0.22
                                                                           ===========================================
</TABLE>
See accompanying notes.

                                     - 24 -
<PAGE>
<TABLE>
<CAPTION>
                                Tumbleweed, Inc.

                           Consolidated Balance Sheets

                                                                                                    Pro forma
                                                                            December 31            December 31
                                                                        1999          1998            1998
                                                                   ----------------------------  --------------
                                                                                                   (Unaudited)
Assets
Current assets:
<S>                                                                <C>            <C>            <C>
   Cash and cash equivalents                                       $    640,189   $  1,898,973   $    1,898,973
   Accounts receivable                                                  606,283        433,872         433,872
   Inventories                                                        1,597,794      1,333,591       1,333,591
   Prepaid expenses                                                     389,271        330,439         330,439
   Deferred preopening expenses                                               -        524,669         524,669
                                                                    ---------------------------   -------------
Total current assets                                                  3,233,537      4,521,544       4,521,544

Property and equipment, net                                          30,147,559     24,920,797      24,920,797

Goodwill, net of accumulated amortization of
   $551,478 in 1999 and $440,242 in 1998                              2,737,265      2,833,704       2,833,704

Other assets                                                            460,817      1,404,861       1,404,861

                                                                    ---------------------------   -------------
Total assets                                                       $ 36,579,178   $ 33,680,906   $  33,680,906
                                                                    ===========================   =============


Liabilities, Redeemable Members' Equity, Members'  Equity,
   Members' Retained Earnings (Deficit) and Stockholders' Equity
Current liabilities:
   Short-term borrowings                                           $          -   $  6,990,348   $   6,990,348
   Accounts payable                                                   1,102,024      1,781,418       1,781,418
   Accrued liabilities                                                1,771,360      1,873,651       1,873,651
   Income taxes payable                                                  61,376              -               -
   Deferred income taxes                                                286,885              -         467,420
   Current maturities on long-term
     debt and capital leases                                          1,028,443        895,310         895,310
                                                                    ---------------------------   -------------
Total current liabilities                                             4,250,088     11,540,727      12,008,147

Long-term liabilities:
   Long-term debt, less current maturities                           11,347,047      9,180,358       9,180,358
   Capital lease obligations, less current maturities                 2,769,339      3,287,296       3,287,296
   Deferred income taxes                                                489,869              -         172,203
   Other liabilities                                                    160,000         94,838          94,838
                                                                    ---------------------------   -------------
Total long-term liabilities                                          14,766,255     12,562,492      12,734,695
                                                                    ---------------------------   -------------

Total liabilities                                                    19,016,343     24,103,219      24,742,842

Redeemable members' equity                                                    -     18,924,688               -

Members' equity                                                               -        354,459               -

Members' retained earnings (deficit)                                          -     (9,701,460)              -

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; 5,881,630 shares issued
     and outstanding in 1999 (5,105,000 shares on a
     pro forma basis in 1998)                                            58,818              -          51,050
   Paid-in capital                                                   16,294,006              -       8,887,014
   Retained earnings                                                  1,210,011              -               -
                                                                    ---------------------------   -------------
     Total stockholders' equity                                      17,562,835              -       8,938,064
                                                                    ---------------------------   -------------

Total liabilities and stockholders' equity                         $ 36,579,178   $ 33,680,906      33,680,906
                                                                    ===========================   =============
</TABLE>
See accompanying notes.


                                     - 25 -
<PAGE>

<TABLE>
<CAPTION>
                                Tumbleweed, Inc.

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

                  Years Ended December 31, 1999, 1998 and 1997

<CAPTION>

                                                                        Redeemable
                                                                         Members'                      Retained
                                            Common       Paid-In     Equity - Class A   Members'       Earnings
                                            Stock        Capital          Members        Equity       (Deficit)        Total
                                       ----------------------------------------------------------------------------------------

<S>                                     <C>          <C>             <C>             <C>           <C>            <C>
Balance at December 31, 1996            $        -   $            -  $   20,232,519  $     6,959   $  (6,084,974) $  14,154,504
Proceeds from issuance of
     members' equity                             -                -          50,958            -               -         50,958
Distributions of members' equity                 -                -        (575,960)           -               -       (575,960)
Net income                                       -                -               -            -       1,713,911      1,713,911
Accretion of redeemable
     members' equity                             -                -       3,712,221            -      (3,712,221)             -
                                       -----------------------------------------------------------------------------------------
Balance at December 31, 1997                     -                -      23,419,738        6,959      (8,083,284)    15,343,413
Captial contribution                             -                -               -      747,500               -        747,500
Distributions of members' equity                 -                -      (1,076,288)    (400,000)              -     (1,476,288)
Assumption of members' line
     of credit                                   -                -      (6,990,348)           -               -     (6,990,348)
Net income                                       -                -                            -       1,953,410      1,953,410
Accretion of redeemable
     members' equity                             -                -       3,571,586            -      (3,571,586)             -
                                       -----------------------------------------------------------------------------------------
Balance at December 31, 1998                     -                -      18,924,688      354,459      (9,701,460)     9,577,687
Merger of Tumbleweed, LLC
     into Tumbleweed, Inc.                  51,050        9,526,637     (18,924,688)    (354,459)      9,701,460              -
Tumbleweed, Inc. balances as of
     January 1, 1999                             1              129               -            -            (129)             1
Proceeds from common stock offering          7,767        7,758,533               -            -               -      7,766,300
Public offering costs                            -         (991,293)              -            -               -       (991,293)
Net income                                       -                -               -            -       1,210,140      1,210,140
                                       -----------------------------------------------------------------------------------------
Balance at December 31, 1999            $   58,818   $   16,294,006  $            -  $         -   $   1,210,011  $  17,562,835
                                       =========================================================================================

