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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                       COMMISSION FILE NUMBER: 000-26223

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

                        TUMBLEWEED COMMUNICATIONS CORP.

             (Exact name of registrant as specified in its charter)

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<S>                                    <C>
           DELAWARE                        94-3336053
 (State of other jurisdiction           (I.R.S. Employer
     of incorporation or               Identification No.)
        organization)
</TABLE>

                               700 SAGINAW DRIVE

                             REDWOOD CITY, CA 94063

          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code (650) 216-2000

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACTS:
                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    Common Stock, $0.001 Par Value per Share

    INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.      YES /X/    NO / /

    INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.      / /

    THE APPROXIMATE AGGREGATE MARKET VALUE OF THE COMMON STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE LAST SALE PRICE OF THE COMMON
STOCK REPORTED ON THE NASDAQ NATIONAL MARKET ON FEBRUARY 15, 2001 WAS
APPROXIMATELY $97,090,144 (BASED ON THE CLOSING PRICE FOR SHARES OF THE
REGISTRANT'S COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET OF $4.53 ON
THAT DATE). SHARES HELD BY EACH OFFICER, DIRECTOR, AND HOLDER OF 5% OR MORE OF
THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE
DEEMED AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A
CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.

    THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 15, 2001 WAS
29,859,162.

                      DOCUMENTS INCORPORATED BY REFERENCE

Certain parts of the Tumbleweed Communications Corp. Proxy Statement relating to
the annual meeting of stockholders to be held on May 30, 2001 (the "Proxy
Statement") are incorporated by reference into Part III of this Annual Report on
Form 10-K.

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                   SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

    This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are subject to the "safe harbor" created
by those sections. The forward-looking statements are based on our current
expectations and projections about future events, including, but not limited to,
implementing our business strategy and new pricing models; attracting and
retaining customers; obtaining and expanding market acceptance of the products
and services we offer; forecasts of Internet usage and the size and growth of
relevant markets; rapid technological changes in our industry and relevant
markets; and competition in our market. Discussions containing such
forward-looking statements may be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations." In some cases,
forward-looking statements can be identified by terminology such as "may,"
"will," "should," "could," "predicts," "potential," "continue," "expects,"
"anticipates," "future," "intends," "plans," "believes," "estimates," and
similar expressions. 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 Annual Report on Form 10-K. We disclaim any obligation to update
these forward-looking statements or to explain the reasons why actual results
may differ. We reserve the right to update these statements for any reason,
including the occurrence of material events. The risks and uncertainties under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risks and Uncertainties" contained herein, among other
things, should be considered in evaluating our prospects and future financial
performance.
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                        TUMBLEWEED COMMUNICATIONS CORP.
                          2000 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

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                                    PART I

Item 1   Business....................................................      4

Item 2   Properties and Facilities...................................     13

Item 3   Legal Proceedings...........................................     14

Item 4   Submission of Matters to a Vote of Security Holders.........     14

                                   PART II

Item 5   Market For The Registrant's Common Equity And Related
           Stockholder Matters.......................................     16

Item 6   Selected Financial Data.....................................     17

Item 7   Management's Discussion And Analysis of Financial Condition
           And Results of Operations.................................     20

Item 7a  Quantitative and Qualitative Disclosures About Market
           Risk......................................................     38

Item 8   Financial Statements And Supplementary Data.................     40

Item 9   Changes In And Disagreements With Accountants On Accounting
           And Financial Disclosure..................................     65

                                   PART III

Item 10  Directors And Executive Officers............................     66

Item 11  Executive Compensation......................................     66

Item 12  Security Ownership of Certain Beneficial Owners And
           Management................................................     66

Item 13  Certain Relationships And Related Transactions..............     66

                                   PART IV

Item 14  Exhibits, Financial Statement Schedules And Reports on Form
           8-K.......................................................     67
</TABLE>

                                   TRADEMARKS

    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-,
Tumbleweed Secure Redirect-TM-, Tumbleweed SPN-TM-, Tumbleweed Message
Monitor-TM-, Tumbleweed Web Filter-TM-, WorldSecure/Mail-TM-, Secure Inbox-TM-,
Secure Envelope-TM-, Tumbleweed IME Platform-TM-, Tumbleweed IME
Applications-TM-, IME Statements-TM-, Tumbleweed My Copy-TM-, Tumbleweed
L2i-TM-, IME Developer-TM-, IME Messenger-TM-, IME Personalize-TM-, and IME
Alert-TM- are our trademarks.

                                       3
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                                     PART I

ITEM 1--BUSINESS.

OVERVIEW

    We are a leading provider of mission-critical messaging solutions that
enable organizations to manage and secure online business communications and
processes. Our customers use our solutions to centrally control and monitor the
corporate communications stream to comply with policies and government
regulations, communicate securely with business partners, suppliers and
customers, and integrate business communications and processes online.
Tumbleweed software creates a foundation for automated legacy data extraction,
preparation and secure two-way communication of sensitive or confidential
business information, such as electronic statements and customer service
inquiries. Tumbleweed solutions integrate with existing systems and end user
behavior. Tumblweed solutions are centrally controlled by IT managers while
remaining transparent to end users -- who do not need to deploy new software or
behavior to comply with corporate security and communications policies.

INDUSTRY BACKGROUND

    E-mail has become a ubiquitous communications channel. Messaging
applications that integrate business applications and business data with e-mail
as a communications channel are poised to transform business communications--and
business itself. The volume of e-mail traffic continues to demonstrate its
transformation into a critical business tool. International Data Corporation
estimates that the number of e-mail messages sent daily will grow from 5.3
billion in 1999 to 26.1 billion in 2005.

    To leverage the power of messaging applications businesses must address
security, automation, legacy integration, and end user behavior issues.
Messaging applications, effectively implemented, are active and engaging with
global reach and full scalability. Messaging applications are the most cost-
efficient means of bringing the benefits of the Internet to business processes.

    On the right messaging foundation, businesses can deploy messaging
management and secure communications systems that address the significant
challenges and opportunities created by the Internet.

TUMBLEWEED'S MESSAGING SOLUTIONS AND SERVICES

    We offer comprehensive messaging solutions that seamlessly integrate with
existing business systems and e-mail networks and enable our customers to
leverage the cost-efficiencies and productivity of Internet communications. Our
solutions can be used independently or together to create a powerful and
complete messaging solution for businesses. All of our solutions offer
multi-level security using industry standards, universal access, and proven
scalability for high volume message traffic.

TUMBLEWEED MESSAGING MANAGEMENT SOLUTIONS

    Our messaging management solutions enable companies to centrally control and
monitor the Internet communications stream. By controlling and monitoring e-mail
and browser-based communications our customers can better comply with their own
internal corporate policies as well as government regulations. Our solutions
combine not only all of the elements required to establish and manage
communications policies but also allow for virus and spam protection, archival
and regulatory compliance.

    Every day, high volumes of e-mail messages flow in and out of businesses
carrying intellectual assets (such as business plans, engineering
specifications, and contracts), personal communications, and harmful content
such as viruses and spam. By neglecting to monitor and manage this
communications stream, businesses risk:

    - Interception of valuable business data by competitors or hackers;

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    - Loss of data and productivity from damage by viruses;

    - Clogging of network bandwidth by spam and recreational multimedia files;

    - Liability for accidental exposure of confidential customer or employee
      information;

    - Liability for the distribution of racist, sexist, or otherwise harmful
      content; and

    - Liability for violation of industry regulations (including, for example,
      SEC or health regulations).

    Businesses need to monitor and manage their communications so that e-mail
can in fact become a tool for fast, cost-effective communications. They need to
centrally manage and globally enforce communications policies. They need a
solution that complements, rather than replaces, their e-mail infrastructure.
They also need a solution that enforces communication controls automatically,
without relying on the initiative or retraining of individual users.

    By integrating our solution for messaging management with existing e-mail
networks, a business can take control of its online communications and set
policies to apply content control, encryption, access control, attachment
management, virus scanning and digital signatures to e-mail traffic. Because our
solutions allow policies to be administered centrally and enforced universally
across an enterprise, our server-based solutions offer several advantages over
desktop solutions, including:

    - Rapid deployment (installed, configured, and tuned within a week);

    - Universal coverage (all e-mail communications are automatically managed);

    - Centralized policy enforcement (identification of sensitive digital
      information, including the use of industry-specific lexicons);

    - Expedited training (end users need not learn new procedures or new
      software tools); and

    - Cost-effectiveness (no expenses for end user training or distributing,
      installing, or maintaining new desktop software).

    Our messaging management products include Tumbleweed Messaging Management
System (MMS), Tumbleweed Message Monitor and Tumbleweed Web Filter. 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. Tumbleweed Message Monitor allows organizations to archive
all or selected messages to an external device, such as an optical jukebox.
Messages can be tagged with information such as violation type and retention
period prior to archiving. Tumbleweed Message Monitor provides Web-based
reviewer tools for performing queries and running reports. Tumbleweed Web Filter
provides URL filtering and monitors HTTP and FTP traffic for inappropriate
content, viruses, and malicious mobile code. Tumbleweed Web Filter can also
monitor the content of Web-based e-mail and message board postings.

TUMBLEWEED SECURE COMMUNICATIONS SOLUTIONS

    Businesses use our secure communications solutions to establish secure
Internet communications channels with partners, suppliers and customers. Our
server-based solution integrates with existing e-mail networks and secures
communications automatically. Without retraining users or changing desktop
software, businesses can take advantage of the speed, convenience, and ubiquity
of the Internet for communicating vital business information securely.

                                       5
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    A great deal of a business's most important communications--such as business
plans, contracts and legal documents and engineering specifications--take place
among branch offices, between branch offices and headquarters or among
businesses and their long-standing partners and customers. Until now, businesses
have not had a cost-effective solution for securing and automating these
communications. Courier services, such as FedEx, are relatively secure, but much
slower and more expensive than e-mail. Virtual Private Networks, or VPNs,
typically involve the installation and maintenance of custom hardware and
software. E-mail is fast and convenient, but not secure. E-mail risks exposing
important confidential information to competitors and hackers. Businesses need a
way to secure these communications--quickly, easily, and automatically. The
solution should:

    - Complement rather than replace e-mail and IT systems at each site;

    - Be based on open standards, so that it works with whatever e-mail software
      and hardware a particular partner is using; and

    - Secure communications automatically, without requiring end users to learn
      new procedures or replace the desktop software they are already familiar
      with.

    By deploying our secure communication solutions, a business can create
secure networks among its offices, partners, suppliers, and customers.
Meanwhile, end users continue using their own e-mail software. Our server-based
solution can automatically encrypt outgoing e-mail messages and sign them with
an organization's digital certificate. Tumbleweed's solution also monitors,
authenticates, and decrypts incoming messages, and delivers them as standard
e-mail to the recipient's desktop. Security is automatic and transparent.

    For communications to individuals at locations outside the network, we offer
Tumbleweed Secure Redirect, which encrypts messages and delivers them securely
to the recipient's Web browser. Tumbleweed Secure Redirect enables businesses to
automatically encrypt, deliver, and track communications to any Internet user
with a standard e-mail program. The advantages of Tumbleweed's secure
communications solutions are:

    - Universal coverage (all e-mail communications are automatically managed);

    - Expedited training (end users need not learn new procedures or new
      software tools); and

    - Cost-effective (no expenses for end user training or distributing,
      installing, or maintaining new desktop software).

    Our secure communication solutions also support secure ad hoc online
communication with our IME platform and IME Messenger application. IME Messenger
is an application that runs on the Tumbleweed Integrated Messaging Exchange
(IME) platform. Tumbleweed IME, a set of products and services that leverage the
Internet and existing e-mail systems, is designed to enable secure, trackable
online communication. IME Messenger enables secure, browser-based,
person-to-person messaging. Using IME Messenger, Internet users can securely
compose, send, receive, store and search messages and files.

    Our secure communications products are Tumbleweed MMS, Tumbleweed SPN,
Tumbleweed Secure Redirect, Tumbleweed Secure Redirect Link.

TUMBLEWEED STATEMENT PRESENTMENT SOLUTIONS

    Using our statement presentment solutions, companies can create a foundation
for the automated preparation, secure Internet delivery, tracking and managed
response of sensitive business information. Our solutions integrate with
existing systems, and can automatically extract legacy data and prepare
statements for delivery. In addition, our solutions can automatically forward
important communications to electronic archives. To receive a statement sent via
Tumbleweed, an end user only needs an e-mail program and a browser. New desktop
software is not required.

