Tumbleweed Inc · 10-K · For 12/31/00

Filed On 3/30/01 9:15am ET   ·   SEC File 0-25443   ·   Accession Number 1064535-1-500005

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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Form 10-K for the Year Ending 12/31/2000              52    290K 

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 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, 2000
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)                                                  

2301 River Road                                                                 
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 20, 2001, was approximately $5,100,000. 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 20, 2001 ($2.56) 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 20, 2001, was 5,839,230.                                               

 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
Exhibit Index: Page 49-50           May 24, 2001                                

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TUMBLEWEED, INC.

PART I

ITEM 1. BUSINESS                                                                

At December 31, 2000, we owned,  franchised or licensed 63 Tumbleweed  Southwest
Mesquite  Grill & Bar  ("Tumbleweed")  restaurants.  We owned  and  operated  36
Tumbleweed  restaurants  in Kentucky,  Indiana and Ohio including one restaurant
which is 50% owned through a joint venture.  There were 19 franchised Tumbleweed
restaurants located in Indiana,  Illinois,  Kentucky,  Michigan,  Virginia, West
Virginia and  Wisconsin,  and eight  licensed  restaurants  located  outside the
United  States in Germany,  Jordan,  Egypt,  Saudi  Arabia,  England and Turkey.
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  AMERICAN  SOUTHWEST  GRILLED ITEMS AND MEXICAN FOOD.  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
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,  baked sweet potato,  southwest  fries,  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,  a lunch menu as well as seasonal menus
to increase the frequency of guest visits.                                      

Tumbleweed  restaurants  typically  contain  full-service  bars  offering a wide
assortment of mixed drinks, wines, domestic and imported beers and featuring the
Tumbleweed  margarita.  Alcoholic beverages accounted for approximately 12.0% of
restaurant sales during 2000.                                                   

Tumbleweed's  menu pricing is designed to create a strong perception of value by
consumers.  Prices for Tex-Mex  dishes  range from $4.19 for two tacos to $11.99
for the "Need the 'Weed" sampler dinner. Mesquite grilled items range from $5.99
for a hamburger to $17.49 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.                                                     

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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 2000, the average check at a  full-service  Tumbleweed
restaurant,  including  beverages,  was approximately $8.81 for lunch and $10.76
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
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                                                                 

Our  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:                           

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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 $40,000 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.                                                                

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During 2000, we opened 4 new  Company-owned  restaurants,  1 restaurant which is
50%  owned  through  a  joint  venture,  7 new  franchised  restaurants  and our
international licensee opened 3 new restaurants in the following areas:         

COMPANY OWNED            FRANCHISEE OWNED           INTERNATIONAL LICENSEE  
-------------            ----------------           ----------------------  
Cincinnati, OH           Shelbyville, KY            Essex, England          
Maysville, KY            Franklin, WI               London, England         
Kettering, OH            Charleston, WV             Istanbul, Turkey        
Ft. Wayne, IN            Grandville, MI                                     
Beckley, WV               
JOINT VENTURE            Mechanicsville, VA                                 
-------------            Somerset, KY                                       
Louisville, KY                                                              

During 2000, a franchisee  elected to close its final two  Tennessee  Tumbleweed
restaurants  (Clarksville  and  Hermitage)  and  another  franchisee  closed its
Beckley, West Virginia restaurant.                                              

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.      

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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 utilize a 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.                 

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.  The  Executive  Vice  President  of the Company
oversees the construction process utilizing outside  architectural  services and
construction services.  Individual site selection analysis is handled by Company
management with final approval by the President of the Company.                 

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 2000 was approximately  3.1% of
sales.                                                                          

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RESTAURANT LOCATIONS                                                            

As of  December  31,  2000,  we owned and  operated  36  Tumbleweed  restaurants
including one Louisville, Kentucky restaurant which is 50% owned through a joint
venture.  The following  table sets forth the markets  (including  the number of
restaurants in each market) of these 36 restaurants:                            

                                                        NO. OF
STATE                LOCATION                                 RESTAURANTS       
-----                --------                                 -----------       
Indiana              Evansville                                    2            

Indiana              Ft. Wayne                                     2            

Indiana              Terre Haute                                   1            

Kentucky             Bowling Green                                 1            

Kentucky             Florence (Cincinnati market)                  1            

Kentucky             Frankfort                                     1            

Kentucky             Henderson (Evansville market)                 1            

Kentucky             Louisville                                    9            

Kentucky             Maysville (Cincinnati market)                 1            

Kentucky             Owensboro (Evansville market)                 1            

Ohio                 Bellefontaine                                 1            

Ohio                 Cincinnati                                    5            

Ohio                 Columbus                                      6            

Ohio                 Dayton                                        2            

Ohio                 Medina                                        1            

Ohio                 Wooster                                       1            
                                                      ----
         TOTAL                                        36
                                                      ====

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FRANCHISED RESTAURANTS                                                          

As of December  31,  2000,  we had ten  franchisees  that owned and  operated 19
Tumbleweed  restaurants.  The following  table sets forth the franchisee and the
location  (including  the number of  restaurants  at each  location) of these 19
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      Franklin             1
   Wisconsin      Madison              1
   Wisconsin      Milwaukee            1
   Wisconsin      New Berlin           1
                                       ---
                                                                     6

TW-Seymour, LLC        Indiana        Seymour              1                    
                                       ---
                                                                     1

TW-Glasgow, Inc.       Kentucky       Glasgow              1                    
                                       ---
                                                                     1

TW-Shelbyville, Inc.   Kentucky       Shelbyville          1                    
                                       ---
                                                                     1

TW-Bullitt, Inc.       Kentucky       Hillview             1                    
                                       ---
                                                                     1

TWED-Charleston, Inc.  West Virginia  Charleston           1                    
                                       ---
                                                                     1

TW-Rivertown, LLC      Michigan       Grandville           1                    
                                       ---
                                                                     1

Tumble South, Inc.     Virginia       Mechanicsville       1                    
                                       ---
                                                                     1

TW-Somerset, LLC       Kentucky       Somerset             1                    
                                       ---
                                                                     1
                                                                    ----
                                                                    19
                                                                    ====

INTERNATIONAL LICENSING AGREEMENT                                               

We have entered into a license  agreement (the  "International  Agreement") with
Tumbleweed International, LLC ("International"), a restaurant developer based in
Hanau,  Germany,  to  develop  Tumbleweed  restaurants  outside  of the  Western
Hemisphere.   During  2000,  International  was  operating  its  restaurants  in
Frankfurt  and  Vilseck,  Germany,  Essex and London,  England,  Amman,  Jordan,
Jeddah,  Saudi  Arabia,   Istanbul,   Turkey  and  Cairo,  Egypt  as  Tumbleweed
restaurants.  See Item 13 "Certain  Relationships and Related  Transactions" for
additional information regarding International.                                 

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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  12.0 % of our restaurant  sales were  attributable to the sale of
alcoholic  beverages for the year ended  December 31, 2000.  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
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.                                                                    

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EMPLOYEES                                                                       

As of December 31, 2000, we had  approximately  2,000 employees,  of whom 35 are
executive and administrative personnel, 150 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 36 Tumbleweed  restaurants  including one
restaurant  which is 50% owned through a joint venture,  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 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 on  profitability,  there can be no assurance
that we will be able to do so in the future.                                    

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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 as of December
31,  2000,  who serve at the  pleasure of the Board of  Directors.  There are no
family relationships among any officers of the Company.                         

Name                     Age  Position                                          
----                     ---  --------                                          
Terrance A. Smith. ....  55   President, Chief Executive Officer, and Director  

James M. Mulrooney ....  49   Executive Vice President, Chief Financial Officer,
and Director        

Gary T. Snyder.........  46   Vice President - Company Operations               

Glennon F. Mattingly...  49   Vice President - Controller                       

Terrance A. Smith has served as  President  and Chief  Executive  Officer of the
Company  since  August  2000,  and is a Director of the  Company.  Mr. Smith was
elected as a director of the Company in September  1997.  Since 1997,  Mr. Smith
has also served as the President of Tumbleweed International,  LLC. From 1987 to
1997, Mr. Smith was the President and CEO of Chi-Chi's International Operations,
Inc.                                                                            

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.                                                        

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.     

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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.                      

SEGMENT INFORMATION                                                             

Segment  information  for the years ended  December 31, 2000,  1999 and 1998 are
presented in Note 16 to our Consolidated  Financial Statements contained in Item
8.                                                                              

ITEM 2.  PROPERTIES                                                             

Of the 36 Company-owned restaurants in operation at December 31, 2000, including
one restaurant which is 50% owned through a joint venture, 18 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 2004 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.  Our  commissary  and warehouse  space are
owned in fee simple by us. Our  executive  offices are located in leased  space.
The lease expires in 2007 and has two 5-year renewal options.                   

ITEM 3.  LEGAL PROCEEDINGS                                                      

The Company has guaranteed  renewals of certain guaranteed  indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee),  to
the extent and in amounts not to exceed the amounts  guaranteed  as of September
30,  1998.  The Company  had  guaranteed  certain  TW-Tennessee  obligations  as
follows,  jointly and  severally  with  TW-Tennessee  common  members:  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.                       