</TABLE>















See accompanying notes.



                                     - 26 -


<PAGE>
<TABLE>
                                Tumbleweed, Inc.

                      Consolidated Statements of Cash Flows

<CAPTION>

                                                                                    Years Ended December 31
                                                                            1999            1998             1997
                                                                      ------------------------------------------------

Operating activities:
<S>                                                                  <C>            <C>               <C>
   Net income                                                        $   1,210,140  $     1,953,410   $     1,713,911
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation                                                      1,650,327        1,285,833           829,250
       Amortization                                                        154,430          156,178           142,613
       Preopening cost amortization                                              -          816,604           544,723
       Deferred income taxes                                               776,754                -                 -
       Loss on disposition of property and equipment                        38,455            7,324            13,499
       Changes in operating assets and liabilities:
         Accounts receivable                                              (172,411)         (87,172)          (50,091)
         Inventories                                                      (264,203)        (508,562)         (126,573)
         Deferred preopening expenses                                      524,669       (1,074,173)         (316,822)
         Prepaid expenses                                                  (79,021)         (51,466)           19,062
         Other assets                                                      (93,756)        (114,550)          (98,042)
         Accounts payable                                                 (177,212)         104,590            31,938
         Accrued liabilities                                              (102,291)         983,396           258,784
         Income taxes payable                                               61,376                -                 -
         Other liabilities                                                  65,162          (23,746)           78,584
                                                                      ------------------------------------------------
Net cash provided by operating activities                                3,592,419        3,447,666         3,040,836

Investing activities:
   Purchases of property and equipment                                  (6,915,544)      (5,313,575)       (4,105,089)
   Proceeds from sale of food courts, net of cash
     relinquished                                                                -                -           100,000
                                                                      ------------------------------------------------

Net cash used in investing activities                                   (6,915,544)      (5,313,575)       (4,005,089)

Financing activities:
   Capital contribution from Class B members                                     -          747,500                 -
   Proceeds from issuance of members' equity                                     -                -            50,958
   Distribution of members' equity                                               -       (1,076,288)         (575,960)
   Proceeds from common stock offering                                   7,766,300                -                 -
   Proceeds from issuance of long-term debt                              8,193,436        5,580,463         3,452,361
   Payments on long-term debt and capital lease obligations             (6,411,571)      (2,329,328)       (1,654,463)
   Payment on short-term borrowings                                     (6,990,348)               -                 -
   Payment of public offering costs                                       (493,476)        (386,332)         (111,485)
                                                                      ------------------------------------------------
Net cash provided by financing activities                                2,064,341        2,536,015         1,161,411
                                                                      ------------------------------------------------

Net increase (decrease) in cash and cash equivalents                    (1,258,784)         670,106           197,158

Cash and cash equivalents at beginning of year                           1,898,973        1,228,867         1,031,709
                                                                      ------------------------------------------------
Cash and cash equivalents at end of year                             $     640,189  $     1,898,973   $     1,228,867
                                                                      ================================================

Supplemental cash flow information:
   Cash paid for interest, net of amount capitalized                 $   1,166,934  $       947,674   $       473,055
                                                                      ================================================

Noncash investing and financing activities:
   Equipment acquired by capital lease obligations                   $           -  $     1,570,246   $       967,529
                                                                      ================================================
   Public offering costs not paid at year-end                        $           -  $       502,183   $             -
                                                                      ================================================

</TABLE>


See accompanying notes.


                                     - 27 -


<PAGE>

                                TUMBLEWEED, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   Basis of Presentation

MERGER OF TUMBLEWEED, LLC AND TUMBLEWEED, INC.

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  776,630  shares  of  common  stock  in an  initial  public  offering  (IPO),
Tumbleweed,  LLC  (Tumbleweed)  was merged into the  Company.  The  interests of
Tumbleweed  members at the time of the  merger  were  converted  into a total of
5,105,000  shares of Company common stock.  As of December 31, 1998, the Company
had not conducted any operations and all expenditures  through December 31, 1998
related to the IPO were funded and  recorded  by  Tumbleweed.  The  accompanying
consolidated  statements  of income and cash flows for the years ended  December
31, 1998 and 1997 and balance  sheet and pro forma  balance sheet as of December
31, 1998 are those of Tumbleweed and are included for comparative purposes since
it was the predecessor company.

