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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 29, 2002

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
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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____

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

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 3, 2003, was approximately $2,333,000. 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 3, 2003 ($1.12) as reported on The Nasdaq Small Cap Market.

The number of shares of common stock, par value of $.01 per share, outstanding
on March 3, 2003, was 5,916,153.

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
Exhibit Index: Page 54-55 Annual Meeting of Shareholders to be held
June 25, 2003



TUMBLEWEED, INC.

PART I



ITEM 1. BUSINESS

At December 29, 2002, Tumbleweed, Inc. (the "Company") owned, franchised or
licensed 56 Tumbleweed Southwest Mesquite Grill & Bar ("Tumbleweed")
restaurants. We owned and operated 31 Tumbleweed restaurants in Kentucky,
Indiana and Ohio. There were 19 franchised Tumbleweed restaurants located in
Indiana, Illinois, Kentucky and Wisconsin, and six licensed restaurants located
outside the United States in Germany, Jordan, Egypt, England and Turkey.
Tumbleweed restaurants feature sophisticated Southwest 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 Company makes available through its internet website,
www.tumbleweedrestaurants.net , its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as soon as reasonably practicable after electronically
filing such material with the Securities and Exchange Commission. The reference
to the Company's website address does not constitute incorporation by reference
of the information contained on the website and should not be considered part of
this document.

THE TUMBLEWEED CONCEPT

The Tumbleweed menu offers both distinctively seasoned, spicier versions of
popular Mexican 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 Mexican 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 Mexican
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 chili, as well as nachos,
quesadillas, buffalo chicken strips, Southwest eggrolls and turkey wings. The
Mexican menu offers burritos, enchiladas, tacos, chimichangas and other items
served both individually and in various combination dinners accompanied by rice
and refried or baked 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, smashed taters, corn on
the cob, grilled veggies, Santa Fe rice, and refried or baked beans. Mesquite
grilled items are available as sandwiches as well as entrees. A variety of
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. In an effort to increase the frequency of guest visits, the
Company introduces new items which complement present menu selections through
seasonal menus. The Company also has a lunch menu which is available during
lunch hours as a complement to the complete menu.

Tumbleweed restaurants typically contain full-service bars offering a wide
assortment of mixed drinks, wines, domestic and imported beers and featuring the
Tumbleweed margarita and Texas Tea. Alcoholic beverages accounted for
approximately 10.4% of restaurant sales during 2002.

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Tumbleweed's menu pricing is designed to create a strong perception of value by
consumers. Prices for Mexican dishes range from $4.39 for two tacos to $11.99
for the "Need the 'Weed" sampler dinner. Mesquite grilled items range from $6.29
for a hamburger to $19.99 for a 22 oz. USDA-choice ribeye steak dinner.
Tumbleweed also offers several daily lunch specials for less than $6.00.

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 2002, the average check at a full-service Tumbleweed
restaurant, including beverages, was $9.48 for lunch and $12.61 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 five 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 and teamwork.

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 Mexican 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

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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:

OPENING RESTAURANTS IN TARGET MARKETS. We target mid-sized metropolitan markets,
initially concentrating in the Midwest and Mid-Atlantic 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. On January 1, 2002, the Company
purchased from its joint venture partner the remaining 50% interest in a
restaurant location. During the first quarter of 2002, the Company closed four
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the
continued improvement of per-store average sales volumes. During the second
quarter of 2002, the Company sold one of its restaurant locations to a
franchisee in accordance with the Company's plan established in the fourth
quarter of 2001. In the next 12 months, the Company expects to construct one or
two additional restaurant facilities.

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. 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.

During 2002, there were no franchise restaurant openings, and two franchisees
elected to close their Tumbleweed restaurant locations (a total of 3 locations).

MATCHING INVESTMENT TO SALES POTENTIAL. When developing a new Tumbleweed
restaurant, we generally use one of two prototype designs management believes is
best suited to a particular site. Our Buffalo Hunter and Gunslinger prototype
restaurants accommodate approximately 250 and 200 guests, respectively. Each
size restaurant offers full service casual dining and a menu containing a wide
assortment of Mexican and mesquite grilled selections. Management believes that

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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.

INTERNATIONAL. In 2002, the Company purchased Tumbleweed International, LLC. See
below for a detail discussion of this transaction. The acquisition gives the
Company direct control and benefit of the international licensing of the
Tumbleweed concept.

RESTAURANT DESIGN

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

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

RESTAURANT OPERATIONS

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

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

COMPREHENSIVE TRAINING AND DEVELOPMENT. We have developed a comprehensive
training program for managers and hourly employees. Managers are required to
complete a ten-week initial training course and regular training programs. The
course emphasizes our culture, commitment to TGS, operating procedures and
standards, and internal controls.

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

RESTAURANT REPORTING. We closely monitor sales, costs of food and beverages, and
labor at each of our restaurants. Management analyzes daily and weekly
restaurant operating results to identify trends at each location, and acts
promptly to remedy negative trends where possible. We use an accounting and
management information system that operates at the restaurant level to ensure
the maintenance of financial controls and operations. Administrative staff
prepare daily reports of sales, labor and customer counts. Cost of sales and
condensed profit and loss statements compiled weekly by store-level personnel
and at the end of each reporting period 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.


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SEASONALITY. We consider restaurant operations to be somewhat seasonal in nature
with late first quarter and second quarter 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 President, Vice President and Chief Financial
Officer, Vice President of Company Operations and the Director of Construction
oversee 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 2002 was approximately 3.3% of
restaurant sales.

RESTAURANT LOCATIONS

As of December 29, 2002, we owned and operated 31 Tumbleweed restaurants. The
following table sets forth the markets (including the number of restaurants in
each market) of these 31 restaurants:


NO. OF
STATE LOCATION RESTAURANTS
- ----- -------- -----------
Indiana Evansville 3
Indiana Ft. Wayne 2
Indiana Terre Haute 1
Kentucky Bowling Green 1
Kentucky Louisville 9
Ohio Cincinnati 5
Ohio Columbus 5
Ohio Dayton 3
Ohio Cleveland 2
--
TOTAL 31
==



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FRANCHISED RESTAURANTS

As of December 29, 2002, we had six 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
Indiana Jeffersonville 1
Kentucky Shelbyville 1
Kentucky Frankfort 1
Kentucky Lexington 1
--
8
Diamondback
Management Corp. Illinois Rockford 1
Wisconsin Appleton 1
Wisconsin Franklin 1
Wisconsin Madison 1
Wisconsin Milwaukee 1
Wisconsin New Berlin 1
Wisconsin Park Place 1
--
7

TW-Seymour, LLC Indiana Seymour 1
--
1

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

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

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

LICENSED RESTAURANTS

As of December 29, 2002, we had six licensed restaurants located outside the
United States. The following table sets forth the location by country (including
the number of restaurants in each country) of these six restaurants:


No. of
Country Restaurants
------- -----------

England 2
Turkey 1
Egypt 1
Germany 1
Jordan 1
-
6





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INTERNATIONAL LICENSING AGREEMENT

Prior to January 1, 2002, the Company had 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. On January 1, 2002, the Company
purchased the ownership interest in International for $1.5 million from
TW-International Investors, Inc. and Chi-Chi's International Operations, Inc.
("CCIO"). CCIO owned 40% of International. The President and Chief Executive
Officer of the Company is the sole shareholder of CCIO. Members of
TW-International Investors, Inc. include three current directors of the Company.
The acquisition gives the Company direct control and benefit of the
international licensing of the Tumbleweed concept. In connection with the
acquisition, the Company assumed an existing $1.4 million bank loan of
TW-International Investors, Inc. and issued 76,923 shares of its common stock to
CCIO. The Company has entered into a commission agreement with CCIO in
connection with the sale of international regional licenses by 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 10.4% of our restaurant sales were attributable to the sale of
alcoholic beverages for the fiscal year ended December 29, 2002. 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.

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

EMPLOYEES

As of December 29, 2002, we had approximately 1,800 employees, of whom 35 are
executive and administrative personnel, 117 are restaurant management personnel,
and the remainder are hourly restaurant and commissary personnel. Many of our
hourly restaurant employees work part-time. None of our employees are covered by
a collective bargaining agreement. We consider our employee relations to be
good.

FORWARD-LOOKING STATEMENTS/RISK FACTORS

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

EXPANSION RISKS. Since 1995, we have grown while developing the operational
systems, internal controls, and management personnel that management believed
was necessary to support our plans for continued expansion. In the course of
expanding our business, we may 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. As of December 29, 2002, we operated 31 Tumbleweed restaurants.
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.

- 9 -





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
29, 2002, 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. ... 57 President, Chief Executive Officer, and Director
Glennon F. Mattingly . 51 Vice President and Chief Financial Officer
Gary T. Snyder........ 48 Vice President of Company Operations
Lynda J. Wilbourn..... 40 Vice President and 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. From 1997 to 2002, Mr.
Smith 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.

Glennon F. Mattingly joined Tumbleweed, LLC, the Company's predecessor, as
Controller in March 1995 and was named Vice President-Controller in April 1998
and Chief Financial Officer in August 2001. 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.

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.

Lynda J. Wilbourn joined Tumbleweed, Inc. in March 1999 as Director of
Accounting and was named Vice President and Controller in November 2001. Ms.
Wilbourn continues to serve the Company in that capacity. From 1987 to 1999,

- 10 -





Ms. Wilbourn held various positions with NTS Corporation, a regional real estate
development firm headquartered in Louisville, Kentucky, including five years as
Vice President of Accounting.

SEGMENT INFORMATION

Segment information for the fiscal years ended December 29, 2002 and December
31, 2001 and 2000 are presented in Note 19 to our Consolidated Financial
Statements contained in Item 8.

ITEM 2. PROPERTIES

Of the 31 Company-owned restaurants in operation at December 29, 2002, 15 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 2007 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
are located in Louisville, Kentucky in leased space. The lease expires in 2007
and has two 5-year renewal options. We own the commissary and warehouse space in
fee simple.

ITEM 3. LEGAL PROCEEDINGS

The Company guaranteed certain equipment leases with a bank for TW-Tennessee,
LLC, a former franchisee (TW- Tennessee) of the Company in which the Company and
David M. Roth, a Director of the Company, were formerly members. The Company has
agreed to assume and pay one of the equipment leases totaling approximately
$125,000 and remains contingently liable on two other equipment leases that
currently have a remaining balance of approximately $36,000 which the Company
believes will be assumed and paid by other guarantors. In the fourth quarter of
2001, the Company reserved $125,000 to cover its portion of the equipment lease
it assumed. As of December 29, 2002, the reserve balance is approximately
$74,000 which management believes is sufficient to satisfy the remaining lease
obligation. The Company's management believes it will not incur significant
additional losses in connection with this matter.

On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company had no contractual obligation to pay a
$270,000 commission to AFI, in connection with a Conditional Commitment entered
into between AFI and the Company and seeking damages for fraud and
misrepresentation. In response, AFI filed suit in the United States District
Court for the Eastern District of Missouri seeking payment of a $405,000
commitment fee plus additional charges, fees and costs all in the excess of
$500,000 relating to the Conditional Commitment, as well as damages for breach
of contract, unjust enrichment and misrepresentation/fraud. This matter is in
the early discover stage. Management believes that AFI's claims are without
merit, but it is too early to predict an outcome. The Company intends to
vigorously defend itself in connection with this matter. As of December 29,
2002, the Company has not made an accrual for a potential liability in
connection with this matter.

We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.

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 29, 2002.



- 11 -





PART II


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

As of March 3, 2003, 5,916,153 shares of Common Stock were issued and
outstanding. There were approximately 1,400 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 Small Cap Market under the symbol "TWED."
The following table shows quarterly high and low closing prices for the Common
Stock during 2002 and 2001 for the periods indicated, as reported by the Nasdaq
Small Cap Market.


2002 2001
---- ----
High Low High Low
---- --- ---- ---
First Quarter $ 1.65 $ 1.10 $ 3.13 $ 1.81
Second Quarter 1.75 0.81 2.99 2.17
Third Quarter 1.60 1.22 2.30 1.30
Fourth Quarter 1.38 0.50 1.50 0.92


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.









- 12 -





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
fiscal years ended December 29, 2002 and December 31, 2001, 2000 and 1999 and
Tumbleweed, LLC for the year ended December 31, 1998 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."