In March 2001, the bank which holds the line of credit filed suit in the Circuit
Court of  Jefferson  County,  Kentucky  against  TW-Tennessee  and  against  the
guarantors  of the line of credit,  including  the Company and a Director of the
Company.  Prior  to the  suit  being  filed,  the  Company  along  with  certain
guarantors  made a partial  payment to the bank. If the bank is  unsuccessful in
collecting the remaining  payments from the other guarantors,  the Company would
have exposure totaling approximately  $1,000,000.  While the Company believes it
has  fulfilled its  obligation to the bank and intends to vigorously  defend its
position,  it is too early in the process to predict with certainty the ultimate
outcome of this  matter  since the suit is in the early  pleading  stages and no
discovery has taken place.                                                      

During  1999,  the  Landlord  under  the  lease  financing   agreement  declared
TW-Tennessee to be in default,  and accelerated the rent  obligations  under the
leases.  On May 8,  2000,  the  Landlord  filed suit in the  Chancery  Court for
Davidson County, Tennessee,  against TW-Tennessee and against certain guarantors
of the lease  obligations,  including the Company and a Director of the Company.
The Company and certain guarantors of the lease obligations reached an agreement
with the Landlord, under which the Company and such guarantors paid certain sums
to the Landlord as a final  settlement  of all claims of the  Landlord,  and the
Landlord  dismissed  its legal  action  against and  released  the Company  from
further liability under its guarantees.                                         

The  lessor  under  the  equipment   leases  with   TW-Tennessee   has  declared
TW-Tennessee to be in default  thereunder and demanded  payment in full from all
guarantors of the leases,  including the Company. The Company has made a partial
payment  to the lessor and is  working  with the  lessor in  pursuing  the other
guarantors of the equipment leases that have not made any payment. If the lessor
is unsuccessful in collecting the remaining sums due from the other  guarantors,
the Company would have additional exposure totaling approximately $312,000.     

As a result of the  settlement  with the Landlord under the  TW-Tennessee  lease
financing  agreement,  and given the demand for payment by the lessor  under the
TW-Tennessee equipment leases and by the bank that holds the line of credit, the
Company  has  incurred  a  loss   related  to  the   Company's   guarantees   of
TW-Tennessee's  obligations.  The Company established a reserve in the amount of
$725,000 during 2000 of which approximately $716,000 had been paid              

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out as of  December  31,  2000.  The reserve  amount was based on the  Company's
payment to the Landlord under the TW- Tennessee lease financing  agreement,  the
Company's share of the various remaining guarantees of TW Tennessee  obligations
and an  estimated  amount for legal  costs  which  will  likely be  incurred  in
connection with the resolution of this matter. The Company's management believes
that it will not incur any significant additional losses in connection with this
matter.                                                                         

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, 2000.                                                

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 PART II

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

As of March  20,  2001,  5,839,230  shares  of  Common  Stock  were  issued  and
outstanding.  There were  approximately 950 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.                                                                 

The Company  received net proceeds of  approximately  $6,800,000  from the stock
offering.  The Company  used the offering  proceeds,  plus the  additional  cash
contributions  of  $747,500 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 2000 and 1999 for the periods indicated, as reported
by the Nasdaq National Market.                                                  

                        2000                            1999
                        ----                            ----
                       High          Low             High          Low
                       ----          ---             ----          ---
First Quarter (1)          $ 6.94       $ 4.75          $ 12.00      $ 8.50     
Second Quarter               6.37         2.62            11.25        7.50     
Third Quarter                4.09         2.62             9.87        7.00     
Fourth Quarter               3.37         2.00             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 two mortgage revolving lines of credit.                            

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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,  Inc. for the
years ended December 31, 2000 and 1999 and  Tumbleweed,  LLC for the years ended
December 31, 1998,  1997 and 1996 have been  derived from  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 on the
following  page 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."                                                                    

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                                                        [Enlarge/Download Table]


                                                              Years Ended December 31                          
                                       ----------------------------------------------------------------------- 
                                                 Tumbleweed,                         Tumbleweed,               
                                                     Inc.                                LLC                   
                                       ---------------------------- ------------------------------------------ 
                                              2000           1999          1998          1997           1996   
                                              ----           ----          ----          ----           ----   
Statement of Income Data:                                                                                      
  Revenues:                                                                                                    
                                                                                                               
    Restaurant sales                   $  51,820,600  $  48,578,123 $  40,490,933 $  27,891,128 $   23,284,007 
    Commissary sales                       1,663,208      1,168,836     1,041,266     1,007,011      1,795,529 
    Franchise fees and royalties           1,271,251      1,064,952       770,806       563,056        474,870 
    Gain from insurance proceeds due to                                                                        
      involuntary conversion of non-                                                                           
      monetary assets                        554,864        -             -             -              -       
    Other revenues                           990,843        532,976       504,639       365,054        177,317 
                                        ------------   ------------  ------------  ------------  --------------
  Total revenues                          56,300,766     51,344,887    42,807,644    29,826,249     25,731,723 
  Operating expenses:                                                                                          
    Restaurant cost of sales              15,275,817     14,232,564    11,788,578     8,191,928      7,103,357 
    Commissary cost of sales               1,460,704      1,053,083       905,814       887,793      1,649,502 
    Operating expenses                    27,456,791     24,377,631    20,881,212    14,035,693     12,386,119 
    Selling, general and administrative                                                                        
      expenses                             6,529,835      4,981,721     4,150,303     3,051,740      2,250,827 
    Preopening expenses                      490,394        395,768       816,604       544,723        405,502 
    Depreciation and amortization          2,147,408      1,804,757     1,442,011       971,863      1,231,290 
    Provision for doubtful accounts           68,464         -            -             -              -       
    Loss on guarantees of indebtedness       725,000        -             -             -              -       
                                        ------------   ------------  ------------  ------------  --------------
  Total operating expenses                54,154,413     46,845,524    39,984,522    27,683,740     25,026,597 
                                        ------------   ------------  ------------  ------------  --------------
  Income from operations                   2,146,353      4,499,363     2,823,122     2,142,509        705,126 
  Interest expense, net                   (1,458,650)    (1,128,906)     (869,712)     (428,598)      (203,810)
  Equity in losses of TW-Springhurst         (58,903)       -             -             -              -       
                                        ------------   ------------  ------------  ------------  --------------
  Income before income taxes and                                                                               
    cumulative effect of a change in                                                                           
    accounting principle                     628,800      3,370,457     1,953,410     1,713,911        501,316 
  Provision for income taxes:                                                                                  
    Current and deferred                      65,439      1,179,659       -             -              -       
    Deferred taxes related to change in                                                                        
        tax status (3)                        -             639,623       -             -              -       
                                        ------------   ------------  ------------  ------------  --------------
  Total provision  for income taxes           65,439      1,819,282       -             -              -       
                                        ------------   ------------  ------------  ------------  --------------
   Income before cumulative effect of a                                                                        
      change in accounting principle         563,361      1,551,175     1,953,410     1,713,911        501,316 
   Cumulative effect of a change in                                                                            
     accounting principle, net of tax        -             (341,035)      -             -              -       
                                        ------------   ------------  ------------  ------------  --------------
   Net income                          $     563,361  $   1,210,140 $   1,953,410 $   1,713,911 $      501,316 
                                        ============   ============  ============  ============  ==============
Basic and diluted earnings per share:                                                                          
   Income before cumulative effect of                                                                          
     a change in accounting principle  $        0.10  $        0.27                                            
   Cumulative effect of a change in                                                                            
     accounting principle, net of tax        -                (0.06)                                           
                                        ------------   ------------                                            
   Net income                          $        0.10  $        0.21                                            
                                        ============   ============                                            

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                                                        [Enlarge/Download Table]


                                                               Years Ended December 31                         
                                        -----------------------------------------------------------------------
                                                Tumbleweed,                         Tumbleweed,                
                                                   Inc.                                 LLC                    
                                        --------------------------- -------------------------------------------
                                            2000            1999          1998           1997          1996    
                                            ----            ----          ----           ----          ----    
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 
   Pro forma income taxes (1)                             1,179,659       683,693       599,896        175,461 
                                                       ------------  ------------  ------------  --------------
   Pro forma income before cumulative                                                                          
     effect of a change in accounting                                                                          
     principle                                            2,190,798     1,269,717     1,114,015        325,855 
   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 
                                                       ============  ============  ============  ==============
Pro forma basic and diluted earnings                                                                           
 per share (2):                                                                                                
   Pro forma income before cumulative                                                                          
     effect of a change in accounting                                                                          
     principle                                        $        0.37 $        0.25 $        0.22 $         0.06 
   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 
                                                       ============  ============  ============  ==============

                                                        [Enlarge/Download Table]


                                                                   As of December 31                           
                                      ------------------------------------------------------------------------ 
                                              Tumbleweed,                         Tumbleweed,                  
                                                 Inc.                                LLC                       
                                      ------------------------  ---------------------------------------------- 
                                                                    Pro                                        
                                                                   Forma                                       
                                           2000         1999     1998 (3)      1998       1997         1996    
                                           ----         ----     --------      ----       ----         ----    
                                                                     (In thousand)                             
Balance Sheet Data:                                                                                            
                                                                                                               
Total assets                          $      39,453  $  36,597  $   33,681  $  33,681  $   26,068  $    21,262 
Long-term debt and capital lease                                                                               
  obligations, including current                                                                               
  maturities                                 16,998     15,145      13,363     13,363       8,542        5,776 
Total liabilities                            21,581     19,035      24,743     24,103      10,725        7,108 
Redeemable members' equity                   -           -           -         18,925      23,420       20,233 
Members' equity                              -           -           -            354           7            7 
Members' retained earnings (deficit)         -           -           -         (9,701)     (8,083)      (6,085)
Stockholders' equity                         17,872     17,563       -          -           -           -      
Pro forma stockholders' equity               -           -           8,938      -           -           -      


(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, 1996.                                                  
(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.                

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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.                                                                       

As of  December  31,  2000,  we owned,  franchised  or  licensed  63  Tumbleweed
restaurants. We owned and operated 36 restaurants in Kentucky, Indiana and Ohio,
including one restaurant which is 50% owned through a joint venture.  There were
19 franchised  restaurants  located in Indiana,  Illinois,  Kentucky,  Michigan,
Virginia,  West Virginia and Wisconsin and eight  licensed  restaurants  located
outside the United States in Germany,  Jordan, Egypt, Saudi Arabia,  England and
Turkey.  The following  table  reflects  changes in the number of  Company-owned
restaurants for the years presented.                                            

Company-owned Restaurants                           2000     1999      1998 
-------------------------                           ----     ----      ---- 

        In operation, beginning of year            29       25        17
        Restaurants opened                          4        4         8
        Joint venture restaurant opened             1        -         -
        Restaurants purchased from franchisee       2        -         -
                                                   ----     ----      ----
        In operation, end of year                  36       29        25
                                                   ----     ----      ----

Franchise and Licensed Restaurants                                          
----------------------------------                                          

        In operation, beginning of year            22       18        12
        Restaurants opened                         10        8         7
         Restaurants closed                         (3)      (4)       (1)
        Restaurants sold to Tumbleweed, Inc.       (2)       -         -
                                                   ----     ----      ----
        In operation, end of year                  27       22        18
                                                   ----     ----      ----
                System total                       63       51        43
                                                   ====     ====      ====

Effective  January 1, 1999,  Tumbleweed,  LLC converted from a limited liability
company  into a C  corporation  by merging  with  Tumbleweed,  Inc.,  a Delaware
corporation formed on December 17, 1997. As a limited liability company,  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.                                                 

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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.   