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

Class A Members had, in addition to their cash contributions, provided financing
which was  accounted  for as redeemable  members'  equity prior to  Tumbleweed's
assumption  of the debt on December 31, 1998 (see Note 7). The capital  accounts
of the  Common,  Class  B and  Class C  Members  were  $6,000,  $459  and  $500,
respectively,  as of December 31, 1997 and 1996. During 1998, the Common Members
received  a  distribution  of  $400,000  and the Class B Members  made a capital
contribution of $747,500.  The capital accounts of the Common, Class B and Class
C Members were $(394,000),  $747,959 and $500, respectively,  as of December 31,
1998.

RESTAURANT FACILITIES

The Company operates and franchises  Tumbleweed Southwest Mesquite Grill and Bar
full service  restaurants.  Following is a summary of the number of  restaurants
open as of December 31:




                                                  1999       1998      1997
                                                  ----       ----      ----
Company owned                                      29         25        17
Franchised and licensed                            22         18        12
                                                   --         --        --
    Total                                          51         43        29
                                                   ==         ==        ==

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

PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

Pursuant to the rules and regulations of the Securities and Exchange Commission,
the  accompanying pro forma balance sheet for Tumbleweed as of December 31, 1998
reflects  the  change  in  capitalization  attributable  to  the  conversion  of
Tumbleweed's members' interests into 5,105,000 shares of Tumbleweed, Inc. common
stock as if the IPO had closed






                                     - 28 -

<PAGE>



1.   Basis of Presentation (continued)

PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

on December 31, 1998 (excluding the effects of the offering  proceeds).  The pro
forma  balance  sheet also  reflects  the  deferred  tax  effects of  Tumbleweed
changing from a limited liability company (which is taxed as a partnership) to a
regular  corporate  taxable  status.  Such  deferred tax effects are 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 years ended December 31, 1999, 1998 and 1997 reflects a pro forma adjustment
to income  before income taxes and  cumulative  effect of a change in accounting
principle  for  federal  and state  income  taxes as if the  Company  had been a
regular  corporate  taxpayer  throughout the years  presented.  Pro forma income
taxes for 1999 excludes the deferred tax effects of  Tumbleweed  changing from a
limited  liability  company  (which  is taxed  as a  partnership)  to a  regular
corporate  taxable  status.  Pro forma  income taxes for 1998 and 1997 are at an
estimated  effective rate of 35%. Pro forma basic and diluted earnings per share
is computed  based upon the  weighted  average  number of shares of common stock
outstanding  for 1999. For 1998 and 1997, the weighted  average number of shares
outstanding  assumes the  conversion of  Tumbleweed's  members'  interests  into
5,105,000 shares of common stock as of the beginning of the period.

2. Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiary.  Intercompany  accounts and transactions have been
eliminated in consolidation.

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.

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.  During 1998
and 1997,  these expenses were 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 was effective beginning January 1, 1999 and requires that start-up costs
capitalized  prior to January  1, 1999 be  written-off  and any future  start-up
costs be expensed  as  incurred.  Prior to 1999,  the  Company  capitalized  its
preopening  costs incurred in connection with opening new restaurant  locations.
The unamortized  balance of the Company's deferred preopening costs ($524,669 as
of December  31,  1998) was  written-off  (net of income taxes of $183,634) as a
cumulative effect of a change in accounting principle on January 1, 1999.




                                     - 29 -

<PAGE>



2. Significant Accounting Policies (continued)

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 life 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.

OTHER ASSETS

Other assets at December 31, 1998  included  approximately  $1,000,000  of costs
incurred in connection with the Company's  initial public offering.  These costs
were funded from the proceeds of the offering in January 1999.

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 would be written
down to  current  fair  value,  which is  generally  determined  from  estimated
discounted  future net cash flows (assets held for use) or net realizable  value
(assets held for sale).

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.

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.  Company  contributions to
the  Marketing  Fund for the years ended  December 31, 1999,  1998 and 1997 were
$117,362, $95,674 and $66,488, respectively. Advertising expense, which includes
the


                                     - 30 -

<PAGE>



2. Significant Accounting Policies (continued)

ADVERTISING COSTS (CONTINUED)

Company's  contributions to the Marketing Fund, for the years ended December 31,
1999, 1998 and 1997 were $1,253,392, $1,052,075 and $631,421, respectively.

INCOME TAXES

Through December 31, 1998,  Tumbleweed was a limited liability company which was
taxed as a partnership  for federal and state income tax purposes.  Accordingly,
any tax liability related to income was reported by the Members of Tumbleweed.

Concurrent with the merger as described in Note 1,  Tumbleweed  converted from a
limited liability company into a C corporation and is now subject to federal and
state income  taxes.  As of the date of the merger,  the Company  recorded a net
deferred  tax  liability  and  corresponding  income tax expense for  cumulative
temporary  differences  between  the tax basis and the  reported  amounts of the
Company's assets and liabilities. At the date of the merger, the net differences
equaled  approximately  $1,780,000 resulting in a net deferred tax liability and
corresponding  income tax expense of $639,623  which is included in the deferred
income tax provision in the  accompanying  consolidated  statement of income for
the year ended December 31, 1999.