                                       6
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    Businesses send more than 20 billion paper bills annually. In the United
States alone, there are more than 350 million financial accounts, each requiring
the periodic delivery of statements. Businesses can save time and money and
improve service by moving these paper statements online. In most industries, a
paper statement costs between $1 and $1.50 to print and mail. Electronic
statements delivered by our solutions cost significantly less because we
eliminate printing and postage costs.

    E-mail and the Web are ubiquitous, and consumers are expecting to find more
and more of their information online. If businesses deliver statements securely
over the Internet, they can dramatically lower costs while improving service.
Our solutions for statement delivery can dramatically lower communication costs
and improve customer service. Tumbleweed's solution also provides a foundation
for additional messaging services that can promote sales, increase customer
loyalty, and streamline customer service.

    Our statement presentment solutions, Tumbleweed IME Statements, run on
Tumbleweed Integrated Messaging Exchange (IME), a platform and set of
applications for creating secure communications channels between a business and
its customers, partners and suppliers. Tumbleweed IME Statements prepares,
delivers, and tracks Internet statements. Businesses can provide each statement
recipient with an IME Secure Inbox--a protected online repository for securely
receiving, storing, organizing, searching, and forwarding online communications.

    Tumbleweed's solution for statement presentment offers several advantages
over traditional paper-based delivery and other electronic delivery methods,
including:

    - Cost reduction (no printing and mailing documents to customers);

    - Existing system integration (extracts statement information from business
      applications, databases, and mainframe print streams);

    - Universal delivery (reaches any Internet user with a standard e-mail
      program and a Web browser);

    - Security and authentication (includes passwords, PINs, and digital
      certificates);

    - Thorough tracking (enables businesses to create an audit trail or
      otherwise track the transmission and receipt of statements);

    - Payment system integration (integrates with payment systems, such as
      VeriSign's Payment Services); and

    - Cost-effective deployment (no expenses for end user training or
      distributing, installing, or maintaining new desktop software).

    Our statement delivery products include Tumbleweed IME, Tumbleweed IME
Statements, Tumbleweed My Copy, and Tumbleweed L2i.

    Built upon the foundation of the IME Platform, IME applications integrate
with e-mail and legacy systems, interact with business applications, and
automate transactions and exchanges to provide a complete internal and external
communications solution for the enterprise. These applications typically
automate specific business processes, such as statement delivery for brokerages
or positive pay in commercial banking. The Tumbleweed application, IME
Statements, enables businesses to automatically compose, deliver, and track
electronic documents, such as monthly statements, trade confirmations, and
invoices. IME Statements can create statements from information in legacy
databases or, using Tumbleweed L2i, it can extract, translate, and format the
information from mainframe print streams. Tumbleweed's IME Developer package
enables third parties and Tumbleweed customers to further customize IME
applications or to develop new applications to run on the IME Platform.

                                       7
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TUMBLEWEED PROFESSIONAL SERVICES

    Our professional services organization provides consulting, integration
engineering, custom application development, training and educational services
and support used to build online communication systems 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 used to create unique online communication
solutions that can be deployed to precisely meet a company's business needs.

    INTEGRATION CONSULTING, which allows our customers 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 and redundancy processes, and physically implementing our
solution in the customer's data center. Our professional services organization
may also provide ongoing support of the customer's data center.

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

    SUPPORT, which assists customers in managing Tumbleweed products they have
deployed.

    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.

    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 our standard fees.

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

CUSTOMERS AND TARGET MARKETS

    Enterprise customers use Tumbleweed solutions to secure online
communications and other business delivery processes originating within their
own enterprise. These communications and processes reach customers, business
partners, suppliers and employees. Examples of Tumbleweed customers include: ABN
Amro Bank, American Century, American Express Travel Related Services Company,
Inc., Amgen, Beckman Coulter, Inc., Broadcom Corporation, Commonwealth of
Pennsylvania, Diners Club, the Food & Drug Administration, Gap Inc., JP Morgan
Chase & Co., Merck, National Semiconductor Corp., Northern Trust, Phoenix Home
Life Insurance Co., Salomon Smith Barney, Skandaniska Enskilda Banken AB, Union
Miniere and Wachovia Securities, Inc.

    Tumbleweed also has a number of service provider customers that principally
use Tumbleweed's IME solution to provide secure, outsourced online
communications services to their customers. Examples of service providers
include Canada Post, La Poste in France, Nippon Telegraph & Telephone
Corporation, Norway Post, Pitney Bowes, Inc., Swiss Post, Toyo Information
Systems, United States Postal Service and UPS.

    Tumbleweed solutions and related services are sold directly to enterprises
across a number of vertical industries. Our strategic markets include:
healthcare, banking, brokerage, insurance,

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pharmaceutical, government, manufacturing, technology and telecommunications. In
addition, our solutions are offered through the service providers such as those
listed above that offer their customers secure, reliable and trackable
communication services for a fee. Tumbleweed's distribution strategy addresses
the requirements of small companies and large enterprises alike. The primary
geographic markets we are focused on are the United States, Japan, Germany and
the UK. We have a reseller program for our messaging management solutions and
may offer our other solutions through a reseller channel in the future.

STRATEGY

    Our objective is to provide comprehensive secure Internet messaging
solutions to businesses worldwide. Key elements of our strategy are:

ESTABLISH TUMBLEWEED AS A LEADING PROVIDER OF MESSAGING SOFTWARE SOLUTIONS THAT
OFFER CUSTOMERS INCREASED PRODUCTIVITY, LOWERED COSTS AND REDUCED LIABILITY.

    We intend to establish Tumbleweed messaging platforms as the leading
foundation upon which to build mission-critical business communications. Our
focus is on offering solutions that allow our customers to rapidly recoup their
original investment and earn a significant return on that investment. Our
customers use our solutions to increase their productivity, efficiency and
reduce costs. By moving business processes online and extending messaging
communications to include a number of different applications, our software
solutions can eliminate costs associated with traditional paper, fax or voice-
based business processes. Our solutions enable our customers to define and
implement multi-layer security policies, ensuring the safe and efficient use of
corporate e-mail systems and the privacy of confidential information. Through a
direct sales force, a reseller channel and service-providers, we are pursuing
customers in healthcare, pharmaceutical, banking, brokerage, insurance,
telecommunications, technology and manufacturing.

FOCUS ON PROVIDING MESSAGING SOLUTIONS IN MARKETS WHERE WE HAVE SOLID MARKET
TRACTION AND WHICH REPRESENT THE LARGEST OPPORTUNITIES FOR US.

    Our strategy is to offer messaging solutions with a number of key
characteristics. We offer solutions that have a horizontal application across a
number of vertical industries thereby reducing our exposure to any single
specific vertical market. We focus on solutions that have a relatively short
deployment time, and therefore a lower services load--reducing the cost of
running our professional services organization and changing the mix of services
revenue in our revenue stream. Our strategy is intended to ultimately help us
improve our overall gross margins and serve our customers better. Our strategy
is to target geographic markets where Internet usage has matured and where we
have reached critical mass in product sales, such as the United States, Japan,
the UK and Germany.

CULTIVATE A CHANNEL OF RESELLERS AND KEY SERVICE PROVIDERS TO AUGMENT OUR DIRECT
SALES EFFORT.

    We intend to promote and leverage our channel of resellers, including
value-added resellers and key service providers, to expand the sales of our
messaging solutions in strategic vertical and geographic markets. By choosing
best-of-breed partners and customers to offer our solutions to the marketplace,
we can better capture the opportunity of a growing market and leverage the brand
recognition and extensive sales and marketing resources of leading technology
providers and consultants.

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OFFER ADDITIONAL SERVICES THAT ALLOW OUR CUSTOMERS TO MANAGE THEIR
ORGANIZATION'S MESSAGE TRAFFIC AND EXPAND INTO ACCOUNTS BY UPSELLING OUR
SOLUTIONS.

    We intend to focus on selling additional applications and value-added
services to our installed customer base, selling MMS customers IME products and
services and selling IME customers MMS products and applications. We plan to
pursue sales of combined products, such as Tumbleweed Secure Redirect, which use
policies in Tumbleweed MMS products to send confidential messages over
Tumbleweed IME. We intend to continue to enter into additional strategic
relationships with other companies to allow us to expand our value-added
services. For example, in 2000, we entered into a strategic relationship with
one of our customers, Iron Mountain Incorporated. With Iron Mountain, we are
developing a solution that will offer digital archiving for e-mail messages and
online documents to both Iron Mountain and Tumbleweed customers. In addition, we
may acquire complementary businesses to increase our message traffic flow as
well.

PROVIDE COMPREHENSIVE PROFESSIONAL AND/OR OUTSOURCING SERVICES THROUGH OUR
IN-HOUSE TEAM OR THROUGH OUR SYSTEMS INTEGRATORS OR SERVICE PROVIDERS.

    Our customers have the option of deploying our products on their premises or
outsourcing the deployment to us. Outsourcing such services enables our
customers to reduce their cost of ownership and the deployment time of our
solutions, thereby helping to reduce our sales cycle in those enterprises. We
offer a full suite of professional and consulting services that are end-to-end
and designed to help customers implement our solutions as rapidly as possible.
The services include business-specific applications consulting, software
development, training and complete technical support. In addition, services and
outsourcing can also be provided through our best-of-breed systems integrators
and service providers.

SALES

    We maintain a direct sales force that focuses on signing key enterprise
customers and additional service providers, as well as further penetrating
existing accounts by selling them new applications. Our sales force is comprised
of domestic and international sales groups consisting of a total of 72 employees
as of February 28, 2001. Offices in the U.S. currently include Redwood City,
California; Santa Clara, California; New York, New York; Los Angeles,
California; San Ramon, California; Chicago, Illinois; Redmond, Washington;
Reston, Virginia; Charlotte, North Carolina and Dallas, Texas. Our offices
outside the U.S. currently include Germany, Japan, and the United Kingdom. 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 resellers 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 corporate marketing. Product marketing
identifies target markets and customer opportunities, then develops the
positioning, programs and materials to reach customers and support sales
activities.

    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. Corporate marketing
drives lead generation activities to support Tumbleweed sales, as well as
overall market awareness of us and our products through media and

                                       10
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analyst relations, events and speaking engagements. Corporate marketing is also
responsible for branding, corporate identity, and the Tumbleweed website.

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.

    In addition, our products rely on encryption and authentication technology
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 255-bit symmetric encryption and 2048-bit public key encryption,
including the IME Server, IME Desktop, IME Receive Applet, IME Remote API using
OmniORB with SSL, and MMS Worldwide/255. 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

    To date, the U.S. Patent and Trademark Office has issued us six U.S.
patents--five utility patents and one design patent related to the user
interface of our products. We have filed an additional seventeen utility patent
applications that are now pending in the U.S. Patent and Trademark Office. We
also have twenty-three patent applications now pending in foreign jurisdictions,
including three pending applications filed under the Patent Cooperation Treaty.
In addition, 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.

    We regard our patents, trademarks and other intellectual property as
critical to our success, and rely on patent and trademark law together with
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our proprietary rights. Despite these
precautions,

                                       11
<PAGE>
we may not be successful in protecting our rights. For example, 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.

COMPETITION

    The markets in which we compete are intensely competitive and rapidly
changing. We believe there is no single competitor that offers the complete
package of mission-critical messaging software that Tumbleweed sells. We are
aware of competitors that exist for each of our product lines and for combined
components of our solution sets.

    Our principal competition in the areas of messaging management and secure
communications are companies that offer various Internet content security, web
security, messaging policy management, and enterprise relationship management
products. Companies that sell products that compete with some of the features
within our products include: Baltimore Technologies plc, Critical Path, Inc.,
Kana Communications, Inc., Symantec Corp., Tivoli Systems, Inc., an IBM company,
Trend Micro Incorporated, ValiCert Inc., and Zixit Corporation.