                                                        [Enlarge/Download Table]


                                                         Years Ended December 31     
                                                       2000       1999      1998     
                                                     --------------------------------
Revenues:                                                                            
                                                                                     
   Restaurant sales                                      92.0%      94.6%     94.6%  
   Commissary sales                                       3.0        2.3       2.4   
   Franchisee fees and royalties                          2.2        2.1       1.8   
   Gain from insurance proceeds due to involuntary                                   
      conversion of non-monetary assets                   1.0          -         -   
   Other revenues                                         1.8        1.0       1.2   
                                                     --------------------------------
      Total revenues                                    100.0      100.0     100.0   
Operating expenses:                                                                  
   Restaurant cost of sales (1)                          29.5       29.3      29.1   
   Commissary cost of sales (2)                          87.8       90.1      87.0   
   Operating expenses (1)                                53.0       50.2      51.6   
   Selling, general and administrative                   11.6        9.7       9.7   
   Preopening expenses                                    0.9        0.8       1.9   
   Depreciation and amortization                          3.8        3.5       3.4   
   Provision for doubtful accounts                        0.1               -    -   
   Loss on guarantees of indebtedness                     1.3          -         -   
                                                     --------------------------------
      Total operating expenses                           96.2       91.2      93.4   
                                                     --------------------------------
      Income from operations                              3.8        8.8       6.6   
Other expense, net                                       (2.7)      (2.2)     (2.0)  
                                                     --------------------------------
Income before income taxes and cumulative                                            
   effect of a change in accounting                                                  
   principle                                              1.1        6.6       4.6   
Provision for income taxes:                                                          
   Current and deferred                                   0.1        2.3         -   
   Deferred taxes related to a change in tax status         -        1.3         -   
                                                     --------------------------------
Total provision for income taxes                          0.1        3.6         -   
                                                     --------------------------------
Income before cumulative effect                                                      
   of a change in accounting principle                    1.0        3.0       4.6   
Cumulative effect of a change in                                                     
   accounting principle, net of tax                         -       (0.7)        -   
                                                     --------------------------------
Net income                                                1.0%       2.3%      4.6%  
                                                     ================================
Pro forma income data (unaudited):                                                   
   Income before income taxes and                                                    
     cumulative effect of a change in                                                
     accounting principle as reported                                6.6%      4.6%  
   Pro forma income taxes (3)                                        2.3       1.6   
                                                                 --------------------
   Pro forma income before cumulative                                                
     effect of a change in accounting                                                
     principle                                                       4.3       3.0   
   Cumulative effect of a change in                                                  
     accounting principle, net of tax                               (0.7)        -   
                                                                 --------------------
   Pro forma net income                                              3.6%      3.0%  
                                                                 ====================

(1)    As percentage of restaurant sales.                                       
(2)    As percentage of commissary sales.                                       

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(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%.                                                           

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND 1999                        

Total  revenues  increased  by  $4,955,879  or  9.6% in  2000  compared  to 1999
primarily as a result of the following:                                         

   Restaurant  sales  increased by  $3,242,477 or 6.7% in 2000 compared to 1999.
   The  increase  is  due  primarily  to  the  addition  of  six   Company-owned
   restaurants  during 2000. The increase is partially offset by a 3.3% decrease
in same store sales.                                                      

   Commissary sales to franchised and licensed restaurants increased by $494,372
   or 42.3% in 2000  compared to 1999.  The  increase is due  primarily  to five
additional franchised or licensed restaurants during 2000.                

   Franchise fees and royalties  increased by $206,299 or 19.4% in 2000 compared
   to 1999 as a result of an increase in royalty  income due  primarily  to five
   additional franchise restaurants.  Franchise fees were approximately the same
in both periods.                                                          

   The gain from  insurance  proceeds was due to the  involuntary  conversion of
    non-monetary assets from a fire at a Company-owned  restaurant.  See Note 12
of the accompanying financial statements for a detail discussion.       

   Other  revenues  increased  by  $457,867  or 85.9% in 2000  compared  to 1999
   primarily  due to $280,000 of insurance  proceeds as it relates to a business
   interruption as a result of a fire at a Company-owned restaurant. See Note 12
   of the accompanying  financial statements for a detail discussion.  There was
   no similar  income in 1999.  In addition,  other  revenues  increased in 2000
   compared  to 1999 as a result of an  increase  in volume  related  purchasing
rebates.                                                                  

Restaurant  cost of sales  increased by  $1,043,253  or 7.3% in 2000 compared to
1999.  The increase  was  principally  due to the addition of six  Company-owned
restaurants  during 2000.  Restaurant cost of sales increased as a percentage of
sales by 0.2% to 29.5% for 2000 compared to 29.3% for 1999.                     

Commissary cost of sales  increased  $407,621 or 38.7% in 2000 compared to 1999.
The increase in  commissary  cost of sales is due  primarily to five  additional
franchised  or licensed  restaurants  during 2000. As a percentage to commissary
sales,  commissary  cost of sales decreased by 2.3% in 2000 compared to 1999 due
to lower manufactured food costs in 2000.                                       

Restaurant  operating expenses increased by $3,079,160 or 12.6% in 2000 compared
to 1999.  The increase  reflects the addition of six  Company-owned  restaurants
during 2000. Operating expenses increased as a percentage of restaurant sales to
53.0%  during  2000  from  50.2% in 1999  primarily  due to a 0.3%  increase  in
promotional costs and a 1.7% increase in total restaurant payroll costs.        

Selling, general and administrative expenses increased by $1,548,114 or 31.1% in
2000 compared to 1999. The increase was due in part to additional  payroll costs
of  approximately  $280,000 which were incurred as a result of the retirement of
the  former  President  and  CEO of the  Company  and the  restructuring  of the
corporate staff. The increase in selling, general and administrative expenses in
2000 as  compared  to 1999 is also  due in part to the  addition  of  management
personnel to support the growing  restaurant base and increased  advertising and
outside professional service costs. As a percentage to total revenues,  selling,
general and  administrative  expenses  were 11.6% and 9.7% of  revenues  for the
years ended December 31, 2000 and 1999, respectively.                           

Preopening  expenses were $490,394 and $395,768 for the years ended December 31,
2000 and 1999,  respectively.  Preopening  expenses are start-up costs which are
incurred in connection  with opening new restaurant  locations.  These costs are
expensed as incurred and will fluctuate  based on the size of the restaurant and
the number of restaurant  locations  which are in the process of being  prepared
for opening.                                                                    

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Depreciation  and  amortization  expense  increased  $342,651  or  19.0% in 2000
compared to 1999 due primarily to the addition of six Company-owned  restaurants
during 2000.                                                                    

A $68,464  provision  for  doubtful  accounts  was  recorded  during  2000.  The
provision relates to a receivable from a related party franchisee for accounting
fees,  royalties  and a  franchise  fee.  As of December  31,  2000,  management
considers it probable that this receivable will not be collected.               

Net interest expense  increased  $333,458 or 29.5% in 2000 compared to 1999. The
increase resulted from increased  borrowings to fund the growth in Company-owned
restaurants and increases in the prime interest rate during 2000.               

The equity in losses of  TW-Springhurst  was $58,903 for the year ended December
31, 2000.  See Note 10 of the  accompanying  financial  statements  for a detail
discussion.                                                                     

The combined  effective  federal and state income tax rate was approximately 10%
and 35% for the years ended December 31, 2000 and 1999, respectively,  excluding
the charge  related to change in tax status.  The effective tax rate is lower in
2000 as a result of lower  profitability  and the resulting impact of employment
tax credits  and state  income  taxes on the  effective  rate.  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.                                         

The  Company's  income  before  cumulative  effect  of a  change  in  accounting
principle  decreased  $1,627,437  or 74.3% for the year ended  December 31, 2000
compared to pro forma income before  cumulative effect of a change in accounting
principle  for the year ended  December  31,  1999.  Earnings  per share  before
cumulative  effect of a change in  accounting  principle  was $0.10 for the year
ended  December  31,  2000 as compared to pro forma  earnings  per share  before
cumulative  effect of a change  in  accounting  principle  of $0.37 for the year
ended December 31, 1999.                                                        

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%.                                 

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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 1999 and 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.                                                                        

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.   

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 table below provides
certain  information  regarding  our  sources  and uses of capital for the years
presented:                                                                      

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                                                        [Enlarge/Download Table]


                                                                         Years                        
                                                                    Ended December 31                 
                                                     ------------------------------------------------ 
                                                         2000              1999               1998    
                                                         ----              ----               ----    
                                                                                                      
Net cash provided by operations                      $  2,262,548     $  3,592,419       $  3,447,666 
Purchases of property and equipment                    (3,090,936)      (6,915,544)        (5,313,575)
Business acquisitions                                  (1,806,333)         -                  -       
Insurance proceeds for property and equipment           1,299,352          -                  -       
Proceeds from common stock offering                      -               7,766,300            -       
Net distributions of members' equity                     -                 -                 (328,788)
Net borrowings of  long-term debt and capital lease                                                   
   obligations                                          1,431,705        1,781,865          3,251,135 
Payment on short-term borrowings                         -               (6,990,34)           -       

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.            

The Company has guaranteed  renewals of certain guaranteed  indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee),  to
the extent and in amounts not to exceed the amounts  guaranteed  as of September
30,  1998.  The Company  had  guaranteed  certain  TW-Tennessee  obligations  as
follows,  jointly and  severally  with  TW-Tennessee  common  members:  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.                       