- 13 -








Tumbleweed,
Tumbleweed, Inc. LLC
--------------------------------------------------------- ------------------
Fiscal Year
Ended Fiscal Year Ended December 31
December 29, -----------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -----------------------------------------------------------

Statement of Operations Data:
Revenues:

Restaurant sales $ 54,076,024 $ 56,025,886 $ 51,820,600 $ 48,578,123 $ 40,490,933
Commissary sales 1,664,591 1,781,252 1,663,208 1,168,836 1,041,266
Franchise fees and royalties 1,223,664 1,227,300 1,271,251 1,064,952 770,806
Other revenues 661,990 418,744 990,843 532,976 504,639
--------------- ------------- ------------ ------------ -------------
Total revenues 57,626,269 59,453,182 55,745,902 51,344,887 42,807,644
Operating expenses:
Restaurant cost of sales 16,231,146 17,426,315 15,275,817 14,232,564 11,788,578
Commissary cost of sales 1,496,587 1,562,049 1,460,704 1,053,083 905,814
Operating expenses 29,940,255 30,567,705 27,456,791 24,377,631 20,881,212
Selling, general and administrative
expenses 5,983,857 6,107,159 6,598,299 4,981,721 4,150,303
Preopening expenses - - 490,394 395,768 816,604
Depreciation and amortization 1,947,610 2,285,452 2,147,408 1,804,757 1,442,011
Special charges 103,773 4,294,539 - - -
Loss on guarantees of indebtedness - 565,000 725,000 - -
--------------- ------------- ------------ ------------ --------------
Total operating expenses 55,703,228 62,808,219 54,154,413 46,845,524 39,984,522
--------------- ------------- ------------ ------------ --------------
Income (loss) from operations 1,923,041 (3,355,037) 1,591,489 4,499,363 2,823,122
Interest expense, net (1,007,126) (1,276,903) (1,458,650) (1,128,906) (869,712)
Gain on sale of property 338,482 - - - -
Gain from insurance proceeds due to
involuntary conversion of non-
monetary assets 91,693 - 554,864 - -
Equity in income (loss) of TW-
Springhurst - 81,318 (58,903) - -
--------------- ------------- ------------ ------------ --------------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of a change in
accounting principle 1,346,090 (4,550,622) 628,800 3,370,457 1,953,410
Provision (benefit) for income taxes:
Current and deferred 730,234 (1,178,144) 65,439 1,179,659 -
Deferred taxes related to change in
tax status (3) - - - 639,623 -
--------------- ------------- ------------ ------------ --------------
Total provision (benefit) for income
taxes 730,234 (1,178,144) 65,439 1,819,282 -
--------------- ------------- ------------ ------------ --------------
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle 615,856 (3,372,478) 563,361 1,551,175 1,953,410
Extraordinary item - write-off of
unamortized loan costs, net of tax (76,743) - - - -
Cumulative effect of a change in
accounting principle, net of tax (1,503,776) - - (341,035) -
--------------- ------------- ------------ ------------ --------------
Net income (loss) $ (964,663)$ (3,372,478)$ 563,361 $ 1,210,140 $ 1,953,410
=============== ============= ============ ============ ==============
Basic and diluted earnings (loss)
per share:
Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle $ 0.10 $ (0.58)$ 0.10 $ 0.27
Extraordinary item - write-off of
unamortized loan costs (0.01) - - -
Cumulative effect of a change in
accounting principle, net of tax (0.25) - - (0.06)
--------------- ------------- ------------ ------------
Net income (loss) $ (0.16 )$ (0.58)$ 0.10 $ 0.21
=============== ============= ============ ============



- 14 -








Tumbleweed,
Tumbleweed, Inc. LLC
--------------------------------------------------------- ---------------
Fiscal Year
Ended Fiscal Year Ended December 31
December 29, ---------------------------------------------------------
2002 2001 2000 1999 1998
------------ ---------------------------------------------------------
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) 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 (2):
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
============ ==============





Tumbleweed, Inc. Tumbleweed, LLC
------------------------------------------------------ ---------------------
As of December 31
----------------------------------------------------------

As of Pro
---
December 29, Forma
-----
2002 2001 2000 1999 1998 (3) 1998
---- ---- ---- ---- -------- ----
(unaudited)
(In thousands)
Balance Sheet Data:

Total assets $ 33,97 $ 34,897 $ 39,453 $ 36,597 $ 33,681 $ 33,681
Long-term debt and capital lease
obligations, including current
maturities 15,881 15,435 16,998 15,145 13,363 13,363
Total liabilities 20,343 20,398 21,581 19,035 24,743 24,103
Redeemable members' equity - - - - - 18,925
Members' equity - - - - - 354
Members' retained earnings (deficit) - - - - - (9,701)
Stockholders' equity 13,634 14,499 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, 1997.

(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.




- 15 -





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 29, 2002, we owned, franchised or licensed 56 Tumbleweed
restaurants. We owned and operated 31 restaurants in Kentucky, Indiana and Ohio.
There were 19 franchised restaurants located in Indiana, Illinois, Kentucky, and
Wisconsin and six licensed restaurants located outside the United States in
Germany, Jordan, Egypt, England and Turkey. The following table reflects changes
in the number of Company-owned, franchised and licensed restaurants for the
years presented.

Company-owned Restaurants 2002 2001 2000
------------------------- ---- ---- ----

In operation, beginning of fiscal year 36 36 29
Restaurants opened - - 4
Restaurant sold to franchisee (1) - -
Restaurants closed (4) - -
Joint venture restaurant opened - - 1
Restaurants purchased from franchisee - - 2
-- -- --
In operation, end of fiscal year 31 36 36
-- -- --


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

In operation, beginning of fiscal year 29 27 22
Restaurants opened - 3 10
Restaurants closed (5) (1) (3)
Restaurant purchased from Tumbleweed,
Inc. 1 - -
Restaurants sold to Tumbleweed, Inc. - - (2)
-- -- ---
In operation, end of fiscal year 25 29 27
-- -- --
System total 56 65 63
== == ==

On January 1, 2002, the Company purchased from its joint venture partner the
remaining 50% interest in a restaurant location. See Note 10 to the accompanying
consolidated financial statements for a further discussion of this transaction.
During the first quarter of 2002, the Company closed four Company-owned
restaurant locations. The restaurants were located in Cincinnati, Ohio (2),
Columbus, Ohio (1), and Evansville, Indiana (1). The restaurant closings were
part of a strategic management decision to eliminate lower sales volume
restaurants that were unprofitable in 2001 and to focus its energies on the on
the continued improvement of per-store average sales volumes. During the second
quarter of 2002, the Company sold one of its restaurant locations to a
franchisee in accordance with the Company's plan established in the fourth
quarter of 2001. See below for a discussion regarding a special charge, which
was recorded in 2001 as a result of the store closings and sale.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted

- 16 -





in the United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates these estimates.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates.

The Company believes the following critical accounting policies affect its more
significant assumptions and estimates used in the preparation of its
consolidated financial statements.

Valuation of Long-Lived Assets

On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of net book
value or fair market value less cost to sell, whether reported in continuing
operations or discontinued operations. SFAS No. 144 also broadens the
presentation of discontinued operations to include components of an entity that
have been or will be disposed of rather than limiting such reporting to
discontinued segments of a business.

We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important that could trigger an impairment review include the
following:

o a significant underperforming store relative to expected historical or
projected future operating results;

o a significant change in the manner of our use of the acquired asset or
the strategy for our overall business;

o a significant negative industry or economic trend;

Through December 29, 2002, we determined whether the carrying value of
long-lived assets may not be recoverable based upon the existence of one or more
indicators of impairment. We determined that there was no impairment based on
the estimated undiscounted future cash flows of assets. If long-lived assets are
not recoverable based upon estimated undiscounted cash flows, we write assets
down to fair value. This fair value is generally determined on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model for
assets held for use or at the lower of net book value less cost to sell for
assets held for sale.

In the fourth quarter of 2001, the Company recorded special charges of
approximately $4,295,000. The special charges include a $3,683,353 charge to
earnings in accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Impairment of Long-Lived Assets." This charge reflects the write-down
of assets associated with six restaurants, four of which were closed in the
first quarter of 2002. The Company sold one of the remaining two restaurants to
a current franchisee and continues to operate the other restaurant for the
present. The restaurant closings were part of a strategic management decision to
eliminate lower sales volume restaurants that were unprofitable in 2001 and to
focus its energies on the continued improvement of per-store average sales
volumes. The special charges also included approximate amounts totaling $611,200
for lease obligations and other costs related to the decision to close these
restaurants of which approximately $295,000 remains accrued at December 29,
2002. Although we do not anticipate significant changes, the actual net proceeds
from anticipated sales of assets and store closing costs may differ from the
estimated amounts.

Impairment of Goodwill

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS). SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment annually, or more
frequently if certain indicators arise. The provisions of SFAS No. 142 also
require the completion of a transitional impairment test within six months of
adoption, with any impairments identified treated as a cumulative effect of a
change in accounting principle.

During the first quarter of 2002, the Company determined that all goodwill as of
January 1, 2002 related to two reporting units was impaired. The fair value of
each unit was determined using accepted valuation techniques. As a result of the

- 17 -





transitional impairment test, an impairment loss in the amount of approximately
$1,504,000, net of tax, was recorded as a cumulative effect of a change in
accounting principle during the first quarter of 2002.

As of December 29, 2002, the Company completed the annual test of impairment and
determined that there is no further impairment of goodwill.

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




















































- 18 -





RESULTS OF OPERATIONS

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




Fiscal Years Ended
------------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
------------------------------------------------------
Revenues:

Restaurant sales 93.8% 94.2% 93.0%
Commissary sales 2.9 3.0 3.0
Franchisee fees and royalties 2.1 2.1 2.2
Other revenues 1.2 0.7 1.8
------------------------------------------------------
Total revenues 100.0 100.0 100.0
Operating expenses:
Restaurant cost of sales (1) 30.0 31.1 29.5
Commissary cost of sales (2) 89.9 87.7 87.8
Operating expenses (1) 55.4 54.6 53.0
Selling, general and administrative 10.4 10.3 11.8
Preopening expenses - - 0.9
Depreciation and amortization 3.4 3.8 3.9
Special charges 0.2 7.2 -
Loss on guarantees of indebtedness - 1.0 1.3
------------------------------------------------------
Total operating expenses 96.7 105.6 96.2
------------------------------------------------------
Income (loss) from operations 3.3 (5.6) 2.8
Other expense, net (1.0) (2.1) (1.7)
------------------------------------------------------
Income (loss) before income taxes, extraordinary item
and cumulative effect of a change in accounting
principle 2.3 (7.7) 1.1
Provision (benefit)for income taxes 1.3 (2.0) 0.1
------------------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of a change in accounting
principle 1.0 (5.7) 1.0
Extraordinary item - write-off of unamortized loan
costs (0.1) - -
Cumulative effect of a change in
accounting principle, net of tax (2.6) - -
------------------------------------------------------
Net income (loss) (1.7)% (5.7)% 1.0%
======================================================



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



Beginning January 1, 2002, the Company changed its fiscal year to end on the
last Sunday in December from a December 31 year end. As a result of this change,
the 2002 fiscal year has two fewer days than the 2001 fiscal year.

COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 29, 2002 AND DECEMBER 31, 2001

Total revenues decreased by $1,826,913 or 3.1% in 2002 compared to 2001
primarily as a result of the following:

Restaurant sales decreased by $1,949,862 or 3.5% in 2002 compared to
2001. The decrease in restaurant sales is primarily a result of the closing
of four Company-owned restaurants during the first quarter of 2002, the sale
of one Company-owned restaurant to a franchisee during the second quarter of
2002 and the Company's change in its fiscal year. The decrease in restaurant
sales is partially offset by a 1.4% increase in same store sales for the
fiscal year ended December 29, 2002.

Commissary sales to franchised and licensed restaurants decreased by
$116,661 or 6.5% in 2002 compared to 2001. The decrease in commissary sales
is primarily a result of the decreased number of franchised and licensed
restaurants during 2002.

- 19 -





Franchise fees and royalties decreased by $3,636 or 0.3% in 2002 compared
to 2001. Franchise fees decreased by $105,000 in 2002 compared to 2001. The
decrease in franchise fee income is a result of having three franchise
restaurant openings in 2001 compared to no franchise restaurant openings in
2002. The decrease in franchise fees is partially offset by $101,364 increase
in royalty income from 2001 to 2002. Royalty income increased primarily as a
result of the Company's acquisition of the ownership interest in Tumbleweed
International, LLC on January 1, 2002.

Other revenues increased $243,246 or 58.1% in 2002 compared to
2001 primarily as a result of an increase in insurance proceeds which relate
to business interruption as a result of fires at two Company-owned
restaurants. Other revenues includes $200,000 of insurance proceeds in 2002,
as a result of a fire which occurred in July 2002, compared to $100,000 of
insurance proceeds in 2001, as a result of a fire which occurred in June
2000. In addition, other revenues increased as a result of recognizing, as
income in 2002, $55,000 of development fees which were forfeited by a
franchisee and an increase in volume related purchasing rebates in 2002
compared to 2001.

Restaurant cost of sales decreased by $1,195,169 or 6.9% in 2002 compared to
2001. The decrease in restaurant cost of sales is primarily a result of the
closing of four Company-owned restaurants during the first quarter of 2002, the
sale of one Company-owned restaurant to a franchisee during the second quarter
of 2002 and the Company's change in its fiscal year as discussed above.
Restaurant cost of sales decreased as a percentage of sales by 1.1% to 30.0% for
2002 compared to 31.1% during 2001. The 1.1% decrease in cost of sales is
primarily the result of a temporary increase in the cost of beef and pork
(primarily steaks and ribs, respectively) during the first part of 2001.