    Our principal competition in the statement presentment market area comes
from other online communication or information security service providers, some
of which have services or products that are intended to compete directly with
our products or that could be used as alternatives to our products. Examples of
some of these providers are Automatic Data Processing, Inc., Critical
Path, Inc., New River Systems, PostX Corporation and Vestcom Corporation. Our
solution statement presentment and secure delivery solutions can be 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. In addition, companies with
which we do not presently directly compete may become competitors in the future,
either through the expansion of our products or through their product
development in the area of secure online communication services. These

                                       12
<PAGE>
companies include International Business Machines Corporation/Lotus Development
Corporation, Microsoft Corporation and VeriSign, Inc.

    The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. Some of our
competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger installed
customer base. Additionally, some of 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. We expect that the
market for mission-critical messaging software, which has been fragmented
historically, will become more consolidated with larger companies being better
positioned to compete in such an environment in the long term. As this market
continues to develop, a number of companies with greater resources than ours
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or business partners. Our success will
depend on our ability to adapt to these competing forces, to develop more
advanced products more rapidly and less expensively than our competitors, and to
educate potential customers as to the benefits of licensing our products rather
than developing their own products. Competitors could introduce products with
superior features, scalability and functionality at lower prices than our
products and could also bundle existing or new products with other more
established products in order to compete with us. In addition, because there are
relatively low barriers to entry for the software market, we expect additional
competition from other established and emerging companies. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could harm our business.

EMPLOYEES

    As of February 28, 2001, we employed 294 people worldwide, including 100 in
engineering, 72 in sales, 41 in professional services, 21 in marketing, and 48
combined in human resources, finance, information technology, corporate
management and other 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. See "Risks and
Uncertainties--If we lose the services of executive officers and other key
employees, our ability to develop our business and secure customer relationships
will suffer."

ITEM 2--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. In September 2000, we leased an additional 42,000
square feet in an adjacent building with a term of five years. We currently
sublease this space. This sublease is scheduled to expire with respect to half
of the space in September 2001 and with respect to the other half in April 2002.
We are currently searching for a new tenant to sublease this space. 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. We currently sublease 15,000 square feet of this
space. We have additional office space in New York, NY under a lease that
expires in April 2005. This lease covers 18,000 square feet of which 10,000
square feet is currently subleased. We also own a building in Ann Arbor,
Michigan consisting of approximately 44,000 square feet. This property is
currently on the market for sale. We also maintain domestic sales offices
including in Redwood City, California; Santa Clara, California; New York, New
York; Los Angeles, California; San Ramon, California; Chicago, Illinois;
Redmond, Washington; Reston, Virginia; Charlotte, North Carolina and Dallas,
Texas. Further, we maintain sales offices in various locations overseas,
including Germany, Japan and the United Kingdom.

                                       13
<PAGE>
ITEM 3--LEGAL PROCEEDINGS.

    On March 3, 1999, we sued The docSpace Company, Inc. in the United States
District Court for the Northern District of California 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
March 9, 2000, Critical Path, Inc. acquired docSpace. On March 9, 2001 the court
issued an order that (i) granted in part and denied in part our motion for
summary judgment of literal infringement, and (ii) granted in part docSpace's
motion for summary judgment of no infringement. Essentially, the court ruled
that the docSpace products Express 4.0 and Express 5.0 violate our patent at
issue and that Express 5.1 and later versions, all designed after the lawsuit
was initiated, do not literally infringe that patent. The order does not address
U.S. Patent No. 6,192,407 which was issued to us on February 20, 2001. We
believe all versions of the docSpace Express product violate our U.S. Patent No.
6,192,407. On March 16, 2001, docSpace filed a motion for reconsideration of the
order dated March 9, 2001.

    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 September 27,
2000, we filed (i) a motion to strike or dismiss for failure to meet the
certification requirements of the Private Securities Litigation Reform Act,
(ii) a motion to dismiss for failure to state a claim, and (iii) a motion to
dismiss because of improper venue, or in the alternative, motion to transfer the
lawsuits to the Eastern District of Michigan. These motions remain pending. We
intend vigorously to defend the Interface lawsuits and seek their dismissal.
Although we believe these actions to be without merit, no prediction of the
ultimate outcome can be made at this time and the outcome may harm our business.
In addition, the costs in defending these complaints could harm future operating
results.

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

    No matters were submitted to a vote of our stockholders during the fourth
quarter of fiscal 2000.

EXECUTIVE OFFICERS OF THE REGISTRANT

    Listed below are our executive officers as of March 30, 2001. There are no
family relationships between any of the executive officers and there is no
arrangement or understanding between any executive officer and any other person
pursuant to which the executive officer was selected. At the annual meeting of
our Board of Directors, which follows the Annual Meeting of Stockholders,
executive officers are elected by the Board to hold office for one year and
until their respective successors are elected and qualified, or until their
earlier resignation or removal.

<TABLE>
<CAPTION>
NAME                                                   TITLE                                     AGE
----                          -------------------------------------------------------  ------------------------
<S>                           <C>                                                      <C>
Jeffrey C. Smith............  Chairman and Chief Executive Officer                                           34
Douglas A. Sabella..........  President and Chief Operating Officer                                          42
Joseph C. Consul............  Chief Financial Officer and Vice President--Finance                            41
</TABLE>

    JEFFREY C. SMITH, 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

                                       14
<PAGE>
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.

    DOUGLAS A. SABELLA, President and Chief Operating Officer, is responsible
for worldwide operations, including research and development, sales,
professional services, and marketing, at Tumbleweed. Prior to joining
Tumbleweed, Mr. Sabella was the president and chief executive officer of Bidcom,
Inc. Prior to joining Bidcom, Mr. Sabella held various senior management
positions at Lucent Technology from February 1985 to February 2000. Mr. Sabella
holds a B.B.A. in Business Administration from Hofstra University.

    JOSEPH C. CONSUL, Chief Financial Officer and Vice President--Finance, is
responsible for financial administration and facilities 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.

                                       15
<PAGE>
PART II

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

    Tumbleweed's common stock is traded on the Nasdaq National Market under the
symbol "TMWD." The table below sets forth, during the periods indicated, the
high and low sales price for Tumbleweed's common stock as reported on the Nasdaq
National Market.

<TABLE>
<CAPTION>
                                                                  PRICE RANGE
                                                              -------------------
                                                                HIGH       LOW
                                                              --------   --------
<S>                                                           <C>        <C>
Year ended December 31, 1999................................  $ 89.50     $10.25
Third Quarter (beginning August 6, 1999)....................  $ 30.50     $10.25
Fourth Quarter..............................................  $ 89.50     $17.75

Year ended December 31, 2000................................  $136.00     $14.00
First Quarter...............................................  $136.00     $48.00
Second Quarter..............................................  $112.00     $28.88
Third Quarter...............................................  $ 70.63     $38.00
Fourth Quarter..............................................  $ 54.00     $14.00
</TABLE>

    As of March 15, 2001, there were approximately 976 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 have not declared or paid any cash dividends on our common stock during
any period for which financial information is provided in this Annual Report on
Form 10-K. We currently intend to retain future earnings, if any, to fund the
development and growth of our business and do not anticipate paying any cash
dividends on our common stock in the foreseeable future.

OFFERINGS OF SECURITIES

    On August 11, 1999, we completed an initial public offering of our common
stock, $0.001 par value. The shares of common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-79687). The Registration Statement was declared
effective by the Securities and Exchange Commission on August 5, 1999.

    On August 1, 2000, we completed a primary and secondary public offering of
3,000,000 shares of our common stock at a price of $56.00 per share. Of the
3,000,000 shares of common stock, 1,500,000 primary shares were sold by us and
1,500,000 secondary shares were sold by our stockholders. The managing
underwriters in the offering were Credit Suisse First Boston Corporation, Chase
Securities, Inc., Dain Rauscher Incorporated, U.S. Bancorp Piper Jaffray Inc.
and ING Barings LLC. Tumbleweed did not receive any of the proceeds from shares
sold by its stockholders. Net proceeds of $77.6 million from the offering of
primary shares will be used 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.

                                       16
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA.

SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                2000       1999       1998       1997       1996
                                              --------   --------   --------   --------   --------
                                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                           <C>        <C>        <C>        <C>        <C>
HISTORICAL CONSOLIDATED STATEMENTS OF
  OPERATIONS DATA:
Revenue from continuing product lines.......  $ 37,338   $ 15,284   $ 10,575   $  4,476   $   597
Gross profit (1)............................    24,221     11,853     11,213      7,946    11,225
Operating expenses (2)......................    97,061     37,900     23,456     19,897    18,226
Operating loss before goodwill amortization
  and merger expenses.......................   (48,262)   (26,047)   (12,243)   (11,951)   (7,001)
Operating loss..............................   (72,840)   (26,047)   (12,243)   (11,951)   (7,001)
Net loss....................................   (69,829)   (24,222)   (11,720)   (11,461)   (6,420)
Net loss per share--basic and diluted.......     (2.51)     (1.65)     (1.79)     (1.90)    (1.15)
Shares used in calculating basic and diluted
  loss per share............................    27,829     14,650      6,549      6,023     5,592
</TABLE>

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                ----------------------------------------------------
                                                  2000       1999       1998       1997       1996
                                                --------   --------   --------   --------   --------
                                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.....................  $ 75,497   $60,544    $ 4,556    $10,972    $ 9,682
Total assets..................................   178,900    75,683     12,719     24,272     24,658
Long-term debt, excluding current
  installments................................       497     1,017        382        132        719
Total stockholders' equity....................   153,612    61,713      4,437     14,818     17,048
</TABLE>

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

(1) Includes gross profit from product lines we discontinued prior to
    January 1, 2000.

(2) Includes stock compensation expense of $5.8 million, $3.5 million, $715,000,
    and $288,000 for the years ended December 31, 2000, 1999, 1998, and 1997,
    respectively.

                                       17
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     QUARTERS ENDED
                                                    ------------------------------------------------
                                                    MARCH 31   JUNE 30    SEPTEMBER 30   DECEMBER 31
                                                    --------   --------   ------------   -----------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>        <C>        <C>            <C>
FISCAL 2000

REVENUE:
  License.........................................  $  4,356   $ 6,824      $  7,607      $  3,703
  Services........................................     1,524     1,748         2,499         2,414
  Transaction fees................................       730     1,518         2,328         2,087
                                                    --------   -------      --------      --------
    Total Revenue.................................     6,610    10,090        12,434         8,204
COST OF REVENUE:

  License.........................................       267       290           514            52
  Services (1)....................................     1,941     2,882         2,992         3,932
  Transaction fees................................        24        20            53            --
                                                    --------   -------      --------      --------
    TOTAL COST OF REVENUE.........................     2,232     3,192         3,559         3,984
                                                    --------   -------      --------      --------
GROSS PROFIT......................................     4,378     6,898         8,875         4,220

OPERATING EXPENSES:
  Research and development (2)....................     2,843     3,171         4,205         4,660
  Sales and marketing (3).........................     7,192     9,742        10,777        12,912
  General and administrative (4)..................     1,640     2,312         2,911         4,708
  Stock compensation..............................     1,485     1,451         1,864         1,171
  Amortization of goodwill, intangibles and
    in-process research and development...........        --        59         5,401         8,315
  Merger related and restructuring expenses (5)...    10,392        --            --            --
                                                    --------   -------      --------      --------
    Total operating expenses......................    23,552    16,735        25,158        31,766
                                                    --------   -------      --------      --------
OPERATING LOSS....................................   (19,174)   (9,837)      (16,283)      (27,546)
  Other income, net...............................       656       365           991         1,341
                                                    --------   -------      --------      --------
LOSS BEFORE TAXES AND MINORITY INTEREST...........   (18,518)   (9,472)      (15,292)      (26,205)
  Provision for taxes.............................        88       150            95            42
                                                    --------   -------      --------      --------
LOSS BEFORE MINORITY INTEREST.....................   (18,606)   (9,622)      (15,387)      (26,247)
  Minority interest...............................        --       (94)          (30)           91
                                                    --------   -------      --------      --------
NET LOSS..........................................   (18,606)   (9,528)      (15,357)      (26,338)
  Other comprehensive income (loss)--translation
    loss..........................................        17      (301)          (42)          212
                                                    --------   -------      --------      --------
COMPREHENSIVE LOSS................................  $(18,589)  $(9,829)     $(15,399)     $(26,126)
                                                    ========   =======      ========      ========
NET LOSS PER SHARE--BASIC AND DILUTED.............  $  (0.73)  $ (0.37)     $  (0.55)     $  (0.89)
                                                    ========   =======      ========      ========
WEIGHTED AVERAGE SHARES--BASIC AND DILUTED........    25,588    26,068        27,872        29,457
                                                    ========   =======      ========      ========
</TABLE>

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

(1) Exclusive of non-cash compensation expense of $61,000, $48,000, $45,000, and
    $(4,000) for the quarter ended March 31, 2000, June 30, 2000, September 30,
    2000, and December 31, 2000, respectively.

