TUMBLEWEED COMMUNICATIONS CORP, S-1/A, 2000-07-26

TUMBLEWEED COMMUNICATIONS CORP
S-1/A, 2000-07-26
BUSINESS SERVICES, NEC

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 2000

REGISTRATION STATEMENT NO. 333-41188
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 2
TO
FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

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TUMBLEWEED COMMUNICATIONS CORP.

(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 7389 94-3336053
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
</TABLE>

700 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 216-2000

(Address, Including Zip Code, and Telephone Number Including Area Code, of
Registrant's Principal Executive Offices)

BERNARD J. CASSIDY
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
TUMBLEWEED COMMUNICATIONS CORP.
700 SAGINAW DRIVE
REDWOOD CITY, CALIFORNIA 94063
(650) 216-2000

(Name, Address, Including Zip Code, and Telephone Number Including Area Code, of
Agent for Service)

------------------------------

COPY TO:

<TABLE>
<S> <C>
GREGORY C. SMITH, ESQ. GREGORY K. MILLER, ESQ.
Skadden, Arps, Slate, Meagher & Flom LLP Gunderson Dettmer Stough Villeneuve
525 University Avenue, Suite 220 Franklin & Hachigian, LLP
Palo Alto, California 94301 155 Constitution Drive
(650) 470-4500 Menlo Park, California 94025
(650) 321-2400
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFICERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>

SUBJECT TO COMPLETION, DATED JULY 26, 2000

3,000,000 Shares

[LOGO]

Common Stock

-----------

We are selling 1,500,000 shares of common stock and the selling stockholders
are selling 1,500,000 shares of common stock. We will not receive any of the
proceeds from the shares sold by the selling stockholders.

Our common stock is listed for trading on The Nasdaq Stock Market's National
Market under the symbol "TMWD." On July 19, 2000, the last reported price for
our common stock was $59.63 per share.

The underwriters have an option to purchase from a selling stockholder a
maximum of 450,000 additional shares to cover over-allotments of shares.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 8.

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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS TUMBLEWEED STOCKHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total................................ $ $ $ $
</TABLE>

Delivery of the shares of common stock will be made on or about
, 2000.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

CREDIT SUISSE FIRST BOSTON

CHASE H&Q

DAIN RAUSCHER WESSELS

U.S. BANCORP PIPER JAFFRAY

ING BARINGS

The date of this prospectus is , 2000.
<PAGE>
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TABLE OF CONTENTS

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<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 3

RISK FACTORS.......................... 8

NOTE ON FORWARD-LOOKING STATEMENTS.... 20

USE OF PROCEEDS....................... 21

PRICE RANGE OF COMMON STOCK........... 21

DIVIDEND POLICY....................... 21

CAPITALIZATION........................ 22

DILUTION.............................. 23

SELECTED CONSOLIDATED FINANCIAL
DATA................................ 24

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 25
</TABLE>

BUSINESS.............................. 38

MANAGEMENT............................ 54

CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 65

PRINCIPAL AND SELLING STOCKHOLDERS.... 67

DESCRIPTION OF CAPITAL STOCK.......... 70

UNDERWRITING.......................... 72

NOTICE TO CANADIAN RESIDENTS.......... 74

LEGAL MATTERS......................... 75

EXPERTS............................... 75

AVAILABLE INFORMATION................. 75

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>

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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
<PAGE>
PROSPECTUS SUMMARY

YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE SECURITIES BEING SOLD IN THIS
OFFERING, TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS, PRO FORMA
INFORMATION AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.

Tumbleweed Communications Corp. is a leading provider of advanced messaging
solutions for business communications. Our products and services enable
businesses to extend existing networks and applications, creating secure online
channels for interactive, business-critical communication. Tumbleweed Integrated
Messaging Exchange, or Tumbleweed IME, is a platform and set of applications for
creating secure communications channels between a business and its customers,
partners and suppliers. Tumbleweed Messaging Management System, or Tumbleweed
MMS, is a comprehensive solution that extends internal e-mail systems to the
Internet through centralized management, policy enforcement, filtering and
archiving. Used together, Tumbleweed IME and Tumbleweed MMS automatically apply
security policies and redirect sensitive e-mail for secure, trackable delivery.

E-mail has quickly claimed its place as one of the most ubiquitous and
utilized forms of business communications. International Data Corporation
estimates that the number of electronic mailboxes will grow from approximately
315 million as of July 1999 to over 757 million by 2005. International Data
Corporation further estimates that the number of e-mail messages sent worldwide
will grow from 5.3 billion per day in 1999 to more than 26 billion per day by
2005. But many companies have not yet expanded their use of e-mail beyond
internal communication or casual Internet correspondence. Proprietary groupware
e-mail solutions are widely used by businesses within an enterprise, but their
security and management features do not extend beyond the corporate network.
Standard Internet e-mail systems have much broader reach, but lack the security,
tracking and archiving functionality required to conduct transactions and
deliver sensitive information online.

Our technology allows our customers to expand and exploit the power of
e-mail, and to fully integrate their existing business processes with the
Internet. Our solution enables enterprises to strengthen business relationships
by proactively interacting with customers via personalized deliveries, alerts,
updates and promotional information, all delivered through a secure
communication channel that requires no proprietary desktop software regardless
of which e-mail system the customer uses. In addition, we enable enterprises to
define and enforce Internet communication policies, by automatically filtering
and monitoring messaging traffic, and protecting internal networks from
intrusion or misuse.

We sell our solution to enterprise customers and service providers such as
American Express, Chase Manhattan Bank, Datek Online, the European Union's Joint
Research Council, the Food and Drug Administration, Mitsui & Co., Northern
Trust, Pitney Bowes, TD Waterhouse, Travelers Property Casualty, UPS and the
United States Postal Service.

Our solution offers customers the following benefits:

- Comprehensive technology;

- Multi-level security;

- Easy, universal access;

- Highly-personalized and customized communication;

- Centralized policy enforcement and traffic management; and

- A design that accommodates growth.

3
<PAGE>
Our objective is to be the leading provider of secure online communication
services. Key elements of our strategy include:

- Establish our products as the leading infrastructure and management
solutions for online business communication;

- Increase recurring transaction-based revenue;

- Cultivate a channel of key service providers;

- Establish Tumbleweed IME as the international standard for secure online
communication;

- Expand into accounts after first securing business-critical applications;
and

- Provide comprehensive professional services.

RECENT DEVELOPMENT

In this prospectus, we present pro forma financial statements based on a
number of assumptions and adjustments to historical financial information,
including adjustments for the divestiture of Interface businesses other than
L2i. The pro forma condensed combined financial information does not purport to
represent what the consolidated results of operations or financial condition of
Tumbleweed would actually have been if the Interface acquisition had in fact
occurred on such dates or the future consolidated results of operations or
financial condition of Tumbleweed. Our expectation with respect to these
amounts, adjustments and periods are preliminary and therefore subject to
substantial subsequent adjustments. The acquisition is not expected to close
until after the closing of this offering. The acquisition is subject to
customary closing conditions, including approval by the shareholders of
Interface. As a result, the acquisition may not close, and investors should not
rely on the consummation of the acquisition in purchasing the shares offered
hereby. The transaction will result in significant one-time charges, whether
completed or not, and, if completed, will substantially increase our operating
expenses in future periods.

Interface's L2i products and services simplify the process of transforming
and using data found in legacy computer systems into electronic content that is
easy to distribute and use online. The L2i products adapt legacy print streams
and other data types to the Internet and intelligently convert them into formats
such as Portable Document Format, HyperText Markup Language or eXtensible Markup
Language for use online. The combination of L2i with Tumbleweed IME would give
our customers a comprehensive, end-to-end solution for electronic statement
presentment. We have announced our intention to divest Interface businesses
other than L2i. These businesses comprised a substantial majority of the
historical operating results of Interface, as more fully described in the pro
forma financial statements included elsewhere in this prospectus.

4
<PAGE>
THE OFFERING

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<S> <C>
Common stock offered by Tumbleweed...................... 1,500,000 shares

Common stock offered by the selling stockholders........ 1,500,000 shares

Common Stock outstanding after the offering............. 27,770,104 shares

Use of proceeds......................................... We expect to use the net proceeds of this
offering for working capital and other
general corporate purposes. In addition, we
may use a portion of the net proceeds to
acquire complementary products, technologies
or businesses.

Nasdaq National Market symbol........................... TMWD

Dividend policy......................................... We intend to retain all future earnings to
fund the development and growth of our
business. Therefore, we do not anticipate
paying cash dividends on our common stock in
the foreseeable future.
</TABLE>

The common stock to be outstanding after the offering is based on shares
outstanding as of June 30, 2000. The shares outstanding exclude:

- 6,579,034 shares of common stock issuable as of June 30, 2000 upon the
exercise of outstanding stock options issued under our stock incentive
plans at a weighted average exercise price of $24.16 per share;

- 418,137 shares of common stock reserved for future issuance as of
June 30, 2000 under our stock incentive plans;

- 436,689 shares of common stock reserved for issuance under our employee
stock purchase plan;

- 540,000 shares of common stock issuable as of June 30, 2000 upon the
exercise of outstanding warrants at a weighted average exercise price of
$27.04 per share;

- 1,245,994 shares of our common stock to be issued in connection with the
closing of our pending acquisition of Interface based on shares
outstanding as of June 28, 2000;

- 233,909 shares of our common stock issuable, after giving effect to the
exchange ratio in the acquisition, upon the exercise of outstanding stock
options, rights and warrants that we have agreed to assume upon the
closing of our pending acquisition of Interface based on shares
outstanding as of June 28, 2000; and

- up to 314,231 shares of our common stock to be reserved for future
issuance, after giving effect to the exchange ratio in the acquisition,
under stock incentive plans we have agreed to assume upon closing of our
pending acquisition of Interface, subject to approval by the Interface
board of directors and shareholder of an increase in shares reserved under
Interface's stock incentive plans.

------------------------

EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO OUR PROPOSED ACQUISITION OF INTERFACE AND ASSUMES THAT THE
UNDERWRITERS DO NOT EXERCISE THE OPTION GRANTED BY A SELLING STOCKHOLDER TO
PURCHASE ADDITIONAL SHARES OF COMMON STOCK IN THIS OFFERING.

5
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SUMMARY CONSOLIDATED FINANCIAL DATA

The following financial data, other than the pro forma data, includes the
financial data of Tumbleweed, after giving effect to the acquisition of
Worldtalk, and excludes the financial data of Interface. Our pro forma
consolidated statement of operations data gives effect to our pending
acquisition of Interface (assuming the divestiture of the Interface businesses
other than L2i) as if it occurred at the beginning of the pro forma period
presented. The completion of this offering is not contingent on consummation of
the acquisition, which is not expected to close until after the completion of
this offering and is subject to customary closing conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Operating Results" for a discussion of the operating results of Tumbleweed and
Interface for the period ended June 30, 2000.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- ---------------------------------------
1999 2000
---------------------- -------------------------
1997 1998 ACTUAL PRO FORMA 1999 ACTUAL PRO FORMA
-------- -------- -------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue from continuing
product lines........ $ 4,476 $ 10,575 $ 15,284 $ 18,636 $ 3,269 $ 6,610 $ 7,931
Total revenue.......... 12,056 15,463 16,756 20,108 3,907 6,610 7,931
Gross profit........... 7,946 11,213 11,853 14,685 3,003 4,362 5,402
Operating
expenses(1).......... 19,897 23,456 37,900 71,411 6,090 23,552 34,785
Operating loss......... (11,951) (12,243) (26,047) (56,726) (3,087) (19,190) (29,383)
Net loss............... (11,461) (11,720) (24,222) (54,899) (2,931) (18,622) (28,803)
Net loss per
share--basic and
diluted.............. (1.90) (1.79) (1.65) (3.45) (0.43) (0.73) (1.07)
Shares used in
calculating basic and
diluted loss per
share................ 6,023 6,549 14,650 15,896 6,889 25,588 26,834
</TABLE>

The pro forma balance sheet data gives effect to the pending acquisition of
Interface (assuming the divestiture of the Interface businesses other than L2i)
as if it had occurred on March 31, 2000. The actual, as adjusted balance sheet
data excludes the pro forma data but gives effect to the sale of shares of
common stock in this offering at an assumed public offering price of $59.63 per
share, less estimated underwriting discounts and commissions and estimated
offering expenses.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
-------------------------------------------
ACTUAL
ACTUAL PRO FORMA AS ADJUSTED(2)
----------- ----------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $46,447 $ 47,276 $129,302
Total assets.............................................. 62,576 131,428 145,431
Long-term debt, excluding current installments............ 858 904 858
Total stockholders' equity................................ 45,883 113,316 128,738
</TABLE>

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(1) Includes stock compensation expense of $288,000, $715,000, $3.5 million,
$336,000 and $1.1 million for the years ended December 31, 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000, respectively.

(2) Our Pro Forma Consolidated Balance Sheet Data as of March 31, 2000, as
adjusted, is as follows: Cash and cash equivalents of $130.1 million; Total
assets of $214.3 million; Long-term debt of $904,000; and, Total
stockholders' equity of $196.2 million.

6
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CONTACT INFORMATION

Our principal executive offices are located at 700 Saginaw Drive, Redwood
City, California 94063, and our telephone number is (650) 216-2000. Our web site
is www.tumbleweed.com. The information on our web site does not constitute part
of this document.
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TUMBLEWEED-REGISTERED TRADEMARK-, WORLDSECURE-REGISTERED TRADEMARK- AND
WORLDTALK-REGISTERED TRADEMARK- ARE REGISTERED TRADEMARKS AND INTEGRATED
MESSAGING EXCHANGE-TM-, IME-TM-, MESSAGING MANAGEMENT SYSTEM (MMS)-TM-,
WORLDSECURE/MAIL-TM-, SECURE INBOX-TM-, SECURE ENVELOPE-TM-, TUMBLEWEED IME
PLATFORM-TM-, TUMBLEWEED IME APPLICATIONS-TM-, IME STATEMENTS-TM-, IME
DEVELOPER-TM-, IME MESSENGER-TM-, IME PERSONALIZE-TM-, AND IME ALERT-TM- ARE
TRADEMARKS OF TUMBLEWEED COMMUNICATIONS CORP. L2I-TM- IS A REGISTERED TRADEMARK
OF INTERFACE SYSTEMS, INC.

7
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RISK FACTORS

RISKS RELATING TO OUR BUSINESS

BECAUSE WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND WE HAVE A HISTORY OF LOSSES,
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND WE MAY FACE EXPENSES, DELAYS AND
DIFFICULTIES.

We have only a limited operating history upon which an evaluation can be
based. Accordingly, our prospects must be considered in light of the risks,
expenses, delays and difficulties frequently encountered by companies in a
similarly early stage of development, particularly companies engaged in new and
rapidly evolving markets like secure online communication services. We incurred
net losses of $18.6 million in the three months ended March 31, 2000 and
$24.2 million in the year ended December 31, 1999. As of March 31, 2000, we had
incurred cumulative net losses of $83.9 million.

WE ANTICIPATE CONTINUED LOSSES.

Our success will depend in large part upon our ability to generate
sufficient revenue to achieve profitability and to effectively maintain existing
relationships and develop new relationships with customers and strategic
partners. If we do not succeed, our revenue may not increase, and we may not
achieve or maintain profitability on a timely basis or at all. In particular, we
intend to expend significant financial and management resources on product
development, sales and marketing, strategic relationships, technology and
operating infrastructure. As a result, we expect to incur additional losses and
continued negative cash flow from operations for the foreseeable future.

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to accurately forecast our revenue or
expenses. Our success is dependent upon our ability to enter into and maintain
strategic relationships with customers and to develop and maintain volume usage
of our products by our customers and their end-users. Our revenue has fluctuated
and our quarterly operating results will continue to fluctuate based on the
timing of the execution of new customer licenses in a given quarter. Our license
revenue is comprised entirely of initial license and distribution fees. As a
result, we will be required to regularly and increasingly sign additional
customers with substantial initial license fees on a timely basis to realize
comparable or increased license revenue.

Our services revenue historically has been comprised almost entirely of
implementation, customization and consulting fees and support and maintenance
fees, as actual transaction-based revenue to date has been minimal. As a result,
we will be required to increase our services revenue in the short term through
custom development work and contractual transaction minimums and in the longer
term through the increased transaction volume with the use of our services.
Unless and until we have developed a significant and recurring transaction-based
revenue stream from communications that are sent with our services, our revenue
will continue to fluctuate significantly. Accordingly, we may be unable to
achieve and recognize quarterly or annual revenue consistent with our historical
operating results or expectations.

In addition, we have experienced, and expect to continue to experience,
fluctuations in revenue and operating results from quarter to quarter for other
reasons, including, but not limited to:

- the amount and timing of operating costs and capital expenditures relating
to our business, operations and infrastructure, including our
international operations;

- our ability to accurately estimate and control costs;

- the announcement or introduction of new or enhanced products and services
in the secure online communications or document delivery markets; and

8
<PAGE>
- acquisitions that we complete or propose, including Worldtalk and
Interface.

As a result of these factors, we believe that quarter-to-quarter comparisons
of our revenue and operating results are not necessarily meaningful, and that
these comparisons may not be accurate indicators of future performance. Because
our staffing and operating expenses are based on anticipated revenue levels, and
because a high percentage of our costs are fixed, small variations in the timing
of the recognition of specific revenue could cause significant variations in
operating results from quarter to quarter. If we are unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall, any
significant revenue shortfall would likely have an immediate negative effect on
our operating results. Moreover, our operating results in one or more future
quarters may fail to meet the expectations of securities analysts or investors.
If this occurs, we would expect to experience an immediate and significant
decline in the trading price of our stock.

A LIMITED NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR REVENUE AND
THE FAILURE TO MAINTAIN OR EXPAND THESE RELATIONSHIPS COULD HARM OUR BUSINESS.

The loss of one or more of our major customers, the failure to attract new
customers on a timely basis, or a reduction in usage and revenue associated with
the existing or proposed customers would harm our business and prospects. Five
customers comprised approximately 30% of our revenue in the first quarter of
2000, and 24% of our revenue in fiscal 1999. We expect that a small number of
customers will continue to account for a substantial portion of our revenue for
the foreseeable future.

OUR SERVICE PROVIDER CUSTOMERS MAY COMPETE WITH US OR FAIL TO PROMOTE OUR
PRODUCT.

To date, we have generated a significant amount of Tumbleweed IME revenue
from contracts with a limited number of service provider customers, which use or
intend to use our products for the communication of third-party documents and
data. If these customers do not effectively promote the use of Tumbleweed IME to
their end-users, the adoption of our services and the recognition of associated
revenue could be limited. Because our contracts with our service provider
customers are non-exclusive, these customers could elect to offer competing
secure online communication services to their customers through our existing or
future competitors. The service provider customers also may compete with our
secure online communication services through their traditional physical delivery
channels.

IF WE DO NOT SECURE KEY RELATIONSHIPS WITH ENTERPRISE CUSTOMERS, OUR ACCESS TO
BROADER MARKETS WILL BE LIMITED.

Our enterprise customers, which use or intend to use our products to
intelligently manage the incoming and outgoing online communications of their
enterprises, are a significant source of our revenue. A key aspect of our
strategy is to access target markets prior to adoption of alternative online
distribution solutions by the larger participants in these markets. The failure
to secure key relationships with new enterprise customers in targeted markets
could limit or effectively preclude our entry into these target markets, which
would harm our business and prospects.

CUSTOMERS IN A PRELIMINARY PHASE OF IMPLEMENTING OUR PRODUCTS MAY NOT PROCEED ON
A TIMELY BASIS OR AT ALL.

Some of our customers are currently in a pre-production or pre-launch stage
of implementing our products and may encounter delays or other problems in
introducing them. A customer's decision not to do so or a delay in
implementation could result in a delay or loss in related revenue or otherwise
harm our businesses and prospects. We cannot predict when any customer that is
currently in a pilot or preliminary phase will implement broader use of our
services.

9
<PAGE>
THE MARKETS FOR ENHANCED ONLINE COMMUNICATION SERVICES GENERALLY, AND FOR OUR
PRODUCTS SPECIFICALLY, ARE NEW AND MAY NOT DEVELOP.

The market for our products and services is new and evolving rapidly. If the
market for our products and services fails to develop and grow, or if our
products and services do not gain broad market acceptance, our business and
prospects will be harmed. In particular, our success will depend upon the
adoption and use by current and potential customers and their end-users of
secure online communication services. Our success will also depend upon
acceptance of our technology as the standard for providing these services. The
adoption and use of our products and services will involve changes in the manner
in which businesses have traditionally exchanged information. In addition, sales
and marketing of our products and services is to a large extent under the
control of our customers. In some cases, our customers have little experience
with products, services and technology like those offered by us. Our ability to
influence usage of our products and services by customers and end-users is
limited. For example, the usage of Tumbleweed IME by the end-users of our
service provider customers has been limited to date. We have spent, and intend
to continue to spend, considerable resources educating potential customers and
their end-users about the value of our products and services. It is difficult to
assess, or to predict with any assurance, the present and future size of the
potential market for our products and services, or its growth rate, if any.
Moreover, we cannot predict whether our products and services will achieve any
market acceptance. Our ability to achieve our goals also depends upon rapid
market acceptance of future enhancements of our products. Any enhancement that
is not favorably received by customers and end-users may not be profitable and,
furthermore, could damage our reputation or brand name.

THE MARKETS WE ADDRESS ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING, AND WE MAY
NOT BE ABLE TO COMPETE SUCCESSFULLY.

We may not be able to compete successfully against current and future
competitors, and the competitive pressures we face could harm our business and
prospects. Tumbleweed IME is an alternative to traditional mail and courier
delivery services, such as those offered by Federal Express Corporation, UPS or
the U.S. Postal Service, and to general purpose e-mail applications and
services. As such, we compete with these options. Our direct competition comes
from other secure online communication service providers of various sizes, some
of which have products that are intended to compete directly with our products.
Examples of secure online communication service providers include Automatic Data
Processing, Inc., Critical Path, Inc., VeriCert.com, e-Parcel, LLC, PostX
Corporation and ZixIt Corporation. In addition, companies with which we do not
presently directly compete may become competitors in the future, either through
the expansion of our products and services or through their product development
in the area of secure online communication services. These companies could
include America Online, Inc./Netscape Communications Corporation, International
Business Machines Corporation/Lotus Development Corporation, Microsoft
Corporation and VeriSign, Inc.

The market for our Tumbleweed MMS products is intensely competitive and
subject to rapid changes. The enterprise security market is characterized by
various products and solutions that compete with our Internet content security
and policy management solutions. These include products offered by Content
Technologies, Ltd. (which is partially owned by Integralis Technology, Ltd.)
Trend Micro Incorporated, SRA International and TenFour AB. We anticipate
competition in the future from other companies in the enterprise security market
as the industry continues to grow.

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into these strategic or commercial relationships on more favorable terms.
Additionally, these competitors have research and development capabilities that
may allow them to develop new or improved products that may compete with product
lines we market and distribute. New technologies and the expansion of existing
technologies may increase competitive pressures on us. Furthermore, one of our
service provider customers currently offers to end-users the choice between
Tumbleweed's products and the products of one of our competitors, and other
current and future customers may also offer end-users a similar choice.
Increased competition may result in reduced operating margins as well as loss of
market share and brand recognition. We may be unable to compete successfully
against current and future competitors, and competitive pressures faced by us
could harm our business and prospects.

WE FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US FROM
SUCCESSFULLY INTEGRATING WORLDTALK, OR ANY OTHER COMPANY WE MAY ACQUIRE.

The integration of the Worldtalk Communications Corporation business,
including its technology, operations and personnel, has been and will be a
complex, time consuming and expensive process that may disrupt our business if
not completed in a timely and efficient manner. Additionally, the integration of
any other company or business we may acquire in the future, including Interface,
will be a complex, time consuming and expensive process that may disrupt our
business if not completed in a timely and efficient manner. Whenever an
acquisition is completed, we must operate as a combined organization utilizing
common information and communication systems, operating procedures, financial
controls and human resources practices. In particular, we are currently
evaluating and upgrading our management information systems and establishing
uniformity among our systems and those formerly operated by Worldtalk. We will
be required to do the same for any subsequently acquired company, including
Interface. We may encounter substantial difficulties, costs and delays involved
in integrating the operations of the Worldtalk, Interface, or any other company,
including:

- potential incompatibility of business cultures;

- perceived adverse changes in business focus;

- potential conflicts in customer, advertising or strategic relationships;

- potential failure to complete anticipated sales; and

- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.

As a result, we may not be successful in integrating Worldtalk, Interface or
any other business or technologies we acquire and may not achieve anticipated
revenue and cost benefits. We also cannot guarantee that these acquisitions will
result in sufficient revenues or earnings to justify our investment in, or
expenses related to, this acquisition. Nor can we guarantee that any anticipated
synergies will develop. If we fail to execute our acquisition strategy
successfully for any reason, our business will suffer significantly.

OUR PRODUCT INTEGRATION EFFORTS MAY BE HINDERED BY A VARIETY OF TECHNICAL
FACTORS.

We face certain risks associated with the ongoing integration of the
Worldtalk technology and proposed integration of Interface technology. For
example, because Worldtalk has historically based its products on an NT platform
and we have created a platform-independent architecture for the Tumbleweed IME
products, the integration of products from Worldtalk may result in unanticipated
architectural incompatibilities that would require additional time and
engineering resources to resolve. The loss of key engineering personnel from
Worldtalk, Interface or any other entities we may acquire may increase the time
and resources needed to resolve these and other technical integration issues.
Our offices and Interface's offices are in different locations, which may create
coordination issues and could increase employee turnover. In addition, the
installation of integrated or complementary software

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products at customer sites may result in difficulties associated with
customer-specific installation processes.

WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES AND
OUR FAILURE TO MANAGE GROWTH COULD CAUSE OUR BUSINESS TO SUFFER.

We have expanded our operations rapidly and intend to continue this
expansion. The number of our employees increased from 75 as of June 30, 1999 to
258 as of March 31, 2000. This expansion has placed, and is expected to
continued to place, a significant strain on managerial and operational
resources. To manage any further growth, we will need to improve or replace our
existing operational, customer service and financial systems, procedures and
controls. Any failure to properly manage these systems and procedural
transitions could impair our ability to attract and service customers, and could
cause us to incur higher operating costs and delays in the execution of our
business plan. We will also need to continue the expansion of our operations and
employee base. Our management may not be able to hire, train, retain, motivate
and manage required personnel. In addition, our management may not be able to
successfully identify, manage and exploit existing and potential market
opportunities. If we cannot manage growth effectively, our business and
operating results could suffer.

WE HAVE A LENGTHY SALES AND IMPLEMENTATION CYCLE WHICH COULD HARM OUR BUSINESS.

If we are unable to license our services to new customers on a timely basis
or if our existing and proposed customers and their end-users suffer delays in
the implementation and adoption of our services, our revenue may be limited and
business and prospects may be harmed. Our customers must evaluate our technology
and integrate our products and services into the products and services they
provide. In addition, our customers may need to adopt a comprehensive sales,
marketing and training program in order to effectively implement Tumbleweed IME.
Finally, we must coordinate with our customers using our product for third-party
communications in order to assist end-users in the adoption of our products in
order to generate usage fees. For these and other reasons, the cycle associated
with establishing licenses in order to generate initial license fees and
implementation of our products in order to generate material transaction-based
services revenue can be lengthy. This cycle is also subject to a number of
significant delays over which we have little or no control.

A FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
BUSINESS.

We currently rely on a combination of patents, trade secrets, copyrights,
trademarks and licenses, together with non-disclosure and confidentiality
agreements to establish and protect our proprietary rights in our products. We
hold certain patent rights with respect to some of our products and currently
have a lawsuit pending against The docSpace Company, Inc. alleging infringement
of one of our patents by docSpace. We have filed, and expect in the future to
file, additional patent applications. Our existing patents or trademarks, as
well as any future patents or trademarks obtained by us, may be challenged,
invalidated or circumvented, or our competitors may independently develop or
patent technologies that are substantially equivalent or superior to our
technology. Further patent or trademark protection may not be obtained, in the
United States or elsewhere, for our existing or new products, applications or
services. In addition, further protection, if obtained, may not be effective. In
some countries, meaningful patent or trademark protection is not available.

To date, we have not received any claims of infringement upon the
proprietary rights of third parties. However, third parties could assert
infringement claims against us in the future, and the cost of responding to such
assertions, regardless of their validity, could be significant. In addition,
such claims may be found to be valid and could result in awards against us,
which could harm our business.

We also rely, to some extent, on unpatented trade secrets and other
unpatented proprietary information. Our policy is to have employees sign
confidentiality agreements, to have selected parties sign non-competition
agreements and to have third parties sign non-disclosure agreements. Although we
take precautionary measures to maintain our unpatented proprietary information,
others may

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acquire equivalent information or otherwise gain access to or disclose our
proprietary information and we may be unable to meaningfully protect our rights
to our proprietary information.

OUR EXPANSION INTO INTERNATIONAL MARKETS MAY BE DIFFICULT OR UNPROFITABLE.

We have recently begun to invest significant financial and managerial
resources to expand our sales and marketing operations in international markets
and have opened sales offices in Germany, the United Kingdom, Japan, France,
Australia, The Netherlands and Sweden. In the first quarter of 2000 and in
fiscal 1999, we derived 34% and 41% of our revenue from international
operations. However, to date, we have limited experience in international
operations and may not be able to compete effectively in international markets.
A key component of our long-term strategy is to further expand into
international markets, and we must continue to devote substantial resources to
our international operations in order to succeed in these markets. In this
regard, we may encounter difficulties such as:

- unexpected changes in regulatory requirements and trade barriers
applicable to the Internet or our business;

- challenges in staffing and managing foreign operations, including
employment laws and practices as we expand into continental Europe;

- seasonal reductions in business activity and economic downturns, in
particular, in Europe and Asia;

- longer payment cycles and problems in collecting accounts receivable;

- problems associated with the conversion of various European currencies
into a single currency, the Euro;

- legal challenges or regulatory requirements related to the export or
import of encryption technologies;

- differing technology standards; and

- reduced protection for intellectual property rights in certain countries
in which we operate or plan to operate.

In addition, our expansion into international markets will increasingly
subject us to fluctuations in currency exchange rates. In the future, an
increasing number of our contracts may be denominated in currencies other than
U.S. dollars. We do not presently engage in hedging or similar transactions to
protect us from currency fluctuations. Any of the foregoing difficulties of
conducting business internationally could harm our international operations and,
consequently, our business and prospects.

IF WE DO NOT PROVIDE ADEQUATE SUPPORT SERVICES TO OUR CUSTOMERS TO IMPLEMENT OUR
PRODUCTS, WE MAY LOSE CUSTOMERS OR REALIZE LOWER TRANSACTION VOLUME.

Our professional services organization assists our customers in implementing
our products through software installation, integration with existing customer
systems, contract engineering, consulting and training. If the professional
services organization does not adequately assess customer requirements or
address technical problems, customers may seek to discontinue their
relationships with us due to dissatisfaction with the product or our customer
support. Furthermore, these customers may realize lower transaction volume than
they could have otherwise achieved because they did not fully capitalize on the
product in ways that could have been addressed by our professional services
organization. Our products must be integrated with existing hardware and complex
software products of our customers or other third parties, and our customers may
not have significant experience with the implementation of products similar to
ours. In addition, the provision of contract engineering and integration
services is an increasingly important aspect of our strategy to strengthen
customer loyalty to our product and

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company. Therefore, our business and future prospects significantly depend on
the strength of our professional services organization.

PRODUCT PERFORMANCE PROBLEMS, SYSTEM FAILURES AND INTERNET PROBLEMS COULD
SEVERELY DAMAGE OUR BUSINESS.

The ability of our customers to use Tumbleweed-based services depends on
stable product performance, and the efficient and uninterrupted operation of the
computer and communications hardware as well as the software and Internet
network systems that they maintain. Although our ability to manage the effects
of system failures which occur in computer hardware, software and network
systems is limited, the occurrences of these failures could harm our reputation,
business and prospects. The Internet has experienced a variety of outages and
other delays as a result of damage to portions of its infrastructure, and the
Internet could face similar outages and delays in the future. In addition, an
increasing number of our customers require us to provide computer and
communications hardware, software and Internet networking systems to them as an
outsourced data center service. All data centers, whether hosted by us, our
customers or by an independent third party to which we outsource this function,
are vulnerable to damage or interruption from fire, flood, earthquake, power
loss, telecommunications failure or other similar events.

IF OUR SOFTWARE CONTAINS ERRORS, WE MAY LOSE CUSTOMERS OR EXPERIENCE REDUCED
MARKET ACCEPTANCE OF OUR PRODUCTS.

Our software products are inherently complex and may contain defects and
errors that are detected only when the products are in use. In addition, some of
our customers require or may require enhanced customization of our software for
their specific needs, and these modifications may increase the likelihood of
undetected defects or errors. Further, we often render implementation,
consulting and other technical services, the performance of which typically
involves working with sophisticated software, computing and networking systems,
and we could fail to meet customer expectations as a result of any defects or
errors. As a result, we may lose customers, customers may fail to implement our
products more broadly within their organization and we may experience reduced
market acceptance of our products. Our products are designed to facilitate the
secure transmission of sensitive business information to specified parties
outside the business over the internet. As a result, the reputation of our
software products for providing good security is vital to their acceptance by
customers. Our products may be vulnerable to break-ins, theft or other improper
activity that could jeopardize the security of information for which we are
responsible. Problems caused by product defects, failure to meet project
milestones for services or security breaches could result in loss of or delay in
revenue, loss of market share, failure to achieve market acceptance, diversion
of research and development resources, harm to our reputation, or increased
insurance, service and warranty costs. To address these problems, we may need to
expend significant capital resources that may not have been budgeted.

IF WE LOSE THE SERVICES OF KEY MANAGEMENT PERSONNEL, INCLUDING CO-FOUNDERS OR
KEY SALES EXECUTIVES, OUR ABILITY TO DEVELOP OUR BUSINESS AND SECURE CUSTOMER
RELATIONSHIPS WILL SUFFER.

We are substantially dependent on the continued services and performance of
our senior management and other key personnel. The loss of the services of any
of our executive officers or other key employees, particularly our co-founders,
Jeffrey C. Smith and Jean-Christophe D. Bandini, could significantly delay or
prevent the achievement of our development and strategic objectives. In
addition, the loss of key members of our senior management, including Kerry S.
Champion and Shomit A. Ghose, could harm our ability to develop our business.
Moreover, the loss of key members of our sales organization, including Donald R.
Gammon and Donald N. Taylor, could harm our ability to secure key relationships
contemplated by our business plan. We do not have long-term employment
agreements with any of our key personnel. The loss of services of any of our
senior management or other key personnel could significantly harm our business
and prospects.

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OUR EFFORTS TO ESTABLISH, MAINTAIN AND STRENGTHEN OUR BRANDS WILL REQUIRE
SIGNIFICANT EXPENDITURES AND MAY NOT BE SUCCESSFUL.

If the marketplace does not associate our brands with high quality Internet
communication services, it may be more difficult for us to attract new customers
or introduce future products and services. The market for our services is new.
Therefore, our failure to establish brand recognition at this stage could harm
our ability to compete in the future with other companies that successfully
establish a brand name for their services. We must succeed in our marketing
efforts, provide high quality services and increase our user base in order to
build our brand awareness and differentiate our products from those of our
competitors. These efforts have required significant expenditures to date.
Moreover, we believe that these efforts will require substantial commitments of
resources in the future as our brands become increasingly important to our
overall strategy and as the market for our services grows.

OUR BUSINESS WILL BE HARMED IF WE CANNOT MEET FUTURE CAPITAL NEEDS.

We will require substantial working capital to fund our business and achieve
our goals. We have experienced negative cash flow from operations and we expect
to continue to experience significant negative cash flow from operations for the
foreseeable future. We believe that our existing capital resources, including
the proceeds to us from this offering, will enable us to maintain our current
and planned operations for at least the next 12 months. However, our capital
requirements depend upon several factors, including:

- the rate of market acceptance of our products and services, including
transaction volume;

- our ability to expand our customer base;

- our level of expenditures, including expenditures related to sales and
marketing;

- the cost of service and technology upgrades; and

- any acquisition we elect to pursue.

If we seek additional funding to meet our requirements, this funding may not
be available on acceptable terms, if at all. If adequate funds are not
available, we may be required to curtail significantly or defer one or more of
our operating goals or programs. If we raise additional funds through the
issuance of equity securities, the issuance could result in substantial dilution
to existing shareholders. In addition, these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock. If
we raise additional funds through the issuance of debt securities, these new
securities would have rights, preferences and privileges senior to those of the
holders of our common stock. The terms of these debt securities could also
impose restrictions on our operations.

BECAUSE OUR PRODUCTS UTILIZE THE INTERNET, IF USE OF THE INTERNET DOES NOT
INCREASE, THE LEVEL OF USE OF OUR PRODUCTS WILL SUFFER.

If the Internet and other products and services necessary for the
utilization of our products are not sufficiently developed, fewer customers and
end-users will use our products and our business will be harmed. In particular,
the success of our products and services will depend on the development and
maintenance of adequate Internet infrastructure, such as a reliable network
backbone with the necessary speed, data capacity and other features demanded by
users. Moreover, our success will also depend on the timely development of
complementary products or services such as high speed modems for providing
reliable Internet access and services and this may not occur. Because the online
exchange of information is new and evolving, the Internet may not prove to be a
viable platform for secure online communication services in the long term. The
Internet has experienced, and is expected to continue to experience, significant
growth in the numbers of users and amount of traffic. As the

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Internet continues to experience increased numbers of users and frequency of
use, or if its users require increasingly more resources, the Internet
infrastructure may not be able to support the demands placed on it. As a result,
the performance or reliability of the Internet may be harmed. This in turn could
decrease the level of Internet usage and also the level of utilization of our
products and services.

ADDITIONAL GOVERNMENT REGULATION RELATING TO THE INTERNET MAY INCREASE COSTS OF
DOING BUSINESS OR REQUIRE CHANGES IN OUR BUSINESS MODEL.

We are subject to regulations applicable to businesses generally and laws or
regulations directly applicable to companies utilizing the Internet. Although
there are currently few laws and regulations directly applicable to the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. These laws could cover issues like user privacy,
pricing, content, intellectual property, distribution, taxation, antitrust,
legal liability and characteristics and quality of products and services. The
adoption of any additional laws or regulations could decrease the demand for our
products and services and increase our cost of doing business or otherwise harm
our business or prospects.

Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues like property ownership, sales and other taxes,
libel and personal privacy is uncertain and may take years to resolve. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in online commerce. New state tax
regulations may subject us to additional state sales and income taxes. Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and commercial
online services could harm our ability to conduct business and harm operating
results.

OUR PRODUCTS ARE SUBJECT TO IMPORT AND EXPORT CONTROLS, AND WE MAY BE UNABLE TO
OBTAIN NECESSARY APPROVALS.

Exports of software products utilizing encryption technology are generally
restricted by the U.S. and various foreign governments. All cryptographic
products require export licenses from certain U.S. government agencies. We have
obtained approval to export products using up to 128-bit symmetric encryption
and 1024-bit public key encryption, including IME Server, IME Desktop, IME
Receive Applet, IME Remote API using OmniORB with SSL, MMS WorldWide/56 and MMS
Strong WorldWide/128. We are not exporting other products and services that are
subject to export control under U.S. law. However, the list of products and
countries for which export approval is required, and the related regulatory
policies, could be revised, and we may not be able to obtain necessary approval
for the export of future products. The inability to obtain required approvals
under these regulations could limit our ability to make international sales.
Furthermore, competitors may also seek to obtain approvals to export products
that could increase the amount of competition we face. Additionally, countries
outside of the U.S. could impose regulatory restrictions impairing our ability
to import our products into those countries.