3. Property and Equipment

Property and equipment as of December 31 consist of:


                                                        1999           1998
                                                  ----------------------------

Land and land improvements                       $   8,698,101  $   6,869,638
Building and improvements                           13,312,798      9,999,830
Leasehold improvements                               2,062,449      2,318,396
Equipment                                            5,926,655      3,986,928
Building and equipment under capital leases          4,274,559      4,249,458
Construction in progress                               556,549        536,324
                                                  ----------------------------
                                                    34,831,111     27,960,574
Less accumulated depreciation and amortization      (4,683,552)    (3,039,777)
                                                  ----------------------------
                                                 $  30,147,559  $  24,920,797
                                                  ============================

4. Accrued Liabilities

Accrued liabilities as of December 31 consist of:


                                                        1999             1998
                                                  ----------------------------

Accrued payroll and related taxes                $     611,566  $     792,809
Accrued insurance and fees                             251,923        284,270
Accrued taxes, other than income and payroll           362,578        393,593
Gift certificate liability                             396,747        275,743
Other                                                  148,546        127,236
                                                  ----------------------------
                                                 $   1,771,360  $   1,873,651
                                                  ============================









                                     - 31 -

<PAGE>



5.  Long-Term Debt

Long-term debt as of December 31 consists of:



                                                         1999           1998
                                                     ---------------------------
Secured  $6,500,000  mortgage revolving line of
 credit note, bearing interest at prime rate
 plus .25% (8.75% at December 31, 1999), due
 December 31, 2002                                   $ 5,242,148   $  4,302,148

Secured  mortgage note payable, bearing interest at
 commercial paper rate plus 2.65% (8.28% at
 December 31, 1999), due February 17, 2006             2,691,433           -

Secured  mortgage note payable, bearing interest at
 prime rate plus 1% (9.5% at December 31, 1999),
 payable in monthly installments through October 1,
 2017                                                  1,061,614      1,084,274

Secured  mortgage note payable, bearing interest at
 8.75% , payable in monthly installments through
 February 15, 2008                                       957,992        991,396

Secured mortgage note payable, bearing interest
 at prime rate (8.5% at December 31,1999), payable
 in monthly installments through March 1, 2006           658,071           -

Secured mortgage note payable, bearing interest at
 prime rate plus 1.25% (9.75% at December 31,
 1999), payable in monthly installments through
 November 27, 2016                                       634,375        671,875

Secured mortgage note payable, bearing interest at
 commercial paper rate plus 3.0%                            -         1,111,928

Secured mortgage note payable, bearing interest
 at commercial paper rate plus 3.1%                         -           695,230

Other installment notes payable                          624,599        750,595
                                                     ---------------------------
                                                      11,870,232      9,607,446
Less current maturities                                  523,185        427,088
                                                     ---------------------------
Long-term debt                                       $11,347,047   $  9,180,358
                                                     ===========================

Property and equipment  with a net book value of  approximately  $20,800,000  at
December 31, 1999 collateralize the Company's long-term debt.


                                      - 32-

<PAGE>



5.  Long-Term Debt (continued)

The aggregate  annual  maturities of long-term debt for the years  subsequent to
December 31, 1999 are as follows:

                    2000             $    523,185
                    2001                  738,509
                    2002                5,511,585
                    2003                  367,712
                    2004                  364,984
                    Thereafter          4,364,257
                                     ------------
                    Total            $ 11,870,232
                                     ============


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
$50,907 in 1999, $104,231 in 1998 and $103,488 in 1997.

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, 1999 were as follows:



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

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
2004                                         84,000        261,661      345,661
Thereafter                                1,092,000      1,054,933    2,146,933
                                       -----------------------------------------
Total minimum lease payments          $   1,512,000   $  3,730,933    5,242,933
                                      =============================
Less amount representing interest
 at 6.25% to 11.3%                                                   (1,968,336)
                                                                     -----------
Net present value of lease payments                                   3,274,597
Less current maturities                                                 505,258
                                                                     -----------
Long-term portion of capital leases                                 $ 2,769,339
                                                                     ===========











                                     - 33 -

<PAGE>



6.  Leases (continued)

The Company leases certain  restaurants  and equipment  under  operating  leases
having terms expiring  between 2002 and 2017.  Most of the  restaurant  facility
leases have renewal clauses of five to twenty years exercisable at the option of
the  Company  and one of the leases  are with a related  party.  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, 1999
were as follows:


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

2000          $      60,000  $   1,344,772  $   1,404,772
2001                 60,000      1,343,853      1,403,853
2002                 60,000      1,342,299      1,402,299
2003                 60,000      1,357,699      1,417,699
2004                 60,000      1,342,699      1,402,699
Thereafter          785,000      9,947,311     10,732,311
               ------------------------------------------
              $   1,085,000  $  16,678,633  $  17,763,633
               ==========================================

Total rental expense was  approximately  $1,654,735 in 1999,  $1,455,500 in 1998
and $975,300 in 1997 and included  contingent rent of approximately  $207,000 in
1999, $178,700 in 1998 and $30,700 in 1997. Rental expense for the related party
leases was  approximately  $407,900 in 1999,  $436,200  in 1998 and  $282,000 in
1997.