(2) Exclusive of non-cash compensation expense of $274,000, $188,000, $455,000,
    and $(89,000), for the quarter ended March 31, 2000, June 30, 2000,
    September 30, 2000, and December 31, 2000, respectively.

(3) Exclusive of non-cash compensation expense of $575,000, $1,098,000,
    $859,000, and $1,621,000 for the quarter ended March 31, 2000, June 30,
    2000, September 30, 2000, and December 31, 2000, respectively.

                                       18
<PAGE>
(4) Exclusive of non-cash compensation expense of $164,000, $117,000, $505,000,
    and $(357,000) for the quarter ended March 31, 2000, June 30, 2000,
    September 30, 2000, and December 31, 2000, respectively.

(5) Exclusive of non-cash compensation expense of $411,000 for the quarter ended
    March 31, 2000.

<TABLE>
<CAPTION>
                                                                     QUARTERS ENDED
                                                    ------------------------------------------------
                                                    MARCH 31   JUNE 30    SEPTEMBER 30   DECEMBER 31
                                                    --------   --------   ------------   -----------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>        <C>        <C>            <C>
FISCAL 1999
REVENUE:
  License.........................................  $  2,702   $ 2,382      $  3,081      $  3,120
  Services........................................       564       491           999           964
  Transaction fees................................         3       203           318           457
                                                    --------   -------      --------      --------
  Revenue from continuing product lines...........     3,269     3,076         4,398         4,541
  Revenue from discontinued product lines.........       638       561           273            --
                                                    --------   -------      --------      --------
    Total Revenue.................................     3,907     3,637         4,671         4,541
COST OF REVENUE:
  License.........................................       117       125           248           247
  Services........................................       782       983         1,246         1,077
  Transaction fees................................         5        15            24            34
                                                    --------   -------      --------      --------
    TOTAL COST OF REVENUE.........................       904     1,123         1,518         1,358
                                                    --------   -------      --------      --------
GROSS PROFIT......................................     3,003     2,514         3,153         3,183

OPERATING EXPENSES:
  Research & development (1)......................     1,794     2,077         2,296         2,756
  Sales & marketing (2)...........................     3,144     4,177         5,428         7,168
  General & administrative (3)....................       816     1,067         2,006         1,635
  Stock compensation..............................       336       969         1,115         1,116
                                                    --------   -------      --------      --------
    Total operating expenses......................     6,090     8,290        10,845        12,675
                                                    --------   -------      --------      --------
OPERATING LOSS....................................    (3,087)   (5,776)       (7,692)       (9,492)
  Other income, net...............................       138       157           956           875
                                                    --------   -------      --------      --------
LOSS BEFORE TAXES.................................    (2,949)   (5,619)       (6,736)       (8,617)
  Provision for taxes.............................       (18)       93           136            90
                                                    --------   -------      --------      --------
NET LOSS..........................................    (2,931)   (5,712)       (6,872)       (8,707)
  Other comprehensive income (loss)--translation
    loss..........................................         4         2             5            44
                                                    --------   -------      --------      --------
COMPREHENSIVE LOSS................................  $ (2,927)  $(5,710)     $ (6,867)     $ (8,663)
                                                    ========   =======      ========      ========
NET LOSS PER SHARES -- BASIC AND DILUTED..........  $  (0.42)  $ (0.79)     $  (0.37)     $  (0.34)
                                                    ========   =======      ========      ========
WEIGHTED AVERAGE SHARES -- BASIC AND DILUTED......     6,889     7,267        18,442        25,376
                                                    ========   =======      ========      ========
</TABLE>

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

(1) Exclusive of non-cash compensation expense of $140,000, $293,000, $318,000,
    and $298,000 for the quarter ended March 31, 2000, June 30, 2000,
    September 30, 2000, and December 31, 2000, respectively.

(2) Exclusive of non-cash compensation expense of $146,000, $545,000, $623,000,
    and $647,000 for the quarter ended March 31, 2000, June 30, 2000,
    September 30, 2000, and December 31, 2000, respectively.

(3) Exclusive of non-cash compensation expense of $50,000, $131,000, $174,000,
    and $171,000 for the quarter ended March 31, 2000, June 30, 2000,
    September 30, 2000, and December 31, 2000, respectively.

                                       19
<PAGE>
ITEM 7--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 AND THE RELATED NOTES. 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 "RISKS AND UNCERTAINTIES".

OVERVIEW

    We are a leading provider of mission-critical messaging solutions that
enable organizations to manage and secure online business communications and
processes. Our customers use our solutions to centrally control and monitor the
corporate communications stream to comply with policies and government
regulations, communicate securely with business partners, suppliers and
customers, and to integrate business communications and processes online.
Tumbleweed software creates a foundation for automated legacy data extraction,
preparation and secure two-way communication of sensitive or confidential
business information, such as electronic statements and customer service
inquiries. Tumbleweed solutions integrate with existing systems and end user
behavior. Tumblweed solutions are centrally controlled by IT managers while
remaining transparent to end users -- who do not need to deploy new software or
behavior to comply with corporate security and communications policies.

    In 2000, our product offerings included the Tumbleweed Messaging Management
System (MMS), a comprehensive solution for enforcing corporate e-mail usage
policies and protecting information as it travels over the Internet; MMS Web
Filter, which provides organizations with the ability to control Internet usage
and to monitor and control submissions to Internet message boards and Web-based
e-mail services; MMS Message Monitor, which includes Enterprise Archiving and a
Web-based reviewer tool that enable an organization to copy all or selected
messages to an external storage medium; Tumbleweed Secure Redirect, which
provides a secure delivery channel directly from the desktop based on
communications policies defined in MMS that are transparent to the end user; and
Tumbleweed Integrated Messaging Exchange (IME), which combines an advanced
software platform and customized applications to establish an Internet
communication channel between a business and its customers, suppliers, and
partners. We announced the discontinuation of two products in April 2000:
WorldSecure Client, an S/MIME encryption plug-in for Microsoft Outlook 97, Lotus
Notes R4, and Eudora Pro, and NetTalk, an Intranet messaging and directory
server that provides directory synchronization and acts as a directory switch
between disparate e-mail systems.

    On January 31, 2000, we completed the acquisition of Worldtalk
Communications Corporation (Worldtalk), a leading provider of Internet security
and policy management solutions that enable organizations to define and manage
e-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.

    On September 1, 2000, we completed the acquisition of Interface
Systems, Inc. (Interface). Interface's Legacy to Internet, or 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 gives our customers a comprehensive,
end-to-end solution for electronic statement presentment.

                                       20
<PAGE>
    The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. Since September 1, 2000, Interface's results of operations have been
included in our consolidated statements of operations. The fair value of the
intangible assets was determined based upon a valuation using a combination of
methods, including a cost approach for the assembled workforce, and an income
approach for the core technology.

    The purchase price of approximately $77.1 million consisted of an exchange
of 1,249,210 shares of the Company's common stock with a fair value of
approximately $64.2 million, assumed stock options with a fair value of
approximately $7.9 million, cash paid of $2.0 million, and other acquisition
related expenses of approximately $3.0 million consisting primarily of payments
for financial advisor and other professional fees.

    Our historical 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, and time and material billings are
recognized based on a percentage of completion. Support and maintenance fees for
our predecessor Worldtalk products 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. Transaction fees include routine maintenance and
product updates. Product upgrades are available to existing customers for
additional contractually specified fees.

    A substantial portion of revenue relates to international customers or
operations. Most of our contracts are denominated in U.S. dollars, except in
Japan, where they are denominated in Japanese yen. However, 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.

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

    On May 15, 2000, we repurchased from Hikari Tsushin 5% of the outstanding
stock of Tumbleweed KK, or TKK, for a price of approximately $700,000. As a
result of this transaction, we own a controlling interest of the Japanese
subsidiary and began accounting for the Japanese subsidiary under the
consolidation method effective April 1, 2000. On August 29, 2000, we repurchased
an additional 25% of the outstanding shares of the jointly owned Japanese
subsidiary, increasing our ownership position to 80%.

    On August 1, 2000, we completed a primary and secondary public offering of
3,000,000 shares of our common stock at a price of $56.00 per share. Of the
3,000,000 shares of common stock, 1,500,000 primary shares were sold by us and
1,500,000 secondary shares were sold by our stockholders. Tumbleweed did not
receive any of the proceeds from shares sold by its stockholders. Net proceeds
of $77.9 million from the offering of primary shares will be used for working
capital and other general

                                       21
<PAGE>
corporate purposes. In addition, we may use a portion of the net proceeds to
acquire complementary products, technologies or businesses.

    In January 2001 our Board of Directors approved a restructuring program.
This restructuring program focuses our efforts towards concentrating on our
strongest opportunities, reducing operating expenses, and improving our
allocation of resources. The restructuring involved closing several
international locations, realigning our professional services organization, and
reducing headcount in most areas of our business. The reduction in force
involved approximately 20% of our staff and total charges incurred as a result
of the restructuring are anticipated to be approximately $9-10 million in the
first quarter of 2001, which includes severance and related charges associated
with the reduction in force and charges related to vacating leased facilities
domestically and abroad. This estimate includes a $5 million non-cash accrual
for potential losses on sub-leased facilities primarily due to reduced sub-
lease rental income expectations reflecting rapidly declining office rent rates
in and around Silicon Valley.

    Beginning in 2001, we expect that new license agreements will generally
incorporate upgrade fees as part of the license and transaction offering, and
will recognize the combination of license, transaction and installation fees
ratably over the term of the contract. We expect that contract terms will be the
shorter of the term of the contractually committed transaction bundles or the
license term.

YEARS ENDED DECEMBER 31, 2000 AND 1999

    REVENUE.  Revenue is comprised of license revenue, services revenue and
transaction fees revenue. Total revenue increased 123% to $37.3 million in 2000
from $16.8 million in 1999 due to increased acceptance of our solutions in the
marketplace. License revenue increased 99% to $22.5 million in 2000 from
$11.3 million in 1999 due to an increase in the number of licenses sold,
additional license fees paid by existing customers, as well as an increase in
the average sales price of the MMS product line during 2000. Services revenue
increased 171% to $8.2 million in 2000 from $3.0 million in 1999 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
was $6.7 million in 2000 compared to $1.0 million in 1999. The increase in
transaction fees revenue resulted from minimum transaction fees from customers
due to the growth of our installed base, and to a lesser extent, due to the
introduction of a transaction pricing model for the MMS product line. Total
revenue excluding discontinued product lines increased 144% in 2000. There was
no revenue from discontinued product lines in 2000. Our sales were impacted by
an unexpected slowdown in technology spending that arrived late in the year. The
slowdown affected us in some larger customer agreements we were in the midst of
negotiating and subsequently, we were unable to complete sufficient sales in the
fourth quarter of 2000 to meet our expectations.

    COST OF REVENUE.  Cost of revenue is comprised of license cost, services
cost and transaction fees 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 paid to third parties for software licensed by
us for inclusion in our products and hardware and bandwidth costs associated
with hosting IME servers for some customers. Cost of revenue increased 168% to
$13.1 million in 2000 from $4.9 million in 1999. License cost increased 52% to
$1.1 million in 2000 from $737,000 in 1999. License costs increased primarily
due to increased 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 are on a fixed fee basis.
Services cost increased 191% to $11.9 million in 2000 from $4.0 million in 1999.
The increase was primarily due to increased personnel costs supporting an
increase in new contract development projects and the acquisition of Interface
from September 1, 2000. Transaction fees cost was $97,000 in 2000

                                       22
<PAGE>
compared to $78,000 in 1999. The increase in transaction fees cost resulted from
allocated royalties due on transaction fees revenue.