COSTS OF COMMUNICATING VIA THE INTERNET COULD INCREASE IF ACCESS FEES ARE
IMPOSED.

Certain local telephone carriers have asserted that the increasing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure, and that many areas with high Internet use have begun to
experience interruptions in telephone service. These carriers have petitioned
the Federal Communications Commission to impose access fees on Internet service
providers and online service providers. If these access fees are imposed, the
costs of communicating on the Internet could increase substantially, potentially
slowing the increasing use of the Internet. This could in turn decrease demand
for our services or increase the costs of doing business.

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WE MAY HAVE LIABILITY FOR INTERNET CONTENT.

As a provider of Internet communication products and services, we face
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the nature and content of the materials
transmitted online. Any imposition of liability, particularly liability that is
not covered by insurance or is in excess of insurance coverage, could be costly
and could require us to implement measures to reduce exposure to this liability.
This may require us to expend substantial resources or to discontinue selected
service or product offerings.

We do not and cannot screen all of the content generated by users of our
product but may be exposed to liability with respect to this content.
Furthermore, certain foreign governments, such as Germany, have enforced laws
and regulations related to content distributed over the Internet that are more
strict than those currently in place in the U.S. Other countries, such as China,
regulate or prohibit the transport of telephonic data in their territories.
Failure to comply with regulations in a particular jurisdiction could result in
fines or criminal penalties or the termination of service in one or more
jurisdictions. Moreover, the increased attention focused on liability issues as
a result of lawsuits and legislative proposals could impact the growth of
Internet use. Liability insurance may not cover claims of these types, or may
not be adequate to indemnify against all liability that may be imposed.

RISKS RELATED TO THE PROPOSED ACQUISITION OF INTERFACE SYSTEMS INC.

OUR PROPOSED ACQUISITION OF INTERFACE MAY NOT CLOSE AND OUR EXPECTATIONS MAY NOT
BE REALIZED, WHICH COULD HARM OUR PROSPECTS.

In connection with our proposed acquisition of Interface, as of June 30,
2000, we expected to expense up to $2.0 million of acquired in-process research
and development, and to record unearned compensation and goodwill and other
intangibles of approximately $66.1 million to be amortized over periods ranging
from one to three years. Our expectations with respect to these amounts,
adjustments and periods are preliminary and therefore subject to substantial
subsequent adjustment. Any such adjustment could adversely affect our historical
or future operating results.

In this prospectus, we present pro forma financial statements based on a
number of assumptions and adjustments to historical financial information,
including adjustments for the divestiture of Interface businesses other than
L2i. The pro forma condensed combined financial information does not purport to
represent what the consolidated results of operations or financial condition of
Tumbleweed would actually have been if the Interface acquisition had in fact
occurred on such dates or the future consolidated results of operations or
financial condition of Tumbleweed. In addition, the transaction will result in
significant one-time charges, whether completed or not, and, if completed, will
substantially increase our operating expenses in future periods. The acquisition
is not expected to close until after the closing of this offering. The
acquisition is subject to customary closing conditions, including approval by
the shareholders of Interface. As a result, the acquisition may not close on a
timely basis or at all, or may close on terms that differ from the terms
currently proposed. Accordingly, investors should not rely on the consummation
of the Interface acquisition as proposed or at all in purchasing the shares made
available in their offering.

THE INTERFACE BUSINESSES OTHER THAN L2I COMPRISED A SUBSTANTIAL MAJORITY OF THE
OPERATING RESULTS OF INTERFACE, AND WE INTEND TO DIVEST THESE BUSINESSES.

The Interface businesses other than L2i comprised a substantial majority of
the historical operating results of Interface, as more fully described in the
pro forma financial statements included elsewhere in this prospectus.
Specifically, the revenue from these businesses comprised approximately
$16.8 million or 83% of the revenues of Interface for the year ended
September 30, 1999 and $1.7 million or 56% of the revenues of Interface for the
three months ended March 31, 2000. In the event that these businesses are
successfully divested, the operations of the ongoing business of Interface will
be

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substantially less than the historical operating results that include these
businesses. We expect that the amount realized from the sale of these
businesses, if successfully completed, will be limited and have assumed no gain
or loss in our pro forma presentation. By contrast, if we do not successfully
divest these businesses, we will be required to maintain or wind-down these
businesses. The costs of doing so could be substantial and would adversely
affect future operating results through ongoing realization of unanticipated
expenses and one-time disposition charges.

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE INTERFACE INTO OUR BUSINESS OR
ACHIEVE THE EXPECTED BENEFITS OF THE INTERFACE ACQUISITION.

Our proposed acquisition of Interface, if completed, will require
integrating our business with theirs, including integrating product lines,
technologies and distinct corporate cultures. We may not be able to successfully
assimilate the personnel, operations and customers of Interface into our
business. Additionally, we may fail to maintain the customers we have and those
of Interface after the acquisition. We also may fail to achieve the anticipated
synergies from the acquisition of Interface, including product development and
other operational synergies. The integration process may further strain our
existing financial and managerial controls and reporting systems and procedures.
This may result in the diversion of management and financial resources from our
core business objectives. We may not be able to retain various individuals who
provide services to Interface that we intend to hire in connection with this
acquisition. Our failure to successfully manage the Interface acquisition could
seriously harm our operating results. In addition, the issuance of our shares of
our common stock in connection with the closing of the Interface acquisition
will result in dilution to existing stockholders.

INTERFACE HAS RECENTLY BEEN NAMED A DEFENDANT IN SEVERAL PURPORTED SECURITIES
CLASS ACTION LAWSUITS.

On July 7, 2000, three complaints were filed by David H. Zimmer,
Congressional Securities, Inc. and other plaintiffs against Interface and
various additional defendants, including Interface's President and Chief
Executive Officer, Robert A. Nero and Fiserv Correspondent Services, Inc., in
the United States District Court for the Southern District of New York. The
three cases contain substantially similar allegations of false and misleading
representations by various defendants allegedly designed to inflate Interface's
stock price. The complaints seek relief under the federal securities laws on
behalf of purported classes of persons who purchased, held, or sold shares of
Interface stock, and under various other causes of action. On July 17, 2000, at
least one of the complaints was amended.

Interface and Mr. Nero have not been served process in these actions, but
intend vigorously to defend them and seek their dismissal. Although Interface
and Mr. Nero believe these actions to be without merit, no prediction of the
ultimate outcome can be made at this time and the outcome may harm Interface's
business. In addition, we cannot fully assess the merits of the lawsuits at this
time and, in any event, the costs in defending these complaints could harm our
future operating results if the acquisition is completed.

RISKS RELATED TO THIS OFFERING

FUTURE SALES OF COMMON STOCK COULD DEPRESS OUR STOCK PRICE.

We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, will depress the market price for our common stock
or our ability to raise capital by offering equity securities. In particular, in
the months of April and May 2000, Hikari Tsushin sold a total of approximately
2,363,000 shares and may choose to sell additional shares of our common stock.
Sales of substantial amounts of common stock, or the perception that these sales
could occur, may depress prevailing market prices for the common stock.
Tumbleweed and its officers and directors have agreed, subject to customary
exceptions, not to sell any shares of common stock for 90 days following the
date of this prospectus without the consent of Credit Suisse First Boston.
Hikari Tsushin has agreed to this

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same restriction for 30 days following the date of this prospectus. Credit
Suisse First Boston may release shares subject to this agreement for sale into
the public market or otherwise at any time without public notice.

INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.

The stock market has experienced significant price and volume fluctuations
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against companies. The
institution of this type of litigation against us could result in substantial
costs and a diversion of our management's attention and resources, which could
harm our business and prospects.

OUR MANAGEMENT WILL BE ABLE TO SUBSTANTIALLY INFLUENCE CORPORATE EVENTS BECAUSE
THEY WILL CONTINUE TO OWN A SIGNIFICANT PERCENTAGE OF OUR STOCK AFTER THE
OFFERING.

Upon completion of this offering, our present directors, executive officers
and principal stockholders as a group will beneficially own approximately 31.6%
of the outstanding common stock, or 28.9% if the underwriters' over-allotment
option is fully exercised. Accordingly, if all or particular stockholders were
to act together, they would be able to exercise significant influence over or
control the election of our board of directors, our management and policies and
the outcome of particular corporate transactions or other matters submitted to
our stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of our assets.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD
DISCOURAGE OR PREVENT AN ACQUISITION OF TUMBLEWEED, WHICH COULD DEPRESS OUR
STOCK PRICE.

Our certificate of incorporation and bylaws may inhibit changes of control
that are not approved by our board of directors. These provisions could limit
the price that investors might be willing to pay in the future for shares of our
common stock. In particular, our certificate of incorporation provides for a
classified board of directors and prohibits stockholder action by written
consent. These provisions require advance notice for nomination of directors and
stockholders' proposals. In addition, as a Delaware corporation, we are subject
to Section 203 of the Delaware General Corporation Law. In general, this law
prevents a person who becomes the owner of 15% or more of the corporation's
outstanding voting stock from engaging in specified business combinations for
three years unless specified conditions are satisfied. In addition, our
certificate of incorporation allows our board of directors to issue preferred
stock without further stockholder approval. This could have the effect of
delaying, deferring or preventing a change in control. The issuance of preferred
stock also could effectively limit the voting power of the holders of our common
stock. The provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, may discourage or prevent an acquisition or
disposition of our business.

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NOTE ON FORWARD-LOOKING STATEMENTS

Discussions containing forward-looking statements may be found under the
captions "Prospectus Summary." "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus. These forward-looking statements
may include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in this prospectus
that are not historical facts. When used in this prospectus, the words "may,"
"will," "should," "could," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes," "estimates" and similar
expressions are generally intended to identify forward-looking statements,
particularly with respect to our ability to complete our proposed acquisition of
Interface. These forward-looking statements are based on current beliefs,
expectations and assumptions and involve certain risks and uncertainties that
could cause actual results, levels of activity, performance, achievements and
events to differ materially from those implied by such forward-looking
statements. These forward-looking statements are made as of the date of this
prospectus. The forward looking-statements contained in this prospects are
subject to the provisions of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We disclaim any obligation
to update these forward-looking statements or to explain the reasons why actual
results may differ. The risks and uncertainties under the caption "Risk Factors"
contained herein, among other things, should be considered in evaluating our
prospects and future financial performance.

20
<PAGE>
USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of shares of our
common stock in this offering of approximately $82.9 million, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. This net proceeds to the Company will not change if the underwriters
exercise their over-allotment option. We will not receive any proceeds from the
sale of shares by the selling stockholders. We expect to use the net proceeds
from this offering for working capital and other general corporate purposes. In
addition, we may use a portion of the net proceeds to acquire complementary
products, technologies or businesses; however, we currently have no commitments
or agreements with respect to any such transactions.

We will have significant discretion in the use of the net proceeds of this
offering. Investors will be relying on the judgment of our management regarding
the application of the proceeds of this offering. Pending use of the net
proceeds as discussed above, we intend to invest these funds in short-term,
interest-bearing, investment-grade obligations.

PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the Nasdaq Stock Market's National
Market under the symbol "TMWD" since August 6, 1999, the date of our initial
public offering. The following table sets forth, for the periods indicated the
high and low sales prices for our common stock as reported by the Nasdaq Stock
Market's National Market:

<TABLE>
<CAPTION>
PRICE RANGE
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
Third Quarter 1999 (beginning August 6, 1999)............... $ 30.50 $ 10.25
Fourth Quarter 1999......................................... $ 89.50 $ 17.75
First Quarter 2000.......................................... $ 136.00 $ 48.00
Second Quarter 2000......................................... $ 112.00 $ 28.88
Third Quarter 2000 (through July 19, 2000).................. $ 62.50 $ 50.81
</TABLE>

The last reported sale for our common stock on the Nasdaq Stock Market's
National Market was $59.63 per share on July 19, 2000. As of June 30, 2000, we
estimate that there were approximately 377 holders of record of our common
stock. This does not include the number of persons whose stock is in nominee or
"street name" accounts through brokers.

DIVIDEND POLICY

We presently anticipate that we will retain any future earnings to finance
the development and expansion of our business and provide working capital.
Therefore, we do not anticipate any cash dividends on our common stock for the
foreseeable future. The terms of our existing credit facility prohibit the
payment of dividends in specified circumstances.

21
<PAGE>
CAPITALIZATION

The following table sets forth the following information:

- our actual capitalization as of March 31, 2000; and

- our actual, as adjusted capitalization giving effect to the sale of shares
of common stock in this offering at an assumed public offering price of
$59.63 per share, less estimated underwriting discounts and commissions
and estimated offering expenses.

<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ACTUAL
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term obligations, excluding current installments....... $ 858 858
Stockholders' equity:
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $0.001 par value 100,000,000 shares
authorized, 25,832,892 shares issued and outstanding,
actual; 27,332,892 shares issued and outstanding, actual
as adjusted............................................. 26 27
Additional paid-in capital................................ 134,764 217,618
Deferred compensation..................................... (5,105) (5,105)
Accumulated other comprehensive income.................... 70 70
Accumulated deficit....................................... (83,872) (83,872)
-------- --------
Total stockholders' equity.............................. 45,883 128,738
-------- --------
Total capitalization.................................. 46,741 129,596
======== ========
</TABLE>

The shares of common stock outstanding in the actual, and actual as adjusted
columns exclude:

- 418,137 shares of common stock reserved for future issuance as of
June 30, 2000 under our stock incentive plans;

- 436,689 shares of common stock reserved for issuance under our employee
stock purchase plan;

- 540,000 shares of common stock issuable as of June 30, 2000 upon the
exercise of outstanding warrants at a weighted average exercise price of
$27.04 per share;

- 1,245,994 shares of our common stock to be issued in connection with the
closing of our pending acquisition of Interface based on the shares
outstanding as of June 28, 2000;

- 233,909 shares of our common stock issuable, after giving effect to the
exchange ratio in the acquisition, upon the exercise of outstanding stock
options, rights, and warrants that we have agreed to assume upon the
closing of our pending acquisition of Interface based on the shares
outstanding as of June 28, 2000; and

- up to 314,231 shares of our common stock to be reserved for future
issuance, after giving effect to the exchange ratio in the acquisition,
under stock incentive plans we have agreed to assume upon closing of our
pending acquisition of Interface, subject to approval by the Interface
board of directors and shareholders of an increase in shares reserved
under Interface's stock incentive plans.

Our pro forma capitalization as of March 31, 2000, as adjusted to give
effect to the proposed offering, is as follows: Deferred compensation of
$7.4 million; Total stockholders' equity of $196.2 million; and Total
capitalization of $197.1 million. The acquisition of Interface is not expected
to close until after the closing of this offering. The acquisition is subject to
customary closing conditions, including approval by the shareholders of
Interface. As a result, the acquisition may not close, and investors should not
rely on the consummation of the acquisition in purchasing the shares offered
hereby.

22
<PAGE>
DILUTION

As of March 31, 2000 the net tangible book value of our common stock was
approximately $45.8 million, or approximately $1.77 per share. Net tangible book
value per share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by purchasers of shares of common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of 1,500,000 shares of
common stock at the assumed public offering price and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable,
our net tangible book value at March 31, 2000 would have been approximately
$128.7 million, or $4.71 per share. This represents an immediate increase in net
tangible book value of $2.94 per share to existing stockholders and immediate
dilution in net tangible book value of $54.92 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:

<TABLE>
<S> <C> <C>
Assumed public offering price per share:.................... $59.63
Net tangible book value per share before this offering as
of March 31, 2000....................................... $1.77
Increase per share attributable to new investors.......... $2.94
Net tangible book value per share after this offering....... 4.71
Dilution in net tangible book value per share to new
investors................................................. $54.92
</TABLE>

The foregoing table excludes outstanding warrants and options to purchase
7,119,034 shares of our common stock and outstanding options, rights and
warrants to purchase 233,909 shares of our common stock upon the closing of our
pending acquisition of Interface based on the shares outstanding as of June 28,
2000. Exercise of these warrants and options would result in additional
dilution. The acquisition is not expected to close until after the closing of
this offering. The acquisition is subject to customary closing conditions,
including a vote by the shareholders of Interface. As a result, the acquisition
may not close, and investors should not rely on the consummation of the
Interface acquisition in purchasing the shares offered hereby.

On a pro forma basis as of March 31, 2000, after giving effect to the
proposed acquisition of Interface and our sale of 1,500,000 shares of common
stock offered by us in this prospectus at the assumed public offering price and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable, our pro forma as adjusted net tangible book value
would have been approximately $134.6 million, or $4.71 per share.

23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. The following
financial data, other than the pro forma data, include the financial data of
Tumbleweed, after giving effect to the acquisition of Worldtalk, and exclude the
financial data of Interface. Our consolidated pro forma statements of operations
data give effect to our pending acquisition of Interface (assuming the
divestiture of the Interface businesses other than L2i) as if it occurred at the
beginning of each of the pro forma periods presented by combining the results
for the year ended December 31, 1999 of Tumbleweed with the results for the year
ended September 30, 1999 of Interface and combining the results for the three
months ended March 31, 2000 of Tumbleweed with the same period of Interface. The
pro forma balance sheet data give effect to our pending acquisition of Interface
(assuming the divestiture of the Interface businesses other than L2i) as if it
had occurred on March 31, 2000. The acquisition is not expected to close until
after the closing of this offering. The acquisition is subject to customary
closing conditions, including approval by the shareholders of Interface. As a
result, the acquisition may not close, and investors should not rely on the
consummation of the Interface acquisition in purchasing the shares offered
hereby. The statements of operations data for each of the years in the
three-year period ended December 31, 1999 and the balance sheet data at
December 31, 1998 and 1999, are derived from our consolidated financial
statements that have been audited by KPMG LLP, independent certified public
accountants, included elsewhere in this prospectus. The statements of operations
data for the two years ended December 31, 1996 and the balance sheet data at
December 31, 1995, 1996 and 1997 are derived from our audited financial
statements that are not included in this prospectus. The statements of
operations data for the three months ended March 31, 1999 and 2000 and the
balance sheet data at March 31, 2000, are derived from our unaudited
consolidated financial statements included elsewhere in this prospectus. The pro
forma statement of operations data for the year ended December 31, 1999 and the
three months ended March 31, 2000 and as of March 31, 2000 are derived from the
selected unaudited pro forma condensed combined financial information included
elsewhere in this prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Operating Results" for a
discussion of the operating results of Tumbleweed and Interface for the period
ended June 30, 2000.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999
----------------------
1995 1996 1997 1998 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue from continuing product
lines.......................... $ 818 $ 597 $ 4,476 $ 10,575 $ 15,284 $ 18,636
Gross profit(1).................. 5,463 11,225 7,946 11,213 11,853 14,685
Operating expenses(2)............ 9,157 18,226 19,897 23,456 37,900 71,411
Operating loss................... (3,694) (7,001) (11,951) (12,243) (26,047) (56,726)
Net loss......................... (3,656) (6,420) (11,461) (11,720) (24,222) (54,899)
Net loss per share-basic and
diluted........................ -- (1.15) (1.90) (1.79) (1.65) $ (3.45)
Shares used in calculating basic
and diluted loss per share..... -- 5,592 6,023 6,549 14,650 15,896

<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2000
-------------------------
1999 ACTUAL PRO FORMA
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue from continuing product
lines.......................... $ 3,269 $ 6,610 $ 7,931
Gross profit(1).................. 3,003 4,362 5,402
Operating expenses(2)............ 6,090 23,552 34,785
Operating loss................... (3,087) (19,190) (29,383)
Net loss......................... (2,931) (18,622) (28,803)
Net loss per share-basic and
diluted........................ $ (0.43) $ (0.73) $ (1.07)
Shares used in calculating basic
and diluted loss per share..... 6,889 25,588 26,834
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31, 2000
---------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 3,065 $ 9,682 $10,972 $ 4,556 $60,544 $46,447 $ 47,276
Total assets................................... 5,933 24,658 24,272 12,719 75,683 62,576 131,428
Long-term debt, excluding current
installments................................. 451 719 132 382 1,017 858 904
Total stockholders' equity (deficit)........... (11,264) 17,048 14,818 4,437 61,713 45,883 113,316
</TABLE>

------------------------------

(1) Includes gross profit from our discontinued product lines.

(2) Includes stock compensation expense of $288,000, $715,000, $3.5 million,
$336,000 and $1.1 million for the years ended December 31, 1997, 1998 and
1999 and the three months ended March 31, 1999 and 2000, respectively.

24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND THE RELATED NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT REFLECT OUR PLANS, ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW AND THOSE LISTED UNDER "RISK FACTORS."

OVERVIEW

We are a leading provider of advanced messaging solutions for business
communications. Our products and services enable businesses to extend existing
networks and applications, creating secure online channels for interactive,
business-critical communication. Tumbleweed Integrated Messaging Exchange, or
Tumbleweed IME, is a platform and set of applications for creating secure
communications channels between a business and its customers, partners and
suppliers. Tumbleweed Messaging Management System, or Tumbleweed MMS, is a
comprehensive solution that extends internal e-mail systems to the Internet
through centralized management, policy enforcement, filtering and archiving.
Used together, Tumbleweed IME and Tumbleweed MMS automatically apply security
policies and redirect sensitive e-mail for secure, trackable delivery.

On January 31, 2000, we completed the acquisition of Worldtalk
Communications Corporation, a leading provider of Internet security and policy
management solutions that enable organizations to define and manage electronic
mail and web security usage policies to manage the risks and liabilities
associated with Internet communications. The business combination has been
accounted for as a pooling of interests and, accordingly, our historical
financial statements have been restated to include the accounts and results of
operations of Worldtalk. Except as otherwise indicated, the terms "Tumbleweed,"
"we" and "our" refer to Tumbleweed and its subsidiaries, including Worldtalk, in
this discussion.

Our revenue consists of (i) license revenue, (ii) services revenue and
(iii) transaction revenue. License revenue consists of initial license fees and
the sale of distribution rights. License revenue typically is recognized upon
the later of customer acceptance or software shipment. Revenue from the sale of
distribution rights is recognized upon the execution of a distribution
agreement. Services revenue consists of consulting fees and support and
maintenance fees. Consulting fees related to installation are recognized upon
acceptance of the installation while all other consulting fees are recognized
based on percentage of completion. Support and maintenance fees are paid for
ongoing customer support as well as for the right to receive future upgrades of
our products during the term of the maintenance agreement. Revenue from support
and maintenance is recognized ratably over the period the support is provided.
Transaction revenue is based on the volume of transactions by our customers, and
the related revenue is recognized based on payment schedules and transaction
reports from our customers. A number of our contracts include minimum
transaction volume requirements. In these cases, the minimum guaranteed revenue
is recognized when fees are due and payable during those months where
transaction volume does not exceed the designated minimums.

In July 1999, Worldtalk completed the sale of its NetJunction e-mail
connectivity and directory integration product line to Wingra Technologies, LLC.
Under the terms of the agreement, Wingra has acquired the assets related to the
NetJunction product line and has assumed support and development
responsibilities for NetJunction customers and resellers with current
agreements. As a result of the sale of the NetJunction product line, revenue
related to the NetJunction product line is reported as discontinued product line
in our consolidated statement of operations.

25
<PAGE>
Historically, our revenue has been concentrated among a few customers, but
the customer base contributing to revenue has been diversifying. For the three
months ended March 31, 2000 and the year ended December 31, 1999, our top five
customers contributed 30% and 24% of total revenue, respectively. In addition,
the constituency of that list is evolving.

A substantial portion of our revenue relates to international customers or
operations. Most of our contracts are denominated in U.S. dollars. However, a
contract between our Japanese subsidiary, Tumbleweed Communications K.K., and
Hikari Tsushin is denominated in Japanese yen, and, in the future, an increasing
number of contracts may be denominated in foreign currencies. We currently do
not have hedging or similar arrangements to protect us against foreign currency
fluctuations. Therefore, we increasingly may be subject to currency
fluctuations, which could harm our operating results in future periods. On
May 15, 2000, we repurchased from Hikari 5% of the outstanding stock of
Tumbleweed KK, for a price of approximately $700,000.

During the years ended December 31, 1999, 1998 and 1997 and the three months
ended March 31, 2000, we recorded aggregate deferred stock compensation expense
of $10.5 million primarily in connection with the grant of certain stock options
which were granted at exercise prices less than the deemed fair value on the
grant date. The deferred stock compensation expense is being amortized on an
accelerated basis over the vesting period of the options, which is generally
four years. Of the total deferred stock compensation expense, $3.5 million,
$715,000, $288,000, $1.1 million and $336,000 was amortized in the years ended
December 31, 1999, 1998 and 1997, and the three months ended March 31, 2000 and
1999, respectively, and we expect that approximately $2.3 million,
$1.8 million, and $1.1 million will be amortized during the remainder of 2000,
2001, and 2002 and thereafter, respectively. The aforementioned amounts do not
include any compensation expense that might result from the proposed Interface
transaction.

Our future net income and cash flow will be affected by our ability to apply
net operating losses for federal tax reporting purposes against taxable income
in future periods due to a cumulative change in ownership for income tax
purposes, as defined in Section 382 of the Internal Revenue Code, arising from
the issuance of stock.

RECENT OPERATING RESULTS

Tumbleweed recently announced operating results for the six months ended
June 30, 2000. Total revenue was $16.7 million, operating loss was
$29.0 million, and net loss per share, basic and diluted, was $1.09. As of
June 30, 2000, Tumbleweed reported total assets of $56.3 million, cash and cash
equivalents of $32.7 million, and long-term debt, excluding current
installments, of $660,000. As of April 1, 2000, we also began consolidating the
operating results of Tumbleweed Communications K.K. Previously, we used the
equity method of accounting, which reflected only royalty revenues generated by
Tumbleweed Communications K.K. and our proportionate share of its operating
loss.

Interface Systems recently announced that for the same six months ended
June 30, 2000, net revenues were $5.7 million, operating loss was $4.1 million,
and net loss per share, basic and diluted, was $0.89. As of June 30, 2000,
Interface Systems reported total assets of $6.9 million, cash and cash
equivalents of $231,000, and long-term debt, excluding current installments, of
$33,000.

On a pro forma basis, after giving effect to the acquisition of Interface
Systems (assuming the divestiture of the Interface businesses other than L2i) as
if such transaction had occurred on January 1, 2000, for the six months ended
June 30, 2000 total revenue would have been $19.2 million, operating loss would
have been $48.5 million, and net loss per share, basic and diluted, would have
been $1.78. As of June 30, 2000, on a pro forma basis, total assets would have
been $126.6, cash and cash equivalents would have been $32.8 million, and
long-term debt, excluding current installments, would have been $693,000. This
pro forma financial information does not purport to represent what the
consolidated results of operations or financial conditions of Tumbleweed would
actually have been if

26
<PAGE>
the Interface acquisition had in fact occurred on such dates or the future
consolidated results of operations or financial condition of Tumbleweed.

RECENT DEVELOPMENT

On June 28, 2000, we entered into a merger agreement providing for the
acquisition of Interface Systems, Inc. Pursuant to the merger agreement, each
outstanding share of Interface common stock will be converted into the right to
receive 0.264 of a share of our common stock upon the closing of the merger, and
we will assume all outstanding options and warrants of Interface. As of June 28,
2000, there were outstanding 4,719,675 shares of Interface common stock as well
as options and warrants to purchase an additional 886,018 shares of Interface
common stock. The acquisition, if completed, will be treated as a purchase for
accounting purposes. Accordingly, as of June 30, 2000, we expected to expense up
to $2.0 million of acquired in-process research and development, and to record
unearned compensation and goodwill and other intangibles of approximately
$66.1 million to be amortized over periods ranging from one to three years. Our
expectation with respect to these amounts and periods are preliminary and
therefore subject to substantial adjustments. We also agreed to loan Interface
$3 million in connection with this transaction. The acquisition is not expected
to close until after the closing of this offering. The acquisition is subject to
customary closing conditions, including approval by the shareholders of
Interface. As a result, the acquisition may not close, and investors should not
rely on the consummation of the acquisition in purchasing the shares offered
hereby. The transaction will result in significant one-time charges, whether
completed or not, and, if completed, will substantially increase our operating
expenses in future periods.

We have announced our intention to divest the Interface businesses other
than L2i. These businesses comprised a substantial majority of the historical
operating results of Interface, as more fully described in the pro forma
financial statements included elsewhere in this prospectus.

RESULTS OF OPERATIONS

THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999

REVENUE. Total revenue from continuing product lines for the three months
ended March 31, 2000 increased 102% to $6.6 million from $3.3 million (excluding
revenue of $638,000 from discontinued products) for the same three months in
1999. Total revenue increased in both periods due to increases in license,
services and transaction revenue.

License revenue for the three months ended March 31, 2000 increased 61% to
$4.4 million from $2.7 million for the same three months in 1999. License
revenue increased due to a higher number of new customers brought into
production and to additional license fees paid by existing customers.

Services revenue for the three months ended March 31, 2000 increased 170% to
$1.5 million from $564,000 for the same three months in 1999. The increase in
services revenue was due to an increase in contract development work performed
by our professional services organization, and, to a lesser extent, increases in
maintenance fees. The increase in contract development work was a direct result
of the increase in customers licensing our products.

Transaction revenue for the three months ended March 31, 2000 increased to
$730,000 from $3,000 for the same three months in 1999. The increase in
transaction revenue resulted from minimum transaction fee payments made by new
customers who launched IME-based services, and to a lesser extent, transaction
fee payments made by existing customers.

Total revenue from the Tumbleweed IME product line for the three months
ended March 31, 2000 increased 474% to $4.0 million from $693,000 for the same
three months in 1999 due to increases in license, services, and transaction fees
revenue. License revenue from the IME product line for the three months ended
March 31, 2000 increased 349% to $2.3 million from $518,000 for the same three

27
<PAGE>
months in 1999 due to bringing new customers into production and to additional
license fees paid by existing customers. Services revenue from the IME product
line for the three months ended March 31, 2000 increased 434% to $923,000 from
$172,000 for the same three months in 1999. The increase in services revenue was
due to an increase in contract development work by our professional services
organization, and, to a lesser extent, increases in maintenance fees.
Transaction fees revenue from the IME product line for the three months ended
March 31, 2000 increased to $730,000 from $3,000 for the same three months in
1999. The increase in transaction fees revenue resulted from minimum transaction
fee payments made by new customers who launched IME-based services and, to a
lesser extent, transaction fee payments from existing customers.

Total revenue from the Tumbleweed MMS product line remained flat at
$2.6 million for both the three months ended March 31, 2000 and the same three
months in 1999 (excluding revenue of $638,000 from discontinued products).
License revenue from the MMS product line for the three months ended March 31,
2000 decreased 7% to $2.0 million from $2.2 million for the same three months in
1999. MMS revenue for the three months ended March 31, 1999 included a
non-recurring commitment with two resellers. Services revenue from the MMS
product line for the three months ended March 31, 2000 increased 53% to $600,000
from $392,000 for the same three months in 1999. The increase in services
revenue was due to an increase in contract development work by our professional
services organization, and, to a lesser extent, increases in maintenance fees.

COST OF REVENUE. Cost of revenue is comprised of license cost, services
cost and transaction cost. License cost is primarily comprised of royalties paid
to third parties for software licensed by us for inclusion in our products.
Services cost is comprised primarily of personnel and overhead costs related to
customer support and contract development projects. Transaction fees cost is
primarily comprised of royalties due on transaction fees revenue and, to a
lesser extent, depreciation expense and connectivity costs incurred in
generating transaction revenue. Total cost of revenue for the three months ended
March 31, 2000 increased 149% to $2.2 million from $904,000 for the same three
months in 1999 corresponding to increased revenue during the same period.

License cost for the three months ended March 31, 2000 increased 128% to
$267,000 from $117,000 for the same three months in 1999. License costs
increased due to an increase in sales of products containing software licensed
from third parties. The increase was not in direct proportion to the increase in
license revenue as some of the agreements with third parties contain fixed
minimum payments.

Services cost for the three months ended March 31, 2000 increased 148% to
$1.9 million from $782,000 for the same three months in 1999. The increase was
primarily due to higher personnel costs supporting an increase in new contract
development projects and an increase in facilities-related expenses.

Transaction fees cost for the three months ended March 31, 2000 was $40,000
compared to $5,000 for the same three months in 1999. The increase in
transaction fees cost resulted primarily from royalties paid on transaction fees
revenue and, to a lesser extent, depreciation expense and connectivity costs
incurred in generating transaction revenue.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
comprised of engineering and related costs associated with the development of
Tumbleweed IME and MMS applications, quality assurance and testing. Research and
development costs for the three months ended March 31, 2000 increased 58% to
$2.8 million from $1.8 million for the same three months in 1999. The increase
was primarily because of an increase in personnel needed to support ongoing
development of our products and new applications for our target markets,
increases in average salaries for development personnel in order to provide a
competitive salary in today's marketplace and increased facilities-related
expenses. We expect that research and development expenses will increase in
absolute dollars in future periods mainly because of an increase in personnel
costs. We anticipate that

28
<PAGE>
additional research and development personnel will be required for us to develop
and support new projects as we expand the functionality of our platforms,
increase the number of vertical applications built for our target markets and
integrate our platforms with new messaging applications.

SALES AND MARKETING EXPENSES. Sales and marketing expenses are primarily
comprised of salaries, commissions, travel expenses and costs associated with
trade shows, advertising and other marketing efforts. Sales and marketing
expenses for the three months ended March 31, 2000 increased 129% to
$7.2 million from $3.1 million for the same three months in 1999. The increase
in sales and marketing expenses was primarily from increased sales staffing and
incentive compensation costs. We expect that sales and marketing expenses will
increase in absolute dollars in future periods as we expand into new target
markets and geographic areas. Current plans are to significantly increase the
number of our sales and marketing personnel worldwide, as we focus on extending
our position in our target markets throughout 2000.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and support costs for our finance, legal,
information systems and human resources departments as well as professional
fees. General and administrative expenses for the three months ended March 31,
2000 increased 100% to $1.7 million from $816,000 for the same three months in
1999. The increase in general and administrative expenses was due to increased
staffing expenses, increased legal fees corresponding to the patent infringement
lawsuit we brought against The docSpace Company, Inc., which is still pending,
and increased professional fees. We expect that general and administrative
expenses will increase in absolute dollars in future periods as we continue to
grow our infrastructure in line with our business growth.

DEFERRED COMPENSATION EXPENSE. Deferred compensation expense is recorded in
connection with the grant of certain stock options to non-employees and options
granted to employees at exercise prices less than the deemed fair value on the
grant date. During the three months ended March 31, 2000, we recorded aggregate
deferred stock compensation expense of $1.3 million compared to $2.3 million for
the same three months in 1999. The deferred stock compensation expense is being
amortized on an accelerated basis over the vesting period of the options, which
is generally four years. Of the total deferred stock compensation expense,
$1.1 million and $336,000 was amortized in the three months ended March 31, 2000
and 1999, respectively.

MERGER RELATED AND RESTRUCTURING EXPENSES. Merger related and restructuring
expenses, which were recorded in connection with the acquisition of Worldtalk,
are primarily comprised of investment banker's fees, legal fees, severance
payments and accounting and printer fees. Merger related and restructuring
expenses for the three months ended March 31, 2000, were $10.8 million.

OTHER INCOME, NET. Other income, net, is primarily comprised of interest
income earned on investment securities. Other income, net, for the three months
ended March 31, 2000 increased 375% to $656,000 from $138,000 for the same three
months in 1999 due to increased interest income from cash invested in money
market accounts and commercial paper. The increase in cash balances available
for investment resulted from proceeds from the issuance of equity securities,
including common stock issued in our initial public offering completed in
August 1999.

YEARS ENDED DECEMBER 31, 1999 AND 1998

REVENUE. Total revenue increased 45% to $15.3 million in 1999 from
$10.6 million in 1998 (excluding revenue of $1.5 million and $4.9 million from
discontinued products in 1999 and 1998) due to increases in license, services
and transaction revenue. License revenue from continuing product lines increased
25% to $11.3 million in 1999 from $9.0 million in 1998 due to bringing new
customers into production and to additional license fees paid by existing
customers. Services revenue from continuing product lines increased 122% to
$3.0 million in 1999 from $1.4 million in 1998. The increase in services

29
<PAGE>
revenue was due to an increase in contract development work by our professional
services organization, and, to a lesser extent, increases in maintenance fees.
Transaction revenue from continuing product lines was $981,000 in 1999 compared
to zero in 1998. The increase in transaction fees revenue resulted from minimum
transaction fee payments made by new customers who launched IME-based services
and, to a lesser extent, transaction fee payments from existing customers.

Total revenue from the IME product line increased 222% to $5.8 million in
1999 from $1.8 million in 1998 due to increases in license revenue, services,
and transaction revenue. License revenue from the IME product line increased
285% to $3.4 million in 1999 from $885,000 in 1998 due to bringing new customers
into production and to additional license fees paid by existing customers.
Services revenue from the IME product line increased 52% to $1.4 million in 1999
from $910,000 in 1998. The increase in services revenue was due to an increase
in contract development work by our professional services organization, and, to
a lesser extent, increases in maintenance fees. Transaction revenue from the IME
product line was $981,000 in 1999 compared to zero in 1998. The increase in
transaction fees revenue resulted from minimum transaction fee payments made by
new customers who launched IME-based services and, to a lesser extent,
transaction fee payments from existing customers.

Total revenue from the MMS product line increased 11% to $9.5 million in
1999 from $8.6 million (excluding revenues of $1.5 million and $4.9 million from
discontinued products in 1999 and 1998) in 1998. License revenue from the MMS
product line decreased 3% to $7.9 million in 1999 from $8.1 million in 1998 due
to termination of a Japanese distributor in the third quarter of 1998, resulting
in no license revenue from Japan for the first six months of 1999. Services
revenue from the MMS product line increased 263% to $1.6 million in 1999 from
$449,000 in 1998. The increase in services revenue was due to an increase in
contract development work by our professional services organization, and, to a
lesser extent, increases in maintenance fees.

COST OF REVENUE. Cost of revenue increased 15% to $4.9 million in 1999 from
$4.3 million in 1998. License cost decreased 21% to $737,000 in 1999 from
$931,000 in 1998. License costs decreased primarily due to reductions in certain
royalty and other amortized costs. Services cost increased 23% to $4.1 million
in 1999 from $3.3 million in 1998. The increase was primarily due to increased
personnel costs supporting an increase in new contract development projects and
an increase in facilities-related expenses. Transaction fees cost was $78,000 in
1999 compared to $0 in 1998. The increase in transaction fees cost resulted from
royalties due on transaction fees revenue and, to a lesser extent, depreciation
expense and connectivity costs incurred in generating transaction fees revenue.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 49% to $8.9 million in 1999 from $6.0 million in 1998. The increase
was primarily due to increased head count supporting development of the
Tumbleweed IME platforms and new applications developed for our target markets,
increases in average salaries for development personnel and increased facilities
related expenses.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 73% to
$19.9 million in 1999 from $11.5 million in 1998. The increase in sales and
marketing expenses was primarily due to increased sales staffing and incentive
compensation costs.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 6% to $5.6 million in 1999 from $5.2 million in 1998. The increase in
general and administrative expenses was due to an increase in legal fees
corresponding to the patent infringement lawsuit we brought against The docSpace
Company, Inc., which remains pending, as well as increased staffing expenses and
professional fees.

OTHER INCOME, NET. Other income, net, increased 306% to $2.1 million in
1999 from $524,000 in 1998 due to increased cash balances invested in money
market accounts and commercial paper. The increase in cash balances available
for investment in 1999 resulted from proceeds from the issuance of equity
securities, including common stock issued in our initial public offering
completed in August 1999.