Commissary cost of sales decreased $65,462 or 4.2% in 2002 compared 2001
primarily as a result of decreased commissary sales. As a percentage to sales,
commissary cost of sales increased 2.2% from 87.7% in 2001 to 89.9% in 2002
primarily as a result of higher raw material product costs.

Restaurant operating expenses decreased by $627,450 or 2.1% in 2002 compared to
2001. The decrease in operating expenses is primarily a result of the closing of
four Company-owned restaurants during the first quarter of 2002, the sale of one
Company-owned restaurant to a franchisee during the second quarter of 2002 and
the change in the Company's fiscal year. The decrease in operating expenses from
2001 to 2002 is partially offset by increased local marketing costs and
increased repair and maintenance costs. Operating expenses as a percentage of
sales increased by 0.8% from 54.6% in 2001 to 55.4% in 2002 primarily due to a
0.4% increase in local marketing costs and a 0.3% increase in repair and
maintenance costs.

Selling, general and administrative expenses decreased by $123,302 or 2.0% in
2002 compared to 2001. The decrease in selling, general and administrative
expenses is primarily due to the fact that the 2001 period includes the cost of
implementing a new menu of approximately $95,000. There was no similar expense
in 2002. The decrease in selling, general and administrative expenses is also
attributable to decreased advertising costs. As a percentage to total revenues,
selling, general and administrative expenses was 10.4% and 10.3% for 2002 and
2001, respectively.

Depreciation and amortization expense decreased $337,842 or 14.8% in 2002
compared to 2001 as a result of goodwill no longer being amortized in accordance
with SFAS No. 142 and the write-down of assets in the fourth quarter of 2001.

The Company recorded special charges of $103,773 in the fourth quarter of 2002.
The special charges represent the write- off of various costs that were incurred
as a result of the proposal to acquire all outstanding shares in a going private
transaction which was originally announced in June 2002. See below for a
discussion regarding the 2001 special charges.

Net interest expense decreased $269,777 or 21.1% in 2002 compared to 2001. The
decrease in net interest expense is due primarily to the decreases in the prime
interest rate during 2002.

The $338,482 gain on sale of property is a result of the sale of one of the
Company-owned restaurants (land and building) which had been closed, as
discussed above, for $1,575,000. A portion of the proceeds from the sale were
used to pay off a $224,611 mortgage payable and other closing costs.

The gain of $91,693 from insurance proceeds during 2002 was due to the
involuntary conversion of non-monetary assets from a fire at a Company-owned
restaurant. See Note 12 of the accompanying consolidated financial statements
for a detail discussion. There was no similar income during 2001.

Income taxes on the Company's income before income taxes, extraordinary item and
cumulative effect of a change in accounting principle for 2002 and 2001 have
been provided for at an estimated effective tax rate of 54% and 26%,
respectively. The effective tax rate differs from the statutory federal tax rate
of 34% as a result of the impact of

- 20 -





employment tax credits, state income taxes and an increase in the valuation
allowance for the deferred tax asset. In 2003, the Company expects the effective
tax rate to moderate closer to the statutory rate.

The extraordinary item - write off of unamortized loans costs, net of tax, of
$76,743 relates to loan costs associated with the Company's long-term debt. The
unamortized loan costs were expensed due to the fact that a commitment letter
was signed prior to December 29, 2002 for financing which will repay all
long-term debt prior to its maturity. See below for a discussion regarding the
$18.0 million financing package that was obtained subsequent to fiscal year end
on December 31, 2002.

COMPARISON OF THE FISCAL YEARS ENDED DECEMBER 31, 2001 AND 2000

Total revenues increased by $3,707,280 or 6.7% in 2001 compared to 2000
primarily as a result of the following:

Restaurant sales increased by $4,205,286 or 8.1% in 2001 compared to
2000. The increase in restaurant sales is due primarily to 42 additional
Company-owned restaurant store months during 2001 compared to 2000. The
increase in restaurant sales is also attributable in part to a 0.7% increase
in same store sales.

Commissary sales to franchised and licensed restaurants increased by
$118,044 or 7.1% in 2001 compared to 2000. The increase is due primarily to
38 additional franchised or licensed restaurant store months in 2001 compared
to 2000.

Franchise fees and royalties decreased by $43,951 or 3.5% in 2001
compared to 2000. Franchise fees decreased by $145,000 in 2001 compared to
2000. The decrease in franchise fee income is a result of having seven
franchise restaurant openings in 2000 compared to three franchise restaurant
openings in 2001. The decrease in franchise fees is partially offset by a
$101,049 increase in royalty income from 2000 to 2001. Royalty income
increased primarily as a result of 38 additional franchised or licensed
restaurant store months in 2001 compared to 2000.

Other revenues decreased by $572,099 or 57.7% in 2001 compared to 2000
primarily due to a decrease in volume related purchasing rebates in 2001
compared to 2000. The decrease in other revenues is also due to a decrease in
insurance proceeds which relate to a business interruption as a result of a
fire which occurred in June 2000 at a Company-owned restaurant. Other
revenues includes $100,000 and $280,000 of insurance proceeds related to a
business interruption in 2001 and 2000, respectively.

Restaurant cost of sales increased by $2,150,498 or 14.1% in 2001 compared to
2000. The increase was principally due to 42 additional Company-owned restaurant
store months in 2001 compared to 2000. Restaurant cost of sales increased as a
percentage of sales by 1.6% to 31.1% in 2001 compared to 29.5% in 2000. The 1.6%
increase in cost of sales is primarily the result of a temporary increase in the
cost of beef and pork (primarily steaks and ribs, respectively) and as a result
of improving the quality of the beef product served in the restaurants.

Commissary cost of sales increased $101,345 or 6.9% in 2001 compared to 2000.
The increase in commissary cost of sales is due primarily to 38 additional
franchised and licensed restaurant store months in 2001 compared to 2000. As a
percentage of commissary sales, commissary cost of sales were 87.7% and 87.8% in
2001 and 2000, respectively.

Restaurant operating expenses increased by $3,110,914 or 11.3% in 2001 compared
to 2000. The increase in operating expenses reflects 42 additional Company-owned
restaurant store months in 2001 compared to 2000. Operating expenses increased
as a percentage of restaurant sales by 1.6% to 54.6% in 2001 from 53.0% in 2000
primarily due to a 0.6% increase in utilities and a 0.4% increase in payroll
costs.

Selling, general and administrative expenses decreased by $491,140 or 7.4% in
2001 compared to 2000. The decrease in selling, general and administrative
expenses is primarily due to decreased payroll costs for corporate personnel.
The decrease in payroll costs is partially offset by increased advertising
costs, the cost of implementing a new menu during the first quarter of 2001and
increased legal costs. As a percentage to total revenues, selling, general and
administrative expenses were 10.3% and 11.8% for 2001 and 2000, 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 number of restaurant locations which are in the process
of being prepared for opening. There were no preopening expenses incurred during
2001. Preopening expenses were $490,394 in 2000.


- 21 -





Depreciation and amortization expense increased $138,044 or 6.4% in 2001
compared to 2000 due primarily to 42 additional Company-owned restaurant store
months in 2001 compared to 2000.

The Company recorded special charges of $4,294,539 in the fourth quarter of
2001. The special charges include a $3,683,353 charge to earnings in accordance
with SFAS No. 121, "Impairment of Long-Lived Assets." This charge reflects the
write-down of assets associated with six restaurants, four of which closed in
the first quarter of 2002. The Company sold one of the remaining two restaurants
to a current franchisee and continues to operate the other restaurant for the
present. The restaurant closings were part of a strategic management decision to
eliminate lower sales volume restaurants that were unprofitable in 2001 and to
focus its energies on the continued improvement of per-store average sales
volumes. The special charges also included $611,186 for lease obligations and
other costs related to the decision to close these restaurants of which
approximately $295,000 remains accrued at December 29, 2002.

Net interest expense decreased $181,747 or 12.5% in 2001 compared to 2000. The
decrease in net interest expense is the result of decreases in the prime
interest rate during 2001 partially offset by higher borrowings incurred during
2000 to fund the growth in Company-owned restaurants.

The gain of $554,864 from insurance proceeds during 2000 was due to the
involuntary conversion of non-monetary assets from a fire at a Company-owned
restaurant. There was no similar income during 2001.

The equity in income of TW-Springhurst was $81,318 in 2001 compared to equity in
losses of $58,903 in 2000. TW- Springhurst experienced a loss in 2000 primarily
as a result of pre-opening costs.

The combined effective federal and state income tax rate was approximately 26%
and 10% for the years ended December 31, 2001 and 2000, respectively. The
effective tax rate is lower than the statutory federal tax rate of 34% as a
result of the impact of employment tax credits and state income taxes on the
effective rate, as well as the impact on the rate in 2001 of the valuation
allowance against deferred income tax assets.

LIQUIDITY AND CAPITAL RESOURCES

Subsequent to fiscal year end on December 31, 2002, the Company completed an
$18.0 million financing package with GE Capital Franchise Finance Corporation
(GE). The loan was divided into two real estate loans totaling $14.5 million
secured by fifteen fee simple properties, one loan ($7,122,000) bearing interest
at a fixed rate of 8.52% for 15 years and the other ($7,378,000) at a variable
rate of LIBOR plus 4.20% over 15 years. The Company also entered into two
equipment loan agreements totaling $3.5 million secured by substantially all the
equipment of the Company. One equipment loan ($1,750,000) bears interest at a
fixed rate of 8.32% over 10 years while the other equipment loan ($1,750,000)
has a variable rate of LIBOR plus 4.20% over 10 years. The financing package
consolidates all of the Company's outstanding debt and provides approximately
$1.7 million for the remodels, modernization and / or upgrades to the properties
described in renovation agreements signed with GE. The Company has until June
30, 2004 to complete the renovations, unless the Company obtains GE's written
consent for an extension of such date. Additionally, the financing package
provides for $1.2 million to be used for expansion of Company restaurants. The
loan imposes restrictions on the Company with respect to the maintenance of
certain financial ratios, the incurrence of indebtedness, the sale of assets and
capital expenditures. The Company is required to maintain two separate Fixed
Charge Coverage Ratios. One is a Corporate Fixed Charge Coverage Ratio of 1.25:1
based on results of the entire company and the second, an aggregate Fixed Charge
Coverage Ratio of at least 1.25:1 on the properties used as collateral on this
loan. Both ratios are determined as of the last day of each fiscal year with
respect to the twelve-month period of time immediately preceding the date of
determination. The Company must also maintain a Funded Debt to EBITDA ratio not
to exceed 5.5 to 1.0, determined as of the last day of each fiscal quarter for
the twelve-month period of time immediately preceding the date of determination.
With the exception of new store development, the Company shall not incur debt in
excess of $500,000 per year without prior written consent of GE. With respect to
each of the required covenants the Company expects to be in compliance
throughout 2003.

Our capital needs during 2002 and 2001 arose from the reconstruction of
restaurant facilities which were damaged by fire during July 2002 and June 2000,
respectively, and the maintenance and improvement of existing restaurant
facilities. The source of capital to fund the reconstruction was insurance
proceeds received during 2002 and 2000. The maintenance and improvement
expenditures were funded by internally generated cash flow. Our capital needs
for 2000 arose from the development of new restaurants, and to a lesser extent,
maintenance and improvement of existing restaurant facilities. The principal
sources of capital to fund these expenditures were internally generated cash
flow, bank borrowings and lease financing. The table below provides certain
information regarding our sources and uses of capital for the years presented:


- 22 -






Fiscal Years Ended
---------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
---------------- -------------- --------------

Net cash provided by operations $ 1,924,314 $ 3,294,158 $ 2,262,548
Purchases of property and equipment (1,063,911) (1,255,406) (3,090,936)
Business acquisitions (150,000) - (1,806,333)
Insurance proceeds for property and equipment - - 1,299,352
Proceeds from sale before debt payment 1,125,815 - -
Net borrowings (payments) on long-term debt and
capital lease obligations (1,258,853) (1,563,315) 1,431,704


The table below provides information regarding our contractual obligations and
commitments as of December 29, 2002, giving effect to the refinancing on
December 31, 2002.