In March 2001, the bank which holds the line of credit filed suit in the Circuit
Court of  Jefferson  County,  Kentucky  against  TW-Tennessee  and  against  the
guarantors  of the line of credit,  including  the Company and a Director of the
Company.  Prior  to the  suit  being  filed,  the  Company  along  with  certain
guarantors  made a partial  payment to the bank. If the bank is  unsuccessful in
collecting the remaining  payments from the other guarantors,  the Company would
have exposure totaling approximately  $1,000,000.  While the Company believes it
has  fulfilled its  obligation to the bank and intends to vigorously  defend its
position,  it is too early in the process to predict with certainty the ultimate
outcome of this  matter  since the suit is in the early  pleading  stages and no
discovery has taken place.                                                      

During  1999,  the  Landlord  under  the  lease  financing   agreement  declared
TW-Tennessee to be in default,  and accelerated the rent  obligations  under the
leases.  On May 8,  2000,  the  Landlord  filed suit in the  Chancery  Court for
Davidson County, Tennessee,  against TW-Tennessee and against certain guarantors
of the lease  obligations,  including the Company and a Director of the Company.
The Company and certain guarantors of the lease obligations reached an agreement
with the Landlord, under which the Company and such guarantors paid certain sums
to the Landlord as a final  settlement  of all claims of the  Landlord,  and the
Landlord  dismissed  its legal  action  against and  released  the Company  from
further liability under its guarantees.                                         

The  lessor  under  the  equipment   leases  with   TW-Tennessee   has  declared
TW-Tennessee to be in default  thereunder and demanded  payment in full from all
guarantors of the leases,  including the Company. The Company has made a partial
payment  to the lessor and is  working  with the  lessor in  pursuing  the other
guarantors of the equipment leases that have not made any payment. If the lessor
is unsuccessful in collecting the remaining sums due from the other  guarantors,
the Company would have additional exposure totaling approximately $312,000.     

As a result of the  settlement  with the Landlord under the  TW-Tennessee  lease
financing  agreement,  and given the demand for payment by the lessor  under the
TW-Tennessee equipment leases and by the bank that holds the line of credit, the
Company  has  incurred  a  loss   related  to  the   Company's   guarantees   of
TW-Tennessee's  obligations.  The Company established a reserve in the amount of
$725,000  during 2000 of which  approximately  $716,000  had been paid out as of
December 31, 2000. The reserve amount was based on the Company's  payment to the
Landlord under the TW- Tennessee lease financing agreement,  the Company's share
of the various remaining guarantees of TW-Tennessee                             

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obligations  and an  estimated  amount  for legal  costs  which  will  likely be
incurred  in  connection  with the  resolution  of this  matter.  The  Company's
management believes that it will not incur any significant  additional losses in
connection with this matter.                                                    

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.                         

In the next 12 months,  the Company expects the demand on future liquidity to be
from the ongoing  maintenance of current restaurant  facilities.  As of December
31, 2000, the Company had no material  commitments for maintenance.  In order to
provide any  additional  funds  necessary to pursue our future growth  strategy,
which  includes both  building new  restaurants  or  purchasing  an  established
restaurant from a franchisee,  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  mortgage  revolving  line of  credit  with a bank.  As of
December 31, 2000,  we had  outstanding  borrowings  under the line of credit of
$5,496,148.  The note  bears  interest  at the prime  rate  plus .25%  (9.75% at
December 31, 2000) and is due December  31, 2003.  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.                                      

We also have an additional  $6,500,000  mortgage revolving line of credit with a
bank. As of December 31, 2000, we had outstanding  borrowings  under the line of
credit of $915,868.  The note bears  interest at the prime rate plus .25% (9.75%
at December 31, 2000) and is due October 3, 2001.  Upon the maturity  date,  the
Loan  Agreement  provides for  extensions of the maturity date until the line of
credit  has  been  repaid  or for  the  conversion  of the  current  outstanding
principal  balance  to a Term Loan with a maturity  of 5-years  from the date of
conversion. The current maximum amount available on the revolving line of credit
is $1,440,000  which can be increased up to $6,500,000 as additional  collateral
is provided by the Company.  The note imposes  restrictions  on the Company with
respect to the  maintenance  of certain  financial  ratios,  the  incurrence  of
indebtedness,  the sale of assets, mergers, capital expenditures and the payment
of dividends.                                                                   

IMPACT OF INFLATION                                                             

The  impact  of  inflation  on the  cost of  food,  labor,  equipment,  land and
construction costs could harm our operations. We pay a majority of our employees
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, 2000,
approximately  $12,295,000  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.                                                       

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                                                        PAGE
                                                                        ----

Report of Independent Auditors                                          26

Consolidated Statements of Income for the years ended                     
 December 31, 2000, 1999 and 1998                                       27

Consolidated Balance Sheets as of December 31, 2000 and 1999            28

Statements of Redeemable Members' Equity, Members' Equity, Members'       
Retained Earnings (Deficit) and Stockholders' Equity for the years      
 ended December 31, 2000, 1999 and 1998                                 29

Consolidated Statements of Cash Flows for the years ended December 31,    
 2000, 1999 and 1998                                                    30

Notes to Consolidated Financial Statements                              31

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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, 2000 and 1999,  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, 2000.  Our audits also  included the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and  schedule  are  the   responsibility  of  the  Company's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule 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, 2000 and 1999 and the consolidated results of its operations and
its cash flows for each of the three  years in the  period  ended  December  31,
2000, in conformity with accounting  principles generally accepted in the United
States.  Also, in our opinion,  the related financial statement  schedule,  when
taken as a whole,  presents fairly in all material  respects the information set
forth therein.                                                                  

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 2, 2001                                                                   

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                                Tumbleweed, Inc.                                                                

                        Consolidated Statements of Income                                                       


                                                                                 Years Ended December 31        
                                                                            2000         1999          1998     
                                                                         -------------------------------------- 
Revenues:                                                                                                       
                                                                                                                
   Restaurant sales                                                     $ 51,820,600 $ 48,578,123  $ 40,490,933 
   Commissary sales                                                        1,663,208    1,168,836     1,041,266 
   Franchise fees and royalties                                            1,271,251    1,064,952       770,806 
   Gain from insurance proceeds due to involuntary conversion                                                   
     of non-monetary assets                                                  554,864            -             - 

   Other revenues                                                            990,843      532,976       504,639 
                                                                         -----------  -----------   ----------- 
Total revenues                                                            56,300,766   51,344,887    42,807,644 
Operating expenses:                                                                                             
   Restaurant cost of sales                                               15,275,817   14,232,564    11,788,578 
   Commissary cost of sales                                                1,460,704    1,053,083       905,814 
   Operating expenses                                                     27,456,791   24,377,631    20,881,212 
   Selling, general and administrative expenses                            6,529,835    4,981,721     4,150,303 
   Preopening expenses                                                       490,394      395,768       816,604 
   Depreciation and amortization                                           2,147,408    1,804,757     1,442,011 
   Provision for doubtful accounts                                            68,464            -             - 
   Loss on guarantees of indebtedness                                        725,000            -             - 
                                                                         -----------  -----------   ----------- 
Total operating expenses                                                  54,154,413   46,845,524    39,984,522 
                                                                         -----------  -----------   ----------- 
Income from operations                                                     2,146,353    4,499,363     2,823,122 
Other income (expense):                                                                                         
   Interest expense, net                                                  (1,458,650)  (1,128,906)     (869,712)
   Equity in losses of TW-Springhurst                                        (58,903)           -             - 
                                                                         -----------  -----------   ----------- 
Total other expense                                                       (1,517,553)  (1,128,906)     (869,712)
                                                                         -----------  -----------   ----------- 
Income before income taxes and cumulative effect of a                                                           
   change in accounting principle                                            628,800    3,370,457     1,953,410 
Provision for income taxes:                                                                                     
   Current and deferred                                                       65,439    1,179,659             - 
   Deferred taxes related to change in tax status                                  -      639,623             - 
                                                                         -----------  -----------   ----------- 
Total provision for income taxes                                              65,439    1,819,282             - 
                                                                         -----------  -----------   ----------- 
Income before cumulative effect of a change in accounting principle          563,361    1,551,175     1,953,410 
Cumulative effect of a change in accounting principle, net of tax                  -     (341,035)            - 
                                                                         -----------  -----------   ----------- 
Net income                                                              $    563,361 $  1,210,140  $  1,953,410 
                                                                         ===========  ===========   =========== 
Basic and diluted earnings per share:                                                                           
   Income before cumulative effect of a change in accounting principle  $       0.10 $       0.27  $          - 
   Cumulative effect of a change in accounting principle, net of tax               -        (0.06)            - 
                                                                         -----------  -----------   ----------- 
   Net income                                                           $       0.10 $       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 
   Pro forma income taxes                                                               1,179,659       683,693 
                                                                                      -----------   ----------- 
   Pro forma income before cumulative effect of a change                                                        
     in accounting principle                                                            2,190,798     1,269,717 
   Cumulative effect of a change in accounting principle, net of tax                     (341,035)            - 
                                                                                      -----------   ----------- 
   Pro forma net income                                                              $  1,849,763  $  1,269,717 
                                                                                      ===========   =========== 
Pro forma basic and diluted earnings per share:                                                                 
   Pro forma income before cumulative effect of a change                                                        
     in accounting principle                                                         $       0.37  $       0.25 
   Cumulative effect of a change in accounting principle,  net of tax                       (0.06)            - 
                                                                                      -----------   ----------- 
   Pro forma net income                                                              $       0.31  $       0.25 
                                                                                      ===========   =========== 

See accompanying notes.                                                         

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                                Tumbleweed, Inc.                                         

                           Consolidated Balance Sheets                                   


                                                                    December 31          
                                                                2000            1999     
                                                           --------------   -------------
Assets                                                                                   
Current assets:                                                                          
                                                                                         