30
<PAGE>
YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUE. Total revenue increased 28% to $15.5 million in 1998 from
$12.1 million in 1997. Approximately 3% of total revenue in 1997 was derived
from prior agreements relating to our Envoy technology that was sold to
Novell, Inc., which is excluded from the IME and MMS product line revenues
described below. License revenue from continuing product lines increased 120% to
$9.0 million in 1998 from $4.1 million in 1997 due primarily to increased sales
of our MMS product lines, which were first shipped in September 1997 and
increases in initial license fees from Tumbleweed IME customers. We have
recognized revenue from Tumbleweed IME commencing with its launch in July 1997.
The level of software license revenue in 1998 was impacted by the termination of
the MMS distributor agreement with a Japanese distributor in the third quarter
resulting in no MMS software license revenue from the Japanese market in the
third and fourth quarters of 1998. Services revenue increased 425% to
$1.4 million in 1998 from $259,000 in 1997 due to increases in custom
development work performed for our customers.

Total revenue from the IME product line increased 722% to $2.0 million in
1998 from $245,000 in 1997. License revenue increased 352% to $885,000 in 1998
from $196,000 in 1997 due to increases in initial license fees from customers.
Services revenue increased 1,757% to $910,000 in 1998 from $49,000 in 1997 due
to increases in custom development work performed for our customers.

Total revenue from the MMS product line increased 128% to $8.6 million in
1998 from $3.7 million (excluding revenue of $4.9 million and $7.6 million from
discontinued products in 1998 and 1997) in 1997. License revenue from the MMS
product line increased 117% to $8.1 million in 1998 from $3.7 million in 1997.
The MMS products were first shipped in September 1997. The level of software
license revenue in 1998 was impacted by the termination of the MMS Japanese
distributor in the third quarter of 1998 resulting in no software license
revenue from the Japanese market in the third and fourth quarters of 1998.
Services revenue from the MMS product line increased 49% to $449,000 in 1999
from $9,000 in 1998. The increase in services revenue was due to an increase in
contract development work by our professional services organization, and, to a
lesser extent, increases in maintenance fees.

COST OF REVENUE. Cost of revenue increased 3% to $4.3 million in 1998 from
$4.1 million in 1997. License cost decreased 15% to $931,000 in 1998 from
$1.1 million in 1997 due to product mix and certain fixed price royalty
arrangements with third-party vendors. Services cost increased 10% to
$3.3 million in 1998 from $3.0 million in 1997 due to increased personnel costs
to support new projects associated with the launch of Tumbleweed IME, partially
offset by lower outside contracting expenses associated with the MMS product
line.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 3% to $6.0 million in 1998 from $6.2 million in 1997. The decrease was
primarily due to the reduction of headcount dedicated to the MMS product lines
early in the second half of 1997.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 16% to
$11.5 million in 1998 from $10.0 million in 1997. The increase was primarily due
to increased staffing as well as increased spending on marketing programs
associated with the launch of Tumbleweed IME and the MMS product lines.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 52% to $5.2 million in 1998 from $3.5 million in 1997. The increase
was primarily due to the termination of the distributor agreement with the MMS
Japanese distributor which resulted in a $1.7 million allowance for doubtful
accounts charge for the full amount owed by the MMS Japanese distributor.

OTHER INCOME, NET. Other income, net, is primarily comprised of interest
income earned on investment securities. Other income, net, decreased 22% to
$524,000 in 1998 from $673,000 in 1998

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<PAGE>
due to fluctuations in the cash and cash equivalent and short-term investments
balances, coupled with interest rate fluctuations.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table presents selected unaudited quarterly consolidated
statements of operations data for the five quarters ended March 31, 2000. In the
opinion of management, this information has been presented on the same basis as
the audited consolidated financial statements and related notes appearing
elsewhere in this prospectus. Management also believes that all necessary
adjustments have been included in the amounts stated below in order to state
fairly the unaudited quarterly results when read in conjunction with our audited
consolidated financial statements and related notes. Results from any quarter
are not necessarily indicative of the results to be expected for the entire
fiscal year or for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 1999 2000
---------- ---------- -------------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
License............................. $ 2,702 $ 2,382 $ 3,081 $ 3,120 $ 4,356
Services............................ 564 491 999 964 1,524
Transaction fees.................... 3 203 318 457 730
------- ------- ------- ------- --------
Revenue from continuing product
lines............................. 3,269 3,076 4,398 4,541 6,610
Discontinued product line........... 638 561 273 -- --
------- ------- ------- ------- --------
Total revenue..................... 3,907 3,637 4,671 4,541 6,610

Cost of revenue:
License cost........................ 117 125 248 247 267
Services cost....................... 782 983 1,246 1,077 1,941
Transaction fees.................... 5 15 24 34 40
------- ------- ------- ------- --------
Total cost of revenue............. 904 1,123 1,518 1,358 2,248
------- ------- ------- ------- --------
Gross profit.......................... 3,003 2,514 3,153 3,183 4,362
77% 69% 68% 70% 66%

Operating expenses:
Research and development(1)......... 1,794 2,077 2,296 2,756 2,843
Sales and marketing(2).............. 3,144 4,177 5,428 7,168 7,192
General and administrative(3)....... 816 1,067 2,006 1,635 1,640
Stock compensation.................. 336 969 1,115 1,116 1,074
Merger related and restructuring
expenses.......................... -- -- -- -- 10,803
------- ------- ------- ------- --------
Total operating expenses.......... 6,090 8,290 10,845 12,675 23,552
------- ------- ------- ------- --------
Operating loss........................ (3,087) (5,776) (7,692) (9,492) (19,190)
Other income (expense), net........... 138 157 956 875 656
------- ------- ------- ------- --------
Net loss before provision for taxes... (2,949) (5,619) (6,736) (8,617) (18,534)
Provision for (benefits from) taxes... (18) 93 136 90 88
------- ------- ------- ------- --------
Net loss.............................. $(2,931) $(5,712) $(6,872) $(8,707) $(18,622)
======= ======= ======= ======= ========
</TABLE>

------------------------

(1) Exclusive of non-cash compensation expense of $140,000, $293,000, $318,000,
$298,000 and $274,000 as of March 31, 1999, June 30, 1999, September 30,
1999, December 31, 1999 and March 31, 2000, respectively.

32
<PAGE>
(2) Exclusive of non-cash compensation expense of $146,000, $545,000, $623,000,
$647,000 and $636,000 as of March 31, 1999, June 30, 1999, September 30,
1999, December 31, 1999 and March 31, 2000, respectively.

(3) Exclusive of non-cash compensation expense of $50,000, $131,000, $174,000,
$171,000 and $164,000 as of March 31, 1999, June 30, 1999, September 30,
1999, December 31, 1999 and March 31, 2000, respectively.

Revenue from continuing product lines decreased in the quarter ended
June 30, 1999. Revenue from the MMS product line declined $508,000 due to
declines in both MMS license and services revenue. MMS license revenue declined
due to termination of a Japanese distributor in the third quarter of 1998,
resulting in no license revenue from Japan for the first six months of 1999. The
decline in MMS revenue was partially offset by an increase in IME license and
transaction revenue during the quarter.

Revenue from continuing product lines increased $1.3 million in the quarter
ended September 30, 1999. Revenue from the IME product line increased $677,000
due to increased license fees from new customer contracts and to an increase in
services revenue. MMS license revenue also increased during the quarter due to
new customer licenses.

Revenue from continuing product lines increased $143,000 in the quarter
ended December 31, 1999. IME product line revenue increased $706,000 during the
quarter due to increased license fees from new contracts and due to an increase
in transaction based fees. The increase in IME revenue was partially offset by a
decline of $563,000 in MMS revenue. MMS revenue declined due to lower license
fees compared to the third quarter.

Revenue from continuing product lines for the quarter ended March 31, 2000
increased $2.1 million. IME product line revenue increased $1.6 million due to
increased license fees, services fees and transaction fees. MMS product line
revenue increased $486,000 due to increased license fees from new customer
contracts.

Gross profit declined as a percentage of sales from 77% in the quarter ended
March 31, 1999 to 69% in the quarter ended June 30, 1999. Services costs
increased during the period as we added personnel to support new development
contracts and anticipated growth in services revenue in future quarters.

Research and development increased each quarter due to increased headcount
supporting the development of the IME and MMS product lines and new applications
developed for our target markets.

Sales and marketing expenses increased each quarter due to increased sales
staffing, the opening of additional sales offices, incentive compensation
expenses and increased expenses related to the expansion into international
markets.

General and administrative expenses increased for the quarters ended
June 30, 1999 and September 30, 1999 while decreasing for the quarters ended
December 31, 1999 and March 31, 2000. The increases were primarily due to
increased legal fees corresponding to the patent infringement lawsuit we filed.
The decreases were due primarily to lower staffing expenses.

FLUCTUATIONS IN QUARTERLY RESULTS

33
<PAGE>
execution of new customer licenses in a given quarter. Our license revenue is
comprised entirely of initial license and distribution fees. As a result, we
will be required to regularly and increasingly sign additional customers with
substantial initial license fees on a timely basis to realize comparable or
increased license revenue.

In addition, sales to a limited number of customers have constituted a
majority of our revenue in any given quarter. In particular, five customers
comprised approximately 30% of our revenue in the three months ended March 31,
2000. Therefore, the deferral or cancellation of an agreement, or a decision not
to move from a pilot or preliminary phase into final production by any existing
or anticipated customer could harm our operating results for a quarter or annual
period. We have experienced, and expect to continue to experience, fluctuations
in revenue and operating results from quarter to quarter for other reasons which
are more fully set forth under the caption "Risk Factors -- Our Quarterly
Financial Results Are Subject to Significant Fluctuations."

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
issuance of equity securities. On March 31, 2000, December 31, 1999,
December 31, 1998 and December 31, 1997, we had $46.5 million, $60.5 million,
$4.6 million and $11.0 million in cash and cash equivalents, respectively.

Net cash used in operating activities for the three months ended March 31,
2000 was $12.9 million. Cash used in operating activities was primarily the
result of net operating losses which included $10.8 million of merger related
and restructuring expenses, offset by certain non-cash charges. Net cash used by
operating activities for 1999 was $18.1 million which was primarily the result
of a net operating loss, offset by certain non-cash charges and increases in
accounts payable and accrued liabilities. Net cash used in operating activities
for 1998 was $10.9 million which was primarily the result of a net operating
loss, offset by certain non-cash charges and increases in accounts payable and
other liabilities, and prepaid expenses and other current assets. Net cash used
in operating activities for 1997 was $6.5 million which was primarily the result
of a net operating loss, offset by certain non-cash charges and an increase in
deferred revenue and a decrease in accounts receivable.

Net cash used in investing activities for the three months ended March 31,
2000 was $2.1 million. Net cash used in investing activities was primarily the
result of capital expenditures related to computer

34
<PAGE>
equipment for new employees and sales and services mainframe software. Net cash
used in investing activities for 1999 was $2.3 million which was primarily the
result of capital expenditures related to increased facilities expansion offset
by the sale of short-term investments. Net cash provided by investing activities
for 1998 was $3.7 million which was primarily the result of sales and maturities
of short-term investments, partially offset by the purchase of short-term
investments. Net cash used in investing activities for 1997 was $1.0 million
which was primarily the result of capital expenditures related to increased
personnel.

Net cash provided by financing activities for the three months ended
March 31, 2000 was $885,000. Cash provided by financing activities was primarily
attributable to proceeds from the exercise of stock options. Net cash provided
by financing activities for 1999 was $76.4 million, which was primarily
attributable to net proceeds from the issuance of equity securities to investors
including our initial public offering of common stock completed in August 1999
and our Series C financing completed in February 1999. Net cash provided by
financing activities for 1998 was $778,000, which was primarily due to an
increase in borrowings and proceeds from the issuance of common stock upon the
exercise of stock options and sale of our common stock under our employee stock
purchase plan. Cash provided by financing activities for 1997 was $8.8 million,
which was primarily attributable to net proceeds from the issuance of equity
securities to investors.

As of March 31, 2000 and December 31, 1999, our principal commitments
consisted of obligations outstanding under equipment and operating leases. Our
equipment leases require payment of rental fees to third party leasing providers
at interest rates of approximately 8.45%. In most cases, we have no obligations
to purchase the equipment at the end of the lease term. We anticipate a
substantial increase in capital expenditures consistent with potential growth in
operations, infrastructure and personnel.

In July 1998, we entered into an agreement with a bank, which included a
$1.5 million revolving credit facility, with availability based on outstanding
accounts receivable, and a $1.75 million equipment loan facility. Borrowings
under the credit facility and equipment facility carry interest at the prime
rate plus 0.5% and 0.75%, respectively, with interest payable monthly.
Borrowings under the equipment facility are due in 36 equal monthly installments
and are secured by certain of our assets. As of March 31, 2000 and December 31,
1999, total borrowings under the equipment loan facility were $1.3 million and
$1.3 million in the aggregate and $300,000 and $200,000 remained available under
the facility, respectively. There were no borrowings under the credit facility
as of March 31, 2000 and December 31, 1999.

In September 1999, we entered into a $525,000 financing arrangement with
another company to finance our directors' and officers' liability insurance
premium. Borrowings under the loan agreement are payable in nine equal monthly
installments. As of March 31, 2000 and December 31, 1999, total debt outstanding
under this financing arrangement was $61,000 and $302,000, respectively, and is
classified as a current liability.

In connection with the proposed Interface transaction, we agreed to purchase
an aggregate of $3.0 million of convertible subordinated promissory notes of
Interface, pursuant to a convertible subordinated note purchase agreement dated
June 28, 2000. At our option, or upon the occurrence of certain other events,
the notes are convertible into Interface common stock at an initial conversion
price of $9.50 per share, subject to adjustment.

Our capital requirements depend on numerous factors, including revenue
generated from operations and market acceptance of our products and services,
the resources devoted to the development of our products and services and the
resources devoted to sales and marketing. We have experienced a substantial
increase in capital expenditures and operating expenses since inception
consistent with relocation and the growth in operations and staffing. We
anticipate that these increases will continue for the foreseeable future.
Additionally, we expect to make additional investments in technologies, and plan
to expand our sales and marketing programs. We believe that our existing

35
<PAGE>
capital resources, including the proceeds to us from this offering, will enable
us to maintain our current and planned operations for at least the next
12 months. However, we may need to raise funds prior to that time.

We intend to continue to consider future financing alternatives, which may
include the incurrence of indebtedness, additional public or private equity
offerings or an equity investment by a strategic partner. However, other than
the revolving credit and equipment loan facilities and the insurance premium
financing arrangement, we have no present commitments or arrangements assuring
us of any future equity or debt financing, and additional equity or debt
financing may not be available to us on favorable terms, if at all. We are not
aware of seasonal aspects of our business that will affect our business on a
short or long-term basis.

YEAR 2000 COMPLIANCE

We are not aware of any Year 2000 problems in any of our critical systems
and products. However, the success to date of our Year 2000 efforts cannot
guarantee that a Year 2000 problem affecting third parties upon which we rely
will not become apparent in the future that could harm our business.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We transact business in various foreign currencies. Accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
This exposure is primarily related to revenue and operating expenses in the
United Kingdom and Japan denominated in the respective local currency. To date,
we have not entered into any derivative financial instruments or hedging
activities.

We currently do not use financial instruments to hedge operating expenses in
the United Kingdom or Japan dominated in the respective local currency. We
assess the need to utilize financial instruments to hedge currency exposures on
an ongoing basis.

We do not use derivative financial instruments for speculative trading
purposes, nor do we hedge our foreign currency exposure in a manner that
entirely offsets the effects of changes in foreign exchange rates. We regularly
review our hedging program and may as part of this review determine at any time
to change our hedging program.

INTEREST RATE SENSITIVITY

The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we have
invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed rate
equal to the then-prevailing interest rate and the prevailing interest rate
later rises, the fair value of our investment will decline. To minimize this
risk, we maintain our portfolio of cash equivalents in commercial paper and
money market funds. In general, money market funds are not subject to market
risk because the interest paid on these funds fluctuates with the prevailing
interest rate.

36
<PAGE>
The following table presents the amounts of our cash equivalents that are
subject to market risk by range of expected maturity and weighted-average
interest rates as of March 31, 2000. This table does not include money market
funds because these funds are not subject to market risk.

<TABLE>
<CAPTION>
MATURING IN
-----------------------------
NINETY DAYS NINETY DAYS OVER FAIR
OR LESS TO ONE YEAR ONE YEAR TOTAL VALUE
------------ -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Included in cash and
cash equivalents.... $16,887 None None $16,887 $16,887
Weighted-average
interest rate....... 6.22%
</TABLE>

FIXED INCOME INVESTMENTS

Our exposure to market risks for changes in interest rates relates primarily
to investments in money market funds and securities. We place our investments
with high credit quality issuers and, by policy, limit the amount of the credit
exposure to any one issuer.

Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of three months or less at the date of purchase are
considered to be cash equivalents, investments with maturities between three and
twelve months are considered to be short-term investments and investments with
maturities in excess of twelve months are considered to be long-term
investments. For the fiscal year ended December 31, 1999, the weighted average
interest rate on the investment portfolio was approximately 5.5%

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting For Derivative Instruments And Hedging Activities. SFAS
No. 133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. To date, we have
not entered into any derivative financial instruments or hedging activities.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101, as amended by SAB No. 101B, and any resulting change in accounting
principle that a registrant would have to report, is effective no later than the
company's fiscal quarter ending December 31, 2000. We do not expect the
application of SAB No. 101 to have a material effect on our financial position
or results of operations, nor do we expect to report a change in accounting
principles resulting from its application.

In March 2000, FASB issued Financial Interpretation No. 44 ("FIN 44").
FIN 44 clarifies (a) the definition of employee for purposes of applying
Accounting Principles Board ("APB") Opinion 25, Accounting For Stock Issued To
Employees, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. We do not expect the application of FIN 44
to have a material effect on our financial position or results of operations.

37
<PAGE>
BUSINESS

THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN
THESE FORWARD-LOOKING STATEMENTS.

OVERVIEW

We are a leading provider of advanced messaging solutions for business
communications. Our products and services enable businesses to extend existing
networks and applications, creating secure online channels for interactive,
business-critical communication. Tumbleweed Integrated Messaging Exchange, or
Tumbleweed IME, is a platform and set of applications for creating secure
communications channels between a business and its customers, partners, and
suppliers. Tumbleweed Messaging Management System, or Tumbleweed MMS, is a
comprehensive solution that extends internal e-mail systems to the Internet
through centralized management, policy enforcement, filtering and archiving.
Used together, Tumbleweed IME and Tumbleweed MMS automatically apply security
policies and redirect sensitive e-mail for secure, trackable delivery.

INDUSTRY BACKGROUND

Although e-mail, with its wide availability and acceptance, is an ideal
mechanism for conducting business exchanges and automating time-intensive
business processes, many companies have not yet expanded their use of e-mail
beyond internal communication or casual Internet correspondence. Groupware
e-mail solutions, like Microsoft Exchange and Lotus Notes, are widely used
within an enterprise, but their security and management features do not extend
beyond the corporate network. Standard Internet e-mail systems have much broader
reach, but lack the security, tracking and archiving functionality required to
conduct transactions and deliver sensitive information online. Thus, business
processes that may in part be automated and online still rely on physical
delivery by first class mail or overnight delivery services, for example, when
sensitive communication is involved.

To take advantage of the e-mail infrastructure already deployed by most
companies, businesses need advanced messaging solutions that create managed,
secure communication channels on top of Internet e-mail, and extend the features
of corporate e-mail networks to enable business-critical Internet communication.

THE TUMBLEWEED SOLUTION

We offer a variety of comprehensive messaging solutions that seamlessly
integrate with existing business systems and networks, enabling our customers to
conduct more business over the Internet.

Our solution consists of two complementary product lines. Tumbleweed IME,
our infrastructure solution for creating secure communication channels, combines
advanced security, tracking and personalization features in a single,
comprehensive messaging environment. Tumbleweed IME uses public networks to
provide efficient business communications over the Internet. Tumbleweed IME
enables businesses to build secure, feature-rich interactive communication
channels, resulting in the secure delivery of sensitive information to anyone,
anywhere, anytime. Tumbleweed MMS enables businesses to safely extend internal
e-mail networks to the Internet. Tumbleweed MMS enables businesses to centrally
define and enforce Internet communication policies and manage their corporate
intellectual assets by filtering content, archiving messages and applying
security to e-mail traffic.

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We sell Tumbleweed IME and related services to service providers that
provide their customers with secure, reliable and trackable communication
services for a fee. We also sell Tumbleweed IME products and services directly
to enterprises in selected strategic markets, such as the banking, financial
services, healthcare and manufacturing industries, enabling them to offer
Tumbleweed-based services to their employees, customers, suppliers and partners.
The Tumbleweed IME solution provides the following benefits to our customers:

- COMPREHENSIVE TECHNOLOGY. Tumbleweed IME is designed to provide a secure,
efficient and cost-effective method for communicating important
information online. Our solution contains all of the core technology,
integration tools and professional services necessary to incorporate
advanced messaging features into existing environments. Tumbleweed IME can
be modified to meet the unique communication needs of specific customers,
and can easily be integrated into existing environments. Because
Tumbleweed has multiple IME applications available for use with the IME
Platform, additional services can be added to an IME environment, enabling
businesses to deliver several types of information over a single channel.

- MULTI-LEVEL SECURITY. In many cases, the reason business-critical
information is not communicated online is the lack of security features
available in existing e-mail solutions. Through our innovative and unique
implementation of industry-standard security technologies, we are able to
offer secure online communication services to anyone with e-mail and
Internet access. Depending on the needs of the sender, security features
can include encryption during transmission and storage, password
protection for user authentication, or for highly sensitive communication,
certificate-based signing and additional encryption features. Any level of
security can easily be employed without requiring the sender and recipient
to have the same messaging software.

- EASY, UNIVERSAL ACCESS. A successful advanced communication system must be
able to reach anyone on the Internet. Tumbleweed IME is based on open
Internet standards, and requires no proprietary desktop software,
protocols or networks. Anyone with an e-mail account and web access can
use our solution to both send and receive messages regardless of which
e-mail system they use or the format of the information included.
Similarly, Tumbleweed IME can be integrated with an enterprise's existing
back office systems to enable automated communication. Because no new
application or user interface is needed, there is no costly training or
desktop deployment associated with our solution.

- PERSONALIZED COMMUNICATION. Communication of important business
information such as transaction confirmations or account statements
requires message customization for specific recipients. Using Tumbleweed
IME, businesses can automatically generate unique messages for each
individual, personalized with recipient-specific information and
preferences. In addition, our solution allows senders to create messages
targeting specific recipient preferences, demographics and communication
history. Tumbleweed IME also enables our customers to easily incorporate
marketing promotions into their business communication.

- SCALABLE ARCHITECTURE. Tumbleweed IME is designed to accommodate a variety
of online communication applications, ranging from small corporate
deployments to large enterprise installations supporting global service
offerings. Our scalable architecture allows customers to accommodate high
transaction volumes and implement desired levels of redundancy. Tumbleweed
IME components can be distributed across multiple servers, allowing for an
increasingly high volume of transactions while maintaining high standards
of performance, reliability and security. The ability to seamlessly handle
increasing transaction volumes is a key consideration for customers in
deploying an enterprise-class online communication system.

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We sell Tumbleweed MMS directly to enterprises in selected strategic
markets, such as financial services, healthcare, manufacturing,
telecommunications and government. The Tumbleweed MMS solution provides the
following benefits to our customers:

- IDENTIFICATION AND HANDLING OF SENSITIVE DIGITAL INFORMATION. Using
lexicons of keywords, Tumbleweed MMS scans messages and attachments
looking for specific information. For example, Tumbleweed MMS can screen
for confidential information, such as credit card numbers, medical
information or legal advice; proprietary material, like business plans,
contracts and sales figures; attachment types that are likely to carry
corporate assets or confidential information; or industry-specific
terminology, like "guaranteed return" in financial services or diagnostic
codes in healthcare. When a policy violation is detected, Tumbleweed MMS
can apply a combination of countermeasures to protect the information, the
business relationship and the company.

- MULTI-LEVEL SECURITY. With Tumbleweed MMS Security Manager, organizations
can create policies that automatically encrypt potentially sensitive
information traveling to and from certain servers using the secure
multipurpose Internet mail extension, or S/MIME, public key of each
organization. This allows companies to create S/MIME Virtual Private
Networks (VPNs) with longer-term business partners, such as law firms,
insurance companies, or suppliers. Tumbleweed MMS handles all digital
certificates at the server level, eliminating the need to deploy desktop
encryption or manage individual public keys. It is also transparent to end
users, allowing organizations to enforce encryption policies centrally,
while users continue to send messages as they normally would.

- DYNAMIC ROUTING BASED ON POLICY. Because business relationships are
dynamic, it doesn't always make sense to establish an S/MIME VPN, or
assume that all parties have S/MIME public keys and S/MIME-compatible
e-mail clients. But security solutions are only effective if they apply to
everyone within an organization, and everyone sending e-mail into that
organization. For ad-hoc communication with individuals, or short-term
communication with business partners or customers, Tumbleweed MMS policies
can transparently redirect messages to a secure delivery system, such as
Tumbleweed IME. Messages that are routed via Tumbleweed IME can be read by
any addressee with e-mail and Internet access. No special keys are
required. Recipients can also reply to messages using the same secure
channel, making Tumbleweed MMS an effective solution that ensures secure
two-way communication between a company and the outside world.

STRATEGY

Our objective is to be the leading provider of online business communication
services. Key elements of our strategy are to:

ESTABLISH OUR PRODUCTS AS THE LEADING INFRASTRUCTURE AND MANAGEMENT SOLUTIONS
FOR ONLINE BUSINESS COMMUNICATION.

We intend to continue to establish Tumbleweed IME as the leading application
platform upon which to build business-critical messaging applications. Rather
than designing Tumbleweed IME as a point solution for a specific application, we
have designed it to be a broad-based application development platform. As such,
Tumbleweed IME can be extended to include a number of different applications and
includes support for a comprehensive, open application programming interface. We
intend to establish Tumbleweed MMS as the leading communication stream
management solution. Tumbleweed MMS enables a wide variety of businesses to
define and enforce security policies, ensuring the safe and efficient use of
corporate e-mail systems. Tumbleweed MMS is scalable and modular, with
components optimized for specific business processes and vertical industries.
Through our direct sales force, we are pursuing key accounts in strategic
markets. These strategic markets initially include the financial services,
healthcare, manufacturing, legal and telecommunications industries.

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INCREASE RECURRING TRANSACTION-BASED REVENUE.

To increase our predictable, recurring revenue, we intend to continue to
generate additional messaging traffic in our communication channel. In addition
to a software license fee and related professional services fee, we charge our
customers a transaction fee based on customer usage as evidenced by the volume
of messages sent through Tumbleweed IME and Tumbleweed MMS. We intend to
increase message volume by selling additional applications and value-added
services to our installed customer base, selling IME customers MMS products and
applications and selling MMS customers IME products and services. We intend to
promote the use of policies defined and enforced in our MMS products to drive
messaging traffic over our IME platform. In addition, we may acquire
complementary businesses to increase our traffic flow.

CULTIVATE A CHANNEL OF KEY SERVICE PROVIDERS.

We intend to leverage our channel of service providers to expand our
business into new strategic industry markets as well as to pursue additional
general purpose transactions. Our service provider customers are helping to
rapidly expand the market for secure online communications through their brand
recognition, extensive sales and marketing resources and substantial services
competencies.

ESTABLISH TUMBLEWEED IME AS THE INTERNATIONAL STANDARD FOR SECURE ONLINE
COMMUNICATION.

We intend to continue to establish Tumbleweed IME as an international
standard for secure online communication services by developing a significant
base of enterprise and service provider customers. We also intend to accomplish
this by capturing business with the national postal authorities. The national
postal authorities present a strategic business opportunity for us. Postal
authorities are highly trusted service providers in their respective geographies
and are uniquely able to dictate national standards for certified online
communication.

EXPAND INTO ACCOUNTS AFTER FIRST SECURING BUSINESS-CRITICAL APPLICATIONS.

The sophistication of the Tumbleweed IME and Tumbleweed MMS systems enable
us to first target those business-critical applications that require the highest
degrees of security and tracking within an enterprise. Having secured these
high-value applications, we can then expand our focus to include other messaging
applications within the same enterprise. Customers benefit through the ability
to use our solutions as the foundation for all of their enterprise messaging
needs, from high-end to low-end applications. Our ability to address the entire
spectrum of an enterprise's communication service needs should enable us to
compete favorably against those companies whose technologies are primarily only
suited to lower-end communications applications.

PROVIDE COMPREHENSIVE PROFESSIONAL SERVICES.

Our full outsourcing services enable our customers to reduce their cost of
ownership and deployment time of our solutions, thereby helping reduce our sales
cycle to those enterprises. Enterprise customers have the option of deploying
our products either on their premises or outsourcing the deployment to us. We
complement our outsourcing services with a full suite of professional and
consulting services. These services are comprehensive, end-to-end and designed
to help customers implement Tumbleweed IME-based applications and Tumbleweed MMS
as rapidly as possible. The services include business-specific applications
consulting, software development, training and education and complete technical
support.

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OUR PRODUCTS

We offer two complementary product lines.

TUMBLEWEED IME

Tumbleweed IME combines an advanced software platform and customized
applications to establish a vital Internet communication channel between a
business and its customers, suppliers and partners. This channel enables
businesses both to greatly expand and exploit the communication power of e-mail
and to fully integrate existing business processes with the Internet. Once
established, the IME channel can be used to securely send sensitive information
to anyone with Internet access. When sensitive information is flowing over the
Tumbleweed IME channel, deliveries can be personalized, tracked and archived,
making business communication more secure.

Tumbleweed IME enables businesses to deliver secure and personalized
outbound information in a variety of ways. This information can be distributed
within e-mail messages, on the Internet via the Tumbleweed Secure Inbox, a
protected repository for receiving and managing secure online communications, or
through a combination of both e-mail and the Internet. IME has the unique and
patented capability of taking an e-mail message recipient to a unique web page
that is relevant to that recipient. In addition to being a vehicle for secure
online communication services, Tumbleweed IME provides features to manage
personalized content, track recipient transactions such as receipt or response,
and integrate the system into existing back-office processes.

The Tumbleweed IME Platform includes the core functionality necessary for
preparing, securing, delivering and tracking electronic communications, and
provides the foundation on which businesses can build one or a series of online
communication applications. Because advanced services require high performance
and scalability, the Tumbleweed IME Platform has been designed to efficiently
handle millions of secure messages daily. The Tumbleweed IME Platform's flexible
architecture supports distributed execution of software components, allowing
customers to expand the service as their requirements grow. This scalability,
combined with advanced security and tracking features, enables customers to use
our technology as the foundation for a variety of online communication services.
Once installed, the IME Platform can be used for an array of
applications--allowing businesses to quickly develop and deploy multiple
services without having to re-invent or re-architect their environments.

Using the Tumbleweed IME Platform as a foundation, Tumbleweed IME
Applications integrate with e-mail and legacy systems, interact with existing
applications, and automate transactions and exchanges to provide a complete
internal and external communications solution for the enterprise. These
applications are built to integrate with and enhance specific business
processes. IME STATEMENTS enables financial institutions to automatically send
documents such as monthly statements and trade confirmations electronically,
directly from back-office databases rather than through a process that involves
printing, paper, and storage. IME ALERT and IME PERSONALIZE enable online
businesses to customize their communications with customers, increasing the
quality and value of the relationship. IME MESSENGER enables individuals to
create ad-hoc electronic deliveries of any kind and send them through the secure
IME channel. IME ASSIST enables businesses to automate responses to customer
inquiries based on the context in which the inquiry is sent. And, IME DEVELOPER
allows third parties to create new IME applications of their own.

TUMBLEWEED MMS

Tumbleweed MMS is a comprehensive solution for managing intellectual
property as it travels over the Internet via e-mail. Tumbleweed MMS allows
businesses to control both the processes and pathways involved, through options
for routing, filtering, monitoring and archiving digital messages and documents.
By defining what is allowed in, what is allowed out, and how deliveries are
secured and sent, enterprises can enforce Internet communication policies,
enabling them to safely extend e-mail

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networks to the Internet. Tumbleweed MMS provides a complete solution for
managing business communications streams.

Tumbleweed MMS allows administrators and policy-makers to define and enforce
security policies to ensure the safe and efficient use of corporate e-mail
systems. Policies can be created to apply virus scanning, content control,
access control, encryption, and digital signature policies universally across
the enterprise. Tumbleweed MMS can also enact policies for secure communications
by automatically re-routing sensitive e-mail traffic to Tumbleweed IME.

Tumbleweed MMS includes a suite of process managers and optional
applications that can be quickly configured to define and enforce the policies
appropriate to a particular business. MMS CONTENT MANAGER scans messages and
attachments for specific words or strings of words. When a policy violation is
detected, MMS can take a number of actions, such as block, quarantine, archive,
or defer delivery. With MMS ACCESS MANAGER, companies can set policies that
restrict e-mail from certain senders or to certain recipients. For example,
policies can block inbound messages from known problem or "SPAM" domains, or
prevent confidential information from being sent to a competitor's e-mail
domain. MMS VIRUS MANAGER uses integrated server-based anti-virus software from
Network Associates to detect and optionally clean or strip infected attachments
in both incoming and outgoing messages. MMS Enterprise ARCHIVING automatically
creates archives for future review. MMS SECURE MESSAGING REDIRECT automatically
routes sensitive messages over more secure Tumbleweed IME channels. And MMS
MESSAGE MONITOR allows organizations to continuously monitor e-mail activity
using graphical reports of measurable statistics, including frequency of policy
violations.

TUMBLEWEED PROFESSIONAL SERVICES

Our professional services organization provides all of the consulting,
integration engineering, custom application development, training and
educational services and support necessary to build a unique online
communication system based on our products.

The following are examples of the professional services we offer:

CUSTOM APPLICATION DEVELOPMENT, which extends the functionality of our
solutions with custom engineering. The result is a unique online communication
solution that can be deployed to precisely meet a company's business needs.

INTEGRATION CONSULTING, which provides the development work required to
integrate our solutions with existing technology infrastructure, including
legacy systems, customer databases, support systems, and billing systems.

DATA CENTER DESIGN AND INSTALLATION, which assists customers in designing
communication services based on our products, including determining hardware
requirements, backup processes and failure systems, and physically implementing
our solution in the customer's data center. Our professional services
organization also provides ongoing support of the customer's data center.

TECHNICAL TRAINING AND SUPPORT, which provides the customer with formal
training in the administration and operation of our products and use of the
Tumbleweed IME application programming interfaces.

Professional services are performed for an additional fee and are offered in
conjunction with the licensing or deployment of our products.

Our products are generally deployed in business-critical environments, where
highly responsive customer support is critical to the continuing success of the
deployed solution. We maintain a centralized technical support group that is
responsible for first-line and second-line customer support as well as
distribution of products and documentation updates. This group works closely
with our professional services and product development organizations in order to
ensure continuity in the areas of problem resolution and priority response.

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Customers may elect to purchase software upgrades for a fee. Transaction
prices include basic support provided by us. We also offer extended customer
assistance 24 hours a day, 7 days a week, for those customers requiring around
the clock support. Pricing for such support is negotiated separately and is in
addition to the standard fees.

CUSTOMERS AND MARKETS

Our customers are businesses for which Tumbleweed IME has created new
opportunities to bring existing communications and business processes online.
These customers fall into two broad categories. Service providers use Tumbleweed
IME to provide secure, outsourced, online communications services to their
business customers. Examples of service providers include Nippon Telegraph &
Telephone Corporation, Pitney Bowes, Inc and UPS. Enterprise customers utilize
Tumbleweed IME to provide secure online communications services originating
within their own enterprise to employees, suppliers and customers. Examples of
enterprise customers include The Chase Manhattan Bank, American Express Travel
Related Services Company, Inc., Datek Online Holdings Corp., TD Waterhouse,
Travelers Property Casualty, Northern Trust and the European Union--Joint
Research Centre.

Service providers and enterprise customers share many common attributes with
respect to software requirements, the professional services necessary to
integrate and implement a solution, and the potential for transaction-based fees
paid based on usage of Tumbleweed IME. Although both service providers and
enterprise customers are using Tumbleweed IME to provide secure online
communications services outside the boundaries of their enterprise, the
principal distinction between the two groups is market focus. Service providers
offer the service on a fee-for-use basis, while enterprise customers typically
provide the improved communication services in order to gain business advantage
through improved cost, speed, and/or interactivity.

We have developed multiple channels of distribution worldwide for our
Tumbleweed MMS products. Our distribution strategy addresses the requirements of
small companies and large enterprises alike and matches the appropriate sales
and distribution channels to our product offerings. In North America, we have
relied primarily on direct field sales, telesales, our professional services
organization and value added resellers, such as Ikon Office Solutions, and their
service organizations for the license, support and installation of our products.
Internationally, sales are directed by non-exclusive distributors and value
added resellers acting in concert with Tumbleweed MMS sales personnel.
Tumbleweed MMS customers include Bell Atlantic, Merrill Lynch, E-Trade, Chevron,
Nike, the Gap, Time Warner, Blue Cross/Blue Shield, Mass Mutual, Best Foods,
Gymboree, Safeway, Kimberly-Clark, John Deere and Robert Half.

The following table lists customers who have provided us with over $100,000
of recognized revenue from their use of Tumbleweed IME or over $50,000 of
recognized revenue from their use of Tumbleweed MMS. This list excludes the
numerous end-user customers, such as Hewlett-Packard, Sears, Roebuck & Co.,
Alston & Bird LLP, Morrison & Foerster LLP, the New York State Department of
Transportation and Jackson National Insurance, that utilize Tumbleweed IME
through our service provider customers.

<TABLE>
<CAPTION>
TUMBLEWEED SERVICE PROVIDERS
<S> <C>
Cable & Wireless HKT Prodamus Ltd.
Canada Post Salmat Pty. Ltd.
La Poste (France) Swiss Post
MessageMedia Inc. UPS
Pitney Bowes, Inc. United States Postal Service
Posten SDS (Norway) UPAQ, Ltd.
</TABLE>

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<TABLE>
<CAPTION>
TUMBLEWEED IME ENTERPRISE CUSTOMERS
<S> <C>
American Century Services Corporation IHM
American Express Mitsui & Co.
Applicast Northern Trust Company
Canon Information Systems, Inc. Prudential Securities, Inc.
The Chase Manhattan Bank Salomon Smith Barney Holdings Inc.
CommFin, Inc. SEB (Enskilda)
Commonwealth of Pennsylvania Siemens Switzerland Ltd.
Datek Online Holdings Corp. Synergy TD Waterhouse Group, Inc.
Diners Club Inc. The Travelers Indemnity Company
European Commission (JRC) Tokyo Matsushita Computer Corp.
Goldman, Sachs & Co. Toppan Forms
Hewlett Packard Japan Co., Ltd. Toyo Information Systems Co., Ltd.
Hikari Tsushin Wachovia Securities, Inc.
</TABLE>

<TABLE>
<CAPTION>
TUMBLEWEED MMS CUSTOMERS
<S> <C> <C>
Advanced Micro Devices, Inc. Fedsure Holdings NTL Group Ltd
Allegro Net First American Corp. Ogilvy & Mather
Amgen, Inc. First Citizens Bank & Trust Company Orrick, Herrington & Sutcliffe
APL Oakland First Security Service Co. Paccar Incorporated
Avery Dennison Florida Power and Light Pacificare
AZ Public Service Co. Freightliner Peoplesoft
BC Tel Gap Inc. Phelps Dodge
Beckman Coulter, Inc. Glaxo Welcome, Inc. Presbyterian Healthcare Services
Bell Atlantic GSA Rabbobank Nederland
Brobeck Phleger & Harrison LLP Halifax Building Society Reckitt Benckiser
California Federal Bank Jacobs Engineering Robert Half
Canaccord JC Bradford Royal Bank of Canada
Catholic Healthcare West Kimberly Clark SAFECO
Chevron Corp. Kmart Corporation Safeway
CIGNA Koch Industries Inc. Sandia National Laboratories
Clarica Life Lehman Brothers Sutter Health
Cosmair, Inc. Mass Mutual Life Insurance Co. Telecom NZ
Credit Suisse First Boston MBNA The Associates
Deere & Co. MediaOne Group, Inc. Thompson Financial Services
Dell Products, L.P. Merrill Lynch Turner Broadcasting/CNN
Dunn and Bradstreet Metropolitan Life Insurance Company US Bancorp
Entrust National Association of Security Dealers US Clearing/Fleet
E-Trade National Semiconductor Corp. US Department of Energy
FDA Nike Inc.
</TABLE>

SALES

We maintain a direct sales force that focuses on signing additional service
providers and key enterprise customers in strategic industries, as well as
further penetrating existing accounts by selling them our new applications. Our
sales force is comprised of domestic and international sales groups consisting
of a total of 97 employees. Offices in the U.S. currently include Redwood City,
California; Santa Clara, California; New York, New York; Mount Laurel, New
Jersey; Los Angeles, California; San Ramon, California; Chicago, Illinois;
Redmond, Washington; Reston, Virginia; Charlotte, North Carolina and Dallas,
Texas. We currently have international offices in Munich, Germany; Hurst, United

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Kingdom; Tokyo, Japan; Paris, France; Chatswood, Australia; Amersfoot, The
Netherlands and Stockholm, Sweden. Our sales force includes field sales
engineers and inside sales personnel who support the account executives. Field
sales engineers assist our account executives with technical presentations,
customer requirements analysis and initial solution designs. Our inside sales
personnel assist the account executives in managing their customer
relationships. Our sales effort is augmented by the sales forces of our service
providers.