Payments Due by Period
---------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After
Total 1 Year Years Years 5 Years
------------ ------------ ------------ ------------- --------------
Long-term debt,
including current

maturities $ 13,995,623 $ 744,540 $ 1,794,274 $ 2,066,511 $ 9,390,298
Capital leases 3,101,424 644,642 482,559 345,018 1,629,205
Operating leases 20,087,012 1,941,106 3,725,195 3,540,064 10,880,647
------------ ------------ ------------ ------------- --------------
Total contractual
obligations $ 37,184,059 $ 3,330,288 $ 6,002,028 $ 5,951,593 $ 21,900,150
============ ============ ============ ============= ==============


Our largest use of funds during 2002 was for the reconstruction of a restaurant
facility which was damaged by fire during 2002, for payments of long-term debt
and capital lease obligations, maintenance and improvement of existing
restaurant facilities, and for the acquisition of the remaining 50% interest in
TW-Springhurst. Our largest source of funds in 2002 was cash flow from
operations, proceeds from the sale of property in the fourth quarter and
proceeds from the Comapny's two mortgage revolving lines of credit. Our largest
use of funds during 2001 was for the reconstruction of a restaurant facility,
which was damaged by fire during 2000, and for payments on long-term debt and
capital lease obligations. Our largest use of funds during 2000 was for capital
expenditures consisting of land, building and equipment, the acquisition of the
assets of two Tumbleweed restaurants from two related party franchisees and for
payments on long-term debt and capital lease obligations. Our largest source of
funds in 2000 was from insurance proceeds for property and equipment which were
damaged in June 2000 and proceeds from long-term debt. 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 guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW- Tennessee, LLC, a former franchisee
(TW-Tennessee) of the Company in which the Company and David M. Roth, a Director
of the Company, were formerly members, 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.

Beginning in 2001, the Company had settlement discussions with the bank holding
the TW-Tennessee line of credit, the other guarantors of that line of credit and
certain of the shareholders of TW International Investors, Inc. and TWI-B, Inc.
regarding the resolution of the suit which had been filed in March 2001 by the
bank which had held the line of credit extended to TW-Tennessee (the "Tennessee
Litigation") and related matters.

On February 28, 2002, the Company entered into a Confidential Settlement
Agreement and Mutual Release (the "Settlement Agreement") which resolved the
Tennessee Litigation and related matters. The Settlement Agreement provided for
a cash payment by the Company to the bank holding the TW-Tennessee line of
credit of $75,000 and the execution of a promissory note, payable to the bank,
in the face amount of $300,000. In addition, subject to certain conditions, the
Company will pay to the bank an additional amount of up to $200,000 in the event
Tumbleweed International, LLC successfully sells regional international licenses
and receives proceeds in excess of the $1,400,000 in indebtedness assumed by the
Company in connection with its acquisition of the interests of TW International
Investors,

- 23 -


Inc. and TWI-B, Inc. in Tumbleweed International, LLC. The completion of the
acquisition of the interests of TW International Investors, Inc. and TWI-B, Inc.
in Tumbleweed International, LLC is included in the Settlement Agreement.

As a result of the Settlement Agreement, the Tennessee Litigation was dismissed.
In addition, the parties to the settlement, including certain Directors of the
Company (George Keller, David M. Roth and Minx M. Auerbach), granted mutual
releases to one another regarding all matters, other than those specifically
excluded. Among the matters excluded from the mutual release contained in the
Settlement Agreement are claims asserted by the holder of the equipment leases
granted to TW-Tennessee relative to guarantees by the Company and others,
including David M. Roth, a Director of the Company, relative to such equipment
leases. The Company agreed to assume and pay one of the equipment leases
totaling approximately $125,000 and remains contingently liable on two other
equipment leases that currently have a remaining balance of approximately
$36,000 which the Company believes will be assumed and paid by other guarantors.

In the fourth quarter of 2001, as a result of the settlement discussions, the
Company increased a reserve established in 2000 by the additional amount of
$565,000, for a total of $1,290,000, of which $1,215,427 had been paid out as of
December 29, 2002. The Company increased this reserve in 2001 to cover its
portion of the settlement payments to the bank holding the TW-Tennessee line of
credit and pay related costs, including legal expenses. The reserve also
included an additional charge for the equipment lease which the Company assumed,
and for payments made by the Company in 2001 on other lease financing claims
related to TW-Tennessee. As of December 29, 2002, the reserve balance is
approximately $74,000 which management believes is sufficient to satisfy the
remaining lease obligation. The Company's management believes it will not incur
significant additional losses in connection with these matters.

On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company had no contractual obligation to pay a
$270,000 commission to AFI, in connection with a Conditional Commitment entered
into between AFI and the Company and seeking damages for fraud and
misrepresentation. In response, AFI filed suit in the United States District
Court for the Eastern District of Missouri seeking payment of a $405,000
commitment fee plus additional charges, fees and costs all in the excess of
$500,000 relating to the Conditional Commitment, as well as damages for breach
of contract, unjust enrichment and misrepresentation/fraud. This matter is in
the early discover stage. Management believes that AFI's claims are without
merit, but it is too early to predict an outcome. The Company intends to
vigorously defend itself in connection with this matter. As of December 29,
2002, the Company has not made an accrual for a potential liability in
connection with this matter.

We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.

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 2003, the Company expects to construct one to two additional restaurant
facilities. 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.

In the next 12 months, the Company expects the demand on future liquidity to be
principally from the ongoing maintenance and improvement of existing restaurant
facilities and from the construction of one to two additional restaurant
facilities. As of December 29, 2002, the Company had no material commitments for
the construction of new restaurants, maintenance or improvement of existing
restaurant facilities. In addition to the $1.2 million reserve established as a
result of the GE financing package, we will utilize mortgage, sale/leaseback
and/or landlord financing, as well as equipment leasing and financing, for a
portion of the development costs of restaurants we plan to open in 2003. The
remaining costs will be funded by available cash reserves and cash provided from
operations. Management believes such sources will be sufficient to fund our
expansion plans through 2003. Should our actual results of operations fall short
of, or our rate of expansion significantly exceed plans, or should our costs of
capital expenditures exceed expectations, we may need to

- 24 -





seek additional financing in the future. In negotiating such financing, there
can be no assurance that we will be able to raise additional capital on terms
satisfactory to us.

OTHER EVENTS

Beginning January 1, 2002, the Company implemented a 401(k) plan. All employees
who are at least 21 years of age with one year of service in which they worked a
minimum of 1,000 hours are eligible. An employee can contribute up to 15% of
their gross salary. The Company matches 25% of the first 4% an employee
contributes. The employee becomes vested in the Company contribution based on a
five-year vesting schedule. The Company match was approximately $67,000 in 2002.

On June 3, 2002, a group consisting of Gerald Mansbach, the Company's largest
stockholder, Terrance A. Smith, the Company's Chairman, President and Chief
Executive Officer, and David M. Roth, a director of the Company, submitted a
proposal to the Company's Board of Directors to acquire of the Company's common
stock not currently owned by them or others they may invite to join their group.
The proposal contemplated a cash tender offer price of $1.75 per share. On June
5, 2002, three additional directors, Minx Auerbach, George Keller and Lewis Bass
joined Gerald Mansbach, Terrance A. Smith and David M. Roth in their proposal to
acquire all the Company's common stock not owned by their group at a price of
$1.75 per share. The group owns approximately 60% of the Company's outstanding
common stock.

The Board appointed a Special Committee of independent directors to evaluate the
proposal. The Special Committee engaged an investment banking firm and a law
firm to act as advisors in connection with its review of the tender offer
proposal.

On or about October 28, 2002, the proposal to acquire all outstanding shares in
the going private transaction was withdrawn. Mr. Gerald Mansbach, the largest
shareholder of Tumbleweed shares and the lead participant in the going private
proposal, notified Tumbleweed that he had decided, for personal reasons, to
withdraw the going private proposal and would explore options for disposition of
his existing shares.

IMPACT OF INFLATION

The impact of inflation on the cost of food, labor, equipment, land and
construction costs could harm our operations. The Company pays a majority of its
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 the Company's restaurants are located, the Company has continued to
increase wages and benefits in order to attract and retain management personnel
and hourly workers. In addition, most of the Company's leases require the
Company to pay taxes, insurance, maintenance, repairs and utility costs, and
these costs are subject to inflationary pressures. Most of the leases provide
for increases in rent based on increases in the Consumer Price Index when the
leases are renewed. The Company 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.





















- 25 -





ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not enter into derivative transactions or speculate on the
future direction of interest rates. The Company is exposed to interest rate
changes primarily as a result of our variable rate debt instruments. As of
December 29, 2002, approximately $10,900,000 of our debt bore interest at
variable rates. A 1% change in the variable interest rate on this debt equates
to an approximate $109,000 change in interest for a twelve month period.






















































- 26 -





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----
Report of Independent Auditors 28

Consolidated Statements of Operations for the fiscal years
ended December 29, 2002 and December 31, 2001 and 2000 29

Consolidated Balance Sheets as of December 29, 2002 and
December 31, 2001 30

Consolidated Statements of Stockholders' Equity for the fiscal
years ended December 29, 2002 and December 31, 2001 and 2000 31

Consolidated Statements of Cash Flows for the fiscal years ended
December 29, 2002 and December 31, 2001 and 2000 32

Notes to Consolidated Financial Statements 33









































- 27 -





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 29, 2002 and December 31, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the fiscal
year ended December 29, 2002 and each of the two fiscal years in the period
ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 15(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 29, 2002 and December 31, 2001 and the consolidated results of its
operations and its cash flows for the fiscal year ended December 29, 2002 and
each of the two fiscal years in the period ended December 31, 2001, 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 4 to the consolidated financial statements, in 2002 the
Company changed its method for accounting for goodwill and other intangible
assets.




/s/ Ernst & Young LLP
Louisville, Kentucky
March 7, 2003























- 28 -







Tumbleweed, Inc.

Consolidated Statements of Operations


Fiscal Years Ended
---------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
---------------------------------------------
Revenues:

Restaurant sales $ 54,076,024 $ 56,025,886 $ 51,820,600
Commissary sales 1,664,591 1,781,252 1,663,208
Franchise fees and royalties 1,223,664 1,227,300 1,271,251
Other revenues 661,990 418,744 990,843
------------- -------------- --------------
Total revenues 57,626,269 59,453,182 55,745,902
Operating expenses:
Restaurant cost of sales 16,231,146 17,426,315 15,275,817
Commissary cost of sales 1,496,587 1,562,049 1,460,704
Operating expenses 29,940,255 30,567,705 27,456,791
Selling, general and administrative expenses 5,983,857 6,107,159 6,598,299
Preopening expenses - - 490,394
Depreciation and amortization 1,947,610 2,285,452 2,147,408
Special charges 103,773 4,294,539 -
Loss on guarantees of indebtedness - 565,000 725,000
------------- -------------- --------------
Total operating expenses 55,703,228 62,808,219 54,154,413
------------- -------------- --------------
Income (loss) from operations 1,923,041 (3,355,037) 1,591,489
Other income (expense):
Interest expense, net (1,007,126) (1,276,903) (1,458,650)
Gain on sale of property 338,482 - -
Gain from insurance proceeds due to involuntary conversion
of non-monetary assets 91,693 - 554,864

Equity in income (loss) of TW-Springhurst - 81,318 (58,903)
------------- -------------- --------------
Total other expense (576,951) (1,195,585) (962,689)
------------- -------------- --------------
Income (loss) before income taxes, extraordinary item and cumulative
effect of a change in accounting principle 1,346,090 (4,550,622) 628,800
Provision (benefit) for income taxes -
current and deferred 730,234 (1,178,144) 65,439
------------- -------------- --------------
Income (loss) before extraordinary item and cumulative effect of a
change in accounting principle 615,856 (3,372,478) 563,361
Extraordinary item - write-off of unamortized loan costs, net of tax (76,743) - -
Cumulative effect of a change in accounting principle, net of tax (1,503,776) - -
------------- -------------- --------------
Net income (loss) $ (964,663)$ (3,372,478)$ 563,361
============= ============== ==============
Basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item and cumulative effect of
a change in accounting principle $ 0.10 $ (0.58)$ 0.10
Extraordinary item - write-off of unamortized loan costs (0.01) - -
Cumulative effect of a change in accounting principle, net of tax (0.25) - -
------------- -------------- --------------
Net income (loss) $ (0.16)$ (0.58)$ 0.10
============= ============== ==============


See accompanying notes.














- 29 -





Tumbleweed, Inc.

Consolidated Balance Sheets




December 29, December 31,
2002 2001
----------------- ---------------
Assets
Current assets:

Cash and cash equivalents $ 1,334,631 $ 757,266
Accounts receivable, net allowance of $4,202 in 2001 942,241 350,586
Inventories 1,786,207 1,785,481
Deferred income taxes - 123,318
Prepaid expenses and other assets 601,751 517,280
----------------- ---------------
Total current assets 4,664,830 3,533,931
Property and equipment, net 26,699,920 28,380,038
Goodwill, net of accumulated amortization of
$723,897 in 2001 174,657 2,349,646
Intangible assets 1,524,530 -
Investment in TW-Springhurst - 126,415
Deferred income taxes 281,840 -
Other assets 631,365 507,320
----------------- ---------------
Total assets $ 33,977,142 $ 34,897,350
================= ===============

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,292,871 $ 1,269,967
Accrued liabilities 2,951,024 3,542,511
Deferred income taxes 153,249 -
Current maturities on long-term
debt and capital leases 1,191,874 1,601,374
----------------- ---------------
Total current liabilities 5,589,018 6,413,852

Long-term liabilities:
Long-term debt, less current maturities 13,251,083 11,843,939
Capital lease obligations, less current maturities 1,437,683 1,989,820
Deferred income taxes - 30,716
Other liabilities 65,000 120,000
----------------- ---------------
Total long-term liabilities 14,753,766 13,984,475
----------------- ---------------
Total liabilities 20,342,784 20,398,327
Commitments and contingencies (Note 21)
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; 5,958,553 and 5,881,630 shares issued
at December 29, 2002 and December 31, 2001,
respectively 59,587 58,818
Paid-in capital 16,393,235 16,294,006
Treasury stock, 42,400 shares (254,695) (254,695)
Retained deficit (2,563,769) (1,599,106)
----------------- ---------------
Total stockholders' equity 13,634,358 14,499,023
----------------- ---------------
Total liabilities and stockholders' equity $ 33,977,142 $ 34,897,350
================= ===============


See accompanying notes.