   Cash and cash equivalents                              $       281,829  $      640,189
   Accounts receivable, net allowance of $68,464 in 2000          757,956         606,283
   Inventories                                                  1,780,577       1,597,794
   Prepaid expenses and other assets                              586,023         302,688
                                                           --------------   -------------
Total current assets                                            3,406,385       3,146,954
Property and equipment, net                                    31,795,454      30,147,559
Goodwill, net of accumulated amortization of                                             
   $669,395 in 2000 and $551,478 in 1999                        3,476,617       2,737,265
Investment in TW-Springhurst                                      141,097               -
Other assets                                                      633,335         565,651
                                                           --------------   -------------
Total assets                                              $    39,452,888  $   36,597,429
                                                           ==============   =============

Liabilities and Stockholders' Equity                                                     
Current liabilities:                                                                     
   Accounts payable                                       $     1,113,443  $    1,102,024
   Accrued liabilities                                          2,489,727       1,850,987
   Deferred income taxes                                            8,244         286,885
   Current maturities on long-term                                                       
     debt and capital leases                                    2,040,667       1,028,443
                                                           --------------   -------------
Total current liabilities                                       5,652,081       4,268,339

Long-term liabilities:                                                                   
   Long-term debt, less current maturities                     12,422,904      11,347,047
   Capital lease obligations, less current maturities           2,534,877       2,769,339
   Deferred income taxes                                          831,525         489,869
   Other liabilities                                              140,000         160,000
                                                           --------------   -------------
Total long-term liabilities                                    15,929,306      14,766,255
                                                           --------------   -------------
Total liabilities                                              21,581,387      19,034,594

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                                          
     at December 31, 2000 and 1999                                 58,818          58,818
   Paid-in capital                                             16,294,006      16,294,006
   Treasury stock, 42,400 shares at December 31, 2000            (254,695)              -
   Retained earnings                                            1,773,372       1,210,011
                                                           --------------   -------------
     Total stockholders' equity                                17,871,501      17,562,835
                                                           --------------   -------------
Total liabilities and stockholders' equity                $    39,452,888  $   36,597,429
                                                           ==============   =============

See accompanying notes.                                                         

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                                Tumbleweed, Inc.                                                                         

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

                  Years Ended December 31, 2000, 1999 and 1998                                                           


                                                                        Redeemable                                       
                                                                          Members                 Retained               
                                       Common     Paid-In   Treasury  Equity-Class A  Members'    Earnings               
                                        Stock     Capital     Stock       Members      Equity     (Deficit)     Total    
                                      ---------------------------------------------------------------------------------- 
                                                                                                                         
Balance at December 31, 1997          $      - $         - $       -  $  23,419,738  $   6,959  $(8,083,284) $15,343,413 
Capital 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 
Net income                                   -          -          -              -          -      563,361      563,361 
Purchase of treasury stock                   -          -   (254,695)             -          -            -     (254,695)
                                      ---------------------------------------------------------------------------------- 
Balance at December 31, 2000          $ 58,818 $16,294,006 $(254,695) $           -  $       -  $ 1,773,372  $17,871,501 
                                      ================================================================================== 

See accompanying notes.                                                         

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                                Tumbleweed, Inc.                                                                 

                      Consolidated Statements of Cash Flows                                                      


                                                                          Years Ended December 31                
                                                                 2000              1999                1998      
                                                            --------------    ---------------     -------------- 
Operating activities:                                                                                            
                                                                                                                 
   Net income                                              $       563,361   $      1,210,140    $     1,953,410 
   Adjustment to reconcile net income to net                                                                     
     cash provided by operating activities:                                                                      
        Depreciation and amortization                            2,147,408          1,804,757          1,442,011 
        Preopening cost amortization                                     -                  -            816,604 
        Provision for doubtful accounts                             68,464                  -                  - 
        Deferred income taxes                                       63,015            776,754                  - 
        Loss on guarantees of indebtedness                         725,000                  -                  - 
        Loss from investment in TW-Springhurst                      58,903                  -                  - 
        Gain from insurance proceeds due to involuntary                                                          
          conversion of non-monetary assets                       (554,864)                 -                  - 
        Loss on disposition of property and equipment               38,250             38,455              7,324 
        Changes in operating assets and liabilities:                                                             
          Accounts receivable                                        2,035           (172,411)           (87,172)
          Inventories                                             (121,404)          (264,203)          (508,562)
          Deferred preopening expenses                                   -            524,669         (1,074,173)
          Prepaid expenses                                        (286,157)             7,563            (51,466)
          Other assets                                             (89,452)          (198,598)          (114,550)
          Accounts payable                                          11,418           (177,212)           104,590 
          Accrued liabilities                                      (41,178)           (84,033)           983,396 
          Income taxes                                            (302,251)            61,376                  - 
          Other liabilities                                        (20,000)            65,162            (23,746)
                                                            --------------    ---------------     -------------- 
Net cash provided by operating activities                        2,262,548          3,592,419          3,447,666 

Investing activities:                                                                                            
   Purchases of property and equipment                          (3,090,936)        (6,915,544)        (5,313,575)
   Insurance proceeds for property and equipment                 1,299,352                  -                  - 
   Business acquisitions                                        (1,806,333)                 -                  - 
   Investment in TW-Springhurst                                   (200,000)                 -                  - 
                                                            --------------    ---------------     -------------- 
Net cash used in investing activities                           (3,797,917)        (6,915,544)        (5,313,575)

Financing activities:                                                                                            
   Capital contribution from Class B members                             -                  -            747,500 
   Distribution of members' equity                                       -                  -         (1,076,288)
   Proceeds from common stock offering                                   -          7,766,300                  - 
   Proceeds from issuance of long-term debt                      6,423,960          8,193,436          5,580,463 
   Payments on long-term debt and capital lease obligations     (4,992,255)        (6,411,571)        (2,329,328)
   Payment on short-term borrowings                                      -         (6,990,348)                 - 
   Purchase of treasury stock                                     (254,696)                 -                  - 
   Payment of public offering costs                                      -           (493,476)          (386,332)
                                                            --------------    ---------------     -------------- 
Net cash provided by financing activities                        1,177,009          2,064,341          2,536,015 
                                                            --------------    ---------------     -------------- 

Net increase (decrease) in cash and cash equivalents              (358,360)        (1,258,784)           670,106 
Cash and cash equivalents at beginning of year                     640,189          1,898,973          1,228,867 
                                                            --------------    ---------------     -------------- 
Cash and cash equivalents at end of year                   $       281,829   $        640,189    $     1,898,973 
                                                            ==============    ===============     ============== 

Supplemental cash flow information:                                                                              
   Cash paid for interest, net of amount capitalized       $     1,477,172   $      1,166,934    $       947,674 
                                                            ==============    ===============     ============== 
   Cash paid for income taxes                              $       304,674   $        798,670    $             - 
                                                            ==============    ===============     ============== 
Noncash investing and financing activities:                                                                      
   Equipment acquired by capital lease obligations         $       224,906   $              -    $     1,570,246 
                                                            ==============    ===============     ============== 
   Public offering costs not paid at year-end              $             -   $              -    $       502,183 
                                                            ==============    ===============     ============== 

See accompanying notes.                                                         
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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  statement of income and cash flows for the year ended December 31,
1998 is that 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. 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                                                           

As of December 31, 2000, the Company owned, franchised or licensed 63 Tumbleweed
restaurants.  The Company owned and operated 36 restaurants in Kentucky, Indiana
and Ohio,  including one restaurant  which is 50% owned through a joint venture.
There were 19 franchised  restaurants  located in Indiana,  Illinois,  Kentucky,
Michigan,  Virginia,  West Virginia and Wisconsin and eight licensed restaurants
located  outside the United  States in Germany,  Jordan,  Egypt,  Saudi  Arabia,
England  and  Turkey.  The  following  table  reflects  changes in the number of
Company-owned, franchise and licensed restaurants during the years presented.   

                                            2000         1999         1998
                                            ----         ----         ----
Company-owned restaurants:                                                      
 In operation, beginning of year            29           25           17
 Restaurants opened                          4            4            8
 Joint venture restaurant opened             1            -            -
 Restaurants purchased from franchisee       2            -            -
                                            ----         ----         ----
 In operation, end of year                  36           29           25
                                            ----         ----         ----
Franchise and licensed restaurants:                                             
 In operation, beginning of year            22           18           12
 Restaurants opened                         10            8            7
  Restaurants closed                         (3)          (4)          (1)
 Restaurants sold to Tumbleweed, Inc.       (2)           -            -

 In operation, end of year                  27           22           18
                                            ----         ----         ----
      System Total                          63           51           43
                                            ====         ====         ====

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1.   Basis of Presentation (continued)                                          

Pro forma Financial Information (unaudited)                                     

Pursuant to the rules and regulations of the Securities and Exchange Commission,
the pro forma net income in the accompanying pro forma income data for the years
ended  December  31,  1999 and 1998  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 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,  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.  The Company's  investment in TW- Springhurst (see
Note 10) is accounted  for using the equity  method,  under which the  Company's
share of earnings or losses are reflected in income as earned.                  

Use of Estimates                                                                

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  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                                                    

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.                                                                        

Deferred preopening expenses included the direct costs typically associated with
opening a new restaurant.  These costs consisted  primarily of costs incurred to
develop the new restaurant management team, marketing and training. During 1998,
these expenses were amortized on a straight-line  method over twelve months from
the restaurant opening date.                                                    

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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.            

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, 2000,  1999 and 1998 were
$123,435,  $117,362  and  $95,674,  respectively.   Advertising  expense,  which
includes the Company's  contributions to the Marketing Fund, for the years ended
December 31, 2000,  1999 and 1998 were  $1,570,179,  $1,253,392 and  $1,052,075,
respectively.                                                                   

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2. Significant Accounting Policies (continued)                                  

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.                                               

Reclassifications of Financial Statements                                       

Certain  reclassifications  have been made to the December 31, 1999 consolidated
balance  sheet  to  conform  with  December  31,  2000  classifications.   These
reclassifications have no effect on previously reported operations.             