The sales force also works with value added resellers, or VARs, to sell
Tumbleweed MMS products. The typical sales cycle can range from several weeks to
six months, but may be significantly longer for large sales.

MARKETING

Our marketing efforts are organized around three primary areas: product
marketing, product management and marketing communications. Product marketing
identifies target markets and customer opportunities, then develops the
positioning, programs and materials to reach customers and support sales
activities. Product marketing is also responsible for branding, corporate
identity, and the Tumbleweed website.

Product management translates customer and market requirements into product
plans and works with engineering to ensure completion. Product management also
trains salespeople on product information and competition. Marketing
communications drives overall market awareness of Tumbleweed and our products
through public relations, industry analyst relationships, product reviews,
editorial promotion, industry events and executive speaking engagements.

TECHNOLOGY

TUMBLEWEED IME

The Tumbleweed IME Platform and Tumbleweed IME Applications have been
designed using a distributed object model. This approach ensures that our
solutions are able to grow as the number of users and messages increases, simply
by adding additional servers, as well as providing enhanced reliability. Our use
of an industry standard protocol for computing using multiple central processing
units which may be distributed across discrete computing systems, known as the
common object request broker architecture, enables us to integrate with systems
from a variety of vendors. In addition, we leverage the proven technologies of
our partners, such as Oracle databases, Netscape web servers and RSA's security
toolkit, in order to provide a foundation for our products.

We have also developed a robust set of software procedures upon which
additional application-specific software functionality can be built, known as
application programming interfaces. These procedures enable us to enhance the
Tumbleweed IME Platform and Tumbleweed IME Applications as the needs of our
service provider customers evolve. Using this set of application programming
interfaces, we can also create new Tumbleweed IME Applications, such as
solutions suited to specific strategic industries, that run on top of the
Tumbleweed IME Platform. We have made these application programming interfaces
open and available to our customers and partners, enabling them to customize the
Tumbleweed IME Platform and Tumbleweed IME Applications to suit their individual
needs.

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[Graphic depicts the Tumbleweed IME architecture, demonstrating how the
Tumbleweed IME application programming interfaces interact with the Tumbleweed
IME Platform and Tumbleweed IME Applications.]

As shown above, our Tumbleweed IME Platform is organized into three separate
tiers, each of which can run on one or more physical servers. These tiers are:

- THE GATEWAY TIER, which provides an interface between the Tumbleweed IME
Server and the Internet. The gateway tier translates outgoing messages
into the appropriate protocols for transfer over the Internet, and
translates incoming messages that use these protocols.

- THE OBJECT TIER, which contains the set of objects which implement the
core functionality of the Tumbleweed messaging platform. Each core element
of a secure communication transaction, such as a user's account or a
secure package, is represented as a unique object within the object tier.

- THE STORAGE TIER, which uses the servers' underlying data storage and file
systems, coupled with a relational database, to maintain objects when they
are not in use.

Tumbleweed IME is a data-driven application architecture. As such, the
Tumbleweed IME Personalization Application allows for the dynamic
personalization of outbound messages on a per-recipient basis. Profile
attributes associated with individual recipients may be stored and used to
populate outbound messages with customized content. Tumbleweed IME's extensible
data model allows both profile attributes and content data to be stored in the
system.

The security options supported by Tumbleweed IME include encryption between
sender and receiver based on the secure sockets layer standard, encryption
technology developed by RSA on the server, name/password authentication, and
encryption and digital signature based on public key infrastructure. Different
security options can be applied depending on the security needs of specific
applications. For applications requiring the highest levels of security,
Tumbleweed IME is fully integrated with digital certificate and encryption
technology from industry-leading vendors such as VeriSign and RSA. These public
key infrastructure capabilities allow Tumbleweed IME to provide

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complete, tamper-proof, end-to-end security for highly sensitive
business-to-business and business-to-consumer communications.

Electronic delivery applications, particularly those under regulatory
control, must provide a full range of tracking capabilities to allow for the
needs of non-repudiation and compliance reporting. Tumbleweed IME, as a
server-based application platform, provides comprehensive tracking and reporting
capabilities. These include tracking notification and receipt, recording failed
transmissions, and providing all necessary status data and statistics for the
messaging application.

We have assembled an engineering team with expertise in the following
technologies and processes:

- HYPERTEXT TRANSFER PROTOCOL--The set of standards used by computers to
transfer hypertext files, i.e. web pages, over the Internet.

- SIMPLE MAIL TRANSFER PROTOCOL--The standard protocol used for routing
e-mail messages over the Internet.

- JAVA AND C++--Computer languages that are particularly well-suited for
developing special programs, called objects, that can communicate with
each other using the Internet.

- COMMON OBJECT REQUEST BROKER ARCHITECTURE--An industry standard protocol
that allows distributed software components to interoperate with each
other. It enables objects to communicate with one another regardless of
what programming language they were written in or on what type of computer
they are running.

- DIGITAL CERTIFICATES--Digital documents, typically containing a public key
and a name, that attest to the binding of a public key to an individual or
other entity.

- PUBLIC KEY INFRASTRUCTURE--An evolving, standards-based system which
relies on digital certificates to ensure the validity of Internet
communications and transactions.

- SECURE MULTIPURPOSE INTERNET MAIL EXTENSIONS--An e-mail standard used to
format complex messages so that they can be sent securely over the
Internet.

- SECURE SOCKETS LAYER--An Internet standard which is used to encrypt data
as it is being transmitted over the Internet.

TUMBLEWEED MMS

MMS is implemented in C++ as a multi-threaded Windows NT/2000 application.
In a typical deployment, MMS is installed on a dedicated Windows machine between
the firewall and the internal e-mail server. It consists of the following key
components:

- Simple Mail Transfer Protocol Relay, or SMTP Relay;

- Policy Engine;

- Policy Managers; and

- Directory.

The MMS SMTP Relay is responsible for routing messages. Like other SMTP
relays, the MMS SMTP Relay accepts SMTP connections on TCP port 25 and initiates
connections to other SMTP relays to transmit SMTP messages to their destinations
or next hops. Between accepting e-mail messages and routing them, the MMS SMTP
Relay passes e-mail messages to the MMS policy engine for evaluation. Depending
on the result of the evaluation, the MMS policy engine might modify messages
(disinfect, annotate, etc.), before returning them to the SMTP Relay. In other
cases, it might drop or return messages, or place them in alternate queues
(deferred delivery, quarantine, redirect) for special handling.

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<PAGE>
The MMS policy engine ensures that the proper policies are applied to all
messages passing through MMS. It prepares messages for evaluation, sends them to
the policy managers for evaluation, and determines final message handling based
on the results of the individual policy manager analyses. For messages with
multiple recipients, the policy engine keeps track of the different recipients
and their corresponding policies, and if necessary, creates separate messages
for recipients with different policy results. For example, if MMS receives a
message with a .gif attachment, and if one of the message recipients has an
attachment stripping policy that removes .gif attachments, then MMS will create
two copies of the message, one without the attachment for the recipient with the
attachment stripping policy and one with the attachment for the other recipient.

The MMS policy managers evaluate e-mail messages for security threats and
other types of content that require special treatment. Each policy manager
specializes in a specific countermeasure and is responsible for the policies
that carry out that countermeasure. For example, the Virus Manager is
responsible for the "Infected Message" policies offered by default in the MMS
setup program. The policy managers are:

- Access Manager;

- Content Manager;

- Format Manager;

- Security Manager; and

- Virus Manager.

The policy engine passes each SMTP message to the policy managers. Each
policy manager invokes the policies it is responsible for, and recommends a
message disposition. In addition, the policy managers might log events or send
notifications. Some policy managers handle the same message multiple times for
different purposes. After the message has been processed by all the policy
managers, the policy engine uses the most restrictive disposition to determine
whether or not the message should be delivered normally, dropped, returned to
the sender, quarantined, deferred or redirected to another service.

The MMS Directory contains security policies and other information about
users protected by MMS. It includes three types of objects: user records, domain
records and folders. User records contain policies that apply to specific users,
identified by their e-mail addresses. Domain records contain policies that apply
to groups of users that belong to the same domain. Folders contain policies that
apply to arbitrary groups of users, domains or other folders.

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The following is a graphical illustration of the Tumbleweed MMS information
flow:

[FLOWCHART]

<TABLE>
<CAPTION>
CONNECTION & ROUTING MESSAGE MANAGEMENT EVALUATION
------------------------ ------------------------ ------------------------
<S> <C> <C>
- Inbound: accept or - Determine applicable - Decompose and evaluate
reject SMTP connection policies - Decrypt, verify
- Outbound: Partition - Pass message to policy - Decompress
message managers for - Scan, disinfect
- Outbound: Route decomposition and - Extract text
message to next hop evaluation - Recommend disposition
- Determine final - Compose
message disposition - Encrypt, sign
- Pass message to policy
managers for
composition
</TABLE>

GOVERNMENTAL REGULATION

We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
and laws or regulations directly applicable to access to online commerce.
However, due to the increasing popularity and use of the Internet and other
online services, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, Internet transaction taxation, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. Furthermore, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. For
example, the Federal Communications Commission could determine through one of
its ongoing proceedings that the Internet is subject to regulation. Among other
possible courses of action, the FCC may determine that Internet service
providers are subject to certain access charges or fees for carrying Internet
traffic over the public switched telephone network. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for our products and
services and increase our cost of doing business, or otherwise have a material
adverse effect on our business, financial condition and results of operations.

Permits or licenses may be required from federal, state, local or foreign
governmental authorities to operate or to sell some products on the Internet. We
may not be able to obtain these permits or licenses. We may be required to
comply with future national and/or international legislation and statutes
regarding conducting commerce on the Internet in all or specific countries
throughout the world. It may not be possible to comply with this legislation or
these statutes on a commercially reasonable basis, if at all.

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In addition, our products rely on encryption and authentication technology
licensed from third parties to provide the security and authentication necessary
to achieve secure transmission of confidential information. Exports of software
products utilizing encryption technology are generally restricted by the U.S.
and various foreign governments. We have obtained approval to export products
using up to 128-bit symmetric encryption and 1024-bit public key encryption,
including IME Server, IME Desktop, IME Receive Applet, IME Remote API using
OmniORB with SSL, MMS WorldWide/56 and MMS Strong WorldWide/128. We are not
exporting other hardware, software or technology that is subject to export
control under U.S. law. However, the list of countries and products for which
exports are restricted and the related regulatory policies could be revised in
the future, and we may not be able to obtain required government approvals

INTELLECTUAL PROPERTY

We have filed sixteen utility patent applications with the U.S. Patent and
Trademark Office and may seek other patents in the future. To date, we have
three issued U.S. patents--a utility patent relating to our fundamental
web-based delivery method, a utility patent relating to secure messaging
technology and a design patent relating to the user interface of our products.
We have also filed twelve patent applications in foreign jurisdictions.

We regard our patents and similar intellectual property as critical to our
success, and rely on patent law and confidentiality and/or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. We currently have nine registered trademarks worldwide, including the
mark Tumbleweed, and are pursuing other key trademarks and service marks in the
U.S. and internationally. Despite these precautions, it may be possible for
unauthorized third parties to copy particular portions of our products or
reverse engineer or obtain and use information that we regard as proprietary.
Some end-user license provisions protecting against unauthorized use, copying
transfer and disclosure of the licensed program may be unenforceable under the
laws of some jurisdictions and foreign countries. In addition, the laws of some
foreign countries do not protect proprietary rights, particularly software based
patents, to the same extent as do the laws of the U.S. Our means of protecting
our proprietary rights in the U.S. or abroad may not be adequate and competing
companies may independently develop similar technology. In particular, we are
currently engaged in litigation to enforce our intellectual property rights,
which may not be successful and in any event will result in substantial
expenditures of resources to pursue.

The status of U.S. patent protection in the software industry is not well
defined and will evolve as the U.S. Patent and Trademark Office grants
additional patents and as the Federal Courts further interpret software-based
inventions. The status of foreign protection in the software industry is also
not well-defined and evolving. Our patent applications may not be issued with
the scope of the claims sought by us, if at all. Our products may infringe
patents issued to third parties. In addition, because foreign patent
applications are not published until 18 months after filing and patent
applications in the U.S. are not publicly disclosed until the patent is issued,
U.S. and/or foreign applications may have been filed by third parties that
relate to our software products.

Third parties could claim infringement by us with respect to current or
future products or services. We may increasingly be subject to claims of
intellectual property infringement as the number of our competitors grows and
the functionality of their products and services increasingly overlap with ours.
Any of these claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources, limit
use of our services or require us to enter into royalty or license agreements. A
successful claim of product infringement against us could harm our business and
prospects.

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LEGAL PROCEEDINGS

On March 3, 1999, we sued The docSpace Company, Inc. alleging infringement
of our U.S. Patent No. 5,790,790. In its answer, docSpace raised counterclaims
alleging, among other things, antitrust violations and unfair competition. On
May 3, 1999, docSpace filed a summary judgment motion of non-infringement. On
May 27, 1999, the court granted Tumbleweed's request to continue docSpace's
summary judgment motion pending further discovery and indicated that docSpace's
motion would be rescheduled. On July 14, 1999, the court issued a scheduling
order stating that it would conduct a hearing on the proper interpretation of
the claims of Tumbleweed's patent, and would afterwards hold a hearing on any
motions for summary judgement on the issue of infringement. The court also
ordered that discovery on all issues other than claim construction and
infringement would be stayed pending resolution of these issues.

The court held the claim interpretation hearing on November 19, 1999. On
December 9, 1999, the court issued an order based on the claims construction
hearing essentially adopting Tumbleweed's interpretation of the patent claims.
Critical Path, Inc. acquired docSpace on March 9, 2000. On April 24, 2000,
Tumbleweed filed a motion for summary judgment that all versions of the docSpace
"Express" system infringe our patent. On the same day, docSpace filed a motion
for summary judgment that its current version of "Express" does not infringe our
patent. On July 10, 2000, the court held a hearing on the parties' summary
judgment motions.

COMPETITION

Tumbleweed IME is an alternative to traditional mail and courier delivery
services, such as those offered by Federal Express Corporation, UPS or the U.S.
Postal Service, and to general purpose e-mail applications and services. As
such, we compete with these options. Our direct competition comes from other
secure online communication service providers of various sizes, some of which
have products that are intended to compete directly with our products. Examples
of secure online communication service providers include Automatic Data
Processing, Inc., Critical Path, Inc., VeriCert.com, e-Parcel, LLC, PostX
Corporation and ZixIt Corporation. In addition, companies with which we do not
presently directly compete may become competitors in the future, either through
the expansion of our products and services or through their product development
in the area of secure online communication services. These companies could
include America Online, Inc./Netscape Communications Corporation, International
Business Machines Corporation/Lotus Development Corporation, Microsoft
Corporation and VeriSign, Inc.

The market for secure online communication services is new, rapidly evolving
and highly competitive. The level of competition is likely to increase as
current competitors improve their offerings and as new participants enter the
market. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us and may enter into
strategic or commercial relationships with larger, more established and
well-financed companies. Some of our competitors may be able to enter into these
strategic or commercial relationships on more favorable terms. Additionally,
these competitors have research and development capabilities that may allow them
to develop new or improved products that may compete with product lines we
market and distribute. New technologies and the expansion of existing
technologies may increase competitive pressures on us. Furthermore, one of our
service provider customers currently offers to end-users the choice between
Tumbleweed's products and the products of one of our competitors, and other
current and future customers may also offer end-users a similar choice.
Increased competition may

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result in reduced operating margins as well as loss of market share and brand
recognition. We may be unable to compete successfully against current and future
competitors, and competitive pressures faced by us could harm our business and
prospects.

EMPLOYEES

As of March 31, 2000, we employed 258 people worldwide, including 69 in
engineering, 97 in sales, 48 in professional services, 19 in marketing and 25 in
corporate management and administration. Our employees are not represented by
any collective bargaining organization. We have never experienced a work
stoppage and consider our relations with our employees to be good.

PROPERTIES AND FACILITIES

We lease approximately 40,000 square feet for our corporate headquarters
located in Redwood City, California under a lease with a term of five years
commencing June 8, 1999. We also lease approximately 30,000 square feet of
office space in Santa Clara, California, the former headquarters of Worldtalk,
under a lease scheduled to terminate in September 2005 and additional office
space in New York, NY under a lease that expires in April 2005. We also maintain
domestic sales offices in Redwood City, California; Santa Clara, California; New
York, New York; Mount Laurel, New Jersey; Los Angeles, California; San Ramon,
California; Chicago, Illinois; Redmond, Washington; Reston, Virginia; Charlotte,
North Carolina and Dallas, Texas and international offices in Munich, Germany;
Hurst, United Kingdom; Tokyo, Japan; Paris, France; Chatswood, Australia;
Amersfoot, The Netherlands and Stockholm, Sweden.

PROPOSED ACQUISITION OF INTERFACE SYSTEMS, INC.

On June 28, 2000, we entered into a merger agreement providing for the
acquisition of Interface Systems, Inc. The acquisition is not expected to close
until after the closing of this offering. The acquisition is subject to
customary closing conditions, including approval by the shareholders of
Interface. As a result, the acquisition may not close, and investors should not
rely on the consummation of the Interface acquisition in purchasing the shares
offered hereby.

The combination of Interface's L2i with Tumbleweed IME would give Tumbleweed
customers a comprehensive, end-to-end solution for electronic statement
presentment. Tumbleweed has announced its intention to divest the Cleo solutions
group of Interface. Interface's L2i products and services simplify the process
of transforming and using data found in legacy systems into electronic content
that is easy to distribute and use online. The L2i products adapt legacy print
streams and other data types to the Internet and intelligently convert them into
formats such as Portable Document Format, HyperText Markup Language or
eXtensible Markup Language for use online.

The Interface businesses other than L2i are comprised of the Cleo solutions
group and IGK Indutries. These businesses comprised a substantial majority of
the historical operating results of Interface, as more fully described in the
pro forma financial statements included elsewhere in this prospectus. The Cleo
solutions group has two major focuses: IBM mainframe connectivity and electronic
commerce communications.

Interface elected to cease or discontinue several non-strategic components
of the historical business. In May of 1998, Interface sold the assets of its
wholly-owned subsidiary, Interface Systems International, Ltd., which was a
United Kingdom based wholesale distributor of laser printers, personal
computers, and supplies from third party manufacturers. Interface terminated the
design and manufacturing of mainframe and midrange printers, and in June of 1999
sold the assets of its printer service business. In December of 1999, Interface
sold IGK Industries, a manufacturer of printed circuit boards.

As of December 31, 1999, Interface employed approximately 109 employees.
Interface's principal office occupies approximately 42,000 square feet located
in Ann Arbor, Michigan that it owns.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The information table sets forth certain information with respect to our
directors and executive officers as of March 31, 2000:

<TABLE>
<CAPTION>
NAME TITLE AGE
---- ----- --------
<S> <C> <C>
Jeffrey C. Smith................... Chairman, President and Chief Executive Officer 33
Pehong Chen........................ Director 41
Timothy C. Draper(2)............... Director 41
Eric J. Hautemont(1)............... Director 34
Kenneth R. Klein................... Director 40
David F. Marquardt(1).............. Director 50
Standish H. O'Grady(2)............. Director 39
Jean-Christophe D. Bandini......... Chief Technical Officer 36
Joseph C. Consul................... Chief Financial Officer and Vice 40
President--Finance
Kerry S. Champion.................. Senior Vice President--Product Development 37
Shomit A. Ghose.................... Senior Vice President--Operations 38
Bernard J. Cassidy................. Vice President, General Counsel and Secretary 45
Michael J. Earhart................. Vice President--Corporate Marketing 35
Donald R. Gammon................... Vice President--North American Sales 54
Mark R. Pastore.................... Vice President--Corporate Development 33
Donald N. Taylor................... Vice President--International Sales 46
Shinji Eura........................ President--Tumbleweed Communications, K.K. 64
</TABLE>

------------------------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

--------------------------------------------------------------------------------

JEFFREY C. SMITH, President and Chief Executive Officer and Chairman of the
Board of Directors, is responsible for strategic planning and business
development. Before founding Tumbleweed in June 1993, Mr. Smith held various
senior positions in research and development with the following firms: Frame
Technology from January 1991 to June 1993; Aeon Corp. from January 1990 to
January 1991; Hewlett Packard from June 1988 to June 1989; and IBM Scientific
Research Center in Palo Alto from June 1987 to June 1988. Mr. Smith served as a
lecturer in Software Engineering at Stanford University in 1988 and 1989.
Mr. Smith holds a B.S. in Computer Science from Stanford University.

PEHONG CHEN has been a Director of Tumbleweed since December 1999. Dr. Chen
has been the Chairman of the Board, Chief Executive Officer, and President of
Broadvision, Inc. since its incorporation in May 1993. From 1992 to 1993,
Dr. Chen served as the Vice President of Multimedia Technology at Sybase, a
supplier of client-server software products. Dr. Chen founded and, from 1989 to
1992, served as President of Gain Technology, a provider of multimedia
applications development systems, which was acquired by Sybase. He received a
B.S. in Computer Science from National Taiwan University, an M.S. in Computer
Science from Indiana University and a Ph.D. in Computer Science from the
University of California at Berkeley.

TIMOTHY C. DRAPER has been a Director of Tumbleweed since August 1996.
Mr. Draper is the Founder and Managing Director of Draper Fisher Jurvetson,
formed in 1985. He currently serves on the boards of directors of PLX
Technology, GoTo.com, and various private companies. Mr. Draper holds a B.S. in
Electrical Engineering from Stanford University and an M.B.A. from Harvard
Business School.

54
<PAGE>
ERIC J. HAUTEMONT has been a Director of Tumbleweed since October 1996.
Mr. Hautemont is Managing Director of Ridge Ventures LLC, a high technology
venture fund dedicated to seed and early stage companies. Before starting Ridge
Ventures in June 1998, Mr. Hautemont served as President of Fractal Design
Corporation from June 1996 to January 1997. Before Fractal, Mr. Hautemont was
co-founder, chairman and CEO of Ray Dream, Inc. from December 1989 to June 1996.
He currently serves on the boards of directors of Xenote Corporation, Tincell
Corporation and Luckysurf.com. Mr. Hautemont holds a M.Sc. in Computer Science
and Applied Mathematics from Enseeiht, University of Toulouse, France.

KENNETH R. KLEIN has been a Director of Tumbleweed since February 2000.
Mr. Klein has been Chief Operating Officer of Mercury Interactive since
February of 2000. Prior to that he served as President, North American
Operations from July 1998 to February 2000. From April 1995 to July 1998 he
served as Vice President of North American Sales. From May 1992 to March 1995,
he served as the Company's Western Area Sales Director. From March 1990 to May
1992, Mr. Klein served as Regional Sales Manager for Interactive Development
Environments, a CASE tool company. Prior to that Mr. Klein served in a variety
of engineering, sales and management roles in the software industry. Mr. Klein
holds degrees in electrical engineering and biomedical engineering from the
University of Southern California.

DAVID F. MARQUARDT has been a Director of Tumbleweed since August 1997.
Mr. Marquardt is a founding General Partner of August Capital, L.P., formed in
1995, and has been a General Partner of various Technology Venture Investors
entities, which are private venture capital limited partnerships, since
August 1980. Mr. Marquardt is a director of Microsoft Corporation,
Netopia, Inc. and various privately held companies. Mr. Marquardt received a
B.S. in Mechanical Engineering from Columbia University and an M.B.A. from
Stanford Graduate School of Business.

STANDISH H. O'GRADY has been a Director of Tumbleweed since August 1997.
Mr. O'Grady has been a Managing Director of H&Q Venture Associates, LLC, a
venture capital firm, since its inception in July 1998. He previously served in
various positions with Hambrecht & Quist Group's venture capital department
since 1986, including Managing Director from 1994 to 1998. Earlier in his
career, Mr. O'Grady was a process engineer with Intel Corporation. Mr. O'Grady
is currently a director of various privately held companies. Mr. O'Grady holds a
B.S.E. degree in Chemical Engineering from Princeton University and an M.B.A.
from the Amos Tuck School of Business Administration at Dartmouth College.

JEAN-CHRISTOPHE D. BANDINI, Chief Technical Officer, serves as Tumbleweed's
primary technical architect and oversees product development. Before founding
Tumbleweed in 1993, Mr. Bandini was a Senior Software Engineer at Frame
Technology from March 1991 to January 1993. Mr. Bandini's industry experience
also includes engineering positions at Oracle from August 1989 to February 1991
and at IBM from March 1986 to October 1986. Mr. Bandini holds an Engineering
Degree from Ecole Centrale Paris, and an M.S. in Computer Science from Stanford
University.

JOSEPH C. CONSUL, Chief Financial Officer and Vice President--Finance, is
responsible for finance, administration, legal and human resources at
Tumbleweed. Before joining Tumbleweed in June 1997, Mr. Consul was Vice
President, Operations for Fractal Design Corporation from May 1996 to May 1997.
From November 1991 to May 1996, Mr. Consul served as Vice President, Finance and
Administration, CFO for Ray Dream, Inc. Mr. Consul has also held senior
financial management positions at XA Systems Corporation from December 1989 to
November 1991 and at Adobe Systems Corporation from February 1987 to
November 1989. Mr. Consul received his M.B.A. from the University of Southern
California, his B.S. from San Jose State University and is a licensed C.P.A.

KERRY S. CHAMPION, Senior Vice President--Product Development, is
responsible for all aspects of engineering, including development, quality
assurance, documentation and information systems. Before joining Tumbleweed in
March 1998, Mr. Champion served as Director of Engineering at Zentek

55
<PAGE>
Technology from January 1997 to December 1997 and served as a Senior Director of
Engineering at BroadVision, Inc. from September 1995 to October 1996.
Mr. Champion was one of the initial members of the Gain Technology engineering
team from June 1989 to September 1995. Mr. Champion holds a B.S. in Business
Administration, with a concentration in Quantitative Methods, from San Francisco
State University.

SHOMIT A. GHOSE, Senior Vice President--Operations, is responsible for
consulting services, customer support, marketing and company alliances. Before
joining Tumbleweed in November 1998, Mr. Ghose served as Vice President of
Engineering and Marketing at Caresoft, Inc. from March 1998 through November
1998 and as Vice President of Marketing at Sky Stream Corp. from October 1997
through February 1998. Mr. Ghose served as Vice President of Worldwide
Consulting at BroadVision, Inc. from June 1995 through October 1997 and as
Senior Director, Business Development, at nCUBE from April 1990 through
June 1995. Mr. Ghose was an engineer at Sun Microsystems, Inc., from
January 1986 to January 1989 and at Metaphor Computer Systems, a company later
acquired by IBM, from February 1983 to January 1986. Mr. Ghose holds a B.A. in
Computer Science from the University of California at Berkeley.

BERNARD J. CASSIDY, Vice President, General Counsel and Secretary, is
responsible for the corporate and legal affairs of Tumbleweed. Before joining
Tumbleweed in May 1999, Mr. Cassidy was in private practice at Wilson Sonsini
Goodrich & Rosati from August 1992 to May 1999, and at Skadden, Arps, Slate
Meagher & Flom LLP from September 1989 to July 1992. Mr. Cassidy holds a B.A. in
Philosophy from Loyola University, an M.A. in Philosophy from the University of
Toronto and a J.D. from Harvard Law School.

MICHAEL J. EARHART, Vice President--Corporate Marketing, is responsible for
all aspects of marketing, including strategic planning, positioning, industry
relations and demand creation. Before joining Tumbleweed in June 1998,
Mr. Earhart served as Director of Marketing at Fabrik Communications from July
1996 to June 1998. He has also served as Business Development Director for
Server Technologies at Oracle from February 1995 to July 1996, and held various
management and strategic marketing positions at Hewlett-Packard from 1987 to
1995. Mr. Earhart holds a B.A. in Economics from the University of California at
Santa Barbara.

DONALD R. GAMMON, Vice President--North American Sales, is responsible for
revenue and customer relationships in North America. Before joining Tumbleweed
in February 1999, Mr. Gammon served as Executive Vice President of PostX
Corporation from May 1997 to December 1998. He has also held senior management
positions at the following firms: Interlink Computer Sciences from July 1994 to
May 1997; Interactive Systems from November 1987 to April 1999; Inference
Corporation from December 1984 to October 1987; and Metier Management Systems
from July 1981 to November 1984. Mr. Gammon holds a B.S. in Management/Marketing
from Oklahoma State University.

MARK R. PASTORE, Vice President--Corporate Development, is responsible for
strategic technology and marketing and sales alliances. Over the course of
Mr. Pastore's tenure at Tumbleweed, he has been responsible for finance and
operations, business development, and strategic planning and alliances. Before
joining Tumbleweed in September 1993, Mr. Pastore held various strategic
marketing and finance positions at Sun Microsystems, Inc. from March 1991 to
August 1993. Mr. Pastore holds a B.S. in Values, Technology, Science, and
Society from Stanford University.

DONALD N. TAYLOR, Vice President--International, is responsible for
Tumbleweed's international sales organization, including our sales teams in
Europe and Japan. Before joining Tumbleweed in January 1999, Mr. Taylor gained
extensive experience in international marketing, sales, and operations, through
a number of senior executive positions at the following firms: Prism Solutions
from August 1995 to October 1998; Oracle from January 1994 to July 1995; Sun
Microsystems from November 1991 to December 1993; Netwise from October 1989 to
September 1991; and Ingres from January 1987 to August 1989. Mr. Taylor holds a
B.A. in History from Williams College.

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<PAGE>
SHINJI EURA, President--Tumbleweed Communications, K.K., is responsible for
the general management of our Japanese subsidiary. Before joining Tumbleweed in
August 1998, Mr. Eura worked from July 1994 to August 1998 at DynaLab Japan Co.,
where he most recently served as a Director of Business Development. From April
1993 to June 1994, Mr. Eura served as a General Manager at I.S.T. Co. From April
1991 to March 1993, Mr. Eura served as President of System Bank Corporation.
From March 1990 to March 1991, Mr. Eura served as Executive Management Director
of NIHON UNISYS. Mr. Eura holds a B.S. in Statistics from the Tokyo College of
Science.

CLASSIFIED BOARD OF DIRECTORS

Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. Each of Jeffrey C. Smith, Dr. Pehong Chen and Kenneth R.
Klein has been designated a Class I director whose term expires at the 2003
annual meeting of stockholders. Eric J. Hautemont and Timothy C. Draper have
been designated Class II directors whose term expires at the 2001 annual meeting
of stockholders. David F. Marquardt and Standish H. O'Grady have been designated
Class III directors whose term expires at the 2002 annual meeting of
stockholders.

Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.

BOARD COMMITTEES

We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and considers and
reports to the board of directors with respect to other auditing and accounting
matters, including the selection of our independent auditors, the scope of
annual audits, fees to be paid to our independent auditors and the performance
of our independent auditors. The audit committee consists of Messrs. Draper,
Hautemont and O'Grady. The compensation committee reviews and recommends to the
board of directors the salaries, benefits and stock option grants for all
employees, consultants, directors and other individuals compensated by us. The
compensation committee also administers our stock option and other employee
benefit plans. The compensation committee consists of Messrs. Hautemont and
Marquardt.

DIRECTOR COMPENSATION

We reimburse our non-employee directors for all out-of-pocket expenses
incurred in the performance of their duties as directors of Tumbleweed. We
currently do not pay fees to our directors for attendance at meetings or for
their services as members of the board of directors.

On October 15, 1996 and September 15, 1998, the board of directors granted
options to purchase an aggregate of 18,000 and 42,000 respectively, shares of
common stock to Mr. Hautemont at an exercise price per share of $0.50. On
May 27, 1999, the board of directors granted an option to purchase an aggregate
of 60,000 shares of common stock to each continuing director at an exercise
price per share of $12.00. On December 1, 1999, Dr. Chen was granted an option
to purchase 15,000 shares pursuant to the automatic grant provisions to
non-employee directors contained in the Plan at an exercise price per share of
$39.75. Also on December 1, 1999 the Board of Directors granted Dr. Chen an
option to purchase an additional 85,000 shares at an exercise price per share of
$39.75. On February 29, 2000, Kenneth R. Klein was granted an option to purchase
15,000 shares pursuant to the automatic grant provisions to non-employee
directors contained in the Plan at an exercise price per share of $71.50. Also
on February 29, 2000 the Board of Directors granted Mr. Klein an option to
purchase an additional 85,000 shares at an exercise price per share of $71.50,
and on May 1, 2000 the

57
<PAGE>
Board of Directors granted Mr. Klein an option to purchase an additional 40,000
shares at an exercise price per share of $31.75.

Each non-employee director elected to the board of directors for the first
time will receive upon election an initial grant of options to purchase 15,000
shares of common stock at fair market value on the date of grant as well as an
annual grant of options to purchase 5,000 shares for each year during the
director's term. All of the foregoing options will have a five-year term and
will vest immediately. The foregoing award of options will be granted
automatically under our 1999 Omnibus Stock Incentive Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the compensation committee of Tumbleweed serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee.

EXECUTIVE COMPENSATION

The following table indicates information concerning compensation of our
Chief Executive Officer and our four most highly compensated executive officers
other than the Chief Executive Officer ("named executive officers") whose salary
and bonus exceeded $100,000 for the year ended December 31, 1999.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
--------------------------------------------- COMPENSATION
OTHER ------------
ANNUAL SECURITIES
NAME AND SALARY BONUS COMPENSATION UNDERLYING
PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS (#)
------------------------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jeffrey C. Smith
Founder, Chairman, President and Chief
Executive Officer........................ 1999 142,708 14,375 -- 60,000

Donald R. Gammon
Vice President-North American Sales...... 1999 150,167 71,277 -- 205,000
Shomit A. Ghose
Senior Vice President-Operations......... 1999 177,876 61,380 -- 90,000
Robert A. Krauss
Vice President-Business Development...... 1999 125,500 83,619 -- 42,000
Donald Taylor
Vice President-International............. 1999 163,050 144,651 13,035 195,000
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1999 to
the named executive officers.

In the fiscal year ended December 31, 1999, we granted options to purchase
up to an aggregate of 2,503,500 shares to employees, directors and consultants.
Most of these options were granted under our 1993 stock option plan at exercise
prices equal to the fair market value of our common stock on the date of grant,
as determined in good faith by the board of directors. All options have a term
of ten years. Most option shares vest over four years, with 25% of the option
shares vesting one year after the option grant date, and the remaining option
shares vesting ratably each month for the next 36 months.

58
<PAGE>
The potential realizable values are based on an assumption that the price of
our common stock will appreciate at the compounded annual rate shown from the
date of grant until the end of the option term. These values do not take into
account amounts required to be paid as income taxes under the Internal Revenue
Code and any applicable state laws or option provisions providing for
termination of an option following termination of employment,
non-transferability or vesting. These amounts are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth of the shares of our common
stock.

With respect to the named executive officers, the option agreements of
Donald Gammon, Shomit Ghose and Donald Taylor provide for the acceleration of a
portion of their stock options upon the occurrence of specified changes in
control of Tumbleweed.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
-------------------------- AT ASSUMED ANNUAL RATE
PERCENT OF STOCK PRICE APPRECIATION
NUMBER TOTAL OPTIONS FOR OPTION TERM
OF SECURITIES GRANTED TO EXERCISE ---------------------------
UNDERLYING EMPLOYEES PRICE EXPIRATION
NAME OPTION GRANTED(#) IN FISCAL YEAR ($/SHARE) DATE 5%($) 10%
---- ----------------- -------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey C. Smith.......... 60,000 2.4% 12.00 2009 $1,172,804 $1,827,495

Donald R. Gammon.......... 195,000 7.8% 0.80 2009 $ 254,108 $ 404,624
10,000 0.4% 22.00 2009 $ 358,257 $ 570,623

Shomit A. Ghose........... 10,000 0.4% 0.80 2009 $ 13,031 $ 20,750
80,000 3.2% 22.00 2009 $2,866,855 $4,564,987

Robert A. Krauss.......... 10,000 0.4% 0.50 2009 $ 8,144 $ 12,969
20,000 0.8% 0.80 2009 $ 26,062 $ 41,500
12,000 0.5% 12.00 2009 $ 234,561 $ 373,499

Donald N. Taylor.......... 140,000 5.6% 0.50 2009 $ 114,023 $ 181,562
30,000 1.2% 0.80 2009 $ 39,093 $ 62,250
25,000 1.0% 22.00 2009 $ 895,892 $1,426,558
</TABLE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table describes for the named executive officers the
exercisable and unexercisable options held by them as of December 31, 1999. No
options were exercised by the named executive officers during the fiscal year
ended December 31, 1999.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey C. Smith................ -- -- -- 60,000 -- 4,365,000

Donald R. Gammon................ -- -- 36,978 168,022 3,104,303 13,893,447

Shomit A. Ghose................. -- -- 65,000 265,000 5,476,250 20,603,250

Robert A. Krauss................ -- -- 54,373 67,627 4,580,925 5,553,574

Donald N. Taylor................ -- -- -- 195,000 -- 15,882,250
</TABLE>

The "Value of Unexercised In-the-Money Options at Fiscal Year End" is based
on a value of $84.75 per share, the fair market value of our common stock as of
December 31, 1999, as determined by the board of directors, less the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our 1993 stock option plan.

59
<PAGE>
EMPLOYMENT AGREEMENTS

Except as described below, we have not entered into employment agreements
with our named executive officers, and their employment may be terminated at any
time at the discretion of our board of directors.

Effective January 7, 1999, we entered into an employment agreement with
Donald Taylor. The agreement provides for a base salary of $185,000 per year,
plus a bonus dependent upon the attainment of specified sales targets. The
minimum guaranteed bonus is $6,000 for each of the first six months of
employment. In addition, Mr. Taylor was granted options to purchase 140,000
shares of common stock. Mr. Taylor's employment is terminable without cause on
six months prior written notice.