- 30 -








Tumbleweed, Inc.
Consolidated Statements of Stockholders' Equity

Fiscal Years Ended December 29, 2002 and December 31, 2001 and 2000




Retained
Common Stock Paid-In Treasury Earnings
------------------------
Shares Amount Capital Stock (Deficit) Total
------------ ---------- ----------- ---------- ----------- -----------


Balance at December 31, 1999 5,881,630 $ 58,818 $ 16,294,006 $ - $ 1,210,011 $ 17,562,835
Net income - - - - 563,361 563,361
Purchase of 42,400 shares of
treasury stock (42,400) - - (254,695) - (254,695)
------------ ---------- ----------- ---------- ----------- -----------

Balance at December 31, 2000 5,839,230 58,818 16,294,006 (254,695) 1,773,372 17,871,501
Net loss - - - - (3,372,478) (3,372,478)
------------ ---------- ----------- ---------- ----------- -----------

Balance at December 31, 2001 5,839,230 58,818 16,294,006 (254,695) (1,599,106) 14,499,023
Net loss - - - - (964,663) (964,663)
Issuance of common stock 76,923 769 99,229 - - 99,998
------------ ---------- ----------- ---------- ----------- -----------

Balance at December 31, 2002 5,916,153 $ 59,587 $ 16,393,235 $ (254,695) $(2,563,769) $ 13,634,358
============ ========== =========== ========== =========== ===========


See accompanying notes.








- 31 -






Tumbleweed, Inc.

Consolidated Statements of Cash Flows



Fiscal Years Ended
----------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
--------------- ---------------- --------------
Operating activities:

Net income (loss) $ (964,663) $ (3,372,478) $ 563,361
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Cummulative effect of a change in accounting principle 2,349,646 - -
Depreciation and amortization 1,947,610 2,285,452 2,147,408
Provision for doubtful accounts - 4,202 68,464
Deferred income taxes (35,989) (1,027,371) 63,015
Loss on guarantees of indebtedness - 565,000 725,000
Special charges 103,773 4,294,539 -
Equity in loss of TW-Springhurst, net of
distributions received of $96,000 in 2001 - 14,682 58,903
Gain on sale of property (338,482) - -
ain from insurance proceeds due to involuntary
G conversion of non-monetary assets (91,693) - (554,864)
Write-off of unamortized loan costs 95,951 - -
Loss on disposition of property and equipment 111,238 66,841 38,250
Changes in operating assets and liabilities:
Accounts receivable (186,169) 403,168 2,035
Inventories (15,713) (177,928) (121,404)
Prepaid expenses (64,165) (57,997) (286,157)
Other assets (338,275) 52,379 (89,452)
Accounts payable 24,990 156,524 11,418
Accrued liabilities (579,467) (123,402) (41,178)
Income taxes (39,278) 230,547 (302,251)
Other liabilities (55,000) (20,000) (20,000)
--------------- ---------------- --------------
Net cash provided by operating activities 1,924,314 3,294,158 2,262,548

Investing activities:
Purchases of property and equipment (1,063,911) (1,255,406) (3,090,936)
Insurance proceeds for property and equipment - - 1,299,352
Business acquisitions (150,000) - (1,806,333)
Proceeds from sale before debt payment 1,125,815 - -
Investment in TW-Springhurst - - (200,000)
--------------- ---------------- --------------
Net cash used in investing activities (88,096) (1,255,406) (3,797,917)

Financing activities:
Proceeds from issuance of long-term debt 1,934,973 3,704,120 6,423,960
Payments on long-term debt and capital lease obligations (3,193,826) (5,267,435) (4,992,256)
Purchase of treasury stock - - (254,695)
--------------- ---------------- --------------
Net cash provided by (used in) financing activities (1,258,853) (1,563,315) 1,177,009
--------------- ---------------- --------------

Net increase (decrease) in cash and cash equivalents 577,365 475,437 (358,360)
Cash and cash equivalents at beginning of year 757,266 281,829 640,189
--------------- ---------------- --------------
Cash and cash equivalents at end of year $ 1,334,631 $ 757,266 $ 281,829
=============== ================ ==============

Supplemental cash flow information:
Cash paid for interest, net of amount capitalized $ 977,309 $ 1,287,461 $ 1,477,172
=============== ================ ==============
Cash paid for income taxes $ 55,914 $ 4,085 $ 304,674
=============== ================ ==============
Noncash investing and financing activities:
Equipment acquired by capital lease obligations $ - $ - $ 224,906
=============== ================ ==============
Licensing rights acquired by assumption of debt $ 1,425,968 $ - $ -
=============== ================ ==============
Licensing rights acquired by issuance of stock $ 99,998 $ - $ -
=============== ================ ==============


See accompanying notes.


- 32 -





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.

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. 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. 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. Certain Common Members acted as the Managers of Tumbleweed
and, acting unanimously, generally had voting control of Tumbleweed.

Restaurant Facilities

As of December 29, 2002, the Company owned, franchised or licensed 56 Tumbleweed
restaurants. The Company owned and operated 31 restaurants in Kentucky, Indiana
and Ohio. There were 19 franchised restaurants located in Indiana, Illinois,
Kentucky and Wisconsin and six licensed restaurants located outside the United
States in Germany, Jordan, Egypt, England and Turkey. The following table
reflects changes in the number of Company-owned, franchise and licensed
restaurants during the fiscal years presented.


2002 2001 2000
---- ---- ----
Company-owned restaurants:
In operation, beginning of fiscal year 36 36 29
Restaurants opened - - 4
Restaurant sold to franchisee (1) - -
Restaurants closed (4) - -
Joint venture restaurant opened - - 1
Restaurants purchased from franchisee - - 2
-- -- --
In operation, end of fiscal year 31 36 36
-- -- --

Franchise and licensed restaurants:
In operation, beginning of fiscal year 29 27 22
Restaurants opened - 3 10
Restaurants closed (5) (1) (3)
Restaurant purchased from
Tumbleweed, Inc. 1 - -
Restaurants sold to Tumbleweed, Inc. - - (2)
-- - --
In operation, end of fiscal year 25 29 27
-- -- --
System Total 56 65 63
== == ==

On January 1, 2002, the Company purchased from its joint venture partner the
remaining 50% interest in a restaurant location. See Note 10 for a further
discussion of this transaction. During the first quarter of 2002, the Company
closed four Company-owned restaurant locations. The restaurants were located in
Cincinnati, Ohio (2), Columbus, Ohio (1), and Evansville, Indiana (1). The
restaurant closings were part of a strategic management decision to eliminate
lower sales volume restaurants that were unprofitable in 2001 and to focus its
energies on the continued improvement of per-store average sales volumes. During
the second quarter of 2002, the Company sold one of its restaurant locations to
a franchisee

- 33 -





1. Basis of Presentation (continued)

in accordance with the Company's plan established in the fourth quarter of 2001.
See Note 14 for a discussion regarding special charges which were recorded in
2001 as a result of these restaurant closings.

Fiscal Year

Beginning January 1, 2002, the Company changed its fiscal year to end on the
last Sunday in December from a December 31 year end. The first three quarters of
each fiscal year, beginning in 2002, consist of 12 weeks and the fourth quarter
consists of 16 weeks. Fiscal year 2002 consists of 363 days compared to 365 days
in 2001, which resulted in lower revenues of approximately $300,000.

Recently Issued Accounting Standards

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141 eliminates the pooling of interest
method of accounting and SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment annually, or more frequently if certain indicators arise.
The provisions of SFAS No. 142 also require the completion of a transitional
impairment test within six months of adoption with any impairments identified
treated as a cumulative effect of a change in accounting principle. The adoption
of SFAS No. 142 had a significant impact on the Company's financial position and
results of operations as described in Note 4.

On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of net book
value or fair market value less cost to sell, whether reported in continuing
operations or discontinued operations. SFAS No. 144 also broadens the
presentation of discontinued operations to include components of an entity that
have been or will be disposed of rather than limiting such reporting to
discontinued segments of a business. The adoption of SFAS No. 144 had no impact
on the Company's financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which is effective for the Company in 2003. SFAS No. 145 eliminates SFAS No. 4,
which required all gains (losses) from extinguishment of debt to be classified
as an extraordinary item, net of related income tax effect, and thus, gains
(losses) from extinguishment of debt should be classified as extraordinary items
only if they meet the criteria in APB Opinion No. 30. SFAS No. 145 amends SFAS
No. 13 to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. Additionally, SFAS No. 145 rescinds SFAS No. 44 and 64 because the
statements are no longer applicable. Tumbleweed plans to adopt SFAS No. 145 in
2003 which will result in reclassifying its loss on unamortized loan costs from
an extraordinary item to an operating item in the Consolidated Statement of
Operations for the 2003 fiscal year.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities," which is effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 nullifies
EITF Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. A commitment to an exit or disposal plan no longer
will be sufficient basis for recording a liability for those activities. The
adoption of SFAS No. 146 in 2003 is not expected to have an immediate material
impact on the Company's financial condition or results of operations, however,
the Company may have future exit or disposal activities to which SFAS No. 146
would apply.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123," which was effective for disclosure purposes for fiscal years ending after
December 15, 2002. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock based
compensation. In addition, it amends the disclosure requirements of SFAS No. 123
to require prominent disclosures about the method of accounting for stock based
compensation and the effect on reported results. The provisions regarding
alternative methods of transition do not apply to the Company which continues to
account for stock-based compensation using the intrinsic value method. The
disclosure provisions have been adopted in Note 2.

- 34 -





1. Basis of Presentation (continued)

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 contains recognition and measurement
provisions that require certain guarantees to be recorded as a liability, at the
inception of the guarantee, at fair value. Current accounting practice is to
record a liability only when a loss is probable and reasonably estimable. FIN 45
also requires a guarantor to make new disclosures. The recognition and
measurement provisions are effective for guarantees issued after December 31,
2002. Management does not expect the adoption of FIN 45 to have a significant
impact on the Company's financial condition or results of operations.

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. Prior to January 1, 2002, the Company's investment
in TW-Springhurst (see Note 10) was accounted for using the equity method, under
which the Company's share of earnings or losses were 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 initial 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.

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

Prior to 2002, the Company amortized goodwill on the straight-line method over
thirty years. As of January 1, 2002, the Company adopted the new accounting
pronouncement related to goodwill (see Notes 1 and 4). In lieu of amortization,
the Company tests goodwill for impairment on an annual basis, unless conditions
exist which would require a more frequent evaluation. In assessing the
recoverability of goodwill, projections regarding estimated future cash flows
and other factors are made to determine the fair value of the respective assets.
If these estimates or related projections change in the future, we may be
required to record impairment charges for goodwill at that time.



- 35 -





2. Significant Accounting Policies (continued)

Long-Lived Assets

The carrying amount of long-lived assets 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 current fair value less cost to
sell (assets held for sale). See Note 14 for a discussion regarding a write-down
of assets in 2001.

Stock-Based Compensation Costs

The Company has a stock-based compensation (stock option) plan which is
described more fully in Note 16. The Company accounts for the plan using the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Because all options granted under this plan had an
exercise price equal to the market value of the underlying common stock on the
date of grant, no stock-based compensation cost has been recognized in the
consolidated statements of income. Had stock-based compensation cost for the
plan been determined using the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," the effect on the Company's consolidated net income (loss) and
earnings (loss) per share would have been as follows:




Fiscal Year Ended
-------------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
--------------- -------------- ----------------


Net income (loss) as reported $ (964,663) $ (3,372,478) $ 563,361
Stock-based compensation cost using fair value
method, net of related tax effects 753,606 1,203,622 584,729
--------------- -------------- ----------------
Pro forma net loss $ (1,718,269) $ (4,576,100) $ (21,368)
=============== ============== ================

Earning (loss) per share:
Basic and diluted, as reported $ (0.16) $ (0.58) $ 0.10
Pro forma basic and diluted (0.29) (0.78) (0.00)


Fair Value of Financial Instruments

The carrying amounts of the Company's 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. and TW- Louisville Marketing Fund, Inc. ("the
Marketing Funds") and developing and conducting advertising activities,
including the placement of electronic and print materials developed by the
Tumbleweed Marketing Fund, Inc. All advertising and related costs are expensed
as incurred. Contributions by Company-owned and franchised restaurants to the
Marketing Funds are based on an established percentage of monthly restaurant
revenues. The Tumbleweed Marketing Fund, Inc. is responsible for the development
of marketing and advertising materials for use throughout the Company's system.
The Marketing Funds are accounted for separately and are not consolidated with
the financial statements of the Company.