3. Property and Equipment                                                       

Property and equipment as of December 31 consist of:                            

                                                     2000           1999
                                                   ---------------------------
Land and land improvements                         $    9,135,805  $  8,698,101 
Building and improvements                              13,929,153    13,312,798 
Leasehold improvements                                  2,294,324     2,062,449 
Equipment                                               7,662,479     5,926,655 
Building and equipment under capital leases             4,496,593     4,274,559 
Construction in progress                                  659,511       556,549 
                                                   ---------------------------
                                                      38,177,865    34,831,111
Less accumulated depreciation and amortization         (6,382,411)   (4,683,552)
                                                   ---------------------------
                                                  $   31,795,454  $ 30,147,559
                                                   ===========================

4. Accrued Liabilities                                                          

Accrued liabilities as of December 31 consist of:                               

                                                     2000           1999
                                                   ---------------------------
Accrued payroll, severance and related taxes       $      897,841  $    611,566 
Accrued insurance and fees                                282,281       270,174 
Accrued taxes, other than payroll                         548,703       423,954 
Gift certificate liability                                470,652       396,747 
Deferred income related to involuntary conversion                               
ofn-monetary assets                                      204,893             -
Other                                                      85,357       148,546 
                                                   ---------------------------
                                                  $    2,489,727  $  1,850,987
                                                   ===========================

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5.  Long-Term Debt                                                              

Long-term debt as of December 31 consists of:                                   

                                                    2000        1999
                                                     -------------------------
Secured $6,500,000 mortgage revolving line of                                   
credit note, bearing interest at prime rate                                     
plus .25% (9.75% at December 31, 2000), due                                     
December 31, 2003                                     $ 5,496,148   $ 5,242,148 

Secured mortgage note payable, bearing interest at                              
commercial paper rate plus 2.65% (9.20% at                                      
December 31, 2000), due February 17, 2006               2,501,399     2,691,433 

Secured mortgage note payable,  bearing interest at                             
prime rate plus 1% (10.5% at December 31, 2000),                                
payable in monthly installments through October 1,                              
2017                                                    1,039,068     1,061,614 

Secured mortgage note payable, bearing interest at                              
8.75% , payable in monthly installments through                                 
February 15, 2008                                         921,756       957,992 

Secured $6,500,000 mortgage revolving line of credit                            
note, bearing interest at prime rate plus .25% (9.75%                           
at December 31, 2000), due October 3, 2001                915,868             - 

Secured mortgage note payable bearing interest at                               
commercial paper rate plus 2.65% (9.20% at December                             
31, 2000), due December 31, 2001                          800,000         4,395 

Secured mortgage note payable, bearing interest                                 
at prime rate (9.5% at December 31, 2000), payable                              
in monthly installments through March 1, 2006             644,185       658,071 

Secured mortgage note payable, bearing interest at                              
prime rate plus 1.25% (10.75% at December 31,                                   
2000), payable in monthly installments through                                  
November 27, 2016                                         596,875       634,375 

Secured mortgage note payable, bearing interest at                              
10.52%, payable in monthly installments through                                 
August 18, 2005                                           506,700             - 

Other installment notes payable                           415,633       620,204 
                                                      ------------------------
                                                      13,837,632    11,870,232
Less current maturities                                 1,414,728       523,185 
                                                      ------------------------
Long-term debt                                        $12,422,904   $11,347,047 
                                                      ========================

Property and equipment  with a net book value of  approximately  $22,000,000  at
December 31, 2000 collateralize the Company's long-term debt.                   

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5.  Long-Term Debt (continued)                                                  

The aggregate  annual  maturities of long-term debt for the years  subsequent to
December 31, 2000 are as follows:                                               

2001                            $  1,414,728    
2002                                 659,387    
2003                               5,912,527    
2004                                 504,416    
2005                                 486,555    
Thereafter                         4,860,019    
                             -----------
Total                           $ 13,837,632    
                             ===========

The Loan  Agreement of the  $6,500,000  line of credit which matures  October 3,
2001  provides for  extensions of the maturity date until the line of credit has
been repaid or for the conversion of the current  outstanding  principal balance
($915,868  at December  31, 2000) to a Term Loan with a maturity of 5-years from
the date of conversion.  The current  maximum amount  available on the revolving
line of  credit  is  $1,440,000  which  can be  increased  up to  $6,500,000  as
additional collateral is provided by the Company.                               

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
approximately $32,000 in 2000, $50,900 in 1999 and $104,200 in 1998.            

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, 2000 were as follows:                    

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

2001                                    $      84,000   $   804,707 $   888,707 
2002                                           84,000       689,510     773,510 
2003                                           84,000       622,040     706,040 
2004                                           84,000       314,338     398,338 
2005                                           84,000       118,279     202,279 
Thereafter                                  1,008,000       966,223   1,974,223 
                                        --------------------------------------
Total minimum lease payments            $   1,428,000   $ 3,515,097   4,943,097 
                            ==========================
Less amount representing interest                                               
  at 6.25% to 11.78%                                                 (1,782,282)
                                                                     -----------
   Net present value of lease payments                               3,160,815
Less current maturities                                                (625,938)
                                                                     -----------
Long-term portion of capital leases                                 $ 2,534,877 
                                                                     ===========

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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 is 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, 2000
were as follows:                                                                

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

2001          $      60,000  $   1,992,260  $   2,052,260       
2002                 60,000      1,990,706      2,050,706       
2003                 60,000      2,001,106      2,061,106       
2004                 60,000      1,986,506      2,046,506       
2005                 60,000      1,753,689      1,813,689       
Thereafter          725,000     13,967,295     14,692,295       
        ------------------------------------------
       $   1,025,000  $  23,691,562  $  24,716,562
        ==========================================

Total rental expense was  approximately  $1,975,700 in 2000,  $1,654,700 in 1999
and $1,455,500 in 1998 and included contingent rent of approximately $244,000 in
2000,  $207,000 in 1999 and $178,700 in 1998.  Rental  expense for related party
leases was  approximately  $388,000 in 2000,  $407,900  in 1999 and  $436,200 in
1998.                                                                           

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  Statement  of  Redeemable
Members'  Equity,  Members' Equity,  Members'  Retained  Earnings  (Deficit) and
Stockholders' Equity 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.         

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8.   Income Taxes                                                               

The  components of the  provision for income taxes for the years ended  December
31,  2000 and 1999  related to income  before  cumulative  effect of a change in
accounting principle consists of the following:                                 

                                           2000             1999
                                            -----------      -----------
Current - federal                              $      2,424     $    798,303    
Current - state                                           -           55,345    
Deferred                                             63,015          326,011    
Deferred taxes resulting from                                                   
a change in tax status                                 -          639,623 
                                            -----------      -----------
                                           $     65,439     $  1,819,282
                                            ===========      ===========

The provision for income taxes for the years ended December 31, 2000 and 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:                                           

                                           2000             1999
                                            -----------      -----------
U.S. federal income taxes at 34%               $    213,792     $  1,145,956    
State income taxes, net of federal tax effect      (138,034)          81,405    
Employment tax credits                              (97,483)         (74,723)   
Deferred taxes resulting from change                                            
in tax status                                          -          639,623 
Other items                                          87,164           27,021    
                                            -----------      -----------
 Provision for income taxes                $     65,439     $  1,819,282
                                            ===========      ===========

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

                                           2000             1999
                                            -----------      -----------
Deferred tax assets:                                                            
 Book over tax amortization                $          -     $     45,767
 Tax credits and carryforwards                  339,763                -
 Unearned revenue                               244,074          200,429
                                            -----------      -----------
      Total deferred tax assets                 583,837          246,196

Deferred tax liabilities:                                                       
  Deferred expenses                             (747,419)        (424,632)
  Tax over book depreciation                    (676,187)        (598,318)
                                            -----------      -----------
       Total deferred tax liabilities         (1,423,606)      (1,022,950)
                                            -----------      -----------
Net deferred tax liability                     $    839,769     $    776,754    
                                            ===========      ===========

As of December 31, 2000, the Company has state net operating loss  carryforwards
of  approximately  $2,600,000  which  expire  partly in 2016 and partly in 2020.
Also, as of December 31, 2000, the Company has a $54,000 alternative minimum tax
credit  carryforward  which  has no  expiration  date,  as well as  $148,000  of
employment tax credit carryforwards expiring in 2021, available to offset future
U.S.  federal  income  taxes.  Management  believes  the Company  will  generate
sufficient  future  regular  taxable  income  to  ensure  realization  of  these
benefits.                                                                       

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                                               

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9.   Related Party Transactions (continued)                                     

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,
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.  The  Company  had
guaranteed certain  TW-Tennessee  obligations as follows,  jointly and severally
with  TW-Tennessee  common  members:  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. See Note 18 for additional  information  regarding
this matter.                                                                    

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 approximately $36,800, $160,800 and $225,600 in 2000, 1999
and 1998,  respectively.  The Company also provides  management  and  accounting
services  for these  entities for which fees are charged.  Such  management  and
accounting  fees recorded in other revenues  related to these  entities  totaled
approximately   $12,200,   $40,500  and   $104,000  in  2000,   1999  and  1998,
respectively.                                                                   

During the year ended December 31, 2000, the Company assumed a TW-Tennessee, LLC
equipment lease which it had previously  guaranteed (see discussion  above). The
equipment  will  be  utilized  in  the  reconstruction  of  the  Company-  owned
restaurant  which was  destroyed  as result of a fire (see Note 12). The capital
lease had a balance of approximately $225,000 on the date the lease was assumed.