EQUITY INCENTIVE PLANS

1993 STOCK OPTION PLAN

The 1993 stock option plan was adopted by our board of directors on
September 30, 1993, and approved by our stockholders on the same date for the
benefit of our officers, directors and consultants. This plan has been amended,
most recently on August 3, 1999 to approve an additional 150,000 shares of
common stock for issuance under this plan, and this amendment was concurrently
approved by our stockholders. This plan provides for the grant of incentive
stock options and nonstatutory stock options. An aggregate of 3,768,500 shares
of common stock is reserved for issuance under this plan. As of August 3, 1999,
we had granted options to purchase an aggregate of 3,747,016 shares of common
stock under this plan. We have not granted options under this plan since our
initial public offering.

In the event of certain mergers or consolidations of Tumbleweed, outstanding
options will be assumed or similar options substituted. In the event outstanding
options are not assumed or substituted for, these options will terminate if not
exercised before the event. In the event of a dissolution or liquidation of
Tumbleweed, outstanding options will terminate if not exercised before these
events.

1999 OMNIBUS STOCK INCENTIVE PLAN

The 1999 Omnibus Stock Incentive Plan was adopted by our board of directors
on May 27, 1999 and approved by our stockholders on June 22, 1999 for the
benefit of our officers, directors, employees, advisors and consultants. This
plan was amended with shareholder approval on May 15, 2000 to annually increase
the total number of shares reserved for issuance under the plan. This plan now
covers an aggregate of 4,381,500 shares of common stock, plus an annual increase
to be added on the first day of our fiscal year beginning in 2001 equal to the
lesser of (a) 2,000,000 shares or (b) five percent (5%) of the number of
outstanding shares on the last day of the immediately preceding fiscal year. As
of March 31, 2000, options to purchase an aggregate of 1,712,110 shares of
common stock with a weighted-average exercise price of $40.43 were outstanding
under this plan. This plan provides for the issuance of stock-based incentive
awards, including stock options, stock appreciation rights, limited stock
appreciation rights, restricted stock, deferred stock and performance shares. An
award may consist of one such arrangement or benefit or two or more of them in
tandem or in the alternative. Under this plan, awards covering no more than 80%
of the shares reserved for issuance under the plan may be granted to any
participant in any one year.

This plan is administered by the compensation committee, although it may be
administered by either our board of directors or any committee of our board of
directors. The group authorized to administer the plan is sometimes referred to
as the plan administrator. The plan administrator may interpret this plan and
may prescribe, amend and rescind rules and make all other determinations
necessary or desirable for the administration of this plan. This plan permits
the plan administrator to

60
<PAGE>
select the officers, directors, key employees, advisors and consultants who will
receive awards and generally to determine the terms and conditions of those
awards.

We may issue two types of stock options under this plan: incentive stock
options, which are intended to qualify under the Internal Revenue Code of 1986,
as amended, and non-qualified stock options. The option price of each incentive
stock option granted under this plan must be at least equal to the fair market
value of a share of common stock on the date the incentive stock option is
granted.

Stock appreciation rights and limited stock appreciation rights may be
granted under this plan either alone or in conjunction with all or part of any
stock option granted under this plan. A stock appreciation right granted under
this plan entitles its holder to receive, at the time of exercise, an amount per
share equal to the excess of the fair market value of a share of common stock at
the date of exercise over a specified price fixed by the plan administrator. A
limited stock appreciation right granted under this plan entitles its holder to
receive, at the time of exercise, an amount per share equal to the excess of the
change in control price of a share of common stock over a specified price fixed
by the plan administrator. A limited stock appreciation right may only be
exercised within the 30-day period following a change in control.

Restricted stock, deferred stock and performance shares may be granted under
this plan. The plan administrator will determine the purchase price, performance
period and performance goals, if any, with respect to the grant of restricted
stock, deferred stock and performance shares. Participants with restricted stock
and preferred shares generally have all of the rights of a stockholder. During
the deferral period, the deferred stock units may be credited with dividend
equivalent rights, subject to the terms and conditions imposed by the plan
administrator. If the performance goals and other restrictions are not attained,
the participant will forfeit his or her shares of restricted stock, deferred
stock and/or performance shares.

In the event of a merger, consolidation, reorganization, recapitalization,
stock dividend or other change in corporate structure affecting the number of
issued shares of common stock, the plan administrator may make adjustments to
the terms of the plan. In particular, the plan administrator may make an
equitable substitution or proportionate adjustment in the number and type of
shares authorized by this plan, the number and type of shares covered by, or
with respect to which payments are measured under, the plan outstanding awards
and the exercise prices. In addition, the plan administrator, in its discretion,
may terminate all awards with payment of cash or in-kind consideration.

The terms of this plan provide that the plan administrator may amend,
suspend or terminate this plan at any time, provided, however, that some
amendments require approval of our stockholders. Further, no action may be taken
which adversely affects any rights under outstanding awards without the holder's
consent.

Each non-employee director elected to the board of directors for the first
time will receive upon this election an initial grant of options to purchase
15,000 shares of common stock at fair market value on the date of grant. These
non-employee directors will also receive an annual grant of options to purchase
5,000 shares for each year during the director's term. All of the foregoing
options will have a five-year term and will vest immediately. The foregoing
award of options will be granted automatically under this plan.

2000 NSO INCENTIVE STOCK PLAN

Our 2000 NSO Incentive Stock Plan was adopted by our board of directors on
July 10, 2000. This plan qualifies as a "broadly based" plan for purposes of the
rules promulgated by the National Association of Securities Dealers, Inc. This
plan is for the benefit of our officers, directors, employees, advisors and
consultants and provides for the issuance of stock-based incentive awards,
including stock options, stock appreciation rights, restricted stock, deferred
stock, and performance shares or any

61
<PAGE>
combination of the foregoing. An aggregate of 500,000 shares of common stock was
reserved for issuance under this plan.

This plan is administered by our board of directors, although it may be
administered by either our board of directors or any committee appointed by our
board of directors. The plan administrator may interpret the plan and may
prescribe, amend and rescind rules, make all other determinations necessary or
desirable for the administration of the plan and generally to determine the
terms and conditions of awards granted under the plan. Employees, advisors and
consultants of ours or of any parent or subsidiary (other than any officer or
director of ours or of any parent or subsidiary) and those individuals who first
become an officer or director of ours or of any parent or subsidiary following
July 10, 2000, are eligible to receive awards under this plan.

We may issue non-qualified stock options, or NSOs, under the plan. The stock
options granted under the plan are not intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986.
The option price of each stock option granted under the plan must be at least
equal to the par value of a share of common stock on the date the stock option
is granted.

Stock appreciation rights, or SARs, may be granted under the plan either
alone or in conjunction with all or part of any stock option granted under the
plan. An SAR granted under the plan entitles its holder to receive, at the time
of exercise, an amount per share equal to the excess of the fair market value
(at the date of exercise) of a share of common stock over a specified price
fixed by the plan administrator.

Restricted stock, deferred stock and performance shares may be granted under
the plan. The plan administrator will determine the purchase price, performance
period and performance goals, if any, with respect to the grant of restricted
stock, deferred stock and performance shares. Participants with restricted stock
and preferred shares generally have all of the rights of a stockholder. With
respect to deferred stock, during the deferral period, subject to the terms and
conditions imposed by the plan administrator, the deferred stock units may be
credited with dividend equivalent rights. If the performance goals and other
restrictions are not attained, the participant will forfeit his or her shares of
restricted stock, deferred stock and/or performance shares.

In the event of any merger, reorganization, consolidation, recapitalization,
stock dividend or other change in corporate structure affecting our stock, the
plan administrator, in its sole discretion, will make equitable substitution or
proportionate adjustments in (i) the aggregate number of shares of our stock
reserved for issuance under the plan, (ii) the kind, number and option price of
shares of our stock subject to outstanding stock options granted under the plan
and (iii) the kind, number and purchase price of shares of our stock subject to
outstanding awards of restricted stock, deferred stock and performance shares
granted under the plan. In connection with any event described in this
paragraph, the plan administrator may provide, in its sole discretion, for the
cancellation of any outstanding awards and payment in cash or other property
therefor.

The terms of the plan provide that the plan administrator may amend, suspend
or terminate the plan at any time. Further, no action may be taken which
adversely affects any rights under outstanding awards without the holder's
consent. The plan will terminate on July 10, 2010.

1999 EMPLOYEE STOCK PURCHASE PLAN

The board of directors adopted our 1999 employee stock purchase plan, which
was approved by our board of directors on May 27, 1999 and approved by our
stockholders on June 25, 1999, which allows eligible employees to purchase our
common stock at a discount from fair market value. A total of 500,000 shares of
common stock has been reserved for issuance under this plan for each fiscal year
occurring during the term of the plan.

62
<PAGE>
This plan will be administered by our board of directors, or a specifically
designated committee of the board of directors, which group is sometimes
referred to as the plan administrator. The plan administrator may interpret the
plan and may prescribe, amend and rescind rules and make all other
determinations necessary or desirable for the administration of the plan,
subject to the provisions of the plan.

This plan contains offering periods that commence on the first trading day
on or after May 15 and November 15 of each year and end on the last trading day
before the commencement of the next offering period. Employees are eligible to
participate if they are employed by us or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year. However,
an employee may not be granted the right to purchase stock under this plan if
the employee

- immediately after the grant would own stock possessing 5% or more of the
total combined voting power or value of all classes of our capital stock,
or

- holds rights to purchase stock under any of our employee stock purchase
plans that together accrue at a rate which exceeds $25,000 worth of stock
for each calendar year.

This plan permits each employee to purchase common stock through payroll
deductions of up to 15% of the employee's "compensation." Compensation is
defined as the employee's base salary, exclusive of any bonus, fee, overtime
pay, severance pay, expenses or other special emolument or any credit or benefit
under any of our employee plans. The maximum number of shares an employee may
purchase during a single offering period is 2,500 shares.

Amounts deducted and accumulated by the employee are used to purchase shares
of common stock at the end of each offering period. The price of the common
stock offered under this plan is an amount equal to 85% of the lower of the fair
market value of the common stock at the beginning or at the end of each offering
period. Employees may end their participation in this plan at any time during an
offering period. In that event, any amounts withheld through payroll deductions
and not otherwise used to purchase shares will be returned to them.
Participation ends automatically upon termination of employment with us.

Rights granted under this plan are not transferable by an employee other
than by will or the laws of descent and distribution. This plan provides that,
in the event of a merger, consolidation, reorganization, recapitalization, stock
dividend or other change in corporate structure affecting the number of issued
shares of our common stock, the plan administrator will conclusively determine
the appropriate equitable adjustments. This plan will terminate in 2009. Our
board of directors has the authority to amend or terminate this plan, except
that no amendment or termination may adversely affect any outstanding rights
under this plan.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our certificate of incorporation includes provisions that eliminate the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or that involved intentional
misconduct or a knowing violation of law;

- under Section 174 of the Delaware law; or

- for any transaction from which the director derives an improper personal
benefit.

Our certificate of incorporation and bylaws further provide for the
indemnification of our directors and officers to the fullest extent permitted by
Section 145 of the Delaware law, including circumstances in which
indemnification is otherwise discretionary. Indemnification for liabilities
arising under the

63
<PAGE>
Securities Act may be permitted to directors, officers and controlling persons
of Tumbleweed under the foregoing provisions, or otherwise. Tumbleweed has been
advised that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in our charter and
bylaws. These agreements, among other things, provide for indemnification of our
directors and executive officers for expenses, judgements, fines and settlement
amounts incurred by any of these people in any action or proceeding arising out
of his or her services as a directors or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified people as directors and executive officers.

64
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock, or an immediate
family member of any of the foregoing, had or will have a direct or indirect
interest other than:

- compensation arrangements, which are described above; and

- the transactions described below.

SERIES C PREFERRED STOCK FINANCING ROUND. In February and May 1999, we sold
shares of Series C preferred stock, at a purchase price of $3.58 per share, to
the following investors, among others:

- 3,914,989 shares of Series C preferred stock to Hikari Tsushin, Inc.;

- 1,118,569 shares of Series C preferred stock to United Parcel Service
General Services Co.;

- 165,093 shares of Series C preferred stock to August Capital, L.P.;

- 154,351 shares of Series C preferred stock to Draper Fisher Associates
Fund III, or to entities affiliated with it; and

- 112,159 shares of Series C preferred stock to Adobe Ventures II, L.P.

SERIES B PREFERRED STOCK FINANCING ROUND. In August and September 1997, we
sold shares of Series B preferred stock, at a purchase price of $1.99 per share,
to the following investors, among others:

- 1,762,336 shares of Series B preferred stock to August Capital, L.P.

- 427,996 shares of Series B preferred stock to Draper Fisher Associates
Fund III.

- 1,258,812 shares of Series B preferred stock to Adobe Ventures II, L.P.

- 12,588 shares of Series B preferred stock to Jeffrey C. Smith, our
President and Chief Executive Officer, and Chairman of our board of
directors.

Hikari Tsushin, Inc. is a 5% or greater shareholder of us. In August 1999,
in connection with our initial public offering, Hikari was allocated and
purchased 400,000 shares of our common stock at $12.00 per share.

HIKARI LICENSE AGREEMENT. On March 31, 1999, we entered into a one-year
license and distribution agreement with Hikari Tsushin, Inc. Between March 31,
1999 and August 31, 1999, Tumbleweed recognized approximately $769,700 of
revenue which was associated with the perpetual license fee, transaction fees
and distribution rights and which was paid by Hikari to Tumbleweed KK, at that
time a wholly-owned Japanese subsidiary of Tumbleweed.

CHANGES IN OWNERSHIP OF SUBSIDIARY. On August 31, 1999, Tumbleweed KK sold
200 shares of its common stock, representing a 50% ownership interest in
Tumbleweed KK, to Hikari for Y350,000,000 (which approximated $3.2 million as of
August 31, 1999). Following Hikari's investment, Hikari and Tumbleweed had equal
board representation in Tumbleweed KK. On May 15, 2000, Tumblweed repurchased
from Hikari 5% of the outstanding stock of Tumbleweed KK, for a price of
Y70,000,000 (which approximated $700,000 as of May 15, 2000).

LEGAL COUNSEL. Gregory C. Smith, a brother of Jeffrey C. Smith (the
President, Chief Executive Officer and Chairman of the Board of Directors of
Tumbleweed), is a partner of the law firm of Skadden, Arps, Slate, Meagher &
Flom LLP, which began providing legal services to Tumbleweed in July 1998 and is
advising Tumbleweed in the offering. Before that time, Gregory Smith was a
partner of

65
<PAGE>
the law firm of Cooley Godward LLP, which provided legal services to Tumbleweed
as well. During the year ended December 31, 1999, the total fees paid to
Skadden, Arps was approximately $1.1 million. The total fees paid to Skadden,
Arps in 1998 was $11,281. The total fees paid to Cooley Godward in 1998 and 1997
were $326,442 and $174,515 respectively. Gregory Smith acted as Secretary of
Tumbleweed during 1997, 1998 and part of 1999.

INVESTMENT BANKING. Curtis H. Smith, a brother of Jeffrey C. Smith (the
President, Chief Executive Officer and Chairman of the Board of Directors of
Tumbleweed), is a Vice President at Credit Suisse First Boston, the lead
underwriter of this offering and financial advisor to Tumbleweed in connection
with the acquisition of Worldtalk. Previously, Curtis H. Smith was an Associate
at ING Barings, a co-manager in Tumbleweed's initial public offering. Credit
Suisse First Boston will receive a customary portion of the aggregate discount
and commissions of this offering, as set forth on the cover page of this
prospectus, and ING Barings received a customary portion of the aggregate
discount and commissions in the initial public offering, as set forth on the
cover page of that prospectus. Credit Suisse First Boston received a customary
fee of approximately $3 million in connection with the Worldtalk acquisition.

INVESTORS' RIGHTS AGREEMENT. We have entered into an investors' rights
agreement with all of the purchasers of preferred stock, our founders and
certain persons or entities which acquired shares of its common stock in
connection with its acquisition of Worldtalk. The agreement provides for
registration rights in favor of such persons. We expect to amend this agreement
to further indemnify selling stockholders in this offering for liabilities that
might arise under the underwriting agreement of this offering.

INDEMNITY AGREEMENTS. We have entered into indemnity agreements with each
of our officers and directors.

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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of our common stock before and after the offering by:

- Each person or entity who beneficially owns more than 5% of our common
stock;

- Each of our named executive officers;

- Each of our directors;

- All executive officers and directors as a group; and

- All other selling stockholders.

Information with respect to beneficial ownership has been furnished by each
director, officer, selling stockholder, or 5% or more stockholder, as the case
may be. Except as otherwise noted below, the address for each person listed on
the table is c/o Tumbleweed Communications Corp., 700 Saginaw Drive, Redwood
City, California 94063. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. These rules generally
attribute beneficial ownership of securities to persons who posses sole or
shared voting power or investment power with respect to those securities and
include shares of common stock issuable upon the exercise of stock options or
warrants that are immediately exercisable or exercisable within 60 days. Unless
otherwise indicated, the persons or entities identified in this table have sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to applicable community property laws.

Percentage ownership calculations are based on 26,270,104 shares of common
stock outstanding as of June 30, 2000, and 27,770,104 shares of common stock
outstanding after the completion of this offering. To the extent that any shares
are issued upon exercise of options, warrants or other rights to acquire our
capital stock that are presently outstanding or granted in the future or
reserved for future issuance under our stock plans, there will be further
dilution to new public investors.

67
<PAGE>

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR SHARES BENEFICIALLY
TO OFFERING(1) OWNED SUBSEQUENT
------------------------ TO OFFERING
PERCENT NUMBER OF -------------------------
NUMBER OF SHARES BEING NUMBER OF PERCENT OF
BENEFICIAL OWNER OF SHARES TOTAL OFFERED SHARES TOTAL
---------------- --------- -------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
FMR Corp................................. 2,790,800 10.6 -- 2,790,800 10.0
82 Devonshire Street
Boston, Massachusetts 02109
Hikari Tsushin, Inc...................... 1,952,314 7.4 1,200,000 752,314(2) 2.7
22F Ohtemachi Nomura Bldg.
2-1-1 Ohtemachi, Chiyoda-ku, Tokyo,
Japan
Jeffrey C. Smith......................... 1,867,031(3)(4) 7.1 100,000 1,767,031(3)(4) 6.3
Jean-Christophe D. Bandini............... 1,978,580 7.3 80,000 1,898,580 6.8
Donald N. Taylor......................... 47,820(4) * 20,000 27,820(4) *
Shomit A. Ghose.......................... 92,324(4) * 20,000 72,324(4) *
Donald R. Gammon......................... 87,794(7)(4) * -- 87,794(7)(4) *
Robert A. Krauss......................... 39,706(4) * -- 39,206(4) *
Pehong Chen.............................. 15,000(4) * -- 15,000(4) *
Kenneth Klein............................ 15,000(4) * -- 15,000(4) *
Tim Draper............................... 382,219(5)(4) 1.5 -- 382,219(5)(4) 1.3
Eric Hautemont........................... 68,241(4) * 10,000 58,241(4) *
David Marquardt.......................... 308,544(4) 1.2 -- 308,544(4) 1.1
Standish O'Grady......................... 129,875(6)(4) * -- 129,875(6)(4) *
Joseph C. Consul......................... 113,163(4) * 20,000 93,163(4) *
Kerry S. Champion........................ 122,766(4) * 20,000 102,766(4) *
Michael J. Earhart....................... 45,510(4) * 10,000 35,510(4) *
Mark R. Pastore.......................... 252,600(4) * 20,000 232,600(4) *
Executive officers and directors as a 5,559,434(8) 21.2 300,000 5,259,434(8) 18.9
group (18 persons).....................
</TABLE>

------------------------

* Less than 1% of the outstanding shares of common stock.

(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G, if any, filed with the
Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, we believe that each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 26,270,104
outstanding shares on June 30, 2000 adjusted as required by
rules promulgated by the SEC.

(2) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters exercise their over-allotment option in full, Hikari Tsushin,
Inc. will sell 450,000 additional shares and will beneficially own 302,314
shares, or 1.1% of the outstanding common stock, after completion of this
offering.

(3) Includes 260,000 shares held by the Jeffrey C. Smith 1999 Annuity Trust.
Mr. Smith is the sole trustee of the trust.

68
<PAGE>
(4) The following table indicates those people whose total number of
beneficially owned shares include shares subject to options exercisable
within 60 days of June 30, 2000:

<TABLE>
<CAPTION>
SHARES SUBJECT
TO OPTIONS
--------------
<S> <C>
Jeffrey C. Smith............................................ 15,000
Shomit A. Ghose............................................. 92,041
Donald R. Gammon............................................ 73,125
Robert A. Krauss............................................ 34,706
Pehong Chen................................................. 15,000
Kenneth Klein............................................... 15,000
Tim Draper.................................................. 15,000
Eric Hautemont.............................................. 38,125
David Marquardt............................................. 15,000
Standish O'Grady............................................ 15,000
Joseph C. Consul............................................ 52,643
Kerry S. Champion........................................... 63,999
Michael J. Earhart.......................................... 20,417
Mark R. Pastore............................................. 2,812
</TABLE>

(5) Includes 159,858 Shares held by Draper Associates, L.P. Voting and
dispositive power over the shares is held by all the general partners of
Draper Fisher Jurvetson. Mr. Draper is Managing Director at Draper Fisher
Jurvetson and as such may be deemed to share voting and investment power
with respect to these shares. However, Mr. Draper disclaims beneficial
ownership of all these shares, except to the extent of his pecuniary
interest arising from his interest in these entities.

(6) Voting and dispositive power over the 21,834 shares held by H&Q Tumbleweed
Investors, L.P. is held by all members of H&Q Adobe Venture Management II,
LLC. Voting and dispositve power over 6,883 shares held by H&Q Adobe Venture
Management II, LLC is held by all its members. Mr. O'Grady is a member of
H&Q Adobe Venture Management II, LLC and may be deemed to share voting and
investment power with respect to these shares. However, Mr. O'Grady
disclaims beneficial ownership of all of these shares, except to the extent
of his pecuniary interest arising from his interest in these entities.

(7) Includes 500 shares held by Donald R. Gammon; 500 shares held by Bonnie I.
Gammon; 500 shares held by Erin A. Gammon; and 500 shares held by Morgan L.
Gammon.

(8) Includes shares issuable upon the exercise of stock options exercisable
within 60 days of June 30, 2000.

SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of common stock and other equity securities of the
Company. Officers, directors and greater than ten percent stockholders are
required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.

To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with, except that a
Form 5 was filed in March 2000 for each of Bernard Cassidy, Kerry Champion,
Joseph Consul, Donald Gammon and Donald Taylor, to reflect an October 1999
option grant to each such person.

69
<PAGE>
DESCRIPTION OF CAPITAL STOCK

Our certificate of incorporation authorizes the issuance of 100,000,000
shares of common stock, $0.001 par value per share, and 10,000,000 shares of
preferred stock, $0.001 par value per share. The following description
summarizes information regarding our capital stock. This information does not
purport to be complete and is subject in all respects to the applicable
provisions of the Delaware General Corporation Law, our certificate of
incorporation and our bylaws.

COMMON STOCK

Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors.
Holders of common stock are entitled to receive ratably the dividends, if any,
declared from time to time by the board of directors out of legally available
funds. Holders of common stock have no conversion, redemption or preemptive
rights to subscribe to any of Tumbleweed's securities. In the event of any
liquidation, dissolution or winding-up of our affairs, holders of common stock
will be entitled to share ratably in our assets remaining after provision for
payment of liabilities to creditors. The rights, preferences and privileges of
holders of common stock are subject to the rights of the holders of any shares
of preferred stock which we may issue in the future.

PREFERRED STOCK

The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. We cannot predict the effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of the preferred stock. However, the effects could include one or more
of the following:

- restricting dividends on the common stock;

- diluting the voting power of the common stock;

- impairing the liquidation rights of the common stock; or

- delaying or preventing a change in control of us without further action by
the stockholders.

Upon the consummation of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.

REGISTRATION RIGHTS

Some of our stockholders have rights with respect to the registration of
their shares under the Securities Act of 1933, as amended. Under the terms of
the agreements providing registration rights, if Tumbleweed proposes to register
any of its securities under the Securities Act, either for its own account or
for the account of other security holders exercising registration rights, these
holders are entitled to notice of this registration and are entitled to include
shares of common stock in the registration. The rights are subject to conditions
and limitations, among them the right of the underwriters of an offering subject
to the registration to limit the number of shares included in the registration.
Holders of these rights may also require Tumbleweed to file a registration
statement under the Securities Act at its expense with respect to their shares
of common stock, and Tumbleweed is required to use its best efforts to effect
this registration, subject to conditions and limitations. Furthermore,
stockholders with registration rights may require Tumbleweed to file additional
registration statements on Form S-3, subject to conditions and limitations.

70
<PAGE>
DELAWARE ANTI-TAKEOVER LAW

We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. Generally, Section 203 of the Delaware General Corporation
Law prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:

- before the date of the business combination, the transaction is approved
by the board of directors of the corporation,

- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock, or

- on or after the date the business combination is approved by the board and
by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.

A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns, or within three
years, did own 15% or more of the corporation's voting stock. The existence of
this provision would be expected to have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.

TRANSFER AGENT AND REGISTRAR

Equiserve L.P. will serve as Transfer Agent and Registrar for our common
stock. Its phone number is (781) 575-2000.

LISTING

Our common stock has been approved for quotation and trading on the Nasdaq
Stock Market's National Market under the trading symbol "TMWD."

71
<PAGE>
UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement dated , we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Chase Securities Inc., Dain Rauscher Incorporated, U.S. Bancorp
Piper Jaffray Inc. and ING Barings LLC are acting as representatives, the
following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Chase Securities Inc........................................
Dain Rauscher Incorporated..................................
U.S. Bancorp Piper Jaffray Inc..............................
ING Barings LLC.............................................
---------
Total..................................................... 3,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.

A selling stockholder has granted to the underwriters a 30-day option to
purchase up to 450,000 additional shares at the public offering price less
underwriting discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.

The underwriters proposes to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.

The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.

<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and Commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
Underwriting Discounts and Commissions
paid by selling stockholders.......... $ $ $ $
</TABLE>

We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 90 days after the date of this prospectus except
issuances related to the acquisition of Interface and pursuant to the exercise
of employee stock options outstanding on the date hereof.

Our officers and directors have agreed that they will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction which

72
<PAGE>
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any such aforementioned transaction is to
be settled by delivery of our common stock or such other securities, in cash or
otherwise, or publicly disclose the intention to make any such offer, sale,
pledge or disposition, or to enter into any such transaction, swap, hedge or
other arrangement, without, in each case, the prior written consent of Credit
Suisse First Boston Corporation for a period of 90 days after the date of this
prospectus. Hikari Tsushin has agreed to this same restriction for a period of
30 days after the date of this prospectus.

We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.

The common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol TMWD.

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934 (the
"Exchange Act").

- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.

- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.

- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.

- In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations, make
bids for or purchases of the common stock until the time, if any, at which
a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations.

Curtis H. Smith, a brother of Jeffrey C. Smith (the President, Chief
Executive Officer and Chairman of the Board of Directors of Tumbleweed), is a
Vice President at Credit Suisse First Boston, the lead underwriter of this
offering and financial advisor to Tumbleweed in connection with the acquisition
of Worldtalk. Previously, Curtis H. Smith was an Associate at ING Barings, a
co-manager in Tumbleweed's initial public offering. Credit Suisse First Boston
will receive a customary portion of the aggregate discount and commissions of
this offering, as set forth on the cover page of this prospectus, and ING
Barings received a customary portion of the aggregate discount and commissions
in the initial public offering, as set forth on the cover page of that
prospectus. Credit Suisse First Boston received a customary fee in connection
with the Worldtalk acquisition.

Dain Rauscher Incorporated expects to receive a customary fee for financial
advisory services in connection with the proposed acquisition of Interface.

73
<PAGE>
NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws. These will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice before any resale of the common
stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that:

- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under such securities laws,

- where required by law, the purchaser is purchasing as principal and not as
agent, and

- the purchaser has reviewed the text above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or these persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. This report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.

74
<PAGE>
LEGAL MATTERS

The validity of the shares of common stock being offered will be passed upon
for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California. Two
attorneys at Skadden, Arps beneficially own a total of approximately 40,244
shares of the common stock, of which approximately 39,146 shares are owned by
Gregory C. Smith, brother of Jeffrey C. Smith, the President, Chief Executive
Officer and Chairman of the Board of Directors of Tumbleweed. Selected legal
matters in connection with this offering will be passed on for the underwriters
by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California.

EXPERTS

The consolidated financial statements of Tumbleweed as of December 31, 1998
and 1999 and for each of the years in the three-year period ended December 31,
1999 have been included herein and in the Registration Statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

The consolidated balance sheets of Interface and its subsidiaries as of
September 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the three-year period ended September 30, 1999, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.

AVAILABLE INFORMATION

We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock being offered. This prospectus does not contain all of the
information described in the registration statement and the related exhibits and
schedules. For further information with respect to Tumbleweed and the common
stock being offered, reference is made to the registration statement and the
related exhibits and schedule. A copy of the registration statement and the
related exhibits and schedule may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities
and Exchange Commission's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from these offices upon
the payment of the fees prescribed by the Securities and Exchange Commission.
Information on the operation of the Public Reference Room may be obtained by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.

We intend to provide our stockholders with annual reports containing
combined financial statements audited by an independent accounting firm and
quarterly reports containing unaudited combined financial data for the first
three quarters of each year.

75
<PAGE>
INDEX TO FINANCIAL STATEMENTS

TUMBLEWEED COMMUNICATIONS CORP.
AND SUBSIDIARIES

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2

Consolidated Balance Sheets as of December 31, 1999 and 1998
and March 31, 2000 (unaudited)............................ F-3

Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 and the three months
ended March 31, 2000 and 1999 (unaudited)................. F-4

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 and the
three months ended March 31, 2000 (unaudited)............. F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 and the three months
ended March 31, 2000 and 1999 (unaudited)................. F-7

Notes to Consolidated Financial Statements.................. F-8

INTERFACE SYSTEMS, INC.
AND SUBSIDIARIES

<CAPTION>
PAGE
--------
Report of Arthur Andersen LLP, Independent Auditors. F-29
<S> <C>

Consolidated Balance Sheets as of September 30, 1999 and
1998 and March 31, 2000 (unaudited)....................... F-30

Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997 and the six months ended
March 31, 2000 and 1999 (unaudited)....................... F-31

Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended September 30, 1999, 1998 and 1997 and
the six months ended March 31, 2000 (unaudited)........... F-32

Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997 and the six months ended
March 31, 2000 and 1999 (unaudited)....................... F-33

Notes to Consolidated Financial Statements.................. F-34

PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Pro Forma Condensed Combined Financial Information:

Introduction................................................ F-50

Pro Forma Condensed Combined Balance Sheet at March 31,
2000...................................................... F-51

Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1999.............................. F-52

Pro Forma Condensed Combined Statement of Operations for the
three months ended March 31, 2000......................... F-53

Notes to Pro Forma Condensed Combined Financial
Information............................................... F-54
</TABLE>

F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Tumbleweed Communications Corp.:

We have audited the accompanying consolidated balance sheets of Tumbleweed
Communications Corp. (the Company) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tumbleweed
Communications Corp. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.

/s/ KPMG LLP

San Francisco, California
January 17, 2000

F-2
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1999 1998 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $60,544 $ 4,556 $46,447
Short-term investments.................................... -- 2,166 --
Accounts receivable, net of allowance for doubtful
accounts of $816, $1,840 and $516, respectively......... 5,182 3,241 4,980
Prepaid expenses and other current assets................. 3,574 779 3,134
------- ------- -------
Total current assets.................................... 69,300 10,742 54,561
Property and equipment, net................................. 3,485 1,428 5,001
Other assets................................................ 2,898 549 3,014
------- ------- -------
Total assets............................................ $75,683 $12,719 $62,576
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,878 $ 923 $ 5,514
Current installments of long-term debt.................... 840 506 594
Accrued liabilities....................................... 6,398 3,867 6,822
Deferred revenue.......................................... 2,579 2,604 2,639
------- ------- -------
Total current liabilities............................... 12,695 7,900 15,569
Long-term debt, excluding current installments.............. 1,017 382 858
Other long-term liabilities................................. 258 -- 266
------- ------- -------
Total liabilities....................................... 13,970 8,282 16,693
------- ------- -------
Commitments

Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, zero issued or outstanding as of December 31,
1999 and 1998 and March 31, 2000.......................... -- -- --
Convertible preferred stock (29,000,000 shares authorized):
Series A, $0.001 par value; zero, 2,700,000, and zero shares
designated as of December 31, 1999 and 1998 and
March 31, 2000, respectively; zero, 2,657,971, and zero
shares issued and outstanding as of December 31, 1999 and
1998 and March 31, 2000, respectively; (aggregate
liquidation preference of $3,668 as of December 31,
1998)..................................................... -- 3 --
Series B, $0.001 par value; zero, 4,250,000, and zero shares
designated as of December 31, 1999 and 1998 and
March 31, 2000, respectively; zero, 4,065,960, and zero
shares issued and outstanding as of December 31, 1999 and
1998 and March 31, 2000, respectively; (aggregate
liquidation preference of $8,105 as of December 31,
1998)..................................................... -- 4 --
Series C, $0.001 par value; zero, 6,000,000, and zero shares
designated as of December 31, 1999 and 1998 and
March 31, 2000, respectively; zero shares issued and
outstanding as of December 31, 1999 and 1998 and
March 31, 2000............................................ -- -- --
Common stock, $0.001 par value; 100,000,000 shares
authorized, 25,423,718, 6,994,189 and 25,830,098 shares
issued and outstanding as of December 31, 1999 and 1998
and March 31, 2000, respectively.......................... 26 7 26
Additional paid-in capital.................................. 132,167 47,001 134,764
Deferred compensation expense............................... (5,283) (1,548) (5,105)
Accumulated other comprehensive income (loss)............... 53 (2) 70
Accumulated deficit......................................... (65,250) (41,028) (83,872)
------- ------- -------
Total stockholders' equity.............................. 61,713 4,437 45,883
------- ------- -------
Total liabilities and stockholders' equity.............. $75,683 $12,719 $62,576
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------------
1999 1998 1997 2000 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License............................................ $ 11,285 $ 8,996 $ 4,097 $ 4,356 $ 2,702
Services........................................... 3,018 1,359 259 1,524 564
Transaction fees................................... 981 -- -- 730 3
Sale of technology................................. -- 220 120 -- --
-------- -------- -------- -------- -------
Revenue from continuing product lines.......... 15,284 10,575 4,476 6,610 3,269
Discountinued product line......................... 1,472 4,888 7,580 -- 638
-------- -------- -------- -------- -------
Total revenue.................................. 16,756 15,463 12,056 6,610 3,907
Cost of revenue
License............................................ 737 931 1,090 267 117
Services........................................... 4,088 3,319 3,020 1,941 782
Transaction fees................................... 78 -- -- 40 5
-------- -------- -------- -------- -------
Total cost of revenue.......................... 4,903 4,250 4,110 2,248 904
-------- -------- -------- -------- -------
Gross profit................................... 11,853 11,213 7,946 4,362 3,003
Operating expenses:
Research & development (exclusive of non-cash
compensation expense of $1,049, $249 and $84 in
1999, 1998 and 1997, respectively, and $274 and
$140 as of March 31, 2000 and 1999,
respectively)...................................... 8,923 5,975 6,154 2,843 1,794
Sales & marketing (exclusive of non-cash
compensation expense of $1,961, $300 and $102 in
1999, 1998 and 1997, respectively, and $636 and
$146 as of March 31, 2000 and 1999,
respectively)...................................... 19,917 11,546 9,988 7,192 3,144
General & administrative (exclusive of non-cash
compensation expense of $526, $166 and $102 in
1999, 1998 and 1997, respectively, and $164 and $50
as of March 31, 2000 and 1999, respectively)....... 5,524 5,220 3,467 1,640 816
Stock compensation................................. 3,536 715 288 1,074 336
Merger related and restructuring expenses.......... -- -- -- 10,803 --
-------- -------- -------- -------- -------
Total operating expenses....................... 37,900 23,456 19,897 23,552 6,090
-------- -------- -------- -------- -------
Operating loss................................. (26,047) (12,243) (11,951) (19,190) (3,087)
Other income, net.................................... 2,126 524 673 656 138
-------- -------- -------- -------- -------
Net loss before provision for taxes................ (23,921) (11,719) (11,278) (18,534) (2,949)
Provision for (benefit from) taxes................. 301 1 183 88 (18)
-------- -------- -------- -------- -------
Net loss........................................... (24,222) (11,720) (11,461) (18,622) (2,931)
Other comprehensive income (loss)--translation
adjustment......................................... 55 (2) -- 17 4
-------- -------- -------- -------- -------
Comprehensive loss................................. $(24,167) $(11,722) $(11,461) $(18,605) $(2,927)
======== ======== ======== ======== =======
Net loss per share--basic and diluted................ $ (1.65) $ (1.79) $ (1.90) $ (0.73) $ (0.43)
======== ======== ======== ======== =======
Weighted average shares--basic and diluted........... 14,650 6,549 6,023 25,588 6,889
======== ======== ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 AND THREE MONTHS ENDED MARCH 31,
2000 (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
-------------------- --------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ---------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996............ 2,657,971 $3 -- $ -- -- $ -- 6,710,400 $7
Issuance of Series B preferred stock,
net of issuance costs of $47....... -- -- 4,065,960 4 -- -- -- --
Issuance of Series B preferred stock
warrant............................ -- -- -- -- -- -- -- --
Issuance of common stock to
nonemployees....................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants................ -- -- -- -- -- -- -- --
Amortization of deferred compensation
expense............................ -- -- -- -- -- -- -- --
Repayment of stockholders' notes
receivable......................... -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options.......... -- -- -- -- -- -- 38,559 --
Purchases under Employee Stock
Purchases Plan..................... -- -- -- -- -- -- 32,240 --
Repurchase of common stock........... -- -- -- -- -- -- (19,500) --
Net loss............................. -- -- -- -- -- -- -- --
--------- -- ---------- ---- --- ---- --------- --
BALANCES, DECEMBER 31, 1997............ 2,657,971 3 4,065,960 4 -- -- 6,761,699 7
Issuance of common stock to
nonemployees....................... -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock options.......... -- -- -- -- -- -- 204,150 --
Purchases under Employee Stock
Purchases Plan..................... -- -- -- -- -- -- 40,300 --
Repurchase of common stock........... -- -- -- -- -- -- (11,960) --
Issuance of Series C preferred stock
warrant............................ -- -- -- -- -- -- -- --
Foreign currency translation
adjustment......................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants................ -- -- -- -- -- -- -- --
Amortization of deferred compensation
expense............................ -- -- -- -- -- -- -- --
Net loss............................. -- -- -- -- -- -- -- --
--------- -- ---------- ---- --- ---- --------- --
BALANCES, DECEMBER 31, 1998............ 2,657,971 3 4,065,960 4 -- -- 6,994,189 7