- 36 -





2. Significant Accounting Policies (continued)

Company contributions to the Marketing Funds for the fiscal years ended December
29, 2002 and December 31, 2001and 2000 were $455,152, $415,611 and $123,435,
respectively. Advertising expense, which includes the Company's contributions to
the Marketing Funds, for the fiscal years ended December 29, 2002 and December
31, 2001 and 2000 were $1,800,927, $1,915,577 and $1,570,179, respectively.

3. Property and Equipment

Property and equipment consist of:

December 29, December 31,
2002 2001
---- ----

Land and land improvements $ 8,638,300 $ 9,048,317
Building and improvements 12,775,399 13,010,660
Leasehold improvements 2,382,305 2,195,482
Equipment 7,898,636 7,383,451
Building and equipment under capital leases 3,777,836 4,139,892
Construction in progress 309,335 13,011
------------------------------
35,781,811 35,790,813
Less accumulated depreciation and amortization (9,081,891) (7,410,775)
------------------------------
$ 26,699,920 $ 28,380,038
==============================

4. Goodwill and Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142 "Goodwill
and Other Intangible Assets." During the first quarter of 2002, the Company
determined that all goodwill as of January 1, 2002 related to two reporting
units was impaired. The fair value of each unit was determined using appropriate
valuation techniques. As a result of the transitional impairment test, an
impairment loss in the amount of $1,503,776, net of tax, was recorded as a
cumulative effect of a change in accounting principle during the first quarter
of 2002.

During the fourth quarter of 2002, the Company completed the annual test of
impairment and determined that there was no impairment of the $174,657 goodwill
acquired during the purchase of the remaining 50% interest in TW-Springhurst.
See Note 10 for a further discussion of this transaction.

If the Company had accounted for its goodwill under SFAS No. 142 for all periods
presented, the Company's net income (loss) and income (loss) per share would
have been as follows:




Fiscal Years Ended
---------------------------------------------------
December 29, December 31, December 31,
2002 2001 2000
---------------- -------------- --------------


Net income (loss), as reported $ (964,663) $ (3,372,478) $ 563,361
Add back:
Goodwill amortization, net of tax - 135,488 117,917
---------------- -------------- --------------
Adjusted net income (loss) $ (964,663) $ (3,236,990) $ 681,278
================ ============== ==============

Basic and diluted earnings (loss) per share:
Net income (loss), as reported $ (0.16) $ (0.58) $ 0.10
Goodwill amortization, net of tax - 0.02 0.02
---------------- -------------- --------------
Adjusted net income (loss) $ (0.16) $ (0.56) $ 0.12
================ ============== ==============






- 37 -





4. Goodwill and Intangible Assets (continued)

The following table sets forth changes in the Company's goodwill for the fiscal
year ended December 29, 2002. All transactions occurred in the restaurant
segment.


Balance as of January 1, 2002 $ 2,349,646
Goodwill acquired (see Note 10) 174,657
Impairment loss (2,349,646)
-------------
Balance as of December 29, 2002 $ 174,657
=============

The Company acquired Tumbleweed International, LLC (see Note 11) during the
first quarter of 2002, which resulted in the acquisition of an intangible asset
in the amount of $1,525,966 and is included in the corporate segment. The
intangible asset consists of $1,455,966 in international licensing rights, which
are indefinitely lived assets not subject to amortization under SFAS No. 142,
and $70,000 of existing franchise contracts, which are definite lived assets
amortized over the 45 year contract period. During 2002, the Company recorded
amortization expense totaling $1,436 for the definite lived intangible. The
amortization expense for each of the next five years will approximate $1,555 per
year.

5. Accrued Liabilities

Accrued liabilities consist of:



December 29, December 31,
2002 2001


Accrued payroll, severance and related taxes $ 979,082 $ 946,545
Accrued insurance and fees 178,117 192,978
Accrued taxes, other than payroll 609,900 683,449
Gift card and certificate liability 524,870 475,914
Reserve for loss on guarantees of indebtedness 74,573 565,000
Reserve for store closing costs 290,990 601,186
Other 293,492 77,439
--------------------------------
$ 2,951,024 $ 3,542,511
================================


6. Long-Term Debt

Long-term debt consists of:




December 29, December 31,
2002 2001
-----------------------------------

Secured $5,960,000 mortgage revolving line of
credit note, bearing interest at prime rate
plus .25% (4.5% at December 29, 2002), due
December 31, 2003 $ 5,801,148 $ 5,726,148

Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65% (3.95% at
December 29, 2002), due April 1, 2003 2,130,342 2,299,567

Secured mortgage payable, bearing interest at
7.5%, payable in monthly installments through
January 22, 2007 with a lump sum payment due
February 22, 2002 1,395,253 -


(Continued next page)





- 38 -





6. Long-Term Debt (continued)


December 29, December 31,
2002 2001
---------------------------------
Secured mortgage note payable, bearing interest at
prime rate plus 1% (5.25% at December 29, 2002), payable
in monthly installments through October 1, 2017 $ 972,916 $ 1,009,847

Secured mortgage note payable, bearing interest at
8.75%, payable in monthly installments through
February 15, 2008 838,428 881,933

Secured $875,000 mortgage revolving line of credit
note, bearing interest at prime rate plus 2.0% (6.25% at
December 29, 2002) due April 1, 2003 874,868 964,868


Secured mortgage note payable, bearing interest at prime
rate (4.25% at December 29, 2002), payable
in monthly installments through March 1, 2006 570,604 613,632

Secured mortgage note payable, bearing interest at
prime rate plus 1.25% (5.5% at December 29,
2002), payable in monthly installments through
November 27, 2016 521,875 559,375


Secured mortgage note payable, bearing interest at
10.52%, payable in monthly installments through
August 18, 2005 319,373 417,937

Unsecured note payable bearing interest at 7.5%, due
February 22, 2007 282,113 -

Secured mortgage note payable, bearing interest at
commercial paper rate plus 2.65%, due April 1, 2003 - 224,611

Other installment notes payable 288,703 206,167
----------------------------------
13,995,623 12,904,085
Less current maturities 744,540 1,060,146
----------------------------------
Long-term debt $ 13,251,083 $ 11,843,939
==================================


Property and equipment with a net book value of approximately $20,500,000 at
December 29, 2002 collateralize the Company's long-term debt.

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. The Company was in violation of the debt coverage ratio covenant
related to the revolving lines of credit (balances as of December 29, 2002 were
$5,801,148 and $874,868) as of December 29, 2002. As a result of the Company
completing an $18.0 million financing package on December 31, 2002 (see
discussion below), it was not necessary for the Company to obtain covenant
waivers as these revolving lines of credit were repaid.

Subsequent to year end on December 31, 2002, the Company completed an $18.0
million financing package with GE Capital Franchise Finance Corporation. The
financing package consolidates all of the Company's outstanding debt and
equipment capital leases and provides approximately $3.0 million for the remodel
and expansion of Company restaurants. The debt bears interest at both fixed
rates ranging from 8.32% to 8.52% ($8,872,000) and a variable rate of LIBOR plus


- 39 -





6. Long-Term Debt (continued)

4.20% ($9,128,000) with terms of 10 to 15 years. The debt is secured by fifteen
fee simple properties and substantially all of the equipment owned by the
Company. The Company is required to meet various financial ratios which
management expects to be in compliance with throughout 2003.

The aggregate annual maturities of the long-term debt for the years subsequent
to December 29, 2002, giving effect to the refinancing on December 31, 2002, are
as follows:

2003 $ 744,540
2004 864,791
2005 929,483
2006 996,961
2007 1,069,550
Thereafter 9,390,298
-----------
Total $ 13,995,623
===========

7. 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. Subsequent to
year end on December 31, 2002, the Company completed an $18.0 million financing
package (see Note 6) which consolidated the Company's outstanding debt and
equipment capital leases. The building capital leases which remain in effect
subsequent to the refinancing have future minimum lease payments totaling
approximately $2,492,000. The table below does not give effect to the
refinancing on December 31, 2002. Future minimum lease payments under the
building and equipment capital leases and the net present value of the future
minimum lease payments at December 29, 2002 were as follows:




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


2003 $ 84,000 $ 560,642 $ 644,642
2004 84,000 226,050 310,050
2005 84,000 88,509 172,509
2006 84,000 88,509 172,509
2007 84,000 88,509 172,509
Thereafter 840,000 789,205 1,629,205
----------------------------------------------
Total minimum lease payments $ 1,260,000 $ 1,841,424 3,101,424
==============================
Less amount representing interest
at 6.25% to 11.30% (1,216,407)
-------------
Net present value of lease payments 1,885,017
Less current maturities (447,334)
-------------
Long-term portion of capital lease obligations $ 1,437,683
=============


The Company leases certain restaurants and equipment under operating leases
having terms expiring between 2003 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. The related party operating lease requires the payment of contingent
rent based on 30% of the restaurant's positive net cash flow.










- 40 -





7. Leases (continued)

Future minimum lease payments on operating leases at December 29, 2002 were as
follows:

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

2003 $ 60,000 $ 1,881,106 $ 1,941,106
2004 60,000 1,881,506 1,941,506
2005 60,000 1,723,689 1,783,689
2006 60,000 1,709,342 1,769,342
2007 60,000 1,710,722 1,770,722
Thereafter 605,000 10,275,647 10,880,647
----------------------------------------------
$ 905,000 $ 19,182,012 $ 20,087,012
==============================================

Total rental expense was approximately $2,173,000 in 2002, $2,302,000 in 2001
and $1,975,700 in 2000 and included contingent rent of approximately $200,000 in
2002, $204,000 in 2001and $244,000 in 2000. Rental expense for related party
leases was approximately $246,000 in 2002, $264,000 in 2001and $304,000 in 2000.

8. Income Taxes

The components of the provision (benefit) for income taxes for the fiscal years
ended December 29, 2002, and December 31, 2001 and 2000 related to income (loss)
before extraordinary item and cumulative effect of a change in accounting
principle consists of the following:


2002 2001 2000
----------- ----------- ------------
Current - federal $ (125,416) $ (150,773) $ 2,424
Deferred 855,650 (1,027,371) 63,015
----------- ----------- ------------
730,234 $ (1,178,144) $ 65,439
=========== =========== ============

The provision (benefit) for income taxes for the fiscal years ended December 29,
2002 and December 31, 2001 and 2000 on income (loss) before income taxes,
extraordinary item 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:



2002 2001 2000
----------- ----------- ------------
U.S. federal income taxes at 34% $ 457,671 $ (1,547,212) $ 213,792
State income taxes, net of federal
tax effect - (180,205) (138,034)
Valuation allowance against deferred
income tax assets 332,168 655,770 -
Employment tax credits (185,361) (139,632) (97,483)

Other items 125,756 33,135 87,164
----------- ----------- ------------
Provision (benefit) for income taxes $ 730,234 $ (1,178,144) $ 65,439
=========== =========== ============














- 41 -





8. Income Taxes (continued)

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




December 29, December 31,
2002 2001
--------------- ---------------
Deferred tax assets:

Asset impairment and store closings $ 1,066,520 $ 1,550,753
Intangible write off 845,891 -
Tax credit and state net operating loss
carryforwards 1,102,441 661,139
Unearned revenue and other 259,150 419,441
Book over tax amortization - -
--------------- ---------------
Total deferred tax assets 3,274,002 2,631,333
Deferred tax liabilities:
Deferred expenses and other (1,005,499) (930,752)
Tax over book depreciation (865,651) (867,259)
Tax over book amortization (185,193) (84,950)
--------------- ---------------
Total deferred tax liabilities (2,056,343) (1,882,961)
Valuation allowance (1,089,068) (655,770)
--------------- ---------------
Net deferred tax asset (liability) $ 128,591 $ 92,602
=============== ===============
Classification:
Current asset $ - $ 123,318
Non-current asset 281,840 -
Current liability (153,249) -
Non-current liability - (30,716)
--------------- ---------------
$ 128,591 $ 92,602
=============== ===============


Deferred tax assets and liabilities are classified as current or long-term
according to the related asset and liability classification of the item
generating the tax.

As of December 29, 2002, the Company has state net operating loss carryforwards
of approximately $6,200,000 which begin expiring in 2015. Also, as of December
29, 2002, the Company has a $20,222 alternative minimum tax credit carryforward
which has no expiration date, as well as $465,000 of employment tax credit
carryforwards which begin expiring in 2019, available to offset future U.S.
federal income taxes. Management has concluded that it is more likely than not
that certain of the Company's deferred tax assets related to state net operating
loss carryforwards and general business tax credits will not be realized.
Accordingly, these deferred tax assets have been offset by a valuation allowance
at December 29, 2002.

9. Related Party Transactions

Franchise fees and royalties recorded by the Company in relation to TW-Tennessee
were approximately $36,800 in 2000. The Company also provided management and
accounting services for TW-Tennessee for which fees were charged. Such
management and accounting fees recorded in other revenues totaled
approximately$12,200 in 2000. During 2002 and 2001, the Company recognized no
income in relation to TW-Tennessee.