In August 1997,  Tumbleweed,  LLC entered into the International  Agreement with
Tumbleweed  International LLC  (International),  a restaurant developer based in
Hanau,  Germany.  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  2000,  1999  and  1998,  International  paid
approximately $7,400, $18,700 and $7,500,  respectively,  in fees to the Company
under the International Agreement.                                              

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9.   Related Party Transactions (continued)                                     

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  approximately  $300,000,  $311,000  and  $242,500 in 2000,  1999 and 1998,
respectively.  As of December  31, 2000,  the Company had an interest  free note
receivable of $50,000 from TW-Indiana,  LLC with a maturity date of December 31,
2002.                                                                           

TW-Indiana,  LLC and a director of the Company  also are members of  TW-Seymour,
LLC,  a  franchisee  of the  Company  which  opened  a  full-service  Tumbleweed
restaurant in Indiana during 1999.  Franchise fees and royalties recorded by the
Company in relation to this  entity  were  approximately  $45,000 and $76,000 in
2000 and 1999, 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 the years ended  December  31, 2000 and 1999,  the Company  entered  into
management   agreements  with  five  companies  who  own  Tumbleweed   franchise
restaurants with respect to five 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
franchisees.  Certain  directors  and  officers of the  Company own  substantial
interests  in these  companies.  Franchise  fees and  royalties  recorded by the
Company  in 2000  and 1999 in  relation  to these  entities  were  approximately
$227,000 and $90,000,  respectively.  Management and accounting fees recorded in
other  revenues by the  Company in 2000 and 1999 in  relation to these  entities
were  approximately  $65,000 and  $13,000,  respectively.  During the year ended
December 31, 2000, the Company  purchased the assets of two of these  companies.
See Note 11 for information regarding these transactions.                       

A provision for doubtful  accounts of approximately  $68,000 was recorded during
2000 which represents the balance due from a related party franchisee (discussed
in the paragraph above) for accounting fees,  royalties and a franchise fees. As
of December 31, 2000, management considers it probable that this receivable will
not be collected.                                                               

See Note 10 for additional related party transactions.                          

10.  Investment in TW-Springhurst                                               

During the year ended December 31, 2000, the Company made a $200,000  investment
in  TW-Springhurst,  LLC  ("TW-  Springhurst").  The  Company  has a 50%  member
interest  with  the  remaining  50% held by  TW-Springhurst  Investors,  LLC.  A
director  of the  Company  and an  officer  of the  Company  own  TW-Springhurst
Investors,  LLC.  The  initial  purpose of the limited  liability  company is to
construct and operate a Tumbleweed restaurant in Louisville, Kentucky. On August
29, 2000, a  Management  Agreement  was signed  between  TW-Springhurst  and the
Company which provides that the Company will manage the day-to-day operations of
the restaurant. The Company's share of TW-Springhurst's net loss was $58,903 for
the year ended December 31, 2000.                                               

11.  Business Acquisitions                                                      

On August 14, 2000, the Company  purchased the assets of an Evansville,  Indiana
Tumbleweed  restaurant from TW- Evansville,  LLC (a limited liability company in
which certain directors and officers of the Company own a substantial  interest)
for $929,400.  The Company also assumed  TW-Evansville,  LLC's equipment capital
lease which had a balance of approximately $197,000 on the date of purchase. The
purchase  price  for the  business  and  property  was at fair  market  value as
determined by an independent  business valuation  appraisal.  The purchase price
was funded by cash reserves and funds drawn on the Company's  mortgage revolving
lines of credit.                                                                

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11.  Business Acquisitions (continued)                                          

The purchase  price has been  allocated as follows based upon the fair values of
the assets acquired and liabilities assumed:                                    

Inventories                       $       47,356                            
Building                                 585,000                            
Equipment                                235,000                            
Deposits                                   3,000                            
Accrued property taxes                  (10,600)                            
Capital lease obligation               (197,008)                            
       -------------
             662,748
Goodwill                                   266,652                              
       -------------
      $      929,400
       =============

On  October 1, 2000,  the  Company  purchased  the  assets of the  Medina,  Ohio
Tumbleweed restaurant from TW-Medina,  LLC (a limited liability company in which
certain directors of the Company own a substantial  interest) for $876,933.  The
purchase  price  for the  business  and  property  was at fair  market  value as
determined by an independent  business valuation  appraisal.  The purchase price
was funded by cash reserves and funds drawn on the Company's  mortgage revolving
lines of credit. The purchase price has been allocated as follows based upon the
fair values of the assets acquired and liabilities assumed:                     

Inventories                       $       57,010                            
Equipment                                235,000                            
Accrued property taxes                   (5,694)                            
       -------------
             286,316
Goodwill                                   590,617                              
       -------------
      $      876,933
       =============

The  acquisitions  have been  accounted for as purchases and,  accordingly,  the
results of operations of the acquired  businesses  are included in the Company's
results of operations since the date of acquisition.                            

12.  Involuntary Conversion of Non-Monetary Assets                              

As a result of a fire which occurred June 7, 2000 at a Company-owned  restaurant
in Kentucky,  an involuntary  conversion of  non-monetary  assets occurred which
resulted in a $554,864  gain. The gain  represents  the  difference  between the
carrying  amount of the  restaurant's  assets  which were  destroyed  (building,
equipment and  inventories of $744,488,  in total,  at the time of the fire) and
the amount to be collected from the insurance company ($1,299,352). In addition,
the Company has received  approximately  $605,000 from the insurance company for
business  interruption  ($280,000) and continuing  expenses  ($120,000)  through
December 31, 2000. The additional  $205,000  received is for estimated  business
interruption  and  continuing  expenses  in 2001.  Accordingly,  the Company has
recorded this as deferred income in the accompanying financial statements.      

13.  Treasury Stock                                                             

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.  Through  December  31,  2000,  the
Company has repurchased 42,400 shares at a total cost of $254,695.              

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14.  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 1,235,000 shares, or 10% of
the number of shares of common stock  outstanding  from time to time,  including
170,000  shares  reserved  for  options  automatically  granted  to  nonemployee
directors under the Plan.                                                       

As of December 31, 2000,  cumulative total options to purchase  1,377,077 shares
of the Company's common stock had been granted to employees and directors of the
Company at prices ranging from $2.56 to $10.00 per share which expire at various
dates during 2009 and 2010 with a contractual  life of 10 years.  Initial grants
of  approximately  492,000  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,  with the
exception  of those  granted  to the  Company's  President  and Chief  Executive
Officer in August 2000, 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.  In August  2000,  367,236
options were granted to the Company's  President and Chief Executive  Officer at
prices  ranging  from  $2.69  to  $3.88  which  become  immediately  vested  and
exercisable in the event of a change in control of the Company.  Activity in the
Plan during the years ended December 31, 2000 and 1999 was:                     

                                                                [Download Table]


                                    2000                         1999           
                         ---------------------------  --------------------------
                                         Weighted                    Weighted   
                                         Average                      Average   
                         Options      Exercise Price  Options     Exercise Price
                         -------      --------------  -------     --------------
Outstanding at the                                                              
                                                                                
  beginning of the year    532,666        $9.34               -         $ -     
Granted                    811,636         3.73         565,441        9.38     
Exercised                        -          -                 -          -      
Forfeited                 (299,848)        8.28         (32,775)       10.00    
                         ---------                      -------                 
Outstanding at the                                                              
  end of the year        1,044,454        $5.30         532,666        $9.34    
                         =========                      =======                 
Exercisable at the end                                                          
  of the year              112,948        $9.52               -          -      
                         =========                      =======                 


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14.  Stock Incentive Plan (continued)                                           

The  following  table  summarizes   information  about  employee  stock  options
outstanding at December 31, 2000:                                               

Range of            Number          Weighted Average    
Exercise Prices       Outstanding        Exercise Price           
---------------       -----------        --------------           
$10.00                259,143           $10.00          
$4.50 - $6.25              65,875            $5.41              
$2.56 - $3.88             719,436            $3.59              
-------------           
1,044,454         
=============           

The remaining  contractual life of the outstanding stock options ranges from 8.1
years to 9.9 years.                                                             

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 2000 and 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 period. The weighted average fair
value of options granted was determined using the  Black-Scholes  option pricing
model with the indicated assumptions.                                           

                                                        2000          1999
                                                        ----          ----
 Net income as reported                                 $ 563,361    $ 1,210,140
 Pro forma net income (loss)                              (21,368)       619,803
 Pro forma basic and diluted earnings per common share      (0.00)          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
 .885% in 2000 and .655% in 1999.  Results may vary depending on the assumptions
applied within the model.  The weighted  average fair value per share of options
granted was $3.68 and $6.31 for 2000 and 1999, respectively.                    

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15.   Earnings  per Share                                                       

The following is a  reconciliation  of the Company's basic and diluted  earnings
per share for the years ended  December  31, 2000,  1999 and 1998 in  accordance
with FAS 128, "Earnings per Share."                                             

                                                        [Enlarge/Download Table]


                                                                         2000          1999           1998    
                                                                     -----------------------------------------
Numerator:                                                                                                    
   Income before cumulative effect of a change in accounting                                                  
                                                                                                              
      principle                                                     $     563,361  $  1,551,175               
   Cumulative effect of a change in accounting principle, net of tax      -            (341,035)              
                                                                     ------------   -----------               
   Net income                                                       $     563,361  $  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
   Cumulative effect of a change in accounting principle, net of tax                   (341,035)        -     
                                                                                    -----------    -----------
   Pro forma net income                                                            $  1,849,763   $  1,269,717
                                                                                    ===========    ===========
Denominator (1):                                                                                              
   Weighted average shares                                                                                    
     outstanding - basic                                                5,839,230     5,881,630      5,105,000
   Effect of dilutive securities:                                                                             
     Director and employee stock options                                   52,706           565         -     
                                                                     ------------   -----------    -----------
   Denominator for diluted earnings per                                                                       
     share - adjusted weighted                                                                                
     average and assumed conversions                                    5,891,936     5,882,195      5,105,000
                                                                     ============   ===========    ===========

(1) Actual for 2000 and pro forma for 1999 and 1998.                            

16.   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.                                     