ACCUMULATED
ADDITIONAL STOCKHOLDER DEFERRED OTHER
PAID-IN NOTE COMPENSATION COMPREHENSIVE ACCUMULATED
CAPITAL RECEIVABLE EXPENSE INCOME (LOSS) DEFICIT
---------- ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996............ $ 35,496 $ (265) $ (382) $ -- $ (17,847)
Issuance of Series B preferred stock,
net of issuance costs of $47....... 8,024 -- -- -- --
Issuance of Series B preferred stock
warrant............................ 28 -- -- -- --
Issuance of common stock to
nonemployees....................... 7 -- -- -- --
Deferred compensation expense on
stock option grants................ 469 -- (469) -- --
Amortization of deferred compensation
expense............................ -- -- 288 -- --
Repayment of stockholders' notes
receivable......................... -- 265 -- -- --
Issuance of common stock upon
exercise of stock options.......... 204 -- -- -- --
Purchases under Employee Stock
Purchases Plan..................... 462 -- -- -- --
Repurchase of common stock........... (13) -- -- -- --
Net loss............................. -- -- -- -- (11,461)
-------- ------ -------- ---- ---------
BALANCES, DECEMBER 31, 1997............ 44,677 -- (563) -- (29,308)
Issuance of common stock to
nonemployees....................... 8 -- -- -- --
Issuance of common stock upon
exercise of stock options.......... 217 -- -- -- --
Purchases under Employee Stock
Purchases Plan..................... 358 -- -- -- --
Repurchase of common stock........... (14) -- -- -- --
Issuance of Series C preferred stock
warrant............................ 55 -- -- -- --
Foreign currency translation
adjustment......................... -- -- (2) --
Deferred compensation expense on
stock option grants................ 1,700 -- (1,700) -- --
Amortization of deferred compensation
expense............................ -- -- 715 -- --
Net loss............................. -- -- -- -- (11,720)
-------- ------ -------- ---- ---------
BALANCES, DECEMBER 31, 1998............ 47,001 -- (1,548) (2) (41,028)

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES, DECEMBER 31, 1996............ $ 17,012
Issuance of Series B preferred stock,
net of issuance costs of $47....... 8,028
Issuance of Series B preferred stock
warrant............................ 28
Issuance of common stock to
nonemployees....................... 7
Deferred compensation expense on
stock option grants................ --
Amortization of deferred compensation
expense............................ 288
Repayment of stockholders' notes
receivable......................... 265
Issuance of common stock upon
exercise of stock options.......... 204
Purchases under Employee Stock
Purchases Plan..................... 462
Repurchase of common stock........... (13)
Net loss............................. (11,461)
----------
BALANCES, DECEMBER 31, 1997............ 14,820
Issuance of common stock to
nonemployees....................... 8
Issuance of common stock upon
exercise of stock options.......... 217
Purchases under Employee Stock
Purchases Plan..................... 358
Repurchase of common stock........... (14)
Issuance of Series C preferred stock
warrant............................ 55
Foreign currency translation
adjustment......................... (2)
Deferred compensation expense on
stock option grants................ --
Amortization of deferred compensation
expense............................ 715
Net loss............................. (11,720)
----------
BALANCES, DECEMBER 31, 1998............ 4,437
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------
SERIES A SERIES B SERIES C COMMON STOCK
--------------------- --------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of stock options...... -- -- -- -- -- -- 877,893 1
Issuance of Series B preferred
stock in exchange for
services....................... -- -- 15,000 -- -- -- -- --
Issuance of Series C preferred
stock and warrants net of
issuance costs of $1,337....... -- -- -- -- 5,586,003 5 -- --
Issuance of Series C preferred
stock in exchange for
services....................... -- -- -- -- 6,500 -- -- --
Issuance of common stock
warrant........................ -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of warrants........... -- -- -- -- -- -- 94,610 --
Purchases under Employee Stock
Purchase Plan.................. -- -- -- -- -- 39,000
Foreign currency translation
adjustment..................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants............ -- -- -- -- -- -- -- --
Amortization of deferred
compensation expense........... -- -- -- -- -- -- -- --
Conversion of preferred stock to
common stock................... (2,657,971) (3) (4,080,960) (4) (5,592,503) (5) 12,331,434 12
Gain on sale of TKK subsidiary... -- -- -- -- -- -- -- --
Repurchase of common stock....... -- -- -- -- -- -- -- --
Issuance of common stock--IPO,
net of issuance costs of
$4,855......................... -- -- -- -- -- -- 4,219,592 5
Issuance of common stock for
equity financing............... -- -- -- -- -- -- 867,000 1
Net loss......................... -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ------ ---------- ---
BALANCES, DECEMBER 31, 1999........ -- -- -- -- -- -- 25,423,718 26
Issuance of commons stock upon
exercise of stock options
(unaudited).................... -- -- -- -- -- -- 406,380 --
Foreign currency translation
adjustment (unaudited)......... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option grants
(unaudited).................... -- -- -- -- -- -- -- --
Deferred compensation expense on
stock option vesting
acceleration (unaudited)....... -- -- -- -- -- -- -- --
Amortization of deferred
compensation expense
(unaudited).................... -- -- -- -- -- -- -- --
Net Loss (unaudited)............. -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ------ ---------- ---
BALANCES, MARCH 31, 2000
(UNAUDITED)....................... -- $ -- -- $ -- -- $ -- 25,830,098 $26
========== ==== ========== ==== ========== ====== ========== ===

ACCUMULATED
ADDITIONAL STOCKHOLDER DEFERRED OTHER TOTAL
PAID-IN NOTE COMPENSATION COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
CAPITAL RECEIVABLE EXPENSE INCOME (LOSS) DEFICIT EQUITY
---------- ------------ -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of stock options...... 1,247 -- -- -- -- 1,248
Issuance of Series B preferred
stock in exchange for
services....................... 54 -- -- -- -- 54
Issuance of Series C preferred
stock and warrants net of
issuance costs of $1,337....... 18,748 -- -- -- -- 18,753
Issuance of Series C preferred
stock in exchange for
services....................... 23 -- -- -- -- 23
Issuance of common stock
warrant........................ 127 -- -- -- -- 127
Issuance of common stock upon
exercise of warrants........... 270 -- -- -- -- 270
Purchases under Employee Stock
Purchase Plan.................. 311 -- -- -- -- 311
Foreign currency translation
adjustment..................... -- -- -- 55 -- 55
Deferred compensation expense on
stock option grants............ 7,271 -- (7,271) -- -- --
Amortization of deferred
compensation expense........... -- -- 3,536 -- -- 3,536
Conversion of preferred stock to
common stock................... -- -- -- -- -- --
Gain on sale of TKK subsidiary... 1,491 -- -- -- -- 1,491
Repurchase of common stock....... (36) -- -- -- -- (36)
Issuance of common stock--IPO,
net of issuance costs of
$4,855......................... 45,769 -- -- -- -- 45,774
Issuance of common stock for
equity financing............... 9,891 -- -- -- -- 9,892
Net loss......................... -- -- -- -- (24,222) (24,222)
-------- ---- ------- --- -------- --------
BALANCES, DECEMBER 31, 1999........ 132,167 -- (5,283) 53 (65,250) 61,713
Issuance of commons stock upon
exercise of stock options
(unaudited).................... 1,290 -- -- -- -- 1,290
Foreign currency translation
adjustment (unaudited)......... -- -- -- 17 -- 17
Deferred compensation expense on
stock option grants
(unaudited).................... 1,032 -- (1,032) -- -- --
Deferred compensation expense on
stock option vesting
acceleration (unaudited)....... 275 -- 136 -- -- 411
Amortization of deferred
compensation expense
(unaudited).................... -- -- 1,074 -- -- 1,074
Net Loss (unaudited)............. -- -- -- -- (18,622) (18,622)
-------- ---- ------- --- -------- --------
BALANCES, MARCH 31, 2000
(UNAUDITED)....................... $134,764 $ -- $(5,105) $70 $(83,872) $ 45,883
======== ==== ======= === ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------------
1999 1998 1997 2000 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(24,222) $(11,720) $(11,461) $(18,622) $(2,931)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation for grant of non-employee stock options
and warrant issuances............................... 464 8 34 411 78
Amortization of deferred compensation................. 3,536 715 288 1,074 336
Depreciation and amortization......................... 1,161 1,030 894 447 247
Change in allowance for doubtful accounts............. (1,024) 1,719 -- -- --
Amortization of debt discount......................... -- 12 -- -- 43
Changes in operating assets and liabilities:
Accounts receivable............................... (1,202) (1,640) 2,281 202 224
Prepaid expenses and other current assets......... (2,000) 298 (414) 440 (84)
Accounts payable and other liabilities............ 5,103 452 (870) 3,068 (42)
Deferred revenue.................................. 44 (1,798) 2,732 60 (792)
-------- -------- -------- -------- -------
Net cash used in operating activities........... (18,140) (10,924) (6,516) (12,920) (2,921)
-------- -------- -------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (3,246) (524) (872) (1,963) (277)
Cash transferred to TKK................................... (683) -- -- -- --
Purchase of short-term investments........................ -- (56,383) (7,418) -- --
Sales and maturities of short-term investments............ 2,166 60,632 7,030 -- 1,666
Other assets.............................................. (580) 7 247 (116) 18
-------- -------- -------- -------- -------
Net cash (used in) provided by investing
activities...................................... (2,343) 3,732 (1,013) (2,079) 1,407
-------- -------- -------- -------- -------
Cash flows from financing activities:
Increase in borrowings.................................... 2,103 560 243 -- 1,167
Repayments of borrowings.................................. (1,639) (343) (351) (405) (1,107)
Proceeds from the issuance of preferred stock and
warrants, net............................................. 18,493 -- 8,028 -- 14,949
Proceeds from the issuance of common stock, net........... 55,666 -- -- -- --
Repurchase of common stock................................ (36) (14) (13) -- --
Issuance of common stock upon exercise of stock options... 1,248 217 204 1,290 301
Issuance of common stock under Employee Stock Purchase
Plan...................................................... 311 358 462 -- --
Issuance of common stock upon exercise of warrants........ 270 -- -- -- --
Payments on stockholder note payable...................... -- -- (19) -- --
Repayment of shareholder receivable....................... -- -- 265 -- --
-------- -------- -------- -------- -------
Net cash provided by financing activities:...... 76,416 778 8,819 885 15,310
-------- -------- -------- -------- -------
Effect of exchange rate fluctuations........................ 55 (2) -- 17 4
-------- -------- -------- -------- -------
Net (decrease) increase in cash and cash equivalents........ 55,988 (6,416) 1,290 (14,097) 13,800
Cash and cash equivalents, beginning of period.............. 4,556 10,972 9,682 60,544 4,556
-------- -------- -------- -------- -------
Cash and cash equivalents, end of period.................... $ 60,544 $ 4,556 $ 10,972 $ 46,447 $18,356
======== ======== ======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 97 $ 79 $ 92 $ 39 $ 82
======== ======== ======== ======== =======
Noncash investing and financing activities:
Issuance of warrants and options for services, debt
issuance costs or equity offering costs................. $ 464 $ 63 $ 34 $ -- $ --
======== ======== ======== ======== =======
Equipment acquired under capital lease agreement.......... $ 85 $ -- $ 110 $ -- $ --
======== ======== ======== ======== =======
Deferred compensation expense associated with stock option
activity.................................................. $ 7,271 $ 1,700 $ 469 $ 1,307 $ 2,326
======== ======== ======== ======== =======
Issuance of debt to acquire insurance contract............ $ 525 $ -- $ -- $ -- $ --
======== ======== ======== ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Tumbleweed Communications Corp. ("Tumbleweed" or "the Company"), a Delaware
corporation initially incorporated in California in June 1993, is a leading
provider of internet infrastructure for business messaging worldwide. We offer
two product lines: Tumbleweed Integrated Messaging Exchange (IME) and Tumbleweed
Messaging Management System (MMS). Tumbleweed IME is a comprehensive set of
products and services that enables businesses to use e-mail and the Web for
secure, trackable online communication. In addition to our core IME technology,
Tumbleweed offers applications aimed at specific vertical markets and common
business processes, and an extensive development toolkit for building customized
online services. Tumbleweed IME is a scalable, feature rich communication
solution, and serves as the foundation for online business services offered by
our customers. Tumbleweed MMS is a set of e-mail management products and
services that enables businesses to protect valuable corporate information on
the Internet. MMS enables businesses to set and enforce policies for security,
archiving, distribution, monitoring and regulatory compliance related to
Internet e-mail. Using MMS, companies can set policies to apply content control,
encryption, access control, attachment management, virus scanning and digital
signature policies that are administered centrally and universally across an
enterprise. MMS can also enable centralized control over communications security
policies by automatically re-routing e-mail traffic that should be sent securely
to Tumbleweed IME.

On January 31, 2000, the Company completed its acquisition of Worldtalk
Communications Corp. ("Worldtalk"). Under the terms of the merger agreement,
each Worldtalk share of common stock has been converted into 0.26 of a share of
the Company's common stock. A total of 3,798,398 shares of the Company's common
stock was exchanged for 14,609,374 shares of Worldtalk common stock. The
business combination was accounted for as a pooling of interests and,
accordingly, the Company's historical financial statements have been restated to
include the accounts and results of operations of Worldtalk.

In March of 1994, the Company sold a technology known as Envoy to
Novell, Inc. pursuant to an asset transfer, and the Company thereafter effected
a substantial distribution to its stockholders. In connection with this sale,
the Company retained the rights to derivative payments from various agreements
that were acquired by Novell, Inc. for specified periods of time. The proceeds
from this asset transfer were used for general corporate purposes, including the
initial development of Tumbleweed IME. Virtually all of the Company's revenue
recognized before June of 1997, which marked the initial launch of Tumbleweed
IME, was derived from these agreements. The Company ceased recognizing revenue
under these agreements in the first quarter of 1997, and does not anticipate
recognizing any additional revenue under these agreements in the future since
management believes that Novell, Inc. has discontinued distribution of products
utilizing Envoy technology. As a result, revenue recognized for periods before
June of 1997 is not indicative of the Company's operating results in subsequent
periods. In addition, in 1998 and 1997, the Company recognized revenue derived
from a sale of ancillary technology to a third party.

On June 28, 1999, the Company filed with the California Secretary of State
to officially change its name to Tumbleweed Communications Corp. from Tumbleweed
Software Corporation. The board of directors and shareholders approved the name
change on June 23, 1999 and June 28, 1999, respectively.

F-8
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
On May 27, 1999, the board of directors approved the Company's
reincorporation in the state of Delaware. On August 2, 1999, the reincorporation
was completed. The Certificate of Incorporation of the Delaware successor
corporation authorizes 100 million shares of common stock, $0.001 par value per
share, and 10 million shares of preferred stock, $0.001 par value per share. The
accompanying consolidated financial statements have been retroactively restated
to give effect to the reincorporation.

In August 1999, the Company sold 4,219,592 shares of its common stock (of
which 219,592 shares were sold pursuant to the Underwriters' over-allotment
option) through its initial public offering (IPO). Net proceeds from the
offering were approximately $45.8 million after deducting the underwriting
discount and other offering expenses. At the time of the IPO, all of the
Company's outstanding preferred stock automatically converted into 12,331,434
shares of common stock.

The Company maintains its headquarters in Redwood City, California. During
1999, the Company incorporated subsidiaries in the United Kingdom, Germany, and
France. During the three months ended March 31, 2000, the Company incorporated
subsidiaries in Australia, the Netherlands and Sweden.

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiary, Worldtalk, and the Company's wholly
owned subsidiary in the United Kingdom, in addition to the United Kingdom's
wholly owned subsidiaries in France, Germany, Australia, the Netherlands and
Sweden. In addition, the Company's consolidated financial statements include its
former wholly owned subsidiary in Japan until August 31, 1999, when it became an
equity method investee. All significant intercompany accounts and transactions
have been eliminated in consolidation.

UNAUDITED INTERIM FINANCIAL DATA

The unaudited consolidated financial information as of March 31, 2000 and
for the three months ended March 31, 2000 and 1999 has been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, includes all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with generally accepted accounting principles. Results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for any future period.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents. As of December 31,
1999 and 1998, the Company had $47.1 million and $604,000 in money market
accounts, respectively. As of December 31, 1999 and 1998, the Company had
$11.9 million and $3.9 million in commercial paper. As of March 31, 2000, the
Company had $27.3 million in money market accounts and $16.9 million in
commercial paper.

F-9
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES.
SFAS No. 115 requires entities to classify investments in debt and equity
securities with readily determined fair values as "held-to-maturity,"
"available-for-sale" or "trading" and establishes accounting and reporting
requirements for each classification. The Company generally has classified its
short-term investment securities as available-for-sale and accounts for them at
estimated fair value. As of December 31, 1998, short-term investments consisted
of commercial paper due within one year or less. Realized and unrealized gains
and losses were not significant for 1999, 1998 and 1997 and the three months
ended March 31, 2000 and 1999, respectively. The cost of securities sold is
based on the specific identification method.

PROPERTY AND EQUIPMENT

Depreciation and amortization of property and equipment, which is stated at
cost, is computed using the straight-line method over the estimated useful life
of the asset, which is 3 to 5 years for computers, furniture and equipment and
the shorter of the estimated useful life of the asset or the remaining lease
term for leasehold improvements. Equipment under capital lease is amortized over
the shorter of the estimated useful life of the asset or the lease term.

CAPITALIZED SOFTWARE

Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility in the form of a working model has been
established. To date, capitalized costs for the Company's software development
have not been material.

CONCENTRATIONS OF CREDIT RISK

Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash equivalents, short-term
investments and accounts receivable. The Company's cash equivalents generally
consist of money market funds with qualified financial institutions. To reduce
credit risk with accounts receivable, the Company performs ongoing evaluations
of its customers' financial conditions and maintains allowances for credit
losses, when necessary.

REVENUE RECOGNITION

In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. Effective January 1, 1998, the
Company adopted SOP 97-2. SOP 97-2 generally requires revenue recognized from
software arrangements to be allocated to each element of the arrangement based
on the relative fair values of the elements, such as software products,
consulting, training, installation, or post-contract customer support. Fair
values are based upon vendor specific objective evidence. If such evidence of
fair value for each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time that evidence of fair value does
exist, or until all elements of

F-10
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the arrangement are delivered. There was no material change to the Company's
accounting for revenue as a result of the adoption of SOP 97-2.

In February 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 98-4, DEFERRAL OF
THE EFFECTIVE DATE OF SOP 97-2. The SOP deferred the effective date for applying
the provisions regarding vendor-specific objective evidence of fair value. There
was no material change to the Company's accounting for revenue as a result of
the adoption of SOP 98-4.

The Company's customer contracts are generally multiple-element
arrangements; that is, they involve the Company providing a combination of
products and services to a customer. Revenue is allocated to the various
elements based on the relative fair values of the elements. Revenue allocated to
the various elements is recognized when the basic revenue recognition criteria
are met for that element or group of elements.

License revenue consists of initial license fees and the sale of
distribution rights. License revenue typically is recognized upon shipment of
the software. Revenue from the sale of distribution rights is recognized upon
the execution of a distribution agreement. Service fee revenue consists of
consulting fees and support and maintenance fees. Consulting fees related to
installation are recognized upon acceptance of the installation while all other
consulting fees are recognized based on percentage of completion. Support and
maintenance fees are paid for ongoing customer support as well as for the right
to receive future upgrades to the Company's products during the term of the
maintenance agreement. Revenue from support and maintenance is recognized
ratably over the period the support is provided. Transaction fees are based on
the volume of transactions by the Company's customers, and the related revenue
is recognized based on payment schedules and transaction reports from the
Company's customers. A number of the Company's contracts include minimum
transaction volume requirements. In these cases, the minimum guaranteed revenue
is recognized when fees are due and payable during those months where
transaction volume does not exceed the designated minimums.

Technology revenue relates to the sale of certain intellectual property. The
Company recognized technology revenue as the payments were collected.

The Company provides limited warranty rights to its customers, which are
accounted for in accordance with SFAS No. 5, ACCOUNTING FOR CONTINGENCIES.
Estimated warranty obligations are provided by charges to operations in the
period in which the related revenue is recognized. To date, the estimated
warranty obligations have not been considered significant.

In December 1998, the Accounting Standards Executive Committee issued
SOP 98-9, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN ARRANGEMENTS,
which requires recognition of revenue using the residual method in a multiple
element arrangement when fair value does not exist for one or more of the
delivered elements in the arrangement. Under the residual method, the total fair
value of the undelivered elements is deferred and subsequently recognized in
accordance with SOP 97-2. SOP 98-9 also extends the deferral of the application
of SOP 97-2 to certain other multiple-element software arrangements through the
Company's year ending December 31, 1999. As a result of the provisions of

F-11
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SOP 98-9, the Company did not have a material change to its accounting for
revenue through December 31, 1999.

ADVERTISING

The Company expenses advertising costs as incurred. Total advertising
expense was $399,000, $565,000, and $489,000 for 1999, 1998, and 1997,
respectively.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce deferred tax
assets to an amount whose realization is more likely than not. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation arrangements for
employees using the intrinsic-value method pursuant to Accounting Principles
Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As such,
compensation expense is recorded for fixed plan stock options on the date of
grant when the fair value of the underlying common stock exceeds the exercise
price for stock options or the purchase price for issuance or sales of common
stock. Options granted to consultants and other non-employees are considered
compensatory and are accounted for at fair value pursuant to SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company discloses the pro forma
effects of using the fair value method of accounting for all stock-based
compensation arrangements in accordance with SFAS No. 123 (See Note 6.).

NET LOSS PER SHARE

Net loss per share is calculated in accordance with SFAS No. 128, EARNINGS
PER SHARE. Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common and potential common shares outstanding during the period if their
effect is dilutive. Potential common shares comprise outstanding shares of
common stock issued to certain officers (see Note 6) but subject to ratable
repurchase by the Company if such officers do not remain employees through
August 1999, and incremental common and preferred shares issuable upon the
exercise of stock options and warrants and upon the conversion of Series A,
Series B, and Series C preferred stock. The following potential

F-12
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
common shares have been excluded from the determination of diluted net loss per
share for all periods because the effect of such shares would have been
anti-dilutive (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options..................... 4,475 3,116 2,212 4,496 3,207
Shares of restricted stock subject to repurchase........ -- 197 535 -- 113
Shares issuable pursuant to warrants or rights to
purchase convertible preferred stock.................. -- 61 40 -- --
Shares issuable pursuant to warrants or rights to
purchase common stock................................. 540 14 7 540 14
Shares of convertible preferred stock on an
"as-if-converted" basis............................... -- 6,724 6,724 -- 120
----- ------ ----- ----- -----
5,015 10,112 9,518 5,036 3,454
===== ====== ===== ===== =====
</TABLE>

As of December 31, 1999, 1998, 1997 and March 31, 2000 and 1999, the
weighted average exercise prices of stock options were $9.39, $3.45, $5.36,
$18.03 and $3.21, respectively. As of December 31, 1999, 1998, 1997 and
March 31, 2000 and 1999, the weighted average exercise prices of warrants or
rights to purchase common stock outstanding were $27.04, $2.87, $2.50, $27.04
and $3.58, respectively.

OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) consists entirely of cumulative
translation adjustments resulting from the Company's application of its foreign
currency translation policy. The tax effects of translation adjustments were not
significant.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's cash, cash equivalents, marketable
securities, accounts receivable, accounts payable and equipment line approximate
their carrying values due to the short maturity or variable-rate structure of
those instruments.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

F-13
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN CURRENCY TRANSLATION

The functional currency for each foreign subsidiary is its respective local
currency. Accordingly, all assets and liabilities related to these operations
are translated at the current exchange rates at the end of each period. The
resulting cumulative translation adjustments are recorded directly to the
accumulated other comprehensive income (loss) account in stockholders' equity.
Revenues and expenses are translated at average exchange rates in effect during
the period. Foreign currency transaction gains and losses are included in
results of operations. These amounts were not significant in 1999, 1998, 1997
and the three months March 31, 2000 and 1999. At March 31, 2000, December 31,
1999 and December 31, 1998, no foreign currency translation exposures were
hedged.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost to sell.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. SFAS No.133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. To date,
Tumbleweed has not entered into any derivative financial instruments or hedging
activities.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101.
The SAB summarized certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101, as amended by SAB No. 101B, and any resulting change in accounting
principle that a registrant would have to report, is effective no later than the
company's fiscal quarter ending December 31, 2000. Tumbleweed does not expect
the application of SAB No. 101 to have a material effect on its financial
position or results of operations, nor do we expect to report a change in
accounting principle resulting from its application.

F-14
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. Tumbleweed does not expect the application
of FIN 44 to have a material effect on its financial position or results of
operations.

(2) FINANCIAL STATEMENT COMPONENTS

A summary of property and equipment as of December 31, 1999 and 1998,
follows (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Office furniture............................................ $1,601 $ 771
Computers and equipment..................................... 5,457 3,679
Leasehold improvements...................................... 691 111
------ ------
7,749 4,561
Less accumulated depreciation............................... 4,264 3,133
------ ------
$3,485 $1,428
====== ======
</TABLE>

Property and equipment as of December 31, 1999 and 1998 includes equipment
under capital leases of approximately $85,000 and $1.5 million and related
accumulated amortization of approximately $12,000 and $1.5 million,
respectively.

A summary of accrued liabilities as of December 31, 1999 and 1998, follows
(in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued compensation........................................ $2,801 $1,542
Professional fees........................................... 1,632 1,100
Accrued sales and foreign taxes............................. 399 114
Other....................................................... 1,566 1,111
------ ------
$6,398 $3,867
====== ======
</TABLE>

Other income, net consisted of the following (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income........................................ $1,761 $622 $782
Interest expense....................................... (200) (108) (109)
Equity loss in TKK..................................... (22) -- --
Miscellaneous income................................... 587 10 --
------ ---- ----
$2,126 $524 $673
====== ==== ====
</TABLE>

F-15
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(3) RELATED PARTY TRANSACTIONS

HIKARI TSUSHIN

In February 1999, the Company issued 3,914,989 shares of Series C preferred
stock at a price of $3.58 to Hikari Tsushin ("Hikari"), a Japanese company,
resulting in gross proceeds to the Company of approximately $14.0 million. In
August 1999, in connection with the initial public offering, Hikari purchased
400,000 shares of common stock at $12.00 per share, resulting in gross proceeds
to the Company of approximately $4.8 million. As of December 31, 1999, Hikari
owns approximately 20% of the Company's outstanding common stock.

On March 31, 1999, Tumbleweed KK (TKK), a wholly-owned Japanese subsidiary
of the Company until August 31, 1999 when it became an equity investee, entered
into a one-year License and Distribution Agreement with Hikari. A summary of the
terms of this agreement is as follows:

- TKK granted Hikari a perpetual license to use the Company's product in
consideration of a one-time, non-refundable fee of Y30,000,000 (which
approximated $251,000 as of March 31, 1999).

- Hikari was granted distribution rights to sell the Company's products to
third parties in consideration of a one-time, non-refundable fee of
Y20,000,000 (which approximated $167,000 as of March 31, 1999).

- Beginning on April 1, 1999, Hikari began making quarterly, non-refundable
prepaid transaction fees of Y23,625,000 (which approximated $231,000 as of
December 31, 1999). The quarterly transaction fees are based on quarterly
minimum volume commitments, and will be recognized as revenue in the
quarter that the amounts are due and payable. The Company recognized
$331,000 in transaction fees from Hikari during 1999.

On July 1, 1999, the Company entered into a Technology License Agreement
with TKK. A summary of the terms of this agreement is as follows:

- The Company granted TKK a five year, non-exclusive license to use
Tumbleweed IME products in connection with the marketing and sub-licensing
of Tumbleweed IME products in Japan.

- Beginning on July 1, 1999, and as consideration for the license grant, TKK
is obligated to pay the Company a royalty based on license and transaction
fees revenue achieved by TKK. The royalty rate begins at 60% of TKK's net
license revenue in 1999, declining to 55% in 2000 and 50% in 2001 and
thereafter. The Company's management believes that these terms approximate
arms-length rates for such sublicensing activities.

- During the term of the agreement, the Company will provide maintenance and
support services to TKK. The Company receives an annual fee of $100,000
for the services.

On August 31, 1999, TKK sold 200 shares of its common stock, representing a
50% ownership interest in TKK, to Hikari for Y350,000,000 (which approximated
$3.2 million as of August 31, 1999). Following Hikari's investment, Hikari and
the Company have equal board representation in TKK. As a result of the equity
transaction and the change in board constituency, the Company no longer believes
that it has control of TKK. Consequently, beginning September 1, 1999, the
Company began accounting

F-16
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(3) RELATED PARTY TRANSACTIONS (CONTINUED)
for its investment in TKK on the equity method of accounting rather than the
consolidation method. Because TKK sold shares to Hikari, the Company's share of
the book value of TKK's net assets exceeded the carrying amount of the
investment by $1.49 million. As a result the Company has recorded $1.49 million
in additional paid-in capital in 1999.

Prior to selling a 50% ownership interest in TKK on August 31, 1999, the
Company recorded consolidated revenues from third-party customers of TKK of
$914,000, $0, and $0 in 1999, 1998 and 1997, respectively. Hikari has
historically been a significant customer of TKK, representing approximately 84%,
0%, and 0% of TKK's third party revenues recorded during the aforementioned
periods. Subsequent to the divestiture on August 31, 1999, the Company recorded
$300,000 in royalties received from TKK based on license revenue TKK earned from
Hikari and an additional $17,000 in service revenue resulting from support and
maintenance the Company provided directly to Hikari. The total amount due from
Hikari was $17,000 as of December 31, 1999. There were no amounts due by the
Company to Hikari as of December 31, 1999. During the three months ended
March 31, 2000, the Company recorded revenues from TKK of approximately
$367,000.

OTHER RELATED PARTY TRANSACTIONS

In July 1999, in exchange for marketing and publicity services, the Company
issued a warrant to a customer to acquire 100,000 shares of the Company's common
stock. The warrant is exercisable immediately in three tranches: 50,000 shares
at an exercise price of $20 per share; 25,000 shares at an exercise price of $30
per share; and 25,000 shares at an exercise price of $40 per share (see
Note 6). In June 1999, the Company entered into a license agreement and a
consulting agreement with this customer and recorded revenues of $374,000 in
1999 and deferred revenues of $650,000 as of December 31, 1999. The total amount
due from this customer was $650,000 and total amount due by the Company to this
customer was $72,000 as of December 31, 1999.

In conjunction with various financing arrangements in 1994, 1995, 1998 and
1999 the Company issued warrants to purchase 447 shares of common stock at
prices ranging from $0.39 per share to $4.72 per share and 2 shares of Series B
redeemable preferred stock now exercisable for common stock in lieu of the
preferred stock at $0.58 per share. Of these warrants to purchase common stock,
433 related to an equity financing with affiliates of Hilal Capital Management
and others completed in July 1999. A total of 440 warrants to purchase common
stock remain available through December 31, 1999. These warrants expire at
various dates through July 7, 2006.

F-17
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(4) DEBT

Long-term debt at December 31, 1999 and 1998 and March 31, 2000 consisted of
the following:

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- ---------
1999 1998 2000
-------- -------- ---------
<S> <C> <C> <C>
Equipment loan facilities................................... $1,335 $510 $1,211
Financing arrangement for directors' and officers' insurance
premium................................................... 302 -- 61
Capital leases.............................................. 85 128 76
Term facility............................................... 135 250 104
------ ---- ------
Total long-term debt........................................ 1,857 888 1,452
Less current portion........................................ 840 506 594
------ ---- ------
Total long-term portion..................................... $1,017 $382 $ 858
====== ==== ======
</TABLE>

REVOLVING CREDIT FACILITY

In July 1998, the Company entered into a debt agreement with a bank, which
includes a $1.5 million revolving credit facility. Borrowings under the
revolving credit facility bear interest at the prime rate plus 0.5%, with
interest payable monthly and an unamortized discount of $43,000. At March 31,
2000, there were no outstanding borrowings under the revolving credit facility.
Under the terms of the revolving credit facility, availability is based on
outstanding accounts receivable of which $1.4 million was available to the
Company at March 31, 2000. The revolving credit facility expires in July 2000.

EQUIPMENT LOAN FACILITIES

In July 1998, the Company entered into a debt agreement with a bank, which
includes a $750,000 equipment loan facility. In June 1999, the Company obtained
a second equipment loan facility in the amount of $1.0 million with the same
bank. The first equipment loan in the amount of $750,000 expires in
December 2001 and the second equipment loan in the amount of $1.0 million
expires in December 2002. Borrowings under both equipment loan facilities bear
interest at prime rate plus 0.75% and are due and payable in 36 equal monthly
installments and are secured by certain assets of the Company. As of March 31,
2000, total borrowings under both equipment loan facilities were $1.2 million in
the aggregate and $500,000 remained available under the facilities. The weighted
average interest rate for the equipment loans was 8.45%, 8.5%, 9.75%, and 8.45%
for 1999, 1998 and the three months ended March 31, 2000 and 1999, respectively.
(See Note 8 for future minimum payments.)

BRIDGE LOAN FACILITY

In November 1998, the Company obtained a $1.5 million bridge loan facility
from the same bank from which the Company obtained its revolving credit facility
and equipment loan facilities. Under the terms of the bridge loan facility,
availability is based on several factors, including the proposed amount of the
Company's Series C equity financing. In addition, the bridge loan facility
prohibited the

F-18
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(4) DEBT (CONTINUED)
Company from making additional borrowings against the revolving credit facility
until the maturity date or February 1999. Borrowings under the Bridge Loan
Facility were due the earlier of (i) the closing of the Company's Series C
preferred stock financing; (ii) 90 days from the initial loan; or
(iii) April 30, 1999. In connection with the Bridge Loan Facility, the Company
issued a warrant to purchase preferred stock with a fair value of $55,000, which
was amortized over the term of the Bridge Loan Facility (see Note 6). Borrowings
under the Bridge Loan Facility bear interest at prime rate plus 1% and are
payable monthly. Upon the closing of the February 1999 Series C preferred stock
financing, the Company repaid all outstanding borrowings against the bridge loan
facility. The weighted average interest rate for the bridge loan facility was
8.8% for 1999, 1998, and for the three months ended March 31, 2000 and 1999.

LOAN AND SECURITY AGREEMENT

On December 30, 1998, the Company entered into a loan and security agreement
comprised of a $1.5 million line of credit, which expired on December 29, 1999
and a $250,000 term facility, which expires on December 29, 2000, bearing
interest at the prime rate (9.5% and 7.75% as of December 1999 and 1998) plus
0.25% and prime rate plus 0.50%, respectively. The agreement is collateralized
by the assets of the Company, contains certain financial covenants and restricts
the Company's ability to incur other indebtedness and pay dividends. As of
December 31, 1999 and 1998, there were no outstanding balances under the line of
credit agreement. Borrowings under the term facility were $135,000 and $0 as of
December 31, 1999 and 1998, respectively, and $104,000 as of March 31, 2000.

FINANCING ARRANGEMENT FOR DIRECTORS' AND OFFICERS' INSURANCE PREMIUM

In September 1999, the Company entered into a $525,000 financing arrangement
with another company to finance its directors' and officers' liability insurance
premium. Borrowings under the loan agreement are payable in nine equal monthly
installments of $60,000. As of March 31, 2000, total debt outstanding under this
financing arrangement was $61,000 and is classified as a current liability. The
weighted average interest rate for the financing arrangement for directors' and
officers' insurance was 7.5% for both 1999 and the three months ended March 31,
2000.

F-19
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(5) INCOME TAXES

The difference between the amount of income tax expense recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
34% for the years ended December 31, 1999, 1998 and 1997, are as follows (in
thousands):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax benefit........................ $(8,133) $(3,984) $(3,835)
Net operating losses not benefited.......................... 6,945 3,755 3,692
State income tax............................................ -- 1 37
Nondeductible stock compensation expense.................... 1,188 229 84
Foreign income tax expense.................................. 301 -- 115
Other....................................................... -- -- 90
------- ------- -------
Income tax expense.......................................... $ 301 $ 1 $ 183
======= ======= =======
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1999 and
1998, are presented below (in thousands):

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $16,516 $ 8,014
Tax credit carryforwards.................................. 2,260 1,730
Reserves and accruals not currently deductible............ 2,373 1,209
Deferred research and development costs................... 2,022 3,889
Other..................................................... -- (69)
------- -------
23,171 14,773
Less valuation allowance.................................... 23,171 14,773
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
</TABLE>

The Company believes that sufficient uncertainty exists with respect to
future realization of these deferred tax assets; therefore, it has established a
valuation allowance against all deferred tax assets.

The net change in the valuation allowance for the year ended December 31,
1999, was an increase of approximately $8.4 million.

As of December 31, 1999, the Company has federal and California net
operating loss carryforwards of approximately $44.1 million and $18.5 million,
respectively.

The net operating loss carryforwards expire in the years 2008 through 2019
for federal income tax purposes and the years 2000 through 2004 for California
income tax purposes.

As of December 31, 1999, the Company has federal and California research and
development tax credit carryforwards of approximately $1.3 million and
$1.0 million, respectively. The research and development tax credit
carryforwards for federal income tax purposes expire in the years 2012 through

F-20
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(5) INCOME TAXES (CONTINUED)
2019. The research and development tax credit carryforwards for California
income tax purposes can be carried forward indefinitely.

The Company's future ability to utilize the net operating loss and research
credit carryforwards may be subject to limitations in the event of ownership
changes as defined in the Internal Revenue Code.

(6) STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

In August 1999, the Company sold 4,219,592 shares of its common stock (of
which 219,592 shares were sold pursuant to the Underwriters' over-allotment
option) through its initial public offering (IPO). At the time of the IPO, all
of the Company's outstanding preferred stock automatically converted into
12,331,434 shares of common stock.

STOCK REPURCHASE AGREEMENTS

On August 16, 1996, stock repurchase agreements were signed with the
Company's Chief Technical Officer and Chief Executive Officer (the Officers).
Under these agreements, the Company could repurchase a ratable portion of the
shares of common stock held by the Officers if the Officers terminated their
employment with the Company at any time prior to August 16, 1999. The common
stock was issued for the value of services rendered, at a value of $0.001 per
share. The repurchase price would be $0.005 per share, and the total number of
shares available for repurchase by the Company was reduced ratably over the
three-year term of the agreements. The number of shares subject to repurchase by
the Company as of December 31, 1999 and 1998, was zero and approximately
197,000, respectively.

1993 STOCK OPTION PLAN

On September 30, 1993, the Company adopted the 1993 Stock Option Plan.
During 1999 and 1998, the board of directors approved an amendment to the plan
to increase the number of shares authorized for issuance by 650,000 shares and
1,000,000 shares, respectively, to a total of 3,768,500 authorized shares.

Under the plan, the exercise price for incentive options is at least 100% of
the fair market value on the date of grant. The exercise price for nonqualified
stock options is at least 85% of the fair market value on the date of grant.
Options generally expire in 10 years. Vesting periods are determined by the
board of directors and generally provide for 25% of the options to vest on the
first anniversary date of the grant with the remaining options vesting monthly
over the following 36 months.

1999 OMNIBUS STOCK INCENTIVE PLAN

The 1999 Omnibus Stock Incentive Plan (the Incentive Plan) was approved by
stockholders on August 3, 1999, for the benefit of the officers, directors, key
employees, advisors and consultants of the Company. An aggregate of 4,381,500
shares of common stock is reserved for issuance under the

F-21
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(6) STOCKHOLDERS' EQUITY (CONTINUED)
Incentive Plan, which provides for the issuance of stock-based incentive awards,
including stock options, stock appreciation rights, limited stock appreciation
rights, restricted stock, deferred stock, and performance shares.

1999 EMPLOYEE STOCK PURCHASE PLAN

The 1999 Employee Stock Purchase Plan (the Purchase Plan) was approved by
stockholders on August 3, 1999, which allows eligible employees to purchase
common stock at a discount from fair market value. A total of 500,000 shares of
common stock has been reserved for issuance under the Purchase Plan for each
fiscal year occurring during the term of the Purchase Plan (the Purchase Plan
will terminate in 2009).