During the year ended December 31, 2000, the Company assumed a TW-Tennessee
equipment lease which it had previously guaranteed. The equipment is being
utilized to replace the equipment in the Company-owned restaurant which was
destroyed as result of a fire in June 2000 (see Note 12). The capital lease had
a balance of approximately $225,000 on the date the lease was assumed, and as of
December 29, 2002 the lease has a balance of approximately $107,000.

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. As of December 29, 2002, TW-Indiana, LLC operated eight full-service
Tumbleweed restaurants. Franchise fees and royalties recorded by the Company in
relation to this entity were approximately $477,000, $448,000 and $300,000 in

- 42 -





9. Related Party Transactions (continued)

2002, 2001 and 2000, respectively. As of December 29, 2002 and December 31,
2001, the Company had an interest free note receivable of $45,000 from
TW-Indiana, LLC with a maturity date of December 31, 2002. Subsequent to
December

29, 2002, the note receivable was repaid.

TW-Indiana, LLC and a director of the Company are also 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 $50,000, $59,000 and,
$45,000 in 2002, 2001 and 2000, respectively.

During the year ended December 31, 2000, 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 current and former directors and officers of the Company owned
substantial interests in these companies. Franchise fees and royalties recorded
by the Company in 2001and 2000 in relation to these entities were approximately
$11,000 and $227,000, respectively. Management and accounting fees recorded in
other revenues by the Company in 2001and 2000 in relation to these entities were
approximately $4,300 and $65,000, respectively. During the year ended December
31, 2000, the Company purchased the assets of two of these companies. See Note
10 for information regarding these transactions. Also during 2000, one of the
five restaurant locations discussed above ceased operations. During 2001, the
Company received equipment in exchange for an approximately $79,000 note
receivable from a related party franchisee at the time the franchisee ceased
operations. During 2002, the last managed store ceased operations. The Company
had not recorded any royalties, management or accounting fees from this
franchisee during 2002.

A provision for doubtful accounts of approximately $68,000 was recorded during
2000 for the write-off of the balance due from a related party franchisee
(discussed in the paragraph above) for accounting fees, royalties and franchise
fees.

Additional related party transaction information is provided in Notes 10 and 11.

10. Business Acquisitions

During the year ended December 31, 2000, the Company made a $200,000 investment
in TW-Springhurst, LLC ("TW- Springhurst"), the owner and operator of a
Tumbleweed restaurant in Louisville, Kentucky. During the year ended December
31, 2001, the Company received a cash distribution of $96,000 from
TW-Springhurst. Through December 31, 2001, the Company had a 50% interest with
the remaining 50% held by TW-Springhurst Investors, LLC. A current and former
director of the Company owned TW-Springhurst Investors, LLC. The Company's share
of TW-Springhurst's net income (loss) was $81,318 and ($58,903) for the years
ended December 31, 2001 and 2000, respectively. On January 1, 2002, the Company
acquired the remaining 50% interest held by TW-Springhurst Investors for
$267,000. The acquisition was funded from cash reserves ($150,000) and a note
payable to TW-Springhurst Investors ($117,000). The Company also assumed
TW-Springhurst, LLC's note payable to a bank which had a balance of
approximately $161,000 on the date of purchase. An independent business
valuation appraisal was used to assist Company management in determining the
purchase price.

The purchase price has been allocated as follows:


Assets and liabilities acquired:
Inventory $ 55,674
Property and equipment 317,601
Deposits 1,200
Other 5,677
Note payable (161,394)
---------------
218,758
Investment in TW-Springhurst (126,415)
Goodwill 174,657
---------------
$ 267,000
===============

-43-



10. Business Acquisitions (continued)

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 former directors and officers of the Company owned 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 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
a current director of the Company owned 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
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 each acquisition.

11. Acquisition of International

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 granted certain licensing and
franchising rights to International for the development of Tumbleweed
restaurants outside of the Western Hemisphere. International was a limited
liability company owned by three corporations which are controlled by current
directors and stockholders of the Company. In 2001 and 2000, International paid
approximately $10,600 and $7,400, respectively, in fees to the Company under the
International Agreement.

On January 1, 2002, the Company purchased the ownership interest in
International for $1.5 million from TW-International Investors, Inc. and
Chi-Chi' International Operations, Inc. ("CCIO"). CCIO owned 40% of
International. The President and Chief Executive Officer of the Company is the
sole shareholder of CCIO. Members of TW-International Investors, Inc. include
three current directors of the Company. The acquisition gives the Company direct
control and benefit of the international licensing of the Tumbleweed concept. In
connection with the acquisition, the Company assumed an existing $1.4 million
bank loan of TW-International Investors, Inc. and issued 76,923 shares of its
common stock to CCIO. The Company has entered into a commission agreement with
CCIO in connection with the sale of international regional licenses by
International.


- 44 -





11. Acquisition of International (continued)

The transaction was accounted for as a purchase and the purchase price was
allocated to the intangible assets acquired - the Tumbleweed international
licensing rights and existing franchise contracts.

The allocation of the purchase price is summarized as follows:


Note payable $ 1,425,968
Common stock 769
Paid-in capital 99,229
-------------
$ 1,525,966
=============
Intangible assets:
Tumbleweed licensing rights $ 1,455,966
Contracts in place 70,000
-------------
$ 1,525,966
=============

12. Involuntary Conversion of Non-Monetary Assets

As a result of a fire on July 11, 2002 at a Company-owned restaurant in Ohio, an
involuntary conversion of a non-monetary asset occurred which resulted in a gain
of approximately $92,000. The gain represents the difference between the
carrying amount of the Company's assets which were destroyed in the fire
(equipment and inventories of approximately $313,000, in total, at the time of
the fire) and the amount collected and estimated amounts to be collected from
the insurance company (approximately $405,000). In addition, the Company
recorded other revenues of approximately $200,000 (business interruption) and
continuing expense reimbursement of $157,000 in 2002 as a result of the fire. As
of December 29, 2002, the Company has received a total of approximately
$1,222,900 from the insurance company for Company and landlord assets which were
destroyed in the fire ($884,400), business interruption ($198,700) and
continuing expense reimbursement ($139,800).

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 collected from the insurance company ($1,299,352). The Company also
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 was for estimated business interruption
and continuing expenses in 2001. Accordingly, the Company recorded this as
deferred income in the accompanying consolidated balance sheet as of December
31, 2000 and subsequently recognized the $205,000 as other income during 2001.

13. Sale of Property

In December 2002, the Company sold the land and building of a Company-owned
restaurant which closed in the first quarter of 2002 (see Note 1) for
$1,575,000. The sale resulted in a gain of $338,482 and cash proceeds prior to
debt repayment of $1,125,815. A portion of the cash proceeds were used to pay
off the $224,611 mortgage note payable associated with the restaurant. The
remaining proceeds will be used for capital improvements to existing stores and
to provide partial funding for the construction of additional restaurants.

14. Special Charges

The Company recorded special charges of $103,773 in the fourth quarter of 2002.
The special charges represent the write- off of various costs that were incurred
as a result of the proposal to acquire all outstanding shares in a going private
transaction which was originally announced in June 2002. In the fourth quarter
of 2002, Mr. Gerald Mansbach, the largest shareholder of Tumbleweed shares and
the lead participant in the going private transaction, notified Tumbleweed that
he had decided, for personal reasons, to withdraw the going private proposal and
is exploring other options for the disposition of his existing shares.


- 45 -





14. Special Charges (continued)

The Company recorded special charges of $4,294,539 in the fourth quarter of
2001. The special charges include a $3,683,353 charge to earnings in accordance
with SFAS No. 121, "Impairment of Long-Lived Assets." This charge reflects the
write-down of assets associated with six restaurants, four of which closed in
the first quarter of 2002. The Company sold one of the remaining two restaurants
to a current franchisee and continues to operate the other restaurant for the
present. The restaurant closings were part of a strategic management decision to
eliminate lower sales volume restaurants that were unprofitable in 2001 and to
focus its energies on the continued improvement of per-store average sales
volumes. The special charges also included $611,186 for lease obligations and
other costs related to the decision to close these restaurants, of which
approximately $306,000 was paid out during 2002. At December 29, 2002,
approximately $295,000 remains accrued for lease obligations and for anticipated
costs connected with the disposal of one restaurant site. No additional accrual
was required during 2002 in connection with the closing of these restaurants.

The following is a summary of the impairment charges:


Carrying Value Value at
at Commitment December 31,
Date Charge 2001
--------------- ------------- --------------
Property and equipment $ 4,260,428 $ 2,485,428 $ 1,775,000
Goodwill 993,811 993,811 -
Other assets 215,837 204,114 11,723
--------------- ------------- --------------
$ 5,470,076 $ 3,683,353 $ 1,786,723
=============== ============= ==============

The value at December 31, 2001 was determined as follows. For stores being
disposed of, the value was based on the estimated net proceeds from the sale of
the assets. For the other store being operated, the Company estimated the fair
value of the restaurant based on estimated future discounted cash flows from its
use and eventual disposition.

The operating results of the restaurants to be disposed of before the special
charges included in the accompanying consolidated statements of operations are
as follows:


2001 2000
--------------- -------------
Revenues $ 5,513,743 $ 4,324,921
Loss from operations (378,843) (209,863)

15. 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 are to 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 were funded by cash reserves. Through December 29,
2002, the Company had repurchased 42,400 shares at a total cost of $254,695.

16. 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

- 46 -





16. Stock Incentive Plan (continued)

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 29, 2002, cumulative total options to purchase 1,481,077 shares
of the Company's common stock had been granted to employees and directors of the
Company at prices ranging from $0.85 to $10.00 per share which expire at various
dates from 2009 to 2012 with a contractual life of 10 years. Initial grants of
approximately 492,000 options were made at an exercise price equal to the
Company's 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.

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 fiscal years ended December 29, 2002 and
December 31, 2001 and 2000 was:




2002 2001 2000
------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at the

beginning of the year 981,385 $4.87 1,044,454 $9.52 532,666 $9.34
Granted 19,000 1.03 85,000 1.80 811,636 3.73
Exercised - - - - - -
Forfeited (68,569) 4.63 (148,069) 5.75 (299,848) 8.28
--------- --------- ---------
Outstanding at the
end of the year 931,816 $4.76 981,385 $4.87 1,044,454 $5.30
========= ========= =========
Exercisable at the end
of the year 656,928 $5.47 383,251 $6.04 112,948 $9.52
========= ========= =========


The following table summarizes information about employee stock options
outstanding at December 31, 2002:


Range of Number Weighted Average
Exercise Prices Outstanding Exercise Price
---------------
$10.00 191,955 $10.00
$4.50 - $6.25 43,525 $5.38
$0.93 - $3.88 696,336 $3.28
-------------
931,816
=============

The remaining contractual life of the outstanding stock options ranges from 6.1
years to 9.9 years.

The Company accounts for the Plan as described in Note 2. The weighted average
fair value of options granted was determined using the Black-Scholes option
pricing model with the following assumptions:

(1) risk-free interest rate of 4.6% to 6.50 %; (2) dividend yield of 0%; (3)
expected life of 6.5 years; and (4) volatility of .921% in 2002, .842% in 2001
and .885% in 2000. Results may vary depending on the assumptions applied within
the model. The weighted average fair value per share of options granted was
$0.82, $1.38 and $3.68 for 2002, and 2001 and 2000, respectively.






- 47 -





17. 401(k) Plan

Beginning January 1, 2002, the Company implemented a 401(k) plan. All employees
who are at least 21 years of age with one year of service in which they worked a
minimum of 1,000 hours are eligible. An employee can contribute up to 15% of
their gross salary. The Company matches 25% of the first 4% an employee
contributes. The employee becomes vested in the Company contribution based on a
five-year vesting schedule. The Company match was approximately $67,000 in 2002.

18. Earnings per Share

The following is a reconciliation of the Company's basic and diluted earnings
per share for the fiscal years ended December 29, 2002 and December 31, 2001 and
2000 in accordance with SFAS No. 128, "Earnings per Share."




2002 2001 2000
------------ ------------ -----------
Numerator:

Income (loss) before extraordinary item and cumulative
effect of a change in accounting principle $ 615,856 $ (3,372,478) $ 563,361
Extraordinary item - write-off unamortized loan costs,
net of tax (76,743) - -
Cumulative effect of a change in accounting principle,
net of tax (1,503,776) - -
------------ ------------ ----------
Net income (loss) $ (964,663)$ (3,372,478) $ 563,361
============ ============ ==========
Denominator:
Weighted average shares
outstanding - basic 5,916,153 5,839,230 5,839,230
Effect of dilutive securities:
Director and employee stock options 6,136 10,509 52,706
------------ ------------ -----------
Denominator for diluted earnings per
share - adjusted weighted
average and assumed conversions 5,922,289 5,849,739 5,891,936
============ ============ ===========


Options to purchase common stock with an exercise price greater than the average
market price were not included in the computation of the dilutive effect of
common stock options because the effect would have been antidilutive. The number
of antidilutive options was 905,816 in 2002, 912,385 in 2001 and 858,254 in
2000.