7.  Redeemable Class A Member Units and Bank Line of Credit

As of December 31, 1998,  Tumbleweed 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  Tumbleweed  assumed the total
liability of $6,990,348.  Prior to Tumbleweed  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 Tumbleweed were accounted for as distributions to the Class A Members.

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 $7,766,300  from the IPO
(see Note 1). If an IPO had not  occurred,  any Class A Member  had the right to
sell to  Tumbleweed  their  interest in  Tumbleweed  at any time after the fifth
anniversary  of the  date  that a Class A  Member  was  admitted  to  Tumbleweed
(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  Tumbleweed  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  consolidated  balance  sheet for the year
ended  December 31, 1998  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.


                                     - 34 -

<PAGE>



8.   Income Taxes

The components of the provision for income taxes for the year ended December 31,
1999  related  to income  before  cumulative  effect  of a change in  accounting
principle consists of the following:

              Current - federal                                $     798,303
              Current - state                                         55,345
              Deferred                                               326,011
              Deferred taxes resulting from
                 a change in tax status                              639,623
                                                                ------------
                                                               $   1,819,282
                                                                ============

The  provision  for income taxes for the year ended  December 31, 1999 on income
before income taxes and  cumulative  effect of a change in accounting  principle
differs from the amount  computed by applying the statutory  federal  income tax
rate due to the following:

              U.S. federal income taxes at 34%                 $   1,145,956
              State income taxes, net of federal tax benefit          81,405
              FICA tax credit                                       (113,217)
              Deferred taxes resulting from change
               in tax status                                         639,623
              Other items                                             65,515
                                                                 -----------
              Effective income taxes                           $   1,819,282
                                                                 ===========

Significant  components of the Company's  deferred tax assets and liabilities as
of December 31, 1999 are as follows:


              Deferred tax assets:
                Book over tax amortization                     $      45,767
                Unearned revenue                                     200,429
                                                                 -----------
                  Total deferred tax assets                          246,196

              Deferred tax liabilities:
                Deferred expenses                                   (424,632)
                Tax over book depreciation                          (598,318)
                                                                 -----------
                  Total deferred tax liabilities                  (1,022,950)
                                                                 -----------
Net deferred tax liability                                      $    776,754
                                                                 ===========

Income tax payments amounted to approximately $800,000 in 1999.

9.   Related Party Transactions

On April 1,  1999,  the  Company  purchased  the  land and  building,  including
improvements,  of the Springdale,  Ohio  restaurant from Keller,  LLC (a limited
liability  company  in  which  a  director  of the  Company  owns a  substantial
interest), the lessor of the property, for $1,625,000. The purchase was made for
an amount substantially equal to the costs originally expended by Keller, LLC in
the  purchase  of  the  land  and  construction  of  the   improvements,   which
approximated the fair market value as determined by an independent appraisal. At
the time of purchase,  the Company entered into a modification  agreement with a
local bank to  increase a line of credit and to place a mortgage on the land and
building to secure the  increased  line of credit.  At the time of the purchase,
the Company's capital lease obligation to Keller,  LLC was terminated.  Prior to
the purchase,  the Company leased the  Springdale,  Ohio restaurant from Keller,
LLC and during 1999 the Company paid rent totaling $46,700 to Keller, LLC.

On July 1,  1999,  the  Company  purchased  the  land  and  building,  including
improvements,  of the Bowling Green,  Kentucky restaurant from Douglass Ventures
(a  Kentucky  general  partnership  and  stockholder  of the  Company in which a
director of the Company is a general  partner) and an unrelated third party, the
co-lessors of the property,  for $884,640.  The purchase price was calculated in
accordance with the lease agreement which  approximated the fair market value as
determined  by an  independent  appraisal.  At the  time  of the  purchase,  the
Company's lease obligation was terminated. The purchase price was funded by cash
reserves and funds drawn on the Company's line of credit. Prior to the purchase,

                                     - 35 -

<PAGE>



9.   Related Party Transactions (continued)

the Company leased the Bowling Green, Kentucky restaurant from Douglass Ventures
and during 1999 the Company paid rent totaling $26,000 to Douglass Ventures.

In February  1997,  Tumbleweed  acquired a 9.5% common  member  interest in T.M.
Riders,  LLC ("TM  Riders") for a nominal  amount.  TM Riders  operated  limited
service food court  restaurants in shopping malls in the  Louisville,  Lexington
and Cincinnati  metropolitan areas and delivery units featuring takeout and home
delivery of Mexican,  Tex- Mex and grilled foods. In September 1998, the Company
relinquished  its interest in TM Riders.  In 1999, TM Riders ceased  operations,
closed its delivery  locations  and sold its  interests in the  Tumbleweed  food
court operations to TW- Indiana,  LLC, an existing  franchisee of the Company in
which a director of the Company is a member.