    RESEARCH AND DEVELOPMENT EXPENSES.  Research and development expenses are
comprised of engineering and related costs associated with the development of
our applications, quality assurance and testing. Research and development costs
increased 57% to $15.7 million in 2000 from $10.0 million in 1999. The increase
was primarily due to increased head count in part from our Interface
acquisition, increases in average salaries for development personnel, and
increased facilities related expenses. We expect that research and development
expenses will increase in absolute dollars in future periods due to increased
personnel required to support new projects that will allow us to expand the
functionality of the MMS and IME product lines, further integrate IME and L2i
into an integrated secure statement presentment platform and integrate all of
our products with targeted third party software packages and services.

    SALES AND MARKETING EXPENSES.  Sales and marketing expenses are comprised of
salaries, commissions, travel expenses and costs associated with trade shows,
lead generation, advertising and other marketing efforts. Sales and marketing
expenses increased 105% to $44.8 million in 2000 from $21.9 million in 1999. The
increase in sales and marketing expenses was primarily due to increased sales
staffing, commissions, and expanded marketing programs. We expect that sales and
marketing expenses will increase in absolute dollars in future periods as we
expand our sales force in core geographic markets.

    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 increased 107% to $12.0 million in
2000 from $6.1 million in 1999. The increase in general and administrative
expenses was due in part to an increase in legal fees corresponding to patent
infringement lawsuit we brought against The docSpace Company, Inc., which is
still pending, as well as increased staffing expenses and professional fees.

    DEFERRED COMPENSATION EXPENSE.  Deferred compensation expense is recorded in
connection with the grant of certain stock options to non-employees and
employees at exercise prices less than the deemed fair value on the grant date.
During the year ended December 31, 2000, we recorded aggregate deferred stock
compensation expense of $6.3 million compared to $7.3 million for the year ended
December 31, 1999. Deferred stock compensation expense for 2000 includes
$2.3 million related to the Interface acquisition and $3.0 million resulting
from the volatility of our stock price combined with certain stock option
commitments made to employees which were not processed in a timely fashion. The
deferred stock compensation expense is being amortized on an accelerated basis
over the vesting period of the options, which is generally four years.
Amortization of stock compensation expense for 2000 was approximately
$5.4 million compared to $3.5 million in 1999.

    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 fiscal 2000 were $10.8 million.

    AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES.  Amortization of goodwill
and other intangibles was $13.8 million for fiscal 2000. The goodwill and other
intangible assets resulted from the Interface purchase and, to a lesser extent,
our increase in ownership of Tumbleweed KK from 50% to 80% during 2000. Goodwill
and other intangibles are amortized over their respective lives, generally one
to three years.

                                       23
<PAGE>
    OTHER INCOME, NET.  Other income, net, is primarily comprised of interest
income earned on investment securities. Other income, net increased 62% to
$3.4 million in 2000 from $2.1 million in 1999. The increase in other income,
net, is due to increased cash balances 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 and our
offering completed in August 2000.

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 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.

    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 obligations 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 increased 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.

                                       24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

    Since inception, we have financed our operations primarily through the
issuance of equity securities. As of December 31, 2000, we had $75.5 million in
cash and cash equivalents.

    Net cash used by operating activities for 2000 was $41.0 million. Cash used
in operating activities was primarily the result of a net operating loss and
increased accounts receivable, offset by certain non-cash charges and increases
in accounts payable and accrued liabilities.

    Net cash used in investing activities for 2000 was $28.3 million. Net cash
used in investing activities was primarily the result of merger costs incurred
as a part of the acquisitions of Worldtalk and Interface; the repurchase of
additional shares of Tumbleweed KK; capital expenditures related to increased
facilities expansion; and certain investments.

    Net cash provided by financing activities for 2000 was $84.3 million. Cash
provided by financing activities was primarily attributable to net proceeds from
the issuance of equity securities to investors, including our public offering
completed in August 2000 and sales of shares under stock option plans and
warrants.

    As of December 31, 2000, our principal commitments consisted of obligations
related to outstanding operating and equipment leases. We anticipate additional
capital expenditures consistent with establishing infrastructure to support our
growth.

    In June 1999, we entered into an operating lease covering approximately
40,000 square feet of office space in Redwood City, California. The lease is for
a term of five years at monthly rent of approximately $96,000. In
September 2000, the Company entered into an operating lease covering
approximately 42,000 square feet of office space in an adjacent building in
Redwood City, California. The lease term is for five years at monthly rent of
approximately $286,000. We currently sublease this space. This sublease is
scheduled to expire with respect to half of the space in September 2001 and with
respect to the other half in April 2002. We are currently searching for a new
tenant to sublease this space. If we are unable to find suitable sub-tenants in
a timely manner, we may experience greater than anticipated operating expenses
in the future.

    We have two equipment loan facilities totaling $1,750,000 with a 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 the prime rate
plus 0.75% and are due and payable in 36 equal monthly installments. As of
December 31, 2000, total borrowings under these equipment loan facilities were
$871,000 in the aggregate and $879,000 remained available under the facilities.

    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 December 31, 2000, there was no debt outstanding under this
financing arrangement.

    Our capital requirements depend on numerous factors, including market
acceptance of our products and services, the resources we devote to development
of our products and services and the resources we devote to sales and marketing.
We have experienced a substantial increase in capital expenditures and operating
expenses since our inception consistent with our relocation and the growth in
operations and staffing. We anticipate that this growth will continue for the
foreseeable future, but not at the rate experienced during 2000. We also expect
to make targeted additional investments in technologies, and plan to expand our
sales force. We currently anticipate that our existing cash and sources of
liquidity will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next 12 months.

    We will continue to consider our 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 equipment loan facilities, 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 expect to experience a seasonal reduction in sales in Europe during the
summer months. In addition, many of our customers delay purchases of our
products until the end of each quarter.

                                       25
<PAGE>
RISKS AND UNCERTAINTIES

BECAUSE WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND 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 $69.8 million, $24.2 million and $11.7 million in the years ended
December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000, we had
incurred cumulative net losses as a C-corporation of $135 million. See
"Consolidated Statements of Operations" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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 transition from a traditional software licensing model to
a subscription-based pricing model, our limited operating history and the
emerging nature of the markets in which we compete, we may not be able 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 and termination of customer
agreements in a given quarter. Under the licensing model, our license revenue
was comprised of initial license and distribution fees. As a result, we
typically recognized initial license fees as revenue in the same quarter an
agreement was signed. Under the subscription-based pricing model, however, we
will account for and report our contracted revenue over the life of the
agreement. In the first two quarters of 2001, we will transition into the new
subscription-based pricing model. During these quarters, we expect a significant
decrease in recognized revenue as a result of our adoption of the new pricing
model.

    Our services revenue historically has been comprised largely of
implementation, customization and consulting fees. Our ability to receive
revenue from services is subject to multiple risks, including the risk that we
may not be able to meet increasing customer demand because of a lack of
adequately trained personnel, and the risk that customers may not timely accept
the services provided and delay payment for such services.

    Our transaction revenue historically has been comprised of contractual
transaction minimums. Our ability to increase our transaction revenue through
increased transaction volume depends on increased usage of our products by our
customers and their end users. Unless and until we have developed a significant
and recurring revenue stream our revenue will continue to fluctuate
significantly.

                                       27
<PAGE>
    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;

    - our ability to timely collect fees owed by customers;

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

    - acquisitions that we complete or propose.

    As a result of these factors, particularly our transition to a
subscription-based pricing model, 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.
Quarterly financials for 2001 under the new subscription-based pricing model
will not be comparable with historical quarters under the our previous licensing
model. 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. In
addition, many of our customers delay purchases of our products until the end of
each 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, we believe the difficulties outlined above with respect to
financial forecasts also apply to securities analysts that may publish estimates
of our financial results. Our operating results in one or more future quarters
may fail to meet the expectations of securities analysts or investors due to any
of a wide variety of factors, including fluctuations in financial ratios or
other metrics used to measure our performance. If this occurs, we would expect
to experience an immediate and significant decline in the trading price of our
stock.

OUR RESTRUCTURING OF OPERATIONS MAY NOT ACHIEVE THE RESULTS WE INTEND AND MAY
  HARM OUR BUSINESS.

    In January 2001, we announced a restructuring of our business, which
included a reduction in force and the closure of three international locations,
among other steps we took to reduce expenses. The planning and implementation of
our restructuring has placed, and may continue to place, a significant strain on
our managerial, operational, financial and other resources. Additionally, the
restructuring may negatively affect our employee turnover, recruiting and
retention of important employees. If we are unable to implement our
restructuring effectively or if we experience difficulties in effecting the
restructuring, our expenses could increase more quickly than we expect. If we
find that our restructuring announced in January is insufficient to decrease the
growth of our expenses, we may find it necessary to implement further
streamlining of our expenses, to perform another reduction in our headcount or
to undertake a restructuring of our business.

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 20% of our revenue in 2000, and approximately
36% of our revenue in 1999. We expect that a small number of customers will
continue to account for a majority of our revenue for the foreseeable future.

                                       28
<PAGE>
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 PRODUCT 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.

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 our 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 and our ability to
identify new markets as they emerge. Any enhancement that is not favorably
received by customers and end-users

                                       29
<PAGE>
may not be profitable and, furthermore, could damage our reputation or brand
name. Any failure to identify and address new market opportunities could harm
our business and prospects.

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 multiple competitive pressures we face could harm our
business and prospects. The markets in which we compete are intensely
competitive and rapidly changing.

    Our principal competition in the areas of messaging management and secure
communications are companies that offer of various Internet content security,
web security, messaging policy management, and enterprise relationship
management products. Companies that sell products that compete with some of the
features within our products include: Baltimore Technologies plc, Critical
Path, Inc., Kana Communications, Inc., Symantec Corp., Tivoli Systems, Inc., an
IBM company, Trend Micro Incorporated, ValiCert Inc., and Zixit Corporation.

    Our principal competition in the statement presentment market area comes
from other online communication or information security service providers, some
of which have services or products that are intended to compete directly with
our products or that could be used as alternatives to our products. Examples of
some of these providers are Automatic Data Processing, Inc., Critical
Path, Inc., New River Systems, PostX Corporation and Vestcom Corporation. Our
solution statement presentment and secure delivery solutions can be 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. In addition, companies with
which we do not presently directly compete may become competitors in the future,
either through the expansion of our products or through their product
development in the area of secure online communication services. These companies
include International Business Machines Corporation/Lotus Development
Corporation, Microsoft Corporation and VeriSign, Inc.

    The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. Some of our
competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger installed
customer base. Additionally, some of 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. We expect that the
market for mission-critical messaging software, which has been fragmented
historically, will become more consolidated with larger companies being better
positioned to compete in such an environment in the long term. As this market
continues to develop, a number of companies with greater resources than ours
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or business partners. Our success will
depend on our ability to adapt to these competing forces, to develop more
advanced products more rapidly and less expensively than our competitors, and to
educate potential customers as to the benefits of licensing our products rather
than developing their own products. Competitors could introduce products with
superior features, scalability and functionality at lower prices than our
products and could also bundle existing or new products with other more
established products in order to compete with us. In addition, because there are
relatively low barriers to entry for the software market, we expect additional
competition from other established and emerging companies. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could harm our business.

                                       30
<PAGE>
WE FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT US FROM
  SUCCESSFULLY INTEGRATING COMPANIES WE MAY ACQUIRE.

    The integration of the Worldtalk Communications Corporation business and the
Interface Systems, Inc. business, including the technology, operations and
personnel of each of them, has been and will continue to 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 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. We may encounter substantial difficulties, costs and delays
involved in integrating the operations of any company we acquire, including:

    - potential inability to fully integrate products;

    - 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 any business or
technologies we acquire and may not achieve anticipated revenue and cost
benefits. We also cannot guarantee that acquisitions will result in sufficient
revenues or earnings to justify our investment in, or expenses related to, such
acquisitions. 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 DEVELOPMENT EFFORTS MAY BE HINDERED BY A VARIETY OF FACTORS.

    Our new product releases may not be timely, scalable, or successful enough
to meet customers' requirements. In addition, we also face certain risks
associated with the ongoing integration of the Worldtalk technology and
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 headquarters and the offices of the companies
we have acquired are in different locations, which may create coordination
issues and could increase employee turnover. In addition, the installation of
integrated or complementary software products at customer sites may result in
difficulties associated with customer-specific installation processes.

THE EXPANSION OF OUR BUSINESS HAS PLACED A STRAIN ON RESOURCES.