19. 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.
















- 48 -





19. Segment Information (continued)

Segment information is as follows:

For the fiscal year ended December 29, 2002:



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


Revenues from external customers $ 54,076,024 $ 1,664,591 $ 1,885,654 $ 57,626,269
Intersegment revenues - 2,496,887 - 2,496,887
General and administrative expenses - - 4,182,930 4,182,930
Advertising expenses - - 1,800,927 1,800,927
Depreciation and amortization 1,593,383 81,947 272,280 1,947,610
Special charges - - 103,773 103,773
Net interest expense - 152,932 854,194 1,007,126
Income (loss) before income taxes, .
extraordinary item and cumulative
effect of a change in accounting
principle 5,703,880 74,053 (4,431,843) 1,346,090
Fixed assets 24,979,122 946,066 774,732 26,699,920
Expenditures for long-lived assets 943,352 21,624 98,935 1,063,911

For the fiscal year ended December 31, 2001:


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

Revenues from external customers $ 56,025,886 $ 1,781,252 $ 1,646,044 $ 59,453,182
Intersegment revenues - 2,671,213 - 2,671,213
General and administrative expenses - - 4,191,582 4,191,582
Advertising expenses - - 1,915,577 1,915,577
Depreciation and amortization 1,797,889 106,596 380,967 2,285,452
Special charges 4,294,539 - - 4,294,539
Loss on guarantees of indebtedness - - 565,000 565,000
Net interest expense - 176,100 1,100,803 1,276,903
Equity in income of TW-Springhurst 81,318 - - 81,318
Income (loss) before income taxes 1,346,244 105,724 (6,002,590) (4,550,622)
Fixed assets 26,537,963 993,509 848,566 28,380,038
Expenditures for long-lived assets 1,182,303 - 73,103 1,255,406

For the fiscal year ended December 31, 2000:

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

General and administrative expenses - - 5,028,120 5,028,120
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 - - 725,000 725,000
Net interest expense - 176,100 1,282,550 1,458,650
Gain from insurance proceeds due to
involuntary conversion of non-
monetary assets - - 554,864 554,864
Equity in losses of TW-Springhurst (58,903) - - (58,903)
Income (loss) before income taxes 6,380,060 85,112 (5,836,372) 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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20. Selected Quarterly Data

The following is a summary of certain unaudited quarterly results of operations
for the fiscal years ended December 29, 2002 and December 31, 2001.



2002:

First Second Third Fourth
Quarter Quarter Quarter Quarter (a) Total
------- ------- ------- ----------- -----


Total revenues $ 14,184,754 $ 14,007,738 $ 13,110,852 $ 16,322,925 $ 57,626,269
Income (loss) from operations 480,159 527,569 515,907 399,406 1,923,041
Income before extraordinary
item and cumulative effect of
a change in accounting
principle 137,805 166,418 41,721 269,912 615,856
Extraordinary item - write-off
of unamortized loan costs,
net of tax - - - (76,743) (76,743)
Net income (loss) (1,365,968)(b) 166,418 41,721 193,166 (964,663)
Basic and diluted income (loss)
before extraordinary item and
cumulative effect of a change
in accounting principle per
share 0.02 0.03 0.01 0.04 0.10
Basic and diluted net income (0.23
(loss) per share ) 0.03 0.01 0.03 (0.16)


2001:

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

Total revenues $ 14,634,264 $ 14,946,045 $ 15,189,795 $ 14,683,078 $ 59,453,182
Income (loss) from operations 192,617 396,850 392,233 (4,336,737)(c) (3,355,037)
Net income (loss) (118,404) 47,251 88,214 (3,389,539) (3,372,478)
Basic and diluted net income (0.02
(loss) per share ) 0.01 0.02 (0.58) (0.58)


(a) Beginning January 1, 2002, the Company changed its fiscal year to end on the
last Sunday in December from a December 31 year end. The first three quarters of
each fiscal year, beginning in 2002, consist of 12 weeks and the fourth quarter
consists of 16 weeks.

(b) Includes a charge which is a result of the cumulative effect of a change in
accounting principle, net of tax, of $1,503,776.

(c) Includes loss on guarantees of indebtedness of $565,000 and special charges
of $4,294,539, before income tax.



21. Contingencies

The Company guaranteed renewals of certain guaranteed indebtedness and any
replacement indebtedness of TW-Tennessee, LLC, a former franchisee
(TW-Tennessee) of the Company in which the Company and David M. Roth, a Director
of the Company, were formerly members, 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 held the line of credit extended to TW-Tennessee
filed suit in the Circuit Court of Jefferson County, Kentucky against the
Company, the Director and others to enforce certain limited guaranty agreements
(the "Tennessee Litigation"). The Company paid the sum of $195,044 against its
line of credit guarantee in September 2000.

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21. Contingencies (continued)

The Company undertook settlement discussions with the bank and the other
guarantors during 2001. On December 28, 2001, the court entered summary judgment
against the Company and certain other guarantors including the affected
Director. The amount of the judgment against the Company was $1,004,956. Prior
to enforcement of the judgment by the bank, the parties continued settlement
discussions which resulted in the settlement described below.

By complaint dated October 4, 2001, Douglas H. Morris, II and Michael R. Greene,
plaintiffs, filed an action (the "Morris and Greene Lawsuit") in the Circuit
Court of Jefferson County, Kentucky against the Company, Tumbleweed
International, LLC and others, including David Roth, a current Director of the
Company, alleging damage to the plaintiffs as a result of (i) the management of
the TW-Tennessee restaurants by the Company, (ii) the alleged wrongful
application of proceeds of the Company's purchase of the Medina, Ohio restaurant
and (iii) the alleged wrongful conversion of loan proceeds belonging to
TW-International, LLC to TWED-Charleston, Inc. Prior to answering the complaint,
the Company entered into settlement discussions with the plaintiffs which
resulted in the settlement described below.

Beginning in 2001, the Company had settlement discussions with the bank holding
the TW-Tennessee line of credit, the other guarantors of that line of credit,
the plaintiffs in the Morris and Greene Lawsuit and certain of the shareholders
of TW International Investors, Inc. and TWI-B, Inc. regarding the resolution of
the Tennessee Litigation, the Morris and Greene Lawsuit and related matters.

On February 28, 2002, the Company entered into a Confidential Settlement
Agreement and Mutual Release (the "Settlement Agreement") which resolved the
Tennessee Litigation, the Morris and Greene Lawsuit and related matters. The
Settlement Agreement provided for a cash payment by the Company to the bank
holding the TW-Tennessee line of credit of $75,000 and the execution of a
promissory note, payable to the bank, in the face amount of $300,000. In
addition, subject to certain conditions, the Company will pay to the bank an
additional amount of up to $200,000 in the event Tumbleweed International, LLC
successfully sells regional international licenses and receives proceeds in
excess of the $1,400,000 in indebtedness assumed by the Company in connection
with its acquisition of the interests of TW International Investors, Inc. and
TWI-B, Inc. in Tumbleweed International, LLC (see Note 11). The completion of
the acquisition of the interests of TW International Investors, Inc. and TWI-B,
Inc. in Tumbleweed International, LLC is included in the Settlement Agreement.

As a result of the Settlement Agreement, the Tennessee Litigation and the Morris
and Greene Lawsuit were dismissed. In addition, the parties to the settlement,
including certain Directors of the Company (George Keller, David M. Roth and
Minx Auerbach), granted mutual releases to one another regarding all matters,
other than those specifically excluded. Among the matters excluded from the
mutual release contained in the Settlement Agreement are claims asserted by the
holder of the equipment leases granted to TW-Tennessee relative to guarantees by
the Company and others, including David M. Roth, a Director of the Company,
relative to such equipment leases. The Company has agreed to assume and pay one
of the equipment leases totaling approximately $125,000 and remains contingently
liable on two other equipment leases that currently have a remaining balance of
approximately $36,000 which the Company believes will be assumed and paid by
other guarantors. These negotiations are ongoing and no agreement has been
reached.

In the fourth quarter of 2001, as a result of the settlement discussions, the
Company increased a reserve established in 2000 by the additional amount of
$565,000, for a total of $1,290,000, of which $1,215,427 had been paid out as of
December 29, 2002. The Company increased this reserve in 2001 to cover its
portion of the settlement payments to the bank holding the TW-Tennessee line of
credit and pay related costs, including legal expenses. The reserve also
included an additional charge for the equipment lease which the Company assumed,
and for payments made by the Company in 2001 on other lease financing claims
related to TW-Tennessee. The Company's management believes it will not incur
significant additional losses in connection with these matters.

On December 16, 2002, the Company filed a Complaint in Jefferson County,
Kentucky Circuit Court against American Federal, Inc. ("AFI") seeking a
declaratory judgment that the Company had no contractual obligation to pay a
$270,000 commission to AFI, in connection with a Conditional Commitment entered
into between AFI and the Company and seeking damages for fraud and
misrepresentation. In response, AFI filed suit in the United States District
Court for the Eastern District of Missouri seeking payment of a $405,000
commitment fee plus additional charges, fees and costs all in excess of $500,000
relating to the Conditional Commitment, as well as damages for breach of
contract, unjust enrichment and misrepresentation/fraud. This matter is in the
early discovery stage. Management believes that AFI's claims are without merit,
but it is too early to predict an outcome. The Company intends to vigorously
defend itself in connection with this matter. As of December 29, 2002, the
Company has not made any accrual for a potential liability in connection with
this matter.


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21. Contingencies (continued)

We are also subject to claims and legal actions in the ordinary course of our
business. Certain of these claims and actions may involve related parties. We
believe that all such claims and actions are either adequately covered by
insurance or would not have a material adverse effect on us if decided in a
manner unfavorable to us.
























































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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 June 25, 2003, 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 June 25, 2003, 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 AND
RELATED STOCKHOLDER MATTERS

The Proxy Statement issued in connection with the shareholders meeting to be
held on June 25, 2003, 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 June 25, 2003, 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.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the date of the filing of this report, the Company's
Chief Executive Officer and Chief Financial Officer conducted an evaluation of
the effectiveness, design and operation of the Company's disclosure controls and
procedures as defined in Exchange Act Rule 13a-14. Based upon that evaluation,
such officers concluded that the Company's disclosure controls and procedures
are effective to ensure that information required to be disclosed is recorded,
processed, summarized, and reported in a timely manner. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly effect these controls subsequent to the date of the
evaluation referred to above.


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PART IV

ITEM 15. 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 56

All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been
omitted.

(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*

10.4 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)*

10.7 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***

99.1 Registration Rights Agreement between Tumbleweed, Inc. and
Tumbleweed, LLC*

99.2 Certifications pursuant to 18U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002










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

** 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) Tumbleweed, Inc. filed Form 8-K on October 28,
2002 to report under Items 5 and 7, Exhibit 99.1,
that the proposal to acquire all the outstanding
shares in a going private transaction, which had
been announced in June 2002, had been withdrawn.
















































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Tumbleweed, Inc.

Schedule II - Valuation and Qualifying Accounts





Additions
------------------------------------
Balance at Charged to Other
Beginning of Charged to Costs Accounts - Deductions - Balance at End
Description Year and Expenses Describe Describe of Year
- ----------- ---- ------------ -------- -------- -------


Fiscal Year Ended December 29, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $4,202 - - $(4,202) (b) -

Fiscal Year Ended December 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts 68,464 4,202 - (68,464) (a) 4,202

Fiscal Year Ended December 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts - 68,464 - - 68,464





(a) Account was written off in 2001.

(b) Account was written off in 2002.










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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, Chief Executive
Officer and Director March 28, 2003


/s/ Glennon F. Mattingly
- ------------------------------
Glennon F. Mattingly Vice President and March 28, 2003
Chief Financial Officer
(Principal Accounting Officer)

/s/ David M. Roth
- ------------------------------
David M. Roth Director March 28, 2003


/s/ Minx Auerbach
- ------------------------------
Minx Auerbach Director March 28, 2003


/s/ Lewis Bass
- ------------------------------
Lewis Bass Director March 28, 2003


/s/ George R. Keller
- ------------------------------
George R. Keller Director March 28, 2003


/s/ James F. Koch
- ------------------------------
James F. Koch Director March 28, 2003


/s/ David Lloyd
- ------------------------------
David Lloyd Director March 28, 2003






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I, Glennon F. Mattingly, certify that:

(1) I have reviewed this annual report on Form 10-K of Tumbleweed, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and
for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 28, 2003 /s/ Glennon F. Mattingly
------------------------
Glennon F. Mattingly
Vice President and
Chief Financial Officer

I, Terrance A. Smith, certify that:

(1) I have reviewed this annual report on Form 10-K of Tumbleweed, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this annual report is being prepared:
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the

- 58 -





registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 28,2003 /s/ Terrance A. Smith
---------------------
Terrance A. Smith
President and Chief
Executive Officer






























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