In February  1997,  Tumbleweed  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,  Tumbleweed sold its
interest  in  TW-Tennessee  to certain  members  of  TW-Tennessee  for  $25,000.
TW-Tennessee  was  organized  to  open  and  operate   Tumbleweed  full  service
restaurants as a franchisee of Tumbleweed.

The Company has guaranteed  renewals of certain guaranteed  indebtedness and any
replacement  indebtedness of TW- Tennessee,  to the extent and in amounts not to
exceed the amounts guaranteed as of September 30, 1998. As of December 31, 1999,
the Company has guaranteed certain TW-Tennessee obligations as follows: a) up to
$1,200,000 under a bank line of credit,  b) approximately  $2,800,000 of a lease
financing  agreement,  and c)  equipment  leases with a bank  totaling  $831,500
jointly and  severally  with  TW-Tennessee  common  members.  During  1999,  the
landlord under the lease  financing  agreement  declared  TW-Tennessee  to be in
default, and accelerated the rent obligations under the leases. Negotiations are
continuing between the landlord and the principals of TW-Tennessee regarding the
restructuring of the lease  obligations,  and management of the Company believes
that TW-Tennessee's default under the leases will not ultimately have a material
adverse  impact on the Company's  financial  position,  results of operations or
cash flows.

TW-Tennessee is governed and managed by a board,  some members of which are also
directors  of the  Company  and  investors  in the  Company.  Certain  of  these
individuals are also investors in TW-Tennessee.

Franchise  fees and  royalties  recorded by the Company in relation to TM Riders
and  TW-Tennessee  were $160,800,  $225,600 and $79,000 in 1999,  1998 and 1997,
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
$40,500, $104,000 and $57,600 in 1999, 1998 and 1997, respectively.

In August 1997,  Tumbleweed,  LLC 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
stockholders of the Company. In 1999, 1998 and 1997, International paid $18,700,
$7,500 and $15,750, respectively, in fees to the Company under the International
Agreement.

Two common  stockholders,  one of which is also a director of the  Company,  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 $311,000 and $242,500 in 1999 and 1998, respectively.

In September 1998, Tumbleweed entered into an agreement to purchase the land and
building,  including  improvements,  located in  Columbus,  Ohio from West Broad
Development  LLC (a limited  liability  company in which a director  and certain
other stockholders of the Company own a substantial interest), the lessor of the
property, under a capital lease obligation. The purchase price of $1,250,000 was
at fair market value as determined by an independent appraisal.  Tumbleweed,  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.

During 1999, the Company entered into management agreements with three companies
who own  Tumbleweed  franchise  restaurants  with  respect  to three  restaurant
locations. The management agreements require the franchisees to pay certain fees
to the Company in exchange for the Company providing  operations  management and
accounting services to the

                                     - 36 -

<PAGE>



9.  Related Party Transactions (continued)

franchisees.  Certain  directors  and  officers of the  Company own  substantial
interests in these limited liability companies. Franchise fees and royalties and
management  and  accounting  fees recorded by the Company in 1999 in relation to
these entities were $90,000 and $13,000, respectively.

10.  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 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 is administered by the Compensation Committee of the Company's Board of
Directors  (the  "Committee").  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.

At December 31, 1999, cumulative total options to purchase 565,441 shares of the
Company's  common  stock had been  granted to  employees  and  directors  of the
Company at prices ranging from $5.50 to $10.00 per share which expire at various
dates during 2009 with a contractual life of 10 years. Initial grants of options
were made at a price equal to the initial  public  offering  price of $10.00 per
share . The exercise  price of subsequent  grants were equal to the market price
at the time of the  grant.  There  were no  options  issued  or  outstanding  at
December 31, 1998.

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  are
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.

Activity in the Plan during 1999 was:

                                                               Weighted
                                                               Average
                                                Shares      Exercise Price
                                                ------      --------------
      Granted                                  565,441        $   9.38
      Exercised                                      -               -
      Forfeited                                (32,775)          10.00
                                               -------
      Outstanding at December 31, 1999         532,666            9.34
                                               =======

The Company  accounts for the Plan in accordance  with APB 25,  "Accounting  for
Stock Issued to Employees," as permitted by FAS 123,  "Accounting and Disclosure
of  Stock-Based  Compensation."  The  Company  has not  recognized  compensation
expense for stock  options  granted  because the  exercise  price of the options
equals the fair value of the underlying stock on the date of grant, which is the
measurement  date. If the  alternative  method of accounting for stock incentive
plans  prescribed  by FAS 123 had been  followed,  the  Company's net income and
earnings  per share for 1999  would have been  reduced to the pro forma  amounts
shown in the following table. For purposes of these pro forma  disclosures,  the
estimated fair value of the options is recognized as  compensation  expense over
the options' vesting




                                     - 37 -

<PAGE>



10.  Stock Incentive Plan (continued)

period.  The weighted average fair value of options granted was determined using
the Black-Scholes option pricing model with the indicated assumptions.