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

2000:                                                                           

                                                        [Enlarge/Download Table]


                                          Restaurant        Commissary        Corporate        Totals     
                                         -------------    --------------    -------------   --------------
                                                                                                          
Revenues from external customers        $   51,820,600  $      1,663,208  $     2,816,958  $   56,300,766 
Intersegment revenues                                -         2,494,802                -       2,494,802 
Gain from insurance proceeds due to                                                                       
   involuntary conversion of non-                                                                         
   monetary assets                                   -                 -          554,864         554,864 
General and administrative expenses                  -                 -        4,959,656       4,959,656 
Advertising expenses                                 -                 -        1,570,179       1,570,179 
Depreciation and amortization                1,689,740           117,326          340,342       2,147,408 
Loss on guarantees of indebtedness and                                                                    
  provision for doubtful accounts                    -                 -          793,464         793,464 
Net interest expense                                 -           176,100        1,282,550       1,458,650 
Equity in losses of TW-Springhurst                   -                 -          (58,903)        (58,903)
Income before income taxes                   6,438,963            85,112       (5,895,275)        628,800 
Fixed assets                                29,758,242         1,072,609          964,603      31,795,454 
Expenditures for long-lived assets           2,779,337            13,978          297,621       3,090,936 

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16. Segment Information (continued)                                             

                                                        [Enlarge/Download Table]


1999:                                                                                                   

                                        Restaurant        Commissary        Corporate         Totals    
                                       -------------    --------------    -------------   --------------
                                                                                                        
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

17.   Selected Quarterly Data                                                   

The following is a summary of certain unaudited  quarterly results of operations
for the years ended December 31, 2000 and 1999.                                 

2000:                                                                           

                                                        [Enlarge/Download Table]


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

                                                                                                              
Total revenues                  $  13,632,368 $  14,391,655     $  14,441,597   $  13,835,146    $  56,300,766
Income (loss) from operations         960,475       853,043(a)        (13,792)(b)     346,627(c)     2,146,353
Income (loss) before                                                                                          
   cumulative effect of a                                                                                     
   change in accounting                                                                                       
   principle                          418,130       337,793          (257,740)         65,178(d)       563,361
Net income (loss)                     418,130       337,793          (257,740)         65,178          563,361
Basic and diluted earnings per                                                                                
  share:                                                                                                      
   Income (loss) before                                                                                       
   cumulative effect of a                                                                                     
   change in accounting                                                                                       
   principle                             0.07          0.06             (0.04)           0.01             0.10
   Net income (loss)                     0.07          0.06             (0.04)           0.01             0.10

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17.   Selected Quarterly Data (continued)                                       

(a)  Includes  gain from  insurance  proceeds due to  involuntary  conversion of
     non-monetary  assets of  approximately  $434,000 and loss on  guarantees of
indebtedness of $475,000.                                             

(b)  Includes  estimated  additional  loss  on  guarantees  of  indebtedness  of
$250,000.                                                             

(c)  Includes  additional  gain  from  insurance  proceeds  due  to  involuntary
     conversion of non-monetary assets of approximately $121,000 and a provision
for doubtful accounts of approximately $68,000.                       

(d)  Includes  a change in  estimate  of  approximately  $190,000  reducing  the
Company's provision for income taxes.                                 

1999:                                                                           

                                                        [Enlarge/Download Table]


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

                                                                                                            
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 (loss) before                                                                                     
     cumulative effect of a                                                                                 
     change in accounting                  (0.04)          0.12           0.11           0.08           0.27
      principle                                                                                             
   Net income (loss)                       (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

18.  Contingencies                                                              

The Company has guaranteed  renewals of certain guaranteed  indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a franchisee (TW-Tennessee),  to
the extent and in amounts not to exceed the amounts  guaranteed  as of September
30,  1998.  The Company  had  guaranteed  certain  TW-Tennessee  obligations  as
follows,  jointly and  severally  with  TW-Tennessee  common  members:  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.                       

In March 2001, the bank which holds the line of credit filed suit in the Circuit
Court of  Jefferson  County,  Kentucky  against  TW-Tennessee  and  against  the
guarantors  of the line of credit,  including  the Company and a Director of the
Company.  Prior  to the  suit  being  filed,  the  Company  along  with  certain
guarantors  made a partial  payment to the bank. If the bank is  unsuccessful in
collecting the remaining  payments from the other guarantors,  the Company would
have exposure totaling approximately  $1,000,000.  While the Company believes it
has fulfilled its obligation to the bank and                                    

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18.  Contingencies (continued)                                                  

 intends to vigorously  defend its  position,  it is too early in the process to
predict with certainty the ultimate  outcome of this matter since the suit is in
the early pleading stages and no discovery has taken place.                     

During  1999,  the  Landlord  under  the  lease  financing   agreement  declared
TW-Tennessee to be in default,  and accelerated the rent  obligations  under the
leases.  On May 8,  2000,  the  Landlord  filed suit in the  Chancery  Court for
Davidson County, Tennessee,  against TW-Tennessee and against certain guarantors
of the lease  obligations,  including the Company and a Director of the Company.
The Company and certain guarantors of the lease obligations reached an agreement
with the Landlord, under which the Company and such guarantors paid certain sums
to the Landlord as a final  settlement  of all claims of the  Landlord,  and the
Landlord  dismissed  its legal  action  against and  released  the Company  from
further liability under its guarantees.                                         

The  lessor  under  the  equipment   leases  with   TW-Tennessee   has  declared
TW-Tennessee to be in default  thereunder and demanded  payment in full from all
guarantors of the leases,  including the Company. The Company has made a partial
payment  to the lessor and is  working  with the  lessor in  pursuing  the other
guarantors of the equipment leases that have not made any payment. If the lessor
is unsuccessful in collecting the remaining sums due from the other  guarantors,
the Company would have additional exposure totaling approximately $312,000.     

As a result of the  settlement  with the Landlord under the  TW-Tennessee  lease
financing  agreement,  and given the demand for payment by the lessor  under the
TW-Tennessee equipment leases and by the bank that holds the line of credit, the
Company  has  incurred  a  loss   related  to  the   Company's   guarantees   of
TW-Tennessee's  obligations.  The Company established a reserve in the amount of
$725,000  during 2000 of which  approximately  $716,000  had been paid out as of
December 31, 2000. The reserve amount was based on the Company's  payment to the
Landlord under the TW- Tennessee lease financing agreement,  the Company's share
of the various remaining guarantees of TW Tennessee obligations and an estimated
amount for legal costs which will  likely be  incurred  in  connection  with the
resolution of this matter.  The Company's  management  believes that it will not
incur any significant additional losses in connection with this matter.         

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

None.                                                                           

PART III

ITEM 10.   DIRECTORS AND OFFICERS OF THE REGISTRANT                             

The Proxy  Statement  issued in connection with the  shareholders  meeting to be
held on May 24, 2001, 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 24, 2001, 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 24, 2001, 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 24, 2001, 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.                                               

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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:                      
             Schedule II- Valuation and Qualifying Accounts    Page 51

(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***                   

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

*       Incorporated by reference to exhibits filed with the
               Commission on  September 29, 1998, in Form S-1 Registration
No. 333-57931.                              

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

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

     (b)       During the quarter ended December 31, 2000, the Company did
not file any reports on Form 8-K            

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Tumbleweed, Inc.

 Schedule II - Valuation and Qualifying Accounts

                                                        [Enlarge/Download Table]


                                                              Additions                                          
                                                  ---------------------------------                              
                                      Balance at   Charged to Other                                              
                                     Beginning of  Charged to Costs     Accounts -   Deductions -  Balance at End
Description                              Year        and Expenses        Describe      Describe       of Year    
-----------                              ----        ------------        --------      --------       -------    
                                                                                                                 
Year Ended December 31, 2000:                                                                                    
  Reserves and allowances deducted                                                                               
    from asset accounts:                                                                                         
        Allowance for uncollectible                                                                              
          accounts                       $ -           $68,464             $ -            $ -         $68,464    

Year Ended December 31, 1999:                                                                                    
  Reserves and allowances deducted                                                                               
    from asset accounts:                                                                                         
        Allowance for uncollectible                                                                              
          accounts                         -              -                 -              -             -       

Year Ended December 31, 1998:                                                                                    
  Reserves and allowances deducted                                                                               
    from asset accounts:                                                                                         
        Allowance for uncollectible                                                                              
          accounts                         -              -                 -              -             -       


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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/ Terrance A. Smith
               By: Terrance A. Smith
                                       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/ Terrance A. Smith                                                           
Terrance A. Smith        President and Chief Executive Officer    March 30, 2001
and Director                

/s/ James M. Mulrooney                                                          
James M. Mulrooney       Chief Financial Officer, Treasurer,      March 30, 2001
          Secretary and Executive Vice President
and Director                
  (Principal Accounting Officer)

/s/ David M. Roth                                                               
David M. Roth            Director                                 March 30, 2001

/s/ Minx Auerbach                                                               
Minx Auerbach            Director                                 March 30, 2001

/s/ Lewis Bass                                                                  
Lewis Bass               Director                                 March 30, 2001

/s/ John A. Butorac, Jr.                                                        
John A. Butorac, Jr.     Director                                 March 30, 2001

/s/ George R. Keller                                                            
George R. Keller         Director                                 March 30, 2001

/s/ James F. Koch                                                               
James F. Koch            Director                                 March 30, 2001

- 52 -

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		9/19/94		31
		1/1/96		17
		12/31/96		15
		2/5/97		49
		6/12/97		49
		8/29/97		49
		12/17/97		18
		12/31/97		15		31
		6/23/98		31		49
		9/29/98		49
		9/30/98		12		46			10-Q/A, 10-Q
		12/31/98		12		51			10-K
		1/1/99		14		32
		1/5/99		37
		1/11/99		14					8-K
		2/25/99		50					8-A12G
		3/29/99		14
		4/1/99		38					424B3
		4/21/99		49
		5/12/99		50					10-Q
		7/1/99		39
		12/31/99		12		51			DEF 14A, 10-K
		1/14/00		41					8-K
		5/8/00		12		47
		6/7/00		41
		8/14/00		40
		8/29/00		40
		10/1/00		41
For The Period Ended		12/31/00		1		51			DEF 14A, 8-K
		3/2/01		26
		3/20/01		1		14
Filed On / Filed As Of		3/30/01		52
		5/24/01		1		48
		10/3/01		24		36
		12/31/02		40					8-K
		12/31/03		24		35
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