    Our business has expanded considerably during 2000. For example, the number
of our employees increased from 111 as of December 31, 1999 to 389 as of
December 31, 2000. This expansion has placed, and is expected to continue to
place, a significant strain on managerial, informational, administrative and
operational resources. Our current systems, procedures and controls may not be
adequate to achieve the rapid execution necessary to effectively operate within
the market for our products and services. We need to enhance and improve our
managerial capacity, and improve or

                                       31
<PAGE>
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. For
these and other reasons, the cycle associated with establishing licenses and
implementing our products can be lengthy. This cycle is also subject to a number
of significant delays over which we have little or no control. Forecasts about
license revenue may be inaccurate as a result of any or all of these factors,
and inaccurate forecasts may cause our business, or market valuation, to suffer.

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

                                       32
<PAGE>
PROFITABLE EXPANSION IN INTERNATIONAL MARKETS MAY BE DIFFICULT.

    We invested 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 and the Netherlands. In fiscal
2000 and in fiscal 1999, we derived 32% and 61%, respectively, 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, OUR BUSINESS MAY SUFFER.

    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 usage 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 our own.
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 company. Therefore, our business and future prospects
significantly depend on the strength of our professional services organization
and our ability to leverage this organization by augmenting our reach through
trained and qualified systems integrators.

                                       33
<PAGE>
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 our 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 it outsources 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. Some of 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.

WE MAY BE UNABLE TO RECRUIT, RETAIN AND MOTIVATE QUALIFIED PERSONNEL, WHICH
  COULD HARM OUR BUSINESS, INCLUDING PRODUCT DEVELOPMENT.

    We must continue to identify, recruit, hire, train, retain and motivate
highly skilled technical, managerial, sales, marketing and customer service
personnel. Competition for these personnel is intense, and we may not be able to
successfully recruit, assimilate or retain sufficiently qualified personnel. In
particular, we may encounter difficulties in recruiting a sufficient number of
qualified software developers and sales personnel, and we may not be able to
retain these employees. The failure to recruit and retain necessary technical,
managerial, sales, merchandising, marketing and customer service personnel could
harm our business and our ability to obtain new customers and develop new
products. Although we have used and continue to use stock options as a retention
tool, many of our employees hold stock options that are "underwater" (i.e., the
market price of our stock is below their option exercise price) and these
options may be ineffective as a retention tool. Our employee turnover may
increase if outstanding stock options continue to remain underwater and we do
not adjust the

                                       34
<PAGE>
option exercise prices. Any adjustment of stock option exercise prices may
result in dilution to our stockholders and depress our stock price.

IF WE LOSE THE SERVICES OF EXECUTIVE OFFICERS OR OTHER KEY EMPLOYEES, OUR
  ABILITY TO DEVELOP OUR BUSINESS AND SECURE CUSTOMER RELATIONSHIPS WILL SUFFER.

    We are substantially dependent on the continued services and performance of
our executive officers and other key personnel. The loss of the services of any
of our executive officers or other key employees could significantly delay or
prevent the achievement of our development and strategic objectives. We do not
have long-term employment agreements with any of our key personnel. The loss of
services of any of our executive officers or other key personnel could
significantly harm our business and prospects.

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.

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 Internet connections for
providing reliable 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
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.

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,

                                       35
<PAGE>
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. Delays in the enactment of expected regulations may result in
delayed software purchasing by our customers who are subject to such
regulations, which in turn may harm our business.

    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 EXPORT CONTROLS, AND WE MAY BE UNABLE TO OBTAIN
  NECESSARY EXPORT 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.

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

                                       36
<PAGE>
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.

INTERFACE SYSTEMS, INC., A TUMBLEWEED SUBSIDIARY, IS 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 September 27,
2000, we filed (i) a motion to strike or dismiss for failure to meet the
certification requirements of the Private Securities Litigation Reform Act,
(ii) a motion to dismiss for failure to state a claim, and (iii) a motion to
dismiss because of improper venue, or in the alternative, motion to transfer the
lawsuits to the Eastern District of Michigan. These motions remain pending.

    Although we believe these lawsuits are without merit, no assurance can be
given about their outcome, and an adverse outcome could significantly harm our
business and operating results. Moreover, the costs in defending these
complaints could harm future operating results.

WE MAY BE UNABLE TO FIND SUB-TENANTS TO SUBLEASE CURRENTLY LEASED SPACE.

    In September 2000, we entered into a lease covering 42,000 square feet of
office space adjacent to our headquarters. This lease is for five years at a
monthly rent of approximately $286,000. Although we currently sublease this
space, this sublease is scheduled to expire with respect to half of the space in
September 2001 and with respect to the other half in April 2002. We are
currently searching for a new tenant to sublease this space. We also sublease an
additional 15,000 square feet in Santa Clara, California and 10,000 in New York
City to third parties. We may not be able to find suitable sub-tenants to occupy
these spaces in the future in a timely manner, if at all, or otherwise sublease
these properties profitably. If we are unable to find suitable sub-tenants, we
may experience greater than anticipated operating expenses in the future.

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.

                                       37
<PAGE>
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 Tumbleweed
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.

FUTURE SALES OF COMMON STOCK BY OUR STOCKHOLDERS 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. Sales of
substantial amounts of common stock, or the perception that these sales could
occur, may depress prevailing market prices for the common stock.

ITEM 7A--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 Europe
and Japan which are denominated in local currencies. However, as of
December 31, 2000, we had no hedging contracts outstanding.

    We currently do not use financial instruments to hedge operating expenses in
Europe or Japan which are denominated in local currencies. 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 its hedging program.

INTEREST RATE SENSITIVITY

    The primary object of our investment activities is to preserve principal
while at the same time maximizing the income we received 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.

                                       38
<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 December 31, 2000. This table does not include money market
funds because these funds are not subject to market risk.

<TABLE>
<CAPTION>
                                                              MATURING IN
                                                          -------------------
                                                          ONE YEAR   OVER ONE
                                                          OR LESS      YEAR      TOTAL     FAIR VALUE
                                                          --------   --------   --------   ----------
<S>                                                       <C>        <C>        <C>        <C>
Included in cash and cash equivalents...................   56,219    None        56,219      56,219
Weighted average interest rate..........................     6.31%
</TABLE>

                                       39
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                        TUMBLEWEED COMMUNICATIONS CORP.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Report of Independent Auditors..............................     41

Consolidated Balance Sheets.................................     42

Consolidated Statements of Operations.......................     43

Consolidated Statements of Stockholders' Equity.............     44

Consolidated Statements of Cash Flows.......................     45

Notes to Consolidated Financial Statements..................     46
</TABLE>

                                       40
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Tumbleweed Communications Corp.:

    We have audited the accompanying consolidated balance sheets of Tumbleweed
Communications Corp. and subsidiaries as of December 31, 2000 and 1999, 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, 2000.
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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

                                               /s/ KPMG LLP

Mountain View, California
January 24, 2001

                                       41
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2000        1999
                                                              ---------   --------
<S>                                                           <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  75,497   $ 60,544
  Accounts receivable, net of allowance for doubtful
    accounts of $1,125 and $816 in 2000 and 1999,
    respectively............................................     11,220      5,182
  Prepaid expenses and other current assets.................      3,641      3,574
                                                              ---------   --------
    Total current assets....................................     90,358     69,300
  Property and equipment, net...............................     13,700      3,485
  Intangible assets, net....................................      4,297        135
  Goodwill, net.............................................     65,319         --
  Other assets..............................................      5,226      2,763
                                                              ---------   --------
    Total assets............................................  $ 178,900   $ 75,683
                                                              =========   ========

LIABILITIES AND STOCKHOLDER' EQUITY
Current liabilities:
  Accounts payable..........................................  $   3,872   $  2,878
  Current installments of long-term debt....................        587        840
  Accrued liabilities.......................................     16,833      6,398
  Deferred revenue..........................................      2,557      2,579
                                                              ---------   --------
    Total current liabilities...............................     23,849     12,695
Long-term debt, excluding current installments..............        497      1,017
Other long-term liabilities.................................        337        258
                                                              ---------   --------
    Total liabilities.......................................     24,683     13,970
                                                              ---------   --------
Commitments and contingencies
Minority interest...........................................        605         --
                                                              ---------   --------
Stockholders' equity:
  Common stock, $.001 par value; 100,000,000 shares
    authorized, 29,554,621 and 25,423,718 shares issued and
    outstanding as of December 31, 2000 and 1999,
    respectively............................................         30         26
  Additional paid-in capital................................    295,183    132,167
  Deferred compensation expense.............................     (6,461)    (5,283)
  Accumulated other comprehensive income (loss).............        (61)        53
  Accumulated deficit.......................................   (135,079)   (65,250)
                                                              ---------   --------
    Total stockholders' equity..............................    153,612     61,713
                                                              ---------   --------
    Total liabilities and stockholders' equity..............  $ 178,900   $ 75,683
                                                              =========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       42
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenue:
  License...................................................  $ 22,490   $ 11,285   $  8,996
  Services..................................................     8,185      3,018      1,359
  Transaction fees..........................................     6,663        981         --
  Sale of technology........................................        --         --        220
                                                              --------   --------   --------
    Revenue from continuing product lines...................    37,338     15,284     10,575
  Discontinued product line.................................        --      1,472      4,888
                                                              --------   --------   --------
    Total revenue...........................................    37,338     16,756     15,463
Cost of revenue:
  License...................................................     1,123        737        931
  Services (inclusive of non-cash compensation of $150 in
    2000)...................................................    11,897      4,088      3,319
  Transaction fees..........................................        97         78         --
                                                              --------   --------   --------
    Total cost of revenue...................................    13,117      4,903      4,250
                                                              --------   --------   --------
    Gross profit............................................    24,221     11,853     11,213
Operating expenses:
  Research and development (inclusive of non-cash
    compensation of $828, $1,049, and $249 in 2000, 1999,
    and 1998, respectively).................................    15,707      9,972      6,224
  Sales and marketing (inclusive of non-cash compensation of
    $4,153, $1,961, and $300 in 2000, 1999, and 1998,
    respectively)...........................................    44,776     21,878     11,846
  General and administrative (inclusive of non-cash
    compensation of $429, $526, and $166 in 2000, 1999, and
    1998, respectively).....................................    12,000      6,050      5,386
  Amortization of goodwill, intangibles, and in-process
    research and development................................    13,775         --         --
  Merger related and restructuring expenses (inclusive of
    non-cash compensation of $411 in 2000)..................    10,803         --         --
                                                              --------   --------   --------
    Total operating expenses................................    97,061     37,900     23,456
                                                              --------   --------   --------
    Operating loss..........................................   (72,840)   (26,047)   (12,243)
  Other income, net.........................................     3,353      2,126        524
                                                              --------   --------   --------
    Net loss before provision for taxes and minority
      interest..............................................   (69,487)   (23,921)   (11,719)
    Provision for income taxes..............................       375        301          1
                                                              --------   --------   --------
    Net loss before minority interest.......................   (69,862)   (24,222)   (11,720)
    Minority interest.......................................       (33)        --         --
                                                              --------   --------   --------
    Net loss................................................  $(69,829)  $(24,222)  $(11,720)
                                                              ========   ========   ========
Net loss per shares--basic and diluted......................  $  (2.51)  $  (1.65)  $  (1.79)
                                                              ========   ========   ========
Weighted average shares--basic and diluted..................    27,829     14,650      6,549
                                                              ========   ========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       43
<PAGE>
                        TUMBLEWEED COMMUNICATIONS CORP.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                 CONVERTIBLE PREFERRED STOCK
                                                            ---------------------------------------------------------------------
                                                                  SERIES A                SERIES B                SERIES C
                                                            ---------------------   ---------------------   ---------------------
                                                              SHARES      AMOUNT      SHARES      AMOUNT      SHARES      AMOUNT
                                                            ----------   --------   ----------   --------   ----------   --------
<S>                                                         <C>          <C>        <C>          <C>        <C>          <C>
BALANCES, DECEMBER 31, 1997...............................   2,657,971     $ 3       4,065,960     $ 4              --     $--
  Issuance of common stock to nonemployees................          --      --              --      --              --      --
  Issuance of common stock upon exercise of stock
    options...............................................          --      --              --      --              --      --
  Purchases under Employee Stock Purchase Plan............          --      --              --      --              --      --
  Repurchase of common stock..............................          --      --              --      --              --      --
  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              --      --
  Issuance of common stock upon exercise of stock
    options...............................................          --      --              --      --              --      --
  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......          --      --              --      --              --      --
  Purchases under Employee Stock Purchase Plan............          --      --              --      --              --      --
  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)
  Gain on sale of TKK subsidiary..........................          --      --              --      --              --      --
  Repurchase of common stock..............................          --      --              --      --              --      --
  Issuance of common stock--IPO, net of issuance costs of
    $4,855................................................          --      --              --      --              --      --
  Issuance of common stock for equity financing...........          --      --              --      --              --      --
  Net loss................................................          --      --              --      --              --      --
                                                            ----------     ---      ----------     ---      ----------     ---
BALANCES, DECEMBER 31, 1999...............................          --      --              --      --              --      --
  Issuance of common stock upon exercise of stock
    options...............................................          --      --              --      --              --      --
  Purchases under Employee Stock Purchase Plan............          --      --              --      --              --      --
  Issuance of options in exchange for services............          --      --              --      --              --      --
  Foreign currency translation adjustment.................          --      --              --      --              --      --
  Deferred compensation expense on stock option grants....          --      --              --      --              --      --
  Deferred compensation expense on vesting acceleration...          --      --              --      --              --      --
  Amortization of deferred compensation expense...........          --      --              --      --              --      --
  Issuance of common stock upon exercise of warrants......          --      --              --      --              --      --
  Issuance of common stock -- second offering, net of
    issuance costs of $6,147..............................          --      --              --      --              --      --
  Issuance of common stock -- Interface acquisition.......          --      --              --      --              --      --
  Net loss................................................          --      --              --      --              --      --
                                                            ----------     ---      ----------     ---      ----------     ---
BALANCES, DECEMBER 31, 2000...............................          --     $--              --     $--              --     $--
                                                            ==========     ===      ==========     ===      ==========     ===