                                                                 1999
                                                                 ----
   Net income as reported                                    $ 1,210,140
   Pro forma net income                                          619,803
   Pro forma basic and diluted earnings per common share            0.11

The following  assumptions were used: (1) risk-free interest rate of 6.50 %; (2)
dividend  yield of 0%; (3) expected  life of 6.5 years;  and (4)  volatility  of
 .655%.  Results may vary depending on the assumptions  applied within the model.
The weighted average fair value per share of options granted was $6.31.

11.   Earnings  per Share

The following is a  reconciliation  of the Company's basic and diluted  earnings
per share in accordance with FAS 128, "Earnings per Share."
<TABLE>
<CAPTION>


                                                         1999          1998           1997
                                                     -----------------------------------------
Numerator:
   Income before cumulative effect of a
<S>                                                 <C>            <C>            <C>
    change in accounting principle                  $   1,551,175
   Cumulative effect of a change in accounting
     principle, net of tax                               (341,035)
                                                     ------------
   Net income                                       $   1,210,140
                                                     ============
Pro forma income data (unaudited):
   Pro forma income before cumulative effect
    of a change in accounting principle             $   2,190,798  $  1,269,717   $  1,114,015
   Cumulative effect of a change in accounting
    principle, net of tax                                (341,035)       -              -
                                                     -----------------------------------------
   Pro forma net income                             $   1,849,763  $  1,269,717   $  1,114,015
                                                     =========================================
Denominator (1):
   Weighted average shares outstanding                  5,881,630     5,105,000      5,105,000
   Effect of dilutive securities:
     Director and employee stock options                      565        -              -
                                                     -----------------------------------------
   Denominator for diluted earnings per
     share - adjusted weighted
     average and assumed conversions                    5,882,195     5,105,000      5,105,000
                                                     =========================================
<FN>

(1) Actual and pro forma for 1999 and pr forma for 1998 and 1997.
</FN>
</TABLE>


12.   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 sales 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
pre-tax  income.  The accounting  policies of the segments are the same as those
described in the summary of significant accounting policies.






                                     - 38 -

<PAGE>



12.   Segment Information (continued)

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

1999:

                                             Restaurant        Commissary        Corporate         Totals
                                            -------------    --------------    -------------   --------------
<S>                                         <C>            <C>               <C>              <C>
Revenues from external customers            $  48,578,123  $      1,168,836  $     1,597,928  $    51,344,887
Intersegment revenues                             -               2,727,283          -              2,727,283
General and administrative expenses               -                -               3,728,329        3,728,329
Advertising expenses                              -                -               1,253,392        1,253,392
Depreciation and amortization                   1,450,288           118,752          235,717        1,804,757
Net interest expense                                    -           172,900          956,006        1,128,906
Income before income taxes
   and cumulative effect of a change
   in accounting principle                      7,338,467            93,911       (4,061,921)       3,370,457
Fixed assets                                   28,160,697         1,147,975          838,887       30,147,559
Expenditures for long-lived assets              6,312,460           237,175          365,909        6,915,544


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
Income before income taxes                      5,853,334           173,361       (4,073,285)       1,953,410
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

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
Income before income taxes                      4,351,013           203,458       (2,840,560)       1,713,911
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
</TABLE>

13.   Subsequent Event

On January 14, 2000, the Board of Directors approved the repurchase from time to
time of up to $500,000 of the Company's  Common Stock.  Purchases may be made in
the open market as well as by private transaction at times and prices considered
appropriate by the Company,  subject to applicable  rules and  regulations.  The
purchases  will be  funded  by cash  reserves.  Subsequently,  the  Company  has
repurchased 17,700 shares at a total cost of $101,851.






                                     - 39 -

<PAGE>



14.   Selected Quarterly Data

The following is a summary of certain unaudited  quarterly results of operations
for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>

1999:

                                                  First         Second         Third          Fourth
                                                 Quarter        Quarter       Quarter        Quarter         Total
                                                 -------        -------       -------        -------         -----

<S>                                          <C>            <C>            <C>            <C>            <C>
Total revenues                               $   11,959,369 $   13,269,554 $  13,525,876  $  12,590,088  $  51,344,887
Income from operations                              865,307      1,320,625     1,309,703      1,003,728      4,499,363
Income (loss) before cumulative effect of a
   change in accounting principle                 (237,296)        678,888       660,533        449,050      1,551,175
Net income (loss)                                 (578,331)        678,888       660,533        449,050      1,210,140
Basic and diluted earnings per share:
   Income before cumulative effect of a
     change in accounting principle                  (0.04)           0.12          0.11           0.08           0.27
   Net income                                        (0.10)           0.12          0.11           0.08           0.21
Pro forma income before cumulative
   effect of a change in accounting
   principle                                        402,327        678,888       660,533        449,050      2,190,798
Pro forma net income                                  61,292       678,888       660,533        449,050      1,849,763
Pro forma basic and diluted earnings
   per share:
   Pro forma income before cumulative
     effect of a change in accounting
     principle                                         0.07           0.12          0.11           0.08           0.37
   Pro forma net income                                0.01           0.12          0.11           0.08           0.31