A summary of stock option activity follows:

<TABLE>
<CAPTION>
WEIGHTED-
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ---------
<S> <C> <C> <C>
Balances, December 31, 1996................................. 3,273,404 1,617,748 $ 4.78
Authorized.................................................. 750,000 -- --
Granted..................................................... (1,033,116) 1,033,116 8.88
Exercised................................................... -- (38,559) 5.29
Canceled.................................................... 400,512 (400,512) 12.13
---------- --------- ------
Balances, December 31, 1997................................. 3,390,800 2,211,793 5.36
Authorized.................................................. 2,000,000 -- --
Granted..................................................... (1,616,130) 1,616,130 2.40
Exercised................................................... -- (204,150) 1.08
Canceled.................................................... 508,103 (508,103) 9.33
---------- --------- ------
Balances, December 31, 1998................................. 4,282,773 3,115,670 3.45
Authorized.................................................. 5,031,500 -- --
Granted..................................................... (2,887,186) 2,887,186 13.32
Exercised................................................... -- (877,893) 1.42
Canceled.................................................... 650,376 (650,376) 9.15
---------- --------- ------
Balances, December 31, 1999................................. 7,077,463 4,474,587 $ 9.39
========== ========= ======

Options vested as of December 31, 1999...................... 893,660
=========
</TABLE>

<TABLE>
<S> <C>
Weighted-average fair value of options granted during the
year:
1999...................................................... $6.44
=====
1998...................................................... $1.19
=====
1997...................................................... $3.93
=====
</TABLE>

F-22
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(6) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1999:

<TABLE>
<CAPTION>
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL LIFE NUMBER
PRICES OUTSTANDING (YEARS) EXERCISABLE
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$0.50......... 1,623,000 8.1 640,762
0.77 - 0.80.. 735,715 9.3 43,505
1.92.......... 455 5.9 455
7.69 - 11.06.. 283,430 9.3 43,787
11.54 -
17.13......... 988,002 8.7 151,631
17.73 -
26.00......... 565,170 9.8 3,900
30.77 -
41.00......... 223,470 9.7 8,775
49.04 -
57.25......... 45,345 9.8 845
81.44......... 10,000 10.0 --
-------------- --------- ---- -------
$0.50 -
81.44......... 4,474,587 8.8 893,660
============== ========= ==== =======
</TABLE>

STOCK-BASED COMPENSATION

The Company uses the intrinsic value method prescribed by APB No. 25 in
accounting for its stock-based compensation arrangements for employees.
Compensation cost has been recognized for fixed stock option issuances in the
accompanying consolidated financial statements because the fair value of the
underlying common stock exceeds the exercise price of the stock options at the
date of grant. The Company has recorded deferred compensation expense of
$7.3 million, $1.7 million and $469,000, for the difference at the grant date
between the exercise price and the fair value of the common stock underlying the
options granted in the years ended December 31, 1999, 1998 and 1997,
respectively. These amounts are being amortized on an accelerated basis over the
vesting period, generally four years, consistent with the method described in
FASB Interpretation No. 28. Amortization of deferred compensation of
approximately $3.5 million, $715,000 and $288,000 was recognized in the years
ended December 31, 1999, 1998 and 1997, respectively. Had compensation cost for
the Company's stock-based compensation plan been determined consistent with the
fair value approach set

F-23
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(6) STOCKHOLDERS' EQUITY (CONTINUED)
forth in SFAS No. 123, the Company's net losses for the years ended
December 31, 1999, 1998, and 1997, would have been as follows (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss as reported........................................ $(24,222) $(11,720) $(11,461)
APB No. 25 compensation expense recorded.................... 3,536 715 288
Additional stock-based compensation under SFAS No. 123...... (3,052) (1,171) (1,896)
-------- -------- --------
Net loss pro forma.......................................... $(23,738) $(12,176) $(13,069)
======== ======== ========
Basic and diluted net loss per share as reported............ $ (1.65) $ (1.79) $ (1.90)

Basic and diluted net loss per share pro forma.............. $ (1.62) $ (1.86) $ (2.17)
</TABLE>

For the year ended December 31, 1999, the fair value of options was
estimated at the date of grant using a Black-Scholes option pricing model for
the multiple-option approach, with the following weighted average assumptions:
no dividend yield; risk-free interest rate of 5.42%, volatility factor of the
expected market price of the Company's common stock of 78.0%, and a
weighted-average expected life of the option of 2.0 years for all options
granted prior to the IPO and 1.0 year for all options granted subsequent to the
IPO. The fair value for the 1999 stock purchases under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model, with the following
weighted-average assumptions: no dividend yield; risk-free interest rate of
5.08%; volatility factor of the expected market price of the Company's common
stock of 78.0%; and the expected life of the purchase period (August 1999
through May 2000). For the years ended December 31, 1998 and 1997, the fair
value of options was estimated on the date of grant using the minimum value
method with the following weighted-average assumptions: no dividend yield;
risk-free interest rates of 5.02% and 6.11%, respectively; and an expected life
of four years.

WARRANTS

In connection with the Company's sale of certain technology rights to a
third party in December 1997, the Company licensed the rights back from the
third party in exchange for a warrant to purchase 40,000 shares of the Company's
Series B convertible preferred stock at an exercise price of $2.50 per share.
The warrant expired upon the closing of the IPO offering of the Company's common
stock. Using the Black-Scholes option pricing model, the Company calculated the
value of the warrant based on the following assumptions: no dividends;
contractual term of 5 years; risk-free interest rate of 5.75%; expected
volatility of 55%. The resultant expense of $28,000 is included in research and
development expenses in 1997.

In connection with the November 1998 Bridge Loan Facility (see Note 4), the
Company issued a warrant to acquire 20,973 shares of Series C preferred stock at
an exercise price of $3.58. Using the Black-Scholes model, the warrant is valued
at $2.65 per share, for a total of $55,000, based on the following assumptions:
no dividends; contractual term of 10 years; risk-free interest rate of 4.86%;
expected volatility of 60%. The value of the warrant was amortized over the term
of the Bridge Loan Facility. The warrant expires upon the earlier of
(i) November 2008; (ii) five years from the closing of

F-24
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(6) STOCKHOLDERS' EQUITY (CONTINUED)
an initial public offering; or (iii) the closing of an acquisition of the
Company in which the Company's stock is sold for at least three times the
initial exercise price. In December 1999, an option for a cash-less exercise was
completed resulting in the issuance of 19,107 shares of the Company common stock
and eliminating the outstanding warrant balance.

In connection with the February 1999 Series C financing, the Company's
financial advisor earned the right to receive a warrant to acquire 58,725 shares
of Series C convertible preferred stock at an exercise price of $3.58. Using the
Black-Scholes model, the warrant is valued at $1.99 per share, for a total of
$117,000, based on the following assumptions: no dividends; contractual term of
5 years; risk-free interest rate of 4.75%; expected volatility of 60%. The value
of the warrant is included as an issuance cost of the Series C financing. The
warrant was exercised at the time of the IPO in August 1999.

In connection with the May 1999 Series C financing, the Company issued a
warrant to acquire 16,778 shares of Series C convertible preferred stock at an
exercise price of $3.58. Using the Black-Scholes model, the warrant was valued
at $8.51 per share, for a total of $143,000, based on the following assumptions:
no dividends; contractual term of 5 years; risk-free interest rate of 4.79%;
expected volatility of 60%. The value of the warrant was included as an issuance
cost of the Series C financing. The warrant was exercised at the time of the IPO
in August 1999.

In July 1999, in exchange for marketing and publicity assistance from a
customer, the Company issued a warrant to acquire 100,000 shares of its common
stock. The warrant is exercisable immediately in three tranches: 50,000 shares
at an exercise price of $20 per share; 25,000 shares at an exercise price of $30
per share; and 25,000 shares at an exercise price of $40 per share. Using the
Black-Scholes option pricing model, the total fair value of the warrant was
estimated to be $127,000, based on the following assumptions: no dividends;
contractual term of three years; risk-free interest rate of 4.8%; and expected
volatility of 60%. The fair value of the warrant was charged to sales and
marketing expense in the third quarter of 1999. In June 1999, the Company
entered into a license agreement and a consulting agreement with the customer
for a total of $355,000.

In conjunction with various financing arrangements in 1994, 1995, 1998 and
1999 the Company issued warrants to purchase 447,000 shares of common stock at
prices ranging from $5.77 per share to $69.85 per share and 2 shares of
Series B redeemable preferred stock now exercisable for common stock in lieu of
the preferred stock at $8.62 per share. Of these warrants to purchase common
stock, 433,000 related to an equity financing with affiliates of Hilal Capital
Management and others completed in July 1999. A total of 440,000 warrants to
purchase common stock remain available through December 31, 1999. These warrants
expire at various dates through July 7, 2006.

(7) EMPLOYEE BENEFIT PLAN

The Company has a 401(k) plan that allows eligible employees to contribute a
percentage of their compensation, limited to $10,000 in 1999 and 1998. The
Company made no contributions in 1999 and 1998. Beginning April 1, 2000, the
Company will match each eligible employee's contribution dollar for dollar up to
4% of the employee's salary. The Company matching contributions and earnings
thereon vest immediately.

F-25
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(8) COMMITMENTS

LEASE COMMITMENTS

The Company leases its facilities and certain equipment under operating
lease agreements. The facilities leases expire at various dates through 2004.
The Company also leases certain equipment under capital lease agreements. These
leases expire at various dates through 2003. Future minimum lease payments as of
December 31, 1999, are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- --------
<S> <C> <C>
2000....................................................... $1,980 $34
2001....................................................... 1,897 26
2002....................................................... 1,900 26
2003....................................................... 1,944 8
2004....................................................... 1,757 --
Thereafter................................................. 377 --
------ ---
Future minimum lease payments.............................. $9,855 94
======
Less amount representing interest.......................... 9
---
85
Less current portion....................................... 32
---
Long-term portion.......................................... $53
===
</TABLE>

Total rent expense under operating leases for the years ended December 31,
1999, 1998 and 1997, was $1.9 million, $942,000 and $799,000, respectively.

ROYALTY AGREEMENTS

During 1997 and 1998, the Company entered into royalty agreements with
various companies whereby the Company was granted a right to sublicense certain
software technology. Under the terms of the agreements, the Company pays
royalties based on the number of software licenses sold or a percentage of
revenue. Royalty expense under these agreements in 1999, 1998 and 1997 was
approximately $223,000, $128,000 and $39,000, respectively, and was recorded as
cost of revenue.

(9) SEGMENT INFORMATION

The Company has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments within the Company for
making operating decisions and assessing financial performance.

The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer. The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information about
revenue by geographic region for purposes of making operating

F-26
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(9) SEGMENT INFORMATION (CONTINUED)
decisions and assessing financial performance. The consolidated financial
information reviewed by the CEO is identical to the information presented in the
accompanying consolidated statements of operations. Therefore, the Company
operates in a single operating segment.

Revenue information regarding operations in the different geographic regions
is as follows (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
United States..................................... $ 9,084 $ 6,919 $2,895 $4,348 $1,980
Europe:
Belgium......................................... 663 560 -- -- 108
Switzerland..................................... 663 -- -- 685 --
Other........................................... 2,947 2,429 1,403 791 717
Asia:
Japan........................................... 1,479 -- -- 384 439
Hong Kong....................................... -- -- -- 322 --
Taiwan.......................................... 58 667 178 -- --
Australia....................................... 390 -- -- 80 --
Other........................................... -- -- -- -- 25
------- ------- ------ ------ ------
Total revenue from continuing product lines....... $15,284 $10,575 $4,476 $6,610 $3,269
======= ======= ====== ====== ======
</TABLE>

Revenue and net loss information for the Company's product lines is as
follows (in thousands):

Discontinued product line.................. 1,472 4,888 7,580 -- 638
-------- -------- -------- -------- --------
Total revenue.......................... $ 16,756 $ 15,463 $ 12,056 $ 6,610 $ 3,907
======== ======== ======== ======== ========
Net loss:
IME and other............................ $(16,416) $ (6,590) $ (4,691) $(10,955) $ (2,056)
MMS and discontinued products............ (7,806) (5,130) (6,770) (7,667) (875)
-------- -------- -------- -------- --------
Total net loss......................... $(24,222) $(11,720) $(11,461) $(18,622) $ (2,931)
======== ======== ======== ======== ========
</TABLE>

F-27
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)

(INFORMATION AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 IS
UNAUDITED)

(9) SEGMENT INFORMATION (CONTINUED)
Revenue aggregating 7%, 6%, 0%, 1% and 11% of total revenue for the years
ended December 31, 1999, 1998 and 1997 and for the three months ended March 31,
2000, respectively, was generated from two customers who, or whose 50%
stockholders, are stockholders of Tumbleweed, and whose ownership percentages as
of March 31, 2000 were 17% and 4%, respectively.

Substantially all of the Company's long-lived assets are located in the
United States.

(10) SUBSEQUENT EVENTS (UNAUDITED)

On May 15, 2000, the Company repurchased from Hikari 5% of the outstanding
stock of Tumbleweed KK, for a price of Y70,000,000.

On June 28, 2000, the Company entered into a merger agreement providing for
the acquisition of Interface Systems, Inc. Pursuant to the merger agreement,
each outstanding share of Interface common stock will be converted into the
right to receive 0.264 of a share of the Company's common stock upon the closing
of the merger, and the Company will assume all outstanding options and warrants
of Interface. The Company will account for the transaction under the purchase
method of accounting. In connection with the transaction, the Company agreed to
purchase an aggregate of $3.0 million of convertible subordinated promissory
notes of Interface, pursuant to a convertible subordinated note purchase
agreement dated June 28, 2000. At the Company's option, or upon the occurrence
of certain events, the notes are convertible into Interface common stock at an
initial conversion price of $9.50 per share, subject to adjustment.

F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Interface Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Interface
Systems, Inc. (a Michigan corporation) and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interface Systems, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Detroit, Michigan
October 29, 1999 (except with
respect to the matters discussed in
Notes 12 and 14, as to which date
is July 7, 2000)

F-29
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- MARCH 31,
1999 1998 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents........................... $ 1,575,139 $ 301,206 $ 931,201
Accounts receivable, less allowance for doubtful
accounts of $101,555, $129,381 and $88,789 at
September 30, 1999, 1998 and March 31, 2000,
respectively...................................... 3,689,511 4,162,320 2,655,961
Refundable income taxes............................. 6,723 1,507,634 --
Inventories......................................... 915,977 2,218,887 527,499
Current portion of note receivable.................. -- -- 6,751
Prepaid expenses and other.......................... 303,676 243,957 311,172
----------- ----------- -----------
Total current assets.............................. 6,491,026 8,434,004 4,432,584
Property and equipment, net........................... 3,188,071 3,443,349 2,407,446
Goodwill, net......................................... 789,140 974,888 696,266
Software development costs, net....................... -- 90,549 --
Note receivable....................................... -- -- 262,972
Other assets.......................................... 55,194 234,280 32,713
----------- ----------- -----------
$10,523,431 $13,177,070 $ 7,831,981
=========== =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Notes payable....................................... $ -- $ 1,350,000 $ --
Accounts payable.................................... 912,018 1,392,146 877,718
Accrued expenses.................................... 1,140,155 1,666,940 1,132,865
Deferred revenue.................................... 431,252 684,406 472,027
Current portion of long-term debt................... 50,200 50,200 50,200
----------- ----------- -----------
Total current liabilities......................... 2,533,625 5,143,692 2,532,810
Long-term debt, less current portion.................. 70,633 120,633 45,633

Commitments

Stockholders' equity (see Note 6):
Common stock, no par value, 12,500,000, 12,500,000
and 25,000,000 shares authorized at September 30,
1999, 1998 and March 31, 2000 (unaudited),
respectively; 4,539,529, 4,452,349 and
4,686,432 shares issued and outstanding at
September 30, 1999, 1998 and March 31, 2000
(unaudited), respectively......................... 11,324,418 11,059,810 11,799,884
Accumulated other comprehensive loss................ (53,117) (59,824) (56,106)
Accumulated deficit................................. (3,352,128) (3,087,241) (6,490,240)
----------- ----------- -----------
Total stockholders' equity........................ 7,919,173 7,912,745 5,253,538
----------- ----------- -----------
$10,523,431 $13,177,070 $ 7,831,981
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-30
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
---------------------------------------- ---------------------------
1999 1998 1997 2000 1999
----------- ----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................... $20,169,116 $21,610,542 $ 19,084,624 $ 6,394,575 $10,073,228
Cost of revenues............... 7,899,004 9,471,755 14,641,081 1,959,428 4,167,813
----------- ----------- ------------ ----------- -----------
Gross profit............... 12,270,112 12,138,787 4,443,543 4,435,147 5,905,415
Expenses:
Product development.......... 3,854,576 3,735,002 3,718,807 1,436,844 804,320
Selling, general and
administrative............. 8,682,677 8,004,242 9,467,720 6,296,076 5,466,485
----------- ----------- ------------ ----------- -----------
Operating income (loss)
from continuing
operations............... (267,141) 399,543 (8,742,984) (3,297,773) (365,390)
Interest expense............... (23,164) (85,496) (79,512) (14,791) (17,112)
Other income................... 66,009 40,672 116,568 181,175 70,855
----------- ----------- ------------ ----------- -----------
Income (loss) from
continuing operations
before income taxes...... (224,296) 354,719 (8,705,928) (3,131,389) (311,647)
Income tax (benefit)
provision.................... 40,591 (412,243) (2,100,810) 6,723 --
----------- ----------- ------------ ----------- -----------
Income (loss) from continuing
operations................... (264,887) 766,962 (6,605,118) (3,138,112) (311,647)
Loss from discontinued
operations................... -- (748,243) (4,273,964) -- --
Loss on disposal of
discontinued operations...... -- (2,140,262) -- -- --
----------- ----------- ------------ ----------- -----------
Net loss................... $ (264,887) $(2,121,543) $(10,879,082) $(3,138,112) $ (311,647)
=========== =========== ============ =========== ===========
Basic and diluted income (loss)
per share:
Income (loss) from continuing
operations................. $ (0.06) $ 0.17 $ (1.50) $ (0.68) $ (0.07)
Loss from discontinued
operations................. -- (0.65) (0.97) -- --
----------- ----------- ------------ ----------- -----------
Net loss per share............. $ (0.06) $ (0.48) $ (2.47) $ (0.68) $ (0.07)
=========== =========== ============ =========== ===========
Weighted average shares
outstanding.................. 4,480,842 4,434,083 4,411,328 4,607,993 4,463,867
=========== =========== ============ =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-31
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER RETAINED
----------------------- COMPREHENSIVE EARNINGS COMPREHENSIVE
SHARES AMOUNT LOSS (DEFICIT) TOTAL LOSS
--------- ----------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996....................... 4,535,879 $11,575,651 $(236,051) $ 9,913,384 $ 21,252,984
Net loss................... -- -- -- (10,879,082) (10,879,082) $(10,879,082)
Sale of stock.............. 16,566 51,768 -- -- 51,768
Retirement of stock........ (127,495) (637,477) -- -- (637,477)
Foreign currency
translation.............. -- -- (45,390) -- (45,390) (45,390)
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss......... $(10,924,472)
============
Balance, September 30,
1997....................... 4,424,950 10,989,942 (281,441) (965,698) 9,742,803
Net loss................... -- -- -- (2,121,543) (2,121,543) $ (2,121,543)
Sale of stock.............. 27,399 69,868 -- -- 69,868
Foreign currency
translation.............. -- -- 221,617 -- 221,617 221,617
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss......... $ (1,899,926)
============
Balance, September 30,
1998....................... 4,452,349 11,059,810 (59,824) (3,087,241) 7,912,745
Net loss................... -- -- -- (264,887) (264,887) $ (264,887)
Sale of stock.............. 87,180 264,608 -- -- 264,608
Foreign currency
translation.............. -- -- 6,707 -- 6,707 6,707
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss......... $ (258,180)
============
Balance, September 30,
1999....................... 4,539,529 11,324,418 (53,117) (3,352,128) 7,919,173
Net loss (unaudited)....... -- -- -- (3,138,112) (3,138,112) $ (3,138,112)
Sale of stock
(unaudited).............. 146,903 475,466 -- -- 475,466
Foreign currency
translation
(unaudited).............. -- -- (2,989) -- (2,989) (2,989)
--------- ----------- --------- ------------ ------------ ------------
Comprehensive loss
(unaudited).............. $ (3,141,101)
============
Balance, March 31, 2000
(unaudited)................ 4,686,432 $11,799,884 $ (56,106) $ (6,490,240) $ 5,253,538
========= =========== ========= ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-32
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------- -------------------------
1999 1998 1997 2000 1999
----------- ----------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $ (264,887) $(2,121,543) $(10,879,082) $(3,138,112) $ (311,647)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 1,019,758 1,866,555 3,170,787 403,464 558,040
Inventory write-off and obsolescence
provision..................................... 312,500 445,580 2,811,573 -- --
Loss on disposal of fixed assets................ 38,269 9,785 52,639 -- --
Deferred income taxes........................... -- (140,000) (895,000) -- --
Gain on sale of IGK............................. -- -- -- (36,736) --
Loss on disposal of discontinued operations..... -- 2,140,262 -- -- --
Gain on sale of securities...................... -- -- (74,777) -- --
Write-off of software development costs......... -- -- 1,616,358 -- --
Change in operating assets and liabilities:
Accounts receivable........................... 472,809 (881,774) (701,182) 633,608 809,432
Refundable income taxes....................... 1,500,911 (325,452) 195,911 6,723 1,459,874
Inventories................................... 990,410 1,177,280 246,880 (37,447) 577,523
Prepaid expenses and other.................... (59,719) 574,068 (328,265) (27,427) (54,354)
Other assets.................................. 178,136 (59,517) (119,750) 22,481 1,774
Accounts payable.............................. (480,128) (346,450) 207,047 199,752 (121,881)
Accrued expenses.............................. (526,785) 247,072 (10,020) (44,479) (530,461)
Deferred revenue.............................. (253,154) 45,697 358,006 40,775 (75,686)
Discontinued operations--non-cash charges
and working capital changes............... -- 1,056,317 2,124,241 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities.................................... 2,928,120 3,687,880 (2,224,634) (1,977,398) 2,312,614
----------- ----------- ------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sale of IGK....................... -- -- -- 1,078,556 --
Proceeds received on note issued on sale of
IGK........................................... -- -- -- 80,277 --
Additions to property and equipment............. (525,502) (289,134) (487,047) (272,850) (233,886)
Proceeds from disposal of discontinued
operations.................................... -- 3,121,500 -- -- --
Investing activities of discontinued
operations.................................... -- -- (300,790) -- --
Additions to software development costs......... -- -- (953,675) -- --
Change in notes receivable...................... -- -- 86,581 -- --
Proceeds from sale of securities................ -- -- 177,612 -- --
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) investing
activities.................................... (525,502) 2,832,366 (1,477,319) 885,983 (233,886)
----------- ----------- ------------ ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under notes
payable....................................... (1,350,000) (7,290,611) 2,949,065 -- (1,350,000)
Reduction of long-term debt..................... (50,000) (50,000) (66,361) (25,000) (25,000)
Proceeds from sale of common stock.............. 264,608 69,868 -- 475,466 44,056
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities.................................... (1,135,392) (7,270,743) 2,882,704 450,466 (1,330,944)
----------- ----------- ------------ ----------- -----------
Effect of exchange rate changes on cash........... 6,707 221,617 (45,390) (2,989) 49,632
----------- ----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 1,273,933 (528,880) (864,639) (643,938) 797,416
Cash and cash equivalents, beginning of period.... 301,206 830,086 1,694,725 1,575,139 301,206
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents, end of period.......... $ 1,575,139 $ 301,206 $ 830,086 $ 931,201 $ 1,098,622
=========== =========== ============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 23,164 $ 85,496 $ 79,512 $ 14,791 $ 17,112
=========== =========== ============ =========== ===========
Cash refunded for income taxes.................. $(1,558,668) $ -- $ (1,323,683) $ -- $(1,558,221)
=========== =========== ============ =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-33
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS. Interface Systems, Inc. (the "Company") primarily
develops and sells software-based tools and solutions to integrate legacy
systems with Internet technology, distribute mainframe documents, and provide
host connectivity. The Company specializes in Internet bill presentment and
payment, as well as electronic delivery of statements and other legacy content
to the Internet, fax, e-mail, and other destinations. The Company operates
primarily in the United States and Europe.

BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of Interface Systems, Inc. and its wholly-owned
subsidiaries, IGK Industries, Inc. ("IGK") and Interface Systems
International, Ltd. ("ISIL"). All significant intercompany transactions and
balances have been eliminated in consolidation.

As discussed in Note 2, in May 1998, the Company sold substantially all
assets and certain liabilities of the ISIL distribution business. Accordingly,
the assets, liabilities and operating results of ISIL have been presented as a
discontinued operation in the accompanying consolidated financial statements.

FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
foreign operations are translated at exchange rates in effect on the balance
sheet date, and revenue and expenses are translated using a weighted average
exchange rate during the period. Cumulative adjustments resulting from
translation of financial statements are reflected as a separate component of
stockholders' equity.

REVENUE RECOGNITION. Revenues from product sales are recognized upon
shipment to the customer. Lease and service revenues are recognized ratably over
the contractual period or as the services are performed. Revenues from licenses
of software products are recognized when the product is shipped and the Company
has no further obligation to the customer. Deferred revenue represents advance
billings on service contracts.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
expensed in the period incurred. These costs, representing development salaries,
fringe benefits, other direct expenses and a portion of the Company's overhead,
are included in the accompanying consolidated financial statements as product
development costs.

CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes investments
in highly liquid financial instruments with maturities of ninety days or less.

F-34
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES. Inventories are valued at the lower of cost (determined on a
first-in, first-out basis) or market, and consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
--------------------- -----------
1999 1998 2000
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods.............................. $ 64,386 $ 897,050 $ --
Purchased parts............................. 557,703 650,346 527,499
Work-in-process............................. 293,888 293,590 --
Service and demo............................ -- 377,901 --
-------- ---------- --------
$915,977 $2,218,887 $527,499
======== ========== ========
</TABLE>

PROPERTY AND EQUIPMENT. Additions to property and equipment are stated at
cost. Depreciation is provided using the straight-line method over the following
estimated useful lives of the assets: building and improvements--33 years; and
machinery and equipment--3 to 10 years. The components of property and equipment
are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------------- -----------
1999 1998 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land..................................... $ 231,383 $ 231,383 $ 231,383
Buildings and improvements............... 2,406,039 2,397,603 1,692,854
Machinery and equipment.................. 4,721,948 4,865,444 3,265,245
---------- ---------- ----------
7,359,370 7,494,430 5,189,482
Less--accumulated depreciation........... 4,171,299 4,051,081 2,782,036
---------- ---------- ----------
$3,188,071 $3,443,349 $2,407,446
========== ========== ==========
</TABLE>

GOODWILL. Goodwill represents the cost in excess of fair value of the net
assets of businesses acquired and is being amortized using the straight-line
method over 15 years. Accumulated amortization expense at September 30, 1999,
1998 and March 31, 2000, was $1,899,272, $1,713,524 and $1,992,146,
respectively. Goodwill amortization expense totaled $185,748, $185,748 and
$260,532 for the years ended September 30, 1999, 1998 and 1997, respectively,
and is included in selling, general and administrative expense in the
accompanying consolidated statements of operations. Goodwill amortization
expense totaled $92,874 for the six months ended March 31, 2000 and 1999.

IMPAIRMENT OF LONG-LIVED ASSETS. In fiscal 1997, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" which requires an evaluation of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. During the third quarter of
fiscal 1997, management's evaluation indicated that the goodwill related to the
Company's investment in its operations in the United Kingdom was impaired and,
consequently, the $1,456,320 carrying value of the related goodwill was written
off as a component of the loss from discontinued operations during fiscal 1997.

F-35
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS. The costs of developing new software products
are capitalized after technological feasibility is established which the Company
defines as having a working model that has been confirmed by testing. The
ongoing assessment of recoverability of capitalized software development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic product lives and changes in software and hardware
technology. With the increase in frequency of product upgrades and a reduction
in the time between establishing technological feasibility and general release
to the public, the Company expects that it will not capitalize any software
development costs in the future.

Amortization of capitalized software development costs is provided on a
product-by-product basis using the straight-line method over the remaining
estimated economic lives of the respective products or three years, whichever is
less. Accumulated amortization was $3,003,596, $2,913,047 and $3,003,596 at
September 30, 1999, 1998 and March 31, 2000, respectively. Amortization expense
was $90,549, $784,103 and $2,033,210 for the years ended September 30, 1999,
1998 and 1997, respectively, and is included in cost of revenues in the
accompanying consolidated statements of operations. Amortization expense was $0
and $46,466 for the six months ended March 31, 2000 and 1999, respectively.

On an ongoing basis, management reviews the valuation and amortization of
capitalized software development costs. As part of its review, management
considers the value of future cash flows attributable to the capitalized
development costs in evaluating potential impairment of the asset. Based on such
review, the Company wrote off $1,616,358 of capitalized software development
costs as a component of cost of revenues during fiscal 1997. No such costs were
written off in fiscal 2000, 1999 or 1998.

STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the stock at grant date over the amount an employee must
pay to acquire the stock. As supplemental information, the Company has provided
pro forma disclosures of stock options granted during fiscal 2000, 1999 and 1998
in accordance with the requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" (see Note 8).

CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
cash, cash equivalents and accounts receivable. At times, such cash and
equivalents in banks are in excess of the respective financial institution's
FDIC insurance limit. With respect to accounts receivable, the Company attempts
to minimize credit risk by reviewing all customers' credit history before
extending credit and by monitoring customers' credit exposure on a continuing
basis. The Company establishes an allowance for possible losses on accounts
receivable based upon factors surrounding the credit risk of specific customers,
historical trends and other information.

FAIR VALUES OF FINANCIAL INSTRUMENTS. The amounts reported for cash and
cash equivalents, accounts receivable, accounts payable, notes payable and
accrued expenses approximate fair value due to the short maturity of these
items.

F-36
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME (LOSS) PER SHARE. Income (loss) per share amounts have been
calculated using the weighted average number of shares of common stock
outstanding during the period. Outstanding stock options do not have a dilutive
effect on income (loss) per share for any periods presented due to the net loss.
In fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share." No
amounts from prior periods needed to be restated to conform to the requirements
of SFAS No. 128.

In 1999, 1998 and 1997, the dilutive effect of certain stock options
outstanding for the purchase of 818,202, 696,867 and 531,767 shares,
respectively, were not included in the calculation of diluted earnings per share
due to the net loss for those periods as doing so would have been anti-dilutive.
For the six months ended March 31, 2000, the excluded options were 811,118
shares.

COMPREHENSIVE INCOME. Effective October 1, 1998, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income," which established standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity. The difference between net income (loss), as
reported in the accompanying consolidated statements of operations, and
comprehensive income (loss) is the foreign currency translation adjustment for
the respective periods. The accumulated other comprehensive loss consists solely
of the cumulative translation adjustment as presented in the accompanying
consolidated balance sheets.

USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. The Financial Accounting
Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The Company is required to adopt the provisions of
SFAS 133 in fiscal 2000. The Company expects the adoption will not affect
results of operations or financial statements.

RECLASSIFICATIONS. For comparative purposes, certain amounts reported in
prior years' financial statements have been reclassified to conform to current
year presentations.

2. SALE OF INTERFACE SYSTEMS INTERNATIONAL LTD. DISTRIBUTION BUSINESS;
DISCONTINUED OPERATIONS

In May 1998, the Company sold substantially all assets and certain
liabilities of its ISIL distribution business to Fayrewood plc for approximately
$3.1 million cash. The liabilities not assumed by Fayrewood include the lease on
the building in the United Kingdom (see Note 9) and certain accounts payable of
approximately $385,000. The sale resulted in a loss of $2,140,262. The sale did
not include the assumption by Fayrewood of all of ISIL's liabilities, and
therefore, no assurances can be given that claims will not be made against the
Company in the future arising out of ISIL's former operations. In management's
opinion, such claims will not have a material adverse effect on the Company's
financial condition and results of operations.

The operating results of ISIL have been segregated from continuing
operations and reported as a separate line item on the Company's consolidated
statement of operations. The Company has restated

F-37
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

2. SALE OF INTERFACE SYSTEMS INTERNATIONAL LTD. DISTRIBUTION BUSINESS;
DISCONTINUED OPERATIONS (CONTINUED)
its prior financial statements to present the operating results of ISIL as a
discontinued operation. Net revenues of the ISIL distribution business totaled
$38.8 million and $62.8 million, for fiscal 1998 and 1997, respectively.

3. LINE OF CREDIT

The Company had a $3.5 million bank credit facility that expired on
February 28, 2000. As of September 30, 1999, there were no borrowings
outstanding under this facility. Advances bore interest at the bank's prime rate
(8.25% at September 30, 1999) plus 1%, were payable on demand and were
collateralized by substantially all of the Company's assets. The amount
available for borrowing at any time was based on borrowing base formulas
relating to levels of accounts receivable, inventories and other bank covenants.
Under such formulas, the entire facility was available to the Company as of
September 30, 1999.

In May 2000, the Company completed the renewal of its bank credit facility
expanding the borrowing capability from $3.5 to $5.0 million. The new credit
facility expires on May 31, 2001. Advances bear interest at the bank's prime
rate (9.0% at March 31, 2000) plus 1%, are payable on demand and are
collateralized by substantially all of the Company's assets. The amount
available for borrowing at any time is based on borrowing base formulas relating
to levels of accounts receivable and other bank covenants. Under such formulas,
$4.2 million was available to the Company at March 31, 2000.

Under the terms of the credit agreement, the Company is required to maintain
certain minimum working capital, net worth and profitability levels and other
specific financial ratios. In addition, the credit agreement prohibits the
payment of cash dividends and contains certain restrictions on the Company's
ability to borrow money or purchase assets or interests in other entities
without the prior written consent of the bank. At March 31, 2000, the Company
was in compliance with the new bank covenants.

4. LONG-TERM DEBT

Long-term debt consists of an installment loan payable to a bank in monthly
installments of $4,167 plus interest at the bank's prime rate (8.25% at
September 30, 1999) plus 1%, due February 2002, and is collateralized by
substantially all of the Company's assets. Long-term debt consists of the
following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1999 1998 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Installment loan payable..................... $120,833 $170,833 $95,833
Less--current maturities..................... 50,200 50,200 50,200
-------- -------- -------
$ 70,633 $120,633 $45,633
======== ======== =======
</TABLE>

F-38
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

5. RETIREMENT PLAN

The Company has a 401(k) plan covering substantially all United States
employees. The Company matches 100% of the amount contributed by participants,
up to 4% of participant compensation, and may make additional contributions as
approved by the Board of Directors. The Company recognized approximately
$242,676, $211,247, and $274,000 of expense related to this plan for the years
ended September 30, 1999, 1998 and 1997, respectively. The Company recognized
approximately $122,000 and $99,000 of expense for the six months ended
March 31, 2000 and 1999, respectively.

6. STOCKHOLDERS' EQUITY

In March 1998, the Company changed its state of incorporation from Delaware
to Michigan. In connection therewith, the number of shares of Common Stock
authorized was changed from 20,000,000 to 12,500,000 and the par value of the
Common Stock was changed from $0.10 to no par value. In February 2000, the
Company increased the number of shares of authorized Common Stock from
12,500,000 to 25,000,000.

In January 1997, the Company acquired 127,495 shares of its Common Stock
valued at $637,477, upon the default in payment of all principal and interest
due and owing as of such date by a former officer of the Company under the terms
of a note payable owed by such officer to the Company. The value of the shares
is equal to all indebtedness which was owed to the Company at the time of
default. In August 1997, the Company issued 16,566 shares of common stock to
employees in exchange for accrued vacation.

7. EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan (the "ESPP") was adopted by the
Company's Board of Directors in February 1998. A total of 225,000 shares of
common stock have been reserved for issuance under the ESPP. The ESPP provides
that the Company will sell shares to employees who elect to participate in the
ESPP at a price equal to 85% of the lesser of the fair market value of the
common stock on the first or last trading day of the six month period beginning
either June 1 or December 1. Under the ESPP, the Company issued 40,688, 36,549
and 27,399 shares of common stock in fiscal 2000, 1999 and 1998, respectively.

8. STOCK OPTIONS

The Company currently grants stock options under two plans, the 1992 Stock
Option Plan (the "1992 Plan") and the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors Plan"). The Company had previously granted options
under the 1982 Stock Option Plan ("the 1982 Plan"), which expired in 1992. At
September 30, 1999, options to purchase 12,700 shares of common stock were
outstanding and exercisable under the 1982 Plan. In fiscal 1998, the Company
also granted non-qualified stock options to employees and to an employee
director upon his retirement to purchase 40,100 shares of common stock. At
September 30, 1999, options to purchase 33,900 shares of common stock were
outstanding and 24,500 were exercisable under these non-qualified grants.

The 1992 Plan provides for the grant of both incentive stock options and
non-qualified options to officers and key employees. Options under the 1992 Plan
are granted at not less than market price on the date of grant, are exercisable
at the rate of 33% per year after one year from the date of grant and

F-39
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

8. STOCK OPTIONS (CONTINUED)
have a term of ten years. The 1992 Plan has 800,000 shares of common stock
authorized for grant which was increased to 1,100,000 in February 2000. At
September 30, 1999, 105,567 shares were available for grant, 644,102 were
outstanding and 261,969 were exercisable under the 1992 Plan.

Effective June 10, 1997, the Company offered current option holders except
for executive officers the opportunity to exchange outstanding options for an
equal number of options of the Company's common stock, at a price of $4 per
share (market price $3). Option holders representing 106,067 shares of common
stock accepted this offer and the Company canceled the previous options and
granted new options under the 1992 Plan. The options vest over three years
effective from the new date of grant.

The Directors Plan provides for the grant to non-employee directors of
options to purchase up to 175,000 shares of common stock. The Plan provides for
discretionary grants with vesting determined at the time of grant. Options are
granted at market price on the date of grant and have a term of ten years. At
September 30, 1999, 47,500 shares were available for grant, 127,500 were
outstanding and exercisable under the Directors Plan.