<CAPTION>

                                                                                                                 ACCUMULATED
                                                                 COMMON STOCK                     DEFERRED          OTHER
                                                            ----------------------              COMPENSATION    COMPREHENSIVE
                                                              SHARES       AMOUNT      APIC        EXPENSE      INCOME (LOSS)
                                                            -----------   --------   --------   -------------   --------------
<S>                                                         <C>           <C>        <C>        <C>             <C>
BALANCES, DECEMBER 31, 1997...............................    6,761,699     $ 7      $ 44,677      $  (563)          $ --
  Issuance of common stock to nonemployees................           --      --             8           --             --
  Issuance of common stock upon exercise of stock
    options...............................................      204,150      --           217           --             --
  Purchases under Employee Stock Purchase Plan............       40,300      --           358           --             --
  Repurchase of common stock..............................      (11,960)     --           (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................................................           --      --            --           --             --
                                                            -----------     ---      --------      -------           ----
BALANCES, DECEMBER 31, 1998...............................    6,994,189       7        47,001       (1,548)            (2)
  Issuance of common stock upon exercise of stock
    options...............................................      877,893       1         1,247           --             --
  Issuance of Series B preferred stock in exchange for
    services..............................................           --      --            54           --             --
  Issuance of Series C preferred stock and warrants net of
    issuance costs of $1,337..............................           --      --        18,748           --             --
  Issuance of Series C preferred stock in exchange for
    services..............................................           --      --            23           --             --
  Issuance of common stock warrant........................           --      --           127           --             --
  Issuance of common stock upon exercise of warrants......       94,610      --           270           --             --
  Purchases under Employee Stock Purchase Plan............       39,000      --           311           --             --
  Foreign currency translation adjustment.................           --      --            --           --             55
  Deferred compensation expense on stock option grants....           --      --         7,271       (7,271)            --
  Amortization of deferred compensation expense...........           --      --            --        3,536             --
  Conversion of preferred stock to common stock...........   12,331,434      12            --           --             --
  Gain on sale of TKK subsidiary..........................           --      --         1,491           --             --
  Repurchase of common stock..............................           --      --           (36)          --             --
  Issuance of common stock--IPO, net of issuance costs of
    $4,855................................................    4,219,592       5        45,769           --             --
  Issuance of common stock for equity financing...........      867,000       1         9,891           --             --
  Net loss................................................           --      --            --           --             --
                                                            -----------     ---      --------      -------           ----
BALANCES, DECEMBER 31, 1999...............................   25,423,718      26       132,167       (5,283)            53
  Issuance of common stock upon exercise of stock
    options...............................................    1,234,033       1         6,260           --             --
  Purchases under Employee Stock Purchase Plan............      111,886      --         1,785           --             --
  Issuance of options in exchange for services............           --      --           616           --             --
  Foreign currency translation adjustment.................           --      --            --           --           (114)
  Deferred compensation expense on stock option grants....           --      --         4,004       (4,004)            --
  Deferred compensation expense on vesting acceleration...           --      --           275          136             --
  Amortization of deferred compensation expense...........           --      --            --        4,944             --
  Issuance of common stock upon exercise of warrants......       35,774      --            --           --             --
  Issuance of common stock -- second offering, net of
    issuance costs of $6,147..............................    1,500,000       2        77,851           --             --
  Issuance of common stock -- Interface acquisition.......    1,249,210       1        72,225       (2,254)            --
  Net loss................................................           --      --            --           --             --
                                                            -----------     ---      --------      -------           ----
BALANCES, DECEMBER 31, 2000...............................   29,554,621     $30      $295,183      $(6,461)          $(61)
                                                            ===========     ===      ========      =======           ====

<CAPTION>

                                                                               TOTAL
                                                            ACCUMULATED    STOCKHOLDERS'
                                                              DEFICIT         EQUITY
                                                            ------------   -------------
<S>                                                         <C>            <C>
BALANCES, DECEMBER 31, 1997...............................   $ (29,308)      $ 14,820
  Issuance of common stock to nonemployees................          --              8
  Issuance of common stock upon exercise of stock
    options...............................................          --            217
  Purchases under Employee Stock Purchase 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)       (11,720)
                                                             ---------       --------
BALANCES, DECEMBER 31, 1998...............................     (41,028)         4,437
  Issuance of common stock upon exercise of stock
    options...............................................          --          1,248
  Issuance of Series B preferred stock in exchange for
    services..............................................          --             54
  Issuance of Series C preferred stock and warrants net of
    issuance costs of $1,337..............................          --         18,753
  Issuance of Series C preferred stock in exchange for
    services..............................................          --             23
  Issuance of common stock warrant........................          --            127
  Issuance of common stock upon exercise of warrants......          --            270
  Purchases under Employee Stock Purchase Plan............          --            311
  Foreign currency translation adjustment.................          --             55
  Deferred compensation expense on stock option grants....          --             --
  Amortization of deferred compensation expense...........          --          3,536
  Conversion of preferred stock to common stock...........          --             --
  Gain on sale of TKK subsidiary..........................          --          1,491
  Repurchase of common stock..............................          --            (36)
  Issuance of common stock--IPO, net of issuance costs of
    $4,855................................................          --         45,774
  Issuance of common stock for equity financing...........          --          9,892
  Net loss................................................     (24,222)       (24,222)
                                                             ---------       --------
BALANCES, DECEMBER 31, 1999...............................     (65,250)        61,713
  Issuance of common stock upon exercise of stock
    options...............................................          --          6,261
  Purchases under Employee Stock Purchase Plan............          --          1,785
  Issuance of options in exchange for services............          --            616
  Foreign currency translation adjustment.................          --           (114)
  Deferred compensation expense on stock option grants....          --             --
  Deferred compensation expense on vesting acceleration...          --            411
  Amortization of deferred compensation expense...........          --          4,944
  Issuance of common stock upon exercise of warrants......          --             --
  Issuance of common stock -- second offering, net of
    issuance costs of $6,147..............................          --         77,853
  Issuance of common stock -- Interface acquisition.......          --         69,972
  Net loss................................................     (69,829)       (69,829)
                                                             ---------       --------
BALANCES, DECEMBER 31, 2000...............................   $(135,079)      $153,612
                                                             =========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       44
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES
              CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(69,829)  $(24,222)  $(11,720)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Amortization of deferred stock and warrant compensation
     expense................................................     5,971      4,000        723
    Depreciation and amortization...........................    14,214      1,161      1,030
    Bad debt expense........................................     2,099     (1,024)     1,719
    Minority interest.......................................       (33)        --         --
    In-process research and development.....................     1,960         --         --
    Amortization of debt discount...........................        --         --         12
  Changes in operating assets and liabilities:
    Accounts receivable.....................................    (6,503)    (1,202)    (1,640)
    Prepaid expenses and other assets.......................     2,584     (2,000)       298
    Accounts payable and accrued liabilities................     8,866      5,103        452
    Deferred revenue........................................      (305)        44     (1,798)
                                                              --------   --------   --------
      Net cash used in operating activities.................   (40,976)   (18,140)   (10,924)
                                                              --------   --------   --------
Cash flows from investing activities:
  Purchase of property and equipment........................    (8,307)    (3,246)      (524)
  Purchase of short-term investments........................        --         --    (56,383)
  Sales and maturities of short-term investments............        --      2,166     60,632
  Acquisitions, net of cash acquired........................   (17,882)        --         --
  Cash transferred to TKK...................................        --       (683)        --
  Purchase of investments...................................    (3,988)        --         --
  Proceeds from sale of Interface product line..............     1,900         --         --
  Other assets..............................................        --       (580)         7
                                                              --------   --------   --------
    Net cash provided by (used in) investing activities.....   (28,277)    (2,343)     3,732
                                                              --------   --------   --------
Cash flows from financing activities:
  Increase in borrowings....................................        --      2,103        560
  Repayments of borrowings..................................    (1,579)    (1,639)      (343)
  Proceeds from issuance of preferred stock and warrants,
    net.....................................................        --     18,493         --
  Proceeds from issuance of common stock, net...............    77,853     55,666         --
  Repurchase of common stock................................        --        (36)       (14)
  Issuance of common stock upon exercise of stock options...     6,261      1,248        217
  Issuance of common stock under Employee Stock Purchase
    Plan....................................................     1,785        311        358
  Issuance of common stock upon exercise of warrants........        --        270         --
                                                              --------   --------   --------
    Net cash provided by financing activities...............    84,320     76,416        778
Effect of exchange rate fluctuations........................      (114)        55         (2)
                                                              --------   --------   --------
Net (decrease) increase in cash and cash equivalents........    14,953     55,988     (6,416)
Cash and cash equivalents, beginning of year................    60,544      4,556     10,972
                                                              --------   --------   --------
Cash and cash equivalents, end of year......................  $ 75,497   $ 60,544   $  4,556
                                                              ========   ========   ========
Supplemental disclosures of cash flow information:
  Cash paid during the year for interest....................  $    132   $     97   $     79
                                                              ========   ========   ========
  Cash paid during the year for taxes.......................  $     93   $     --   $     --
                                                              ========   ========   ========
Non-cash investing and financing activities:
  Issuance of warrants and options for services, debt
    issuance costs or equity offering costs.................  $  1,027   $    464   $     63
                                                              ========   ========   ========
  Equipment acquired under capital lease agreement..........  $     --   $     85   $     --
                                                              ========   ========   ========
  Issuance of debt to acquire insurance contract............  $     --   $    525   $     --
                                                              ========   ========   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       45
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                                    AND 1998

(1) ORGANIZATION

    Tumbleweed Communications Corp. ("Tumbleweed" or "the Company"), a Delaware
corporation initially incorporated in California in June 1993, is a leading
provider of mission-critical messaging solutions that enable organizations to
manage and secure online business communications and processes. Customers may
use Tumbleweed's solutions to centrally control and monitor the corporate
communications stream to comply with policies and government regulations,
communicate securely with business partners, suppliers, and customers, and to
integrate business communications and processes online. Tumbleweed software
offers a foundation for the automated legacy data extraction, preparation, and
secure two-way communication of sensitive or confidential business information,
such as electronic statements and customer service inquiries. Tumbleweed
solutions are centrally controlled by IT managers while remaining transparent to
end-users who do not need to deploy new software or modify behavior to comply
with corporate security and communications policies.

    On August 2, 1999, the Company reincorporated in the state of Delaware. The
Certificate of Incorporation of the Delaware successor corporation authorizes
100 million shares of common stock and 10 million shares of preferred stock at
$0.001 par value per share. The accompanying consolidated financial statements
have been retroactively restated to give effect to the reincorporation.