1998:

                                                  First         Second         Third          Fourth
                                                 Quarter        Quarter       Quarter        Quarter         Total

Total revenues                               $    8,907,876 $   10,777,335 $  11,105,504  $  12,016,929  $  42,807,644
Income from operations                              484,009        828,660       839,197        671,256      2,823,122
Income before cumulative effect of a
   change in accounting principle                   342,147        591,293       613,050        406,920      1,953,410
Net income                                          342,147        591,293       613,050        406,920      1,953,410
Pro forma income before cumulative
   effect of a change in accounting
   principle                                        222,396        384,340       398,482        264,499      1,269,717
Pro forma net income                                222,396        384,340       398,482        264,499      1,269,717
Pro forma basic and diluted earnings per share:
   Pro forma income before cumulative
     effect of a change in accounting
     principle                                         0.04           0.08          0.08           0.05           0.25
   Pro forma net income                                0.04           0.08          0.08           0.05           0.25
</TABLE>

15.  Contingencies

See Note 9, Related Party Transactions, regarding certain guarantees the Company
has made in connection with TW- Tennessee.





                                     - 40 -

<PAGE>



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL

None.

                                    PART III


ITEM 10.   DIRECTORS AND OFFICERS OF THE REGISTRANT

The Proxy  Statement  issued in connection with the  shareholders  meeting to be
held on May 11, 2000, to be filed with the  Securities  and Exchange  Commission
pursuant to Rule 14a-6b,  contains  under the caption  "Election  of  Directors"
information  required by Item 10 of Form 10-K as to directors of the Company and
is  incorporated  herein by  reference.  Pursuant to General  Instruction  G(3),
certain information  concerning executive officers of the Company is included in
Part I of this Form 10-K, under the caption "Executive Officers."

ITEM 11.  EXECUTIVE COMPENSATION

The Proxy  Statement  issued in connection with the  shareholders  meeting to be
held on May 11, 2000, to be filed with the  Securities  and Exchange  Commission
pursuant to Rule 14a-6(b),  contains under the caption "Executive  Compensation"
information  required  by Item 11 of Form  10-K and is  incorporated  herein  by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Proxy  Statement  issued in connection with the  shareholders  meeting to be
held on May 11, 2000, to be filed with the  Securities  and Exchange  Commission
pursuant to Rule  14a-6(b),  contains  under  caption  "Beneficial  Ownership Of
Common Stock"and 'Election of Directors" information required by Item 12 of Form
10-K and is incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Proxy  Statement  issued in connection with the  shareholders  meeting to be
held on May 11, 2000, to be filed with the  Securities  and Exchange  Commission
pursuant to Rule 14a-6(b) contains under the caption "Certain  Relationships and
Related  Transactions"  information  required  by Item 13 of  Form  10-K  and is
incorporated herein by reference.(See Proxy Statement for detail information.)
























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                                     PART IV

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

a) (1)     Financial Statements: See Item 8.

   (2)     Financial Statement Schedules: Not Applicable

   (3)     Listing of Exhibits:

   EXHIBIT
   NUMBER    DESCRIPTION OF DOCUMENT
   ------    -----------------------
   2.1       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      Master  International  License  Agreement,  dated
             August 29, 1997, between Tumbleweed International
             LLC and Tumbleweed, LLC*

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

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

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

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

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

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

   10.8      Form of Standard Franchise Agreement for Tumbleweed, LLC*

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

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

   10.11     Bonus Compensation Plan for Senior Executives*

   10.12     Revolving Line of Credit Note, dated April 21, 1999, between
             Tumbleweed, Inc. and National City Bank of Kentucky and related
             Loan Agreement***

   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
             the Commission on September 29, 1998, in Form S-1 Registration
             No. 333-57931.


                                     - 42 -
<PAGE>

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

   ***       Incorporated by reference to exhibits of the same number filed with
             the Commission on May 12, 1999 in Form 10-A, File No. 333-57931.

   (b)       During the quarter ended  December 31, 1999,  the
             Company did not file any reports on Form 8-K.










                                     - 43 -

<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.


                                          /s/  John A. Butorac, Jr.
                                          -------------------------
                                     By:  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 Executive        March 14, 2000
                              Officer and Director


/s/ James M. Mulrooney
     James M. Mulrooney     Chief Financial Officer, Treasurer,  March 14, 2000
                              and Executive Vice President and
                              Director(Principal Accounting
                              Officer)

/s/ David M. Roth
    David M. Roth           Director                             March 14, 2000


/s/ Minx Auerbach
     Minx Auerbach          Director                             March 14, 2000


/s/ Lewis Bass
     Lewis Bass             Director                             March 14, 2000


/s/ W. Roger Drury
     W. Roger Drury         Director                             March 14, 2000


/s/ George R. Keller
     George R. Keller       Director                             March 14, 2000


/s/ Terrance A. Smith
     Terrance A. Smith      Director                             March 14, 2000


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