The following table summarizes stock option activity through March 31, 2000:

<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, September 30, 1996........................ 408,666 $ 6.86
Granted.......................................... 419,268 3.94
Canceled......................................... (296,167) 7.10
--------
Balance, September 30, 1997........................ 531,767 4.59
Granted.......................................... 295,900 2.67
Canceled......................................... (130,800) 3.93
--------
Balance, September 30, 1998........................ 696,867 3.90
Granted.......................................... 212,100 2.94
Exercised........................................ (50,631) 3.61
Canceled......................................... (40,134) 3.93
--------
Balance, September 30, 1999........................ 818,202 3.67
Granted (unaudited).............................. 118,300 16.45
Exercised (unaudited)............................ (108,215) 3.77
Canceled (unaudited)............................. (17,169) 3.31
--------
Balance, March 31, 2000 (unaudited)................ 811,118 5.49
========
</TABLE>

F-40
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

8. STOCK OPTIONS (CONTINUED)
The following table summarizes information about options outstanding at
September 30, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
RANGE WEIGHTED AVERAGE WEIGHTED WEIGHTED
OF EXERCISE NUMBER CONTRACTUAL REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------- ----------- --------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.25..................... 121,600 8.89 $ 2.25 40,766 $ 2.25
2.75-4.13................ 612,702 8.18 3.50 304,003 3.75
4.75-5.38................ 62,000 4.89 5.16 62,000 5.16
7.19..................... 1,500 5.11 7.19 1,500 7.19
11.00-16.25............... 20,400 6.32 12.31 20,400 12.31
------- -------
Total.................... 818,202 7.98 $ 3.67 428,669 $ 4.23
======= =======
</TABLE>

The following table summarizes information about options outstanding at
March 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------
RANGE WEIGHTED AVERAGE WEIGHTED WEIGHTED
OF EXERCISE NUMBER CONTRACTUAL REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------------------- ----------- --------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.25..................... 114,566 8.39 $ 2.25 33,535 $ 2.25
2.75-4.13................ 534,402 7.65 3.55 370,711 3.73
4.31-5.38................ 25,500 3.56 5.28 25,500 5.28
7.19-7.50................ 250 4.61 7.19 250 7.19
11.00-16.25............... 124,400 9.01 13.74 20,400 12.31
37.50..................... 12,000 9.88 37.50 12,000 37.50
------- -------
Total.................... 811,118 7.87 $ 5.49 462,396 $ 4.97
======= =======
</TABLE>

STOCK-BASED COMPENSATION

Using the intrinsic value method of accounting for the value of stock
options granted during fiscal 2000, 1999, 1998 and 1997, no compensation cost
was recorded in the accompanying consolidated statements of operations. Had
compensation cost been determined based on the fair value at the date of grant
for awards in fiscal 2000, 1999 and 1998 consistent with the provisions of SFAS
No. 123,

F-41
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

8. STOCK OPTIONS (CONTINUED)
income (loss) from continuing operations and income (loss) per share from
continuing operations would have been reduced (increased) to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
---------------------------------- -----------
1999 1998 1997 2000
--------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) from continuing
operations:
As reported.................. $(264,887) $766,962 $(6,605,118) $(3,138,112)
Pro forma.................... $(668,630) $412,716 $(6,749,711) $(3,565,601)
Income (loss) per share from
continuing operations:
As reported.................. $ (0.06) $ 0.17 $ (1.50) $ (0.68)
Pro forma.................... $ (0.15) $ 0.09 $ (1.53) $ (0.77)
</TABLE>

The weighted average estimated fair value of stock options granted during
fiscal 2000, 1999, 1998 and 1997 was $11.39, $1.61, $1.42 and $2.32,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model. Because the SFAS No. 123
method of accounting has not been applied to options granted prior to
October 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The following weighted
average assumptions were used in valuing the option grants:

<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
------------------------------ ----------
1999 1998 1997 2000
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Expected life (years)........................... 3.0 3.0 3.0 3.0
Risk free interest rate......................... 5.0% 5.5% 6.3% 6.1%
Expected stock price volatility................. 79.0% 78.8% 67.8% 107.7%
Expected dividend yield......................... 0.0% 0.0% 0.0% 0.0%
</TABLE>

9. COMMITMENTS

The Company has various non-cancelable operating leases which require future
minimum rental payments in excess of one year as follows: 2000--$133,000;
2001--$65,000; 2002--$24,000; and 2003--$2,500. Rent expense under all leases
for the years ended September 30, 1999, 1998 and 1997 was approximately
$241,000, $296,000 and $338,000, respectively. Rent expense for the six months
ended March 31, 2000 and 1999, was approximately $85,000 and $69,000,
respectively.

In connection with the sale of the ISIL distribution business, the Company
assumed the operating lease obligation for ISIL's former office building. The
building lease has future minimum payments of approximately $177,000 per year
and expires in April 2020. The building has been sublet through April 2003 on
the same terms and conditions as the master lease. The Company believes that it
will continue to be able to sublease the office building throughout the master
lease period and that its

F-42
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

9. COMMITMENTS (CONTINUED)
ultimate exposure will not have a material impact on the consolidated financial
statements. Therefore, no liability has been recorded in the accompanying
consolidated balance sheets for this lease.

10. INCOME TAXES

A summary of income (loss) from continuing operations before income taxes
and components of the provision (benefit) for income taxes is as follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
----------------------------------- -----------
1999 1998 1997 2000
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) from continuing operations
before income taxes:
Domestic.................................... $(122,179) $ 581,628 $(7,572,504) $(2,965,105)
Foreign..................................... (102,117) (226,909) (1,133,424) (166,284)
--------- --------- ----------- -----------
$(224,296) $ 354,719 $(8,705,928) $(3,131,389)
========= ========= =========== ===========
Provision (benefit) for income taxes:
Current--federal............................ $ 40,591 $(272,243) $(1,205,810) $ 6,723
Deferred--federal........................... -- (140,000) (895,000) --
--------- --------- ----------- -----------
$ 40,591 $(412,243) $(2,100,810) $ 6,723
========= ========= =========== ===========
</TABLE>

A reconciliation of the consolidated income tax provision (benefit) at the
Federal statutory rate and the consolidated income tax provision (benefit) at
the Company's effective rate is as follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
---------------------------------- -----------
1999 1998 1997 2000
-------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal statutory provision (benefit).......... $(76,000) $ 121,000 $(2,960,000) $(1,065,000)
Utilization of tax benefits.................... -- (336,000) -- --
Increase to (reduction of) taxes provided in
prior years.................................. 40,591 (272,243) -- 6,723
Losses without tax benefit..................... 25,000 -- 682,000 1,026,000
Amortization of goodwill....................... 63,000 63,000 63,000 32,000
Other.......................................... (12,000) 12,000 114,190 7,000
-------- --------- ----------- -----------
Consolidated income tax provision (benefit).... $ 40,591 $(412,243) $(2,100,810) $ 6,723
======== ========= =========== ===========
</TABLE>

F-43
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

10. INCOME TAXES (CONTINUED)
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. The components of
the Company's deferred taxes are as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1999 1998 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax liabilities--
Depreciation and amortization.......... $ (260,000) $ (375,000) $ (226,000)
Deferred tax assets--
Net operating loss carry forwards.... 3,069,000 3,044,000 4,116,000
Receivable and inventory reserves.... 174,000 311,000 170,000
Accrued liabilities.................. 44,000 107,000 15,000
Tax credits.......................... 354,000 162,000 431,000
----------- ----------- -----------
Gross deferred income taxes........ 3,381,000 3,249,000 4,506,000
Valuation allowance.................... (3,381,000) (3,249,000) (4,506,000)
----------- ----------- -----------
Net deferred income taxes.......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>

The Company has pre-tax net operating loss carryforwards of approximately
$12,100,000 available for tax reporting purposes which can be used to offset its
future taxable income whereby $8,954,000 of the loss carryforward expires in
2018, $134,000 expires in 2019 and $3,012,000 expires in 2020. The related
deferred tax benefit is fully offset by a valuation allowance as management does
not believe that realization of the tax benefit is more likely than not.

F-44
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

11. GEOGRAPHIC AND INDUSTRY SEGMENT INFORMATION

Effective in fiscal 1999, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Under the provisions
of SFAS No. 131, the Company operates in one segment--the development, marketing
and support of software products and computer peripherals. The Company operates
in two geographic regions: the United States and Europe.

Management evaluates business segment performance based on income from
continuing operations.

The following table shows net revenues, net income (loss) and identifiable
assets by geographic region:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
--------------------------------------- ------------------------
1999 1998 1997 2000 1999
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
United States............... $18,893,190 $20,321,710 $18,505,583 $5,999,608 $ 9,524,388
Europe...................... 2,013,197 1,726,486 1,927,508 456,295 956,064
Intercompany................ (737,271) (437,654) (1,348,467) (61,328) (407,224)
----------- ----------- ----------- ---------- -----------
$20,169,116 $21,610,542 $19,084,624 $6,394,575 $10,073,228
=========== =========== =========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
------------------------- -----------
1999 1998 2000
----------- ----------- -----------
<S> <C> <C> <C> <C>
Identifiable assets:
United States........................... $11,365,644 $12,196,307 $ 8,772,083
Europe.................................. 1,260,997 1,208,934 1,007,122
Discontinued business................... -- -- --
Eliminations............................ (2,103,210) (228,171) (1,947,224)
----------- ----------- -----------
$10,523,431 $13,177,070 $ 7,831,981
=========== =========== ===========
</TABLE>

One Cleo Enterprise Networking products customer accounted for 13% of 1998
consolidated net revenue. No customer accounted for more than 10% of
consolidated net revenue in fiscal 2000, 1999 or 1997.

12. SUBSEQUENT EVENTS

On December 22, 1999, the Company sold its subsidiary, IGK Industries, Inc.
for $1,450,000 which resulted in a small gain. The purchaser acquired all assets
and assumed all current liabilities of IGK. Also included in the sale was the
building that houses IGK's operations which was owned by the Company and leased
to IGK. See Note 14 for unaudited pro forma data related to this transaction.

On June 28, 2000, the Company entered into a merger agreement with
Tumbleweed Communications Corp. ("Tumbleweed") whereby the Company agreed to
merge with a newly formed subsidiary of Tumbleweed. The Company's stockholders
are expected to receive 0.264 shares of Tumbleweed common stock for each share
of the Company's common stock. In addition, outstanding

F-45
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

12. SUBSEQUENT EVENTS (CONTINUED)
options and warrants will be converted into options or warrants to purchase
0.264 shares of Tumbleweed common stock with an appropriate adjustment to the
exercise price to reflect the exchange ratio. In connection with the merger, the
Company granted Tumbleweed an option to purchase 19.9% of the total number of
shares of the Company issued and outstanding at June 28, 2000 if an event occurs
which would entitle Tumbleweed to terminate the merger agreement and which would
entitle Tumbleweed to receive a termination fee. In connection with the merger,
Tumbleweed also agreed to purchase $3,000,000 of convertible subordinate
promissory notes of the Company.

On July 7, 2000, several parties, including Congressional Securities, Inc.
and David H. Zimmer, filed complaints against the Company, its President and
Chief Executive Officer and certain other third parties. The complaints
generally allege that the Company and its officers intentionally made statements
containing material omissions or misrepresentations in an effort to induce
plaintiffs to purchase stock in the Company. The complaints allege violations of
the federal securities laws and other complaints allege fraudulent and negligent
misrepresentation, defamation and tortious interference with business relations.
The complaints seek compensatory and punitive damages allegedly incurred as a
result of the decline in the market price of shares of the Company's common
stock after a dramatic stock market correction that occurred in April 2000. On
July 17, 2000, at least one of the complaints was amended. These actions are in
a preliminary stage and the Company and its named officer have not yet been
served process in these actions. However, the Company believes that these
actions are without merit, and the Company and its named officer intend to
vigorously defend these claims. Although the final resolution of this litigation
cannot be presently determined, management of the Company does not believe it
will have a material adverse effect on the Company's business, or the future
consolidated financial statements, although such adverse effects could be
possible.

13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of selected quarterly financial data for the
years ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------- FISCAL
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1999
Net revenues...................... $5,211,186 $4,862,042 $5,201,865 $4,894,023 $20,169,116
Gross profit...................... 3,109,747 2,795,668 3,205,635 3,159,062 12,270,112
Net income (loss)................. 130,098 (441,745) 228,753 (181,993) (264,887)
Net earnings (loss) per share..... 0.03 (0.10) 0.05 (0.04) (0.06)
</TABLE>

F-46
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------- FISCAL
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1998
Net revenues...................... $5,623,214 $5,066,318 $4,826,340 $6,094,670 $21,610,542
Gross profit...................... 3,231,276 2,730,135 2,806,289 3,371,087 12,138,787
Income (loss) from continuing
operations:
Income (loss)................... 151,652 21,287 (66,858) 660,881 766,962
Income (loss) per share......... 0.03 0.01 (0.02) 0.15 0.17
Net income (loss)................. (62,628) (2,303,676) (66,858) 311,619 (2,121,543)
Net earnings (loss) per share..... (0.01) (0.52) (0.02) 0.07 (0.48)
</TABLE>

14. PRO FORMA DATA (UNAUDITED)

The following unaudited pro forma consolidated condensed balance sheet as of
September 30, 1999, and unaudited pro forma consolidated condensed statement of
operations for the year then ended, give pro forma effect to the disposition of
IGK as if it had occurred as of October 1, 1998. The unaudited pro forma
consolidated condensed balance sheet and statement of operations do not purport
to be indicative of the financial position or the results of operations of the
Company had the transaction actually been completed as of October 1, 1998, or
which may be obtained in the future. The pro forma effects of this disposition
for the six months ended March 31, 2000 are not material.

F-47
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

14. PRO FORMA DATA (UNAUDITED) (CONTINUED)
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO
INTERFACE IGK PRO FORMA FORMA
SYSTEMS, INC. INDUSTRIES, INC. ADJUSTMENTS HISTORICAL
------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 1,575 $ -- $1,100 $ 2,675
Accounts receivable, net..................... 3,690 359 106 3,437
Inventories.................................. 916 466 -- 450
Prepaid expenses and other................... 310 12 -- 298
------- ------ ------ -------
Total current assets....................... 6,491 837 1,206 6,860
------- ------ ------ -------
Property and equipment, net.................... 3,188 509 (224) 2,455
Goodwill, net.................................. 789 -- -- 789
Note receivable................................ -- -- 270 270
Other assets................................... 55 -- -- 55
------- ------ ------ -------
$10,523 $1,346 $1,252 $10,429
======= ====== ====== =======
Current Liabilities:
Accounts payable............................. $ 912 $ 92 $ -- $ 820
Accrued expenses............................. 1,190 65 -- 1,125
Deferred revenue............................. 431 -- -- 431
------- ------ ------ -------
Total current liabilities.................. 2,533 157 -- 2,376
------- ------ ------ -------
Long-term debt................................. 71 -- -- 71
Stockholders' Equity:
Common stock................................. 11,324 450 450 11,324
Accumulated deficit.......................... (3,352) 739 802 (3,289)
Accumulated other comprehensive loss......... (53) -- -- (53)
------- ------ ------ -------
Total stockholders' equity................. 7,919 1,189 1,252 7,982
------- ------ ------ -------
$10,523 $1,346 $1,252 $10,429
======= ====== ====== =======
</TABLE>

F-48
<PAGE>
INTERFACE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999 ARE
UNAUDITED)

14. PRO FORMA DATA (UNAUDITED) (CONTINUED)
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO
INTERFACE IGK PRO FORMA FORMA
SYSTEMS, INC. INDUSTRIES, INC. ADJUSTMENTS HISTORICAL
------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Net revenues................................... $20,169 $2,717 $ -- $17,452
Cost of revenues............................... 7,899 2,400 -- 5,499
------- ------ --------- -------
Gross profit................................. 12,270 317 -- 11,953
Product development............................ 3,854 -- -- 3,854
Selling, general & administrative.............. 8,683 419 -- 8,264
------- ------ --------- -------
Loss from operations......................... (267) (102) -- (165)
Other income................................... 43 -- 26 69
------- ------ --------- -------
Loss before taxes............................ (224) (102) 26 (96)
Income tax provision (credit).................. 41 (4) -- 45
------- ------ --------- -------
Loss from continuing operations................ $ (265) $ (98) $ 26 $ (141)
======= ====== ========= =======
Basic loss per share........................... $ (0.06) $ (0.03)
======= =======
Weighted average shares outstanding............ 4,481 4,481
======= =======
</TABLE>

The above pro forma consolidated condensed financial statements include the
following pro forma adjustments:

(1) Recognition of twelve months of interest income on the note receivable
from the sale.

(2) Removal of the building owned by ISI that was sold in the transaction.

(3) Recognition of the proceeds from the disposition of IGK.

F-49
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The selected unaudited pro forma condensed combined financial information
for Tumbleweed set forth below gives effect to the acquisition of Interface
Systems, Inc. ("Interface"). The historical financial information set forth
below has been derived from, and is qualified by reference to, the consolidated
financial information of Tumbleweed and Interface and should be read in
conjunction with those financial statements and the notes thereto included
elsewhere herein. The selected unaudited pro forma condensed combined balance
sheet as of March 31, 2000 gives effect to the acquisition of Interface as if it
occurred on that date. The selected unaudited pro forma condensed combined
statement of operations data for the year ended December 31, 1999 and the three
months ended March 31, 2000 give effect to the acquisition as if it occurred on
the first day of each of those periods under the purchase method of accounting
by combining the results for the year ended December 31, 1999 of Tumbleweed with
the results for the year ended September 30, 1999 of Interface, and combining
the results for the three months ended March 31, 2000 of Tumbleweed with the
same period of Interface. The selected unaudited pro forma condensed combined
financial information reflects certain adjustments, including adjustments to
reflect the amortization of goodwill resulting from the acquisition. The
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 reflects the elimination of the results of operations of
Interface's non-L2i businesses from October 1, 1998 to September 30, 1999 and
from January 1, 2000 to March 31, 2000. The unaudited pro forma condensed
combined statements of operations and balance sheet do not include the financial
results and accounting for the Company's additional investment in Tumbleweed KK
because the additional investment and Tumbleweed's resulting change to
consolidation accounting were not deemed significant. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes of Tumbleweed and Interface included elsewhere in
this prospectus. The pro forma condensed combined financial information does not
purport to represent what the consolidated results of operations or financial
condition of Tumbleweed would actually have been if the Interface acquisition
had in fact occurred on such dates or the future consolidated results of
operations or financial condition of Tumbleweed.

F-50
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

PRO FORMA CONDENSED COMBINED BALANCE SHEET

MARCH 31, 2000

(IN THOUSANDS)

<TABLE>
<CAPTION>
INTERFACE NON-L2I PRO FORMA PRO FORMA
TUMBLEWEED SYSTEMS BUSINESSES L2I ADUSTMENTS PRO FORMA
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................ $ 46,447 $ 931 $ (102) $ 829 $ -- $ 47,276
Accounts Receivable................. 4,980 2,656 (979) 1,677 -- 6,657
Other Current Assets................ 3,134 1,109 (585) 524 -- 3,658
-------- ------- ------- ------- -------- --------
TOTAL CURRENT ASSETS.............. 54,561 4,696 (1,666) 3,030 -- 57,591
-------- ------- ------- ------- -------- --------
NET PROPERTY & EQUIPMENT.............. 5,001 2,407 (166) 2,241 1,400 8,642
GOODWILL AND INTANGIBLES.............. -- 696 (696) -- 61,536 61,536
OTHER ASSETS.......................... 3,014 33 (1) 32 -- 3,046
NET ASSETS HELD FOR DISPOSAL.......... -- -- 1,656 1,656 (1,043) 613
-------- ------- ------- ------- -------- --------
TOTAL ASSETS.................... $ 62,576 $ 7,832 $ (873) $ 6,959 $ 61,893 $131,428
======== ======= ======= ======= ======== ========

LIABILITIES & EQUITY
CURRENT LIABILITIES:
Notes Payable....................... $ 594 $ 50 $ -- $ 50 $ -- $ 644
Accounts Payable.................... 5,514 878 (214) 664 -- 6,178
Accrued Liabilities................. 6,822 1,133 (474) 659 -- 7,481
Deferred Revenue.................... 2,639 471 (207) 264 (264) 2,639
-------- ------- ------- ------- -------- --------
TOTAL CURRENT LIABILITIES......... 15,569 2,532 (895) 1,637 (264) 16,942
-------- ------- ------- ------- -------- --------
LONG TERM DEBT:....................... --
Long Term Debt...................... 858 46 -- 46 -- 904
Other Long term Liabilities......... 266 -- -- -- -- 266
-------- ------- ------- ------- -------- --------
TOTAL LONG TERM DEBT.............. 1,124 46 -- 46 -- 1,170
-------- ------- ------- ------- -------- --------
TOTAL LIABILITIES................. 16,693 2,578 (895) 1,683 (264) 18,112
-------- ------- ------- ------- -------- --------
SHAREHOLDERS' EQUITY.................. --
Par Value........................... 26 11,800 -- 11,800 (11,799) 27
Additional Paid-in Capital.......... 134,764 -- -- -- 71,687 206,451
Deferred Compensation Expense....... (5,105) -- -- -- (2,255) (7,360)
Translation Gain (Loss)............. 70 (56) 22 (34) 34 70
Retained Earnings (Deficit)......... (83,872) (6,490) -- (6,490) 4,490 (85,872)
-------- ------- ------- ------- -------- --------
TOTAL STOCKHOLDERS' EQUITY........ 45,883 5,254 22 5,276 62,157 113,316
-------- ------- ------- ------- -------- --------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY.......... $ 62,576 $ 7,832 $ (873) $ 6,959 $ 61,893 $131,428
======== ======= ======= ======= ======== ========
</TABLE>

F-51
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INTERFACE NON-L2I
TUMBLEWEED SYSTEMS BUSINESSES
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA PRO FORMA
1999 1999 1999 L2I ADUSTMENTS PRO FORMA
------------ ------------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
License Fees.................... $ 11,285 $12,647 $ 9,849 $ 2,798 $ -- $ 14,083
Transaction Fees................ 981 -- -- -- -- 981
Services and Support Fees....... 3,018 1,992 1,623 369 -- 3,387
Other........................... 1,472 5,530 5,345 185 -- 1,657
-------- ------- ------- ------- -------- --------
NET REVENUE..................... 16,756 20,169 16,817 3,352 -- 20,108

License......................... 737 2,672 2,609 63 -- 800
Transaction..................... 78 -- -- -- -- 78
Services........................ 4,088 1,030 733 297 -- 4,385
Other........................... -- 4,197 4,037 160 -- 160
-------- ------- ------- ------- -------- --------
COST OF REVENUES................ 4,903 7,899 7,379 520 -- 5,423
-------- ------- ------- ------- -------- --------
GROSS PROFIT.................... 11,853 12,270 9,438 2,832 -- 14,685
-------- ------- ------- ------- -------- --------
OPERATING EXPENSES:
Research and Development...... 8,923 3,855 2,312 1,543 -- 10,466
Sales and Marketing........... 19,917 5,392 1,893 3,499 -- 23,416
General & Administrative...... 5,524 3,290 671 2,619 21 8,164
Stock Compensation............ 3,536 -- -- -- 1,127 4,663
Acquired in-process research
and development............. -- -- -- -- 2,000 2,000
Goodwill and other intangibles
amortization................ -- -- -- -- 22,702 22,702
-------- ------- ------- ------- -------- --------
TOTAL OPERATING EXPENSES........ 37,900 12,537 4,876 7,661 25,850 71,411
-------- ------- ------- ------- -------- --------
OPERATING PROFIT (LOSS)......... (26,047) (267) 4,562 (4,829) (25,850) (56,726)
-------- ------- ------- ------- -------- --------
OTHER INCOME, NET............. 2,126 2 -- 2 -- 2,128
-------- ------- ------- ------- -------- --------
LOSS BEFORE PROVISION FOR INCOME
TAXES......................... (23,921) (265) 4,562 (4,827) (25,850) (54,598)
-------- ------- ------- ------- -------- --------
Income Tax Expense.............. 301 -- -- -- -- 301
-------- ------- ------- ------- -------- --------
NET INCOME (LOSS) AFTER TAX..... $(24,222) $ (265) $ 4,562 $(4,827) $(25,850) $(54,899)
======== ======= ======= ======= ======== ========
Net loss per share--basic and
diluted....................... $ (1.65) $ (3.45)
Shares used in computing net
loss per share--basic and
diluted....................... 14,650 15,896
</TABLE>

See accompanying notes to selected unaudited pro forma condensed combined
financial information.

F-52
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2000

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INTERFACE NON-L2I PRO FORMA PRO FORMA
TUMBLEWEED SYSTEMS BUSINESSES L2I ADUSTMENTS PRO FORMA
---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
License Fees........................ $ 4,356 $ 1,957 $1,181 $ 776 $ -- $ 5,132
Transaction Fees.................... 730 11 -- 11 -- 741
Services and Support Fees........... 1,524 685 151 534 -- 2,058
Other............................... -- 322 322 -- -- --
-------- ------- ------ ------- ------- --------
NET REVENUE......................... 6,610 2,975 1,654 1,321 -- 7,931

License............................. 267 318 318 -- -- 267
Transaction......................... 40 -- -- -- -- 40
Services............................ 1,941 281 -- 281 -- 2,222
Other............................... -- 274 274 -- -- --
-------- ------- ------ ------- ------- --------
COST OF REVENUES.................... 2,248 873 592 281 -- 2,529
-------- ------- ------ ------- ------- --------
GROSS PROFIT........................ 4,362 2,102 1,062 1,040 -- 5,402
-------- ------- ------ ------- ------- --------
OPERATING EXPENSES:.................
Research and Development............ 2,843 752 84 668 -- 3,511
Sales and Marketing................. 7,192 1,448 157 1,291 -- 8,483
General & Administrative............ 1,640 1,590 279 1,311 5 2,956
Stock Compensation.................. 1,074 -- -- -- 282 1,356
Acquired in-process research and
development....................... -- -- -- -- 2,000 2,000
Goodwill and other intangibles
amortization...................... -- -- -- -- 5,676 5,676
Merger related expenses............. 10,803 -- -- -- -- 10,803
-------- ------- ------ ------- ------- --------
TOTAL OPERATING EXPENSES............ 23,552 3,790 520 3,270 7,963 34,785
-------- ------- ------ ------- ------- --------
OPERATING PROFIT (LOSS)............. (19,190) (1,688) 542 (2,230) (7,963) (29,383)
-------- ------- ------ ------- ------- --------
OTHER INCOME, NET................. 656 12 -- 12 -- 668
-------- ------- ------ ------- ------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME
TAXES............................. (18,534) (1,676) 542 (2,218) (7,963) (28,715)
-------- ------- ------ ------- ------- --------
Income Tax Expense.................. 88 -- -- -- -- 88
-------- ------- ------ ------- ------- --------
NET INCOME (LOSS) AFTER TAX......... $(18,622) $(1,676) $ 542 $(2,218) $(7,963) $(28,803)
======== ======= ====== ======= ======= ========
Net loss per share--basic and
diluted........................... $ (0.73) $ (1.07)

Shares used in computing net loss
per share--basic and diluted.... 25,588 26,834
</TABLE>

See accompanying notes to selected unaudited pro forma condensed combined
financial information.

F-53
<PAGE>
NOTES TO PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION

The Company entered into an agreement on June 28, 2000 to purchase the
common stock and assume stock options and warrants of Interface Systems, Inc. in
a transaction planned to be accounted for under the purchase method of
accounting. The preliminary estimate of the total purchase price is
approximately $74.7 million consisting of cash surrendered of $3.0 million,
approximately 1.25 million shares of the Company's common stock (with a fair
value of approximately $64.1 million) the assumption of outstanding stock
options with a fair value of approximately $4.1 million, and transaction costs
of approximately $3.5 million.

The Interface historical financials have been adjusted to reflect the
Company's assumed divestiture of Interface's non-L2i operations and product
lines assuming such divestitures had occurred as of the beginning of the periods
presented. Interface's non-L2i net assets have been reflected in the pro forma
combined balance sheet as net assets held for disposal. Interface's non-L2i
operations are reflected in the pro forma combined statements of operations
using the following allocation guidelines:

- Revenues and expenses directly attributable to non-L2i operations and
products;

- For centralized functions that served all of Interface's operations, costs
were allocated to non-L2i operations and products based on headcount and
certain activity measures such as revenue; and

- For corporate level activities, all costs not directly attributable to
non-L2i operations were allocated to L2i operations.

Pro forma adjustments for the unaudited pro forma condensed combined balance
sheet as of March 31, 2000 and statements of operations for the year ended
December 31, 1999 and the three months ended March 31, 2000 are as follows:

1. To reflect the preliminary allocation of the estimated purchase price.

The total estimated purchase price for the acquisition has been allocated on
a preliminary basis to assets and liabilities based on management's best
estimates of their fair value with the excess costs over the net assets
acquired allocated to goodwill. The preliminary allocation has resulted in
unearned stock compensation of approximately $2.3 million, purchased
in-process research and development estimated to be $2.0 million, and
estimated goodwill and identified intangible assets of $61.5 million which
are being amortized over periods ranging from one to three years. The net
assets held for disposal have been adjusted to their estimated net
realizable value. This allocation is subject to change pending a final
analysis of the value of the assets acquired and liabilities assumed.

2. To reflect amortization of goodwill and other intangible assets resulting
from the acquisition.

3. To reflect the acquisition of all of the outstanding stock of Interface.

4. Basic and diluted net loss per share has been adjusted to reflect the
issuance of approximately 1.25 million shares of the Company's common stock
as if these shares had been outstanding for the entire period. Dilutive
options and warrants are excluded from the computation as their effect is
antidilutive.

F-54
<PAGE>
[LOGO]
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table indicates the expenses to be incurred in connection with
the offering described in this Registration Statement, all of which will be paid
by Tumbleweed. All amounts are estimates, other than the registration fee, the
NASD fee, and the Nasdaq National Market listing fee.

<TABLE>
<S> <C>
SEC Registration fee........................................ $ 48,045
NASD Filing fee............................................. $ 18,699
Accounting fees and expenses................................ 150,000
Legal fees and expenses..................................... 350,000
Printing and engraving expenses............................. 150,000
Transfer agent fees and expenses............................ 25,000
Blue sky fees and expenses.................................. 5,000
Miscellaneous fees and expenses............................. 253,256
----------
Total..................................................... $1,000,000
==========
</TABLE>

------------------------

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102 of the Delaware General Corporation Law, or the DGCL, as
amended, allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.

Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of Tumbleweed) by reason of the fact that the person
is or was a director, officer, agent or employee of Tumbleweed or is or was
serving at our request as a director, officer, agent, or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with the
action, suit or proceeding. The power to indemnify applies (a) if the person is
successful on the merits or otherwise in defense of any action, suit or
proceeding, or (b) if the person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of Tumbleweed, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of Tumbleweed as well,
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgment or settlement of the claim itself, and with the
further limitation that in these actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to Tumbleweed, unless the court believes that in light of all the
circumstances indemnification should apply.

Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for these actions. A
director who was either absent when the unlawful actions were

II-1
<PAGE>
approved or dissented at the time, may avoid liability by causing his or her
dissent to these actions to be entered in the books containing the minutes of
the meetings of the board of directors at the time the action occurred or
immediately after the absent director receives notice of the unlawful acts.

Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:

- for any breach of the director's duty of loyalty to Tumbleweed or its
stockholders;

- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;

- under the section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or

- for any transaction from which the director derived an improper personal
benefit.

These provisions are permitted under Delaware law.

Our Amended and Restated Bylaws provide that:

- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;

- we must indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our board of directors; and

- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law.

The indemnification provisions contained in our Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws are not exclusive
of any other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, we maintain
insurance on behalf of our directors and executive officers insuring them
against any liability asserted against them in their capacities as directors or
officers or arising out of this status.

We have entered or intend to enter into agreements to indemnify our
directors and executive officers, in addition to indemnification provided for in
our bylaws. These agreements, among other things, will provide for
indemnification of our directors and executive officers for expenses, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of the person's services as a director or executive
officer or at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:

(a) On August 28, 1996, September 30, 1996 and October 29, 1997, Registrant
issued and sold an aggregate of 2,657,971 shares of Series A preferred
stock to 18 investors for $1.38 per share, or an aggregate of
$3,667,999.98. Each share of Series A preferred stock has been converted
into one share of common stock. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transactions did not involve a
public offering.

II-2
<PAGE>
(b) On August 21, 1997 and September 4, 1997, Registrant issued and sold an
aggregate of 4,065,960 shares of Series B preferred stock to 13 investors
for $1.98 per share, or an aggregate of $8,074,996.56. Each share of
Series B preferred stock has been converted into one share of common
stock. The foregoing purchases and sales were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof and
Regulation D promulgated thereunder on the basis that the transactions
did not involve a public offering.

(c) On December 19, 1997, Registrant issued a warrant to Dynalab Technology
to purchase 40,000 shares of Series B preferred stock for $2.50 per
share. The issuance of this warrant was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.

(d) On November 30, 1998, Registrant issued a warrant to Silicon Valley Bank
to purchase 20,973 shares of Series C preferred stock for $3.576 per
share. The issuance of this warrant was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.

(e) On February 11, 1999, Registrant issued 15,000 shares of Series B
preferred stock to a consultant of Registrant for services rendered
valued at $29,790. These shares of Series B preferred stock have been
converted into 15,000 shares of common stock. The foregoing purchase and
sale was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.

(f) On February 26, 1999 and May 13, 1999, Registrant issued and sold an
aggregate of 5,592,503 shares of Series C preferred stock to a total of
14 investors for $3.576 per share, or an aggregate of $19,975,546.73.
Each share of Series C preferred stock has been converted into one share
of common stock. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder on the basis that the
transactions did not involve a public offering.

(g) On March 24, 1999, Registrant issued 6,500 shares of Series C preferred
stock to a consultant of Registrant for services rendered valued at
$23,244. These shares of Series C preferred stock have been converted
into 6,500 shares of common stock. The foregoing purchase and sale was
exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.

(h) On May 13, 1999, Registrant issued a warrant to Hambrecht & Quist LLC to
purchase 75,503 shares of Series C preferred stock for $3.576 per share.
The issuance of this warrant was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.

(i) On July 30, 1999, Registrant issued a warrant to American Express Travel
Related Services, Inc. to purchase up to 100,000 shares of common stock
for a weighted average exercise price of $27.50 per share. The issuance
of this warrant was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transaction did
not involve a public offering.

(j) As of August 3, 1999, an aggregate of 886,372 shares of common stock had
been issued upon exercise of options under the Registrant's 1993 stock
option plan at a weighted average exercise price of $0.47 per share, or
an aggregate of $418,186. The foregoing purchases and sales were exempt
from registration under the Securities Act pursuant to
Section 4(2) thereof or Rule 710 promulgated thereunder.

None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, except that Hambrecht & Quist
LLC acted as placement agent in

II-3
<PAGE>
connection with the transaction described in paragraph (f) above. The recipients
in such transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution, and appropriate legends were affixed to the share certificates and
instruments issued in those transactions.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

a. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
--------------------- -----------
<C> <S>
1.1 Form of Underwriting Agreement

2.1(3) Agreement and Plan of Merger, dated as of November 18, 1999,
among Tumbleweed Communications Corp., Keyhole Acquisition
Corp. and Worldtalk Communications Corporation.

2.2(7) Agreement and Plan of Merger, dated as of June 28, 2000,
among Tumbleweed Communications Corp., Maize Acquisition
Sub, Inc. and Interface Systems, Inc.

3.1(1) Amended and Restated Articles of Incorporation of the
Registrant

3.2(1) Amended and Restated Bylaws of the Registrant

4.1(1) Specimen common stock certificate

4.2(6) Amended and Restated Investor's Rights Agreement, dated as
of January 31, 2000

4.3(1) Warrant to Purchase Stock, dated November 30, 1998, issued
to Silicon Valley Bank

5.1** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP

10.1(5) Form of Indemnity Agreement between the Registrant and each
of its directors and officers

10.2(1) 1993 Stock Option Plan, as amended, and form of agreements
thereunder

10.3(1) Form of 1999 Omnibus Stock Incentive Plan and form of stock
option thereunder

10.4** 1999 Omnibus Stock Incentive Plan, as Amended

10.5(1) Form of 1999 Employee Stock Purchase Plan

10.6** 2000 NSO Incentive Stock Plan

10.7(1)+ Software License, Development and Services Agreement, dated
December 19, 1997, between the Registrant and United Parcel
Service General Services, Co.

10.8(1)+ Posta License and Distribution Agreement, dated as of
March 31, 1999, between Tumbleweed Software, K.K. and K.K.
Hikari Tsushin.

10.9(1)+ OEM Object Code License Agreement, dated as of March 30,
1998, between the Registrant and RSA Data Security, Inc.

10.10(1) Employment Agreement, dated May 24, 1999, between Tumbleweed
Software Inc. and Tumbleweed Limited and Donald N. Taylor

10.11(4) Investment Agreement, dated August 12, 1999, between Hikari
Tsushin and Tumbleweed Communications Corp.

10.12(4) Standstill Agreement, dated August 27, 1999, between Hikari
Tsushin and Tumbleweed Communications Corp.

10.13 Form of Indemnification Agreement by and among the
Registrant, Jeffrey C. Smith, Jean-Christophe D. Bandini,
Joseph C. Consul, and Hikari Tsushin, Inc.

10.14 Form of Waiver of Amended and Restated Investors' Rights
Agreement among the Registrant and the Holders (as defined
therein).
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
--------------------- -----------
<C> <S>
21.1** Subsidiaries of the Registrant

23.1 Consent of KPMG LLP

23.2 Consent of Arthur Andersen, LLP

23.3** Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1)

24.1** Power of Attorney (included on signature page)

27.1** Financial Data Schedule
</TABLE>

------------------------

(1) Previously filed in Tumbleweed's Registration Statement on Form S-1 (File
No. 79687), as amended and incorporated herein by reference.

(2) Subject to Confidential Treatment Order.

(3) Previously filed in Tumbleweed's Current Report on Form 8-K, filed
November 26, 1999, and incorporated herein by reference.

(4) Previously filed in Tumbleweed's Quarterly Report on Form 10-Q, filed
November 15, 1999, and incorporated herein by reference.

(5) Previously filed in Tumbleweed's Registration Statement on Form S-4, filed
December 10, 1999 (File No. 333-92589), as amended and incorporated herein
by reference.

(6) Previously filed in Tumbleweed's Registration Statement on Form S-8, filed
February 23, 2000 (File No. 333-84683), and incorporated herein by
reference.

(7) Previously filed in Tumbleweed's Current Report on Form 8-K, filed July 6,
2000, and incorporated herein by reference.

** Previously filed.

+ We sought confidential treatment from the Securities and Exchange Commission
for selected portions of this exhibit. The omitted portions were separately
filed with the Securities and Exchange Commission.

b. FINANCIAL STATEMENT SCHEDULE

Report on Financial Statement Schedule

Schedule II--Valuation and Qualifying Accounts

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing certificates in the denominations and registered in the names as
required by the Underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification by the registrant against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by

II-5
<PAGE>
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against pubic policy as expressed
in the Securities Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant under Rule 424(b) (1) or (4) or
497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bonafide offering thereof.

II-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redwood City, State of
California, on July 25, 2000.

<TABLE>
<S> <C> <C>
TUMBLEWEED COMMUNICATIONS CORP.

By: /s/ JOSEPH C. CONSUL
-----------------------------------------
Joseph C. Consul
VICE PRESIDENT--FINANCE AND
CHIEF FINANCIAL OFFICER
</TABLE>

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<C> <S> <C>
* Chairman of the Board, President and Chief
--------------------------------- Executive Officer (Principal Executive July 25, 2000
Jeffrey C. Smith Officer

Vice President--Finance and Chief
* Financial Officer (Principal Financial
--------------------------------- Officer and Principal Accounting July 25, 2000
Joseph C. Consul Officer)

*
--------------------------------- Director July 25, 2000
David F. Marquardt

*
--------------------------------- Director July 25, 2000
Timothy C. Draper

*
--------------------------------- Director July 25, 2000
Standish H. O'Grady

*
--------------------------------- Director July 25, 2000
Eric J. Hautemont

*
--------------------------------- Director July 25, 2000
Kenneth R. Klein

*
--------------------------------- Director July 25, 2000
Pehong Chen
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ JOSEPH C. CONSUL
--------------------------------------
Joseph C. Consul
(ATTORNEY-IN-FACT)
</TABLE>

II-7
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE

The Board of Directors
Tumbleweed Communications Corp.:

Under the date of January 17, 2000, we reported on the consolidated balance
sheets of Tumbleweed Communications Corp. as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999, which are included in the registration statement. In connection with our
audits of the aforementioned financial statements, we also audited the
accompanying financial statement schedule. The financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
a opinion on this financial statement schedule based on our audit.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

San Francisco, California
January 17, 2000

S-1
<PAGE>
TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
AT CHARGED DEDUCTIONS: AT END
BEGINNING TO WRITE-OFFS OF
DESCRIPTION OF PERIOD EXPENSE OF ACCOUNTS PERIOD
----------- --------- --------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for bad debt............................... $ 149 $ 41 $ (69) $ 121
====== ====== ======= ======
Year ended December 31, 1998:
Allowance for bad debt............................... $ 121 $1,720 $ (1) $1,840
====== ====== ======= ======
Year ended December 31, 1999:
Allowance for bad debt............................... $1,840 $ 215 $(1,239) $ 816
====== ====== ======= ======
</TABLE>

S-2
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
10.13 Form of Indemnification Agreement by and among the
Registrant, Jeffrey C. Smith, Jean-Christophe D. Bandini,
Joseph C. Consul, and Hikari Tsushin, Inc.
10.14 Form of Waiver of Amended and Restated Investors' Rights
Agreement among the Registrant and the Holders (as defined
therein).
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen, LLP
</TABLE>

* To be filed by amendment.