    The Company maintains its headquarters in Redwood City, California. During
1999, the Company incorporated subsidiaries in the United Kingdom, Germany,
France, and Japan. During 2000, the Company incorporated subsidiaries in
Australia, the Netherlands, Sweden, Hong Kong, and Switzerland.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION AND CONSOLIDATION POLICY

    The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, Worldtalk Communications Corp.
("Worldtalk"), and Interface Systems, Inc. ("Interface"); the Company's wholly
owned subsidiary in the United Kingdom, which includes the United Kingdom's
wholly owned subsidiaries in France, Germany, Australia, the Netherlands,
Switzerland, Sweden and Hong Kong; and the Company's majority-owned subsidiary
in Japan, Tumbleweed Communications KK ("TKK"). The results of operations for
TKK have been included in the Company's consolidated statements of operations
except for the period from September 1, 1999 to March 31, 2000, when it was an
investment accounted for under the equity method. The results of operations for
Interface have been included commencing September 1, 2000, the effective date of
its acquisition.

    All significant intercompany accounts and transactions have been eliminated
in consolidation.

    CASH, CASH EQUIVALENTS AND INVESTMENTS

    The Company considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents.

    The Company generally has classified its investment securities as
available-for-sale and accounts for them at estimated fair value. Realized and
unrealized gains and losses were not significant for 2000, 1999, and 1998. The
cost of securities sold is based on the specific identification method.

                                       46
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    PROPERTY AND EQUIPMENT

    Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful life of the
asset, generally 3 to 5 years for computers, furniture, and equipment; 33 years
for buildings and improvements; 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.

    OTHER INVESTMENTS

    During 2000, the Company made investments in two non-public companies of
$977,000 and $3.0 million. The investments are accounted for using the cost
method and are included in other assets in the accompanying balance sheet as of
December 31, 2000. One of the investee companies provided services to Tumbleweed
in the amount of approximately $542,000 for the year ended December 31, 2000.

    GOODWILL AND INTANGIBLE ASSETS

    Goodwill and intangible assets relating to purchase business combinations
are recorded at cost less accumulated amortization and are amortized on a
straight-line basis over their estimated useful lives ranging from one to five
years.

    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 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

    The Company recognizes revenue in accordance with American Institute of
Certified Public Accountants issued Statement of Position ("SOP") 97-2, SOFTWARE
REVENUE RECOGNITION and SOP 98-9, SOFTWARE REVENUE RECOGNITION WITH RESPECT TO
CERTAIN ARRANGEMENTS, which 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
undelivered element of the arrangement does not exist, all revenue from

                                       47
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the arrangement is deferred until such time that evidence of fair value does
exist, or until all elements of the arrangement are delivered.

    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.

    The Company provides limited warranty rights to its customers, which are
accounted for in accordance with Statement of Financial Accounting Standards
("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.

    ADVERTISING

    The Company expenses advertising costs as incurred. Total advertising
expense was $450,000, $399,000, and $565,000 for 2000, 1999, and 1998,
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 carry forwards. 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.

                                       48
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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. Expense associated with stock-based compensation is being amortized on an
accelerated basis over the vesting period of the individual award consistent
with the method described in Financial Accounting Standards Board ("FASB")
Interpretation No. 28. 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.

    NET LOSS PER SHARE

    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. The following potential 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>
                                                           YEARS ENDED DECEMBER 31,
                                                        ------------------------------
                                                          2000       1999       1998
                                                        --------   --------   --------
<S>                                                     <C>        <C>        <C>
Shares issuable under stock options...................   7,243      4,475       3,116
Shares of restricted stock subject to repurchase......      --         --         197
Shares issuable pursuant to warrants or rights to
  purchase convertible preferred stock................      --         --          61
Shares issuable pursuant to warrants or rights to
  purchase common stock...............................     484        540          14
Shares of convertible preferred stock on an
  "as-if-converted" basis.............................      --         --       6,724
                                                         -----      -----      ------
                                                         7,727      5,015      10,112
                                                         =====      =====      ======
</TABLE>

    OTHER COMPREHENSIVE INCOME (LOSS)

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

                                       49
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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
accounting principles generally accepted in the United States of America
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.

    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 2000, 1999, and
1998. At December 31, 2000 and 1999, no foreign currency translation exposures
were hedged.

    IMPAIRMENT OF LONG-LIVED ASSETS

    The Company reviews its long-lived assets, including goodwill and intangible
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.

    RECLASSIFICATION

    Certain reclassifications, none of which affected net income, have been made
to prior year amounts to conform to the current year presentation.

    RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the 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,

                                       50
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, was adopted by Tumbleweed during the
quarter ended December 31, 2000. There was no material change to the Company's
accounting for revenue as a result of the adoption of SAB Nos. 101 and 101B.

    In March 2000, FASB issued Financial Interpretation No. 44 ("FIN 44"). FIN
44 clarifies (a) the definition of employee for purposes of applying 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. The application of FIN 44 did not have a material impact on Tumbleweed's
financial position or results of operations.

(3) BUSINESS COMBINATIONS

    WORLDTALK COMMUNICATIONS CORPORATION

    On January 31, 2000, the Company completed its acquisition of 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.

    INTERFACE SYSTEMS, INC.

    On September 1, 2000, Tumbleweed acquired Interface, which developed and
sold software-based tool and solutions to integrate legacy systems with Internet
technology, distribute mainframe documents, and provide host connectivity. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values on the acquisition
date. Since September 1, 2000, Interface's results of operations have been
included in the Company's Consolidated Statements of Operations. The fair value
of the intangible assets was determined based upon a valuation using a
combination of methods, including a cost approach for the assembled workforce,
and an income approach for the core technology.

    The purchase price of approximately $77.1 million consisted of an exchange
of 1,249,210 shares of the Company's common stock with a fair value of
approximately $64.2 million, assumed stock options with a fair value of
approximately $7.9 million, cash paid of $2.0 million, and other acquisition
related

                                       51
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(3) BUSINESS COMBINATIONS (CONTINUED)
expenses of approximately $2.9 million consisting primarily of payments for
investment banker's fees, legal fees, accounting fees, and printer fees.

    The following is a summary of the allocation of the purchase price in the
acquisition of Interface (in thousands):

<TABLE>
<S>                                                           <C>
Property and equipment......................................  $ 4,263
Net current assets..........................................      971
Deferred compensation.......................................    2,254
Identifiable intangible assets..............................    4,325
Assembled workforce.........................................    1,961
In-process research and development.........................    1,960
Goodwill....................................................   61,391
                                                              -------
Total                                                         $77,125
                                                              =======
</TABLE>

    PRO FORMA RESULTS (UNAUDITED)

    The results of operations previously reported by the separate enterprises,
Tumbleweed and Worldtalk, and the combined amounts presented in the accompanying
consolidated financial statements are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                            1999       1998
                                                          --------   --------
<S>                                                       <C>        <C>
Revenues
  Tumbleweed............................................  $  5,777   $  2,015
  Worldtalk.............................................    10,979     13,448
                                                          --------   --------
  Total.................................................  $ 16,756   $ 15,463
                                                          ========   ========
Net Loss
  Tumbleweed............................................  $(16,416)  $ (6,590)
  Worldtalk.............................................    (7,806)    (5,130)
                                                          --------   --------
  Total.................................................  $(24,222)  $(11,720)
                                                          ========   ========
</TABLE>

    The following unaudited pro forma summary presents the Company's
consolidated results of operations for the years ended December 31, 2000 and
1999 as if the Interface acquisition had been consummated at the beginning of
the earliest period. The pro forma consolidated results of operations include
certain pro forma adjustments, including amortization of goodwill and other
intangible assets, amortization of deferred compensation and the elimination of
the charge for acquired in process research and development.

                                       52
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(3) BUSINESS COMBINATIONS (CONTINUED)
    Pro forma results for the years ended December 31, 2000 and 1999 are as
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Revenues................................................  $ 44,267   $ 20,108
Net loss................................................   (64,069)   (54,899)
Net loss per share--basic and diluted...................  $  (2.07)  $  (3.45)
</TABLE>

    The pro forma results are not necessarily indicative of those that would
have actually occurred had the acquisition taken place at the beginning of the
periods presented.

(4) FINANCIAL STATEMENT COMPONENTS

    A summary of cash and cash equivalents as of December 31, 2000 and 1999
follows (in thousands):

<TABLE>
<CAPTION>
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Cash......................................................  $13,731    $ 1,559
Money market mutual funds.................................    5,547     47,100
Commercial paper..........................................   56,219     11,885
                                                            -------    -------
  Cash and cash equivalents...............................   75,497     60,544
Less restricted cash equivalents..........................    1,929         --
                                                            -------    -------
  Unrestricted cash and cash equivalents..................  $73,568    $60,544
                                                            =======    =======
</TABLE>

    Restricted cash consists of a lease deposit related to one of the Company's
facilities in Redwood City, California.

    A summary of property and equipment as of December 31, 2000 and 1999 follows
(in thousands):

<TABLE>
<CAPTION>
                                                               2000       1999
                                                             --------   --------
<S>                                                          <C>        <C>
Office furniture...........................................  $ 3,307     $1,601
Computers and equipment....................................   11,375      5,457
Land and buildings.........................................    3,436         --
Leasehold improvements.....................................    2,405        691
                                                             -------     ------
                                                              20,523      7,749
Less accumulated depreciation..............................    6,823      4,264
                                                             -------     ------
                                                             $13,700     $3,485
                                                             =======     ======
</TABLE>

                                       53
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(4) FINANCIAL STATEMENT COMPONENTS (CONTINUED)
    A summary of goodwill and other intangible assets as of December 31, 2000
and 1999 follows (in thousands):

<TABLE>
<CAPTION>
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Goodwill....................................................  $74,850      $ --
Developed and core technology...............................    4,325        --
Acquired workforce..........................................    2,023        62
Capitalized organizational and software development costs...      231       231
                                                              -------      ----
                                                               81,429       293
Less accumulated amortization...............................   11,813       158
                                                              -------      ----
                                                              $69,616      $135
                                                              =======      ====
</TABLE>

    A summary of accrued liabilities as of December 31, 2000 and 1999 follows
(in thousands):

<TABLE>
<CAPTION>
                                                               2000       1999
                                                             --------   --------
<S>                                                          <C>        <C>
Accrued compensation.......................................  $ 7,694     $2,801
Professional fees..........................................    3,128      1,632
Accrued sales and foreign taxes............................    1,705        399
Accrued royalties..........................................    2,106         --
Other......................................................    2,200      1,566
                                                             -------     ------
                                                             $16,833     $6,398
                                                             =======     ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2000       1999       1998
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Interest income......................................   $3,512     $1,761     $ 622
Interest expense.....................................     (160)      (200)     (108)
Equity loss in TKK...................................       --        (22)       --
Miscellaneous income.................................        1        587        10
                                                        ------     ------     -----
                                                        $3,353     $2,126     $ 524
                                                        ======     ======     =====
</TABLE>

(5) 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, 2000 and 1999,
Hikari owned approximately 0% and 20% of the Company's outstanding common stock,
respectively.

                                       54
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(5) RELATED PARTY TRANSACTIONS (CONTINUED)
    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
      $310,000 and $331,000 in transaction fees from Hikari during 2000 and
      1999, respectively.

    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 had equal board representation in TKK. As a result of the equity
transaction and the change in board constituency, the Company no longer believed
it had control of TKK. Consequently, beginning September 1, 1999, the Company
began accounting 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 recorded
$1.49 million in additional paid-in capital in 1999.

    On May 15, 2000, Tumbleweed repurchased 5% of the outstanding shares of
TKK's common stock from Hikari for Y70,000,000 (which approximated $645,000 as
of May 15, 2000), increasing the Company's ownership interest in TKK to 55% and
resumed consolidating the Japanese subsidiary effective April 1, 2000. On
August 29, 2000, Tumbleweed repurchased an additional 25% of the outstanding
shares of the jointly owned Japanese subsidiary for approximately
$13.8 million, increasing

                                       55
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(5) RELATED PARTY TRANSACTIONS (CONTINUED)
the Company's ownership position to 80%. The Company recorded approximately
$13.5 million of goodwill as a result of these transactions.

    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, and $0 in 1999 and 1998, respectively. Hikari has historically been a
significant customer of TKK, representing approximately 84% 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. During
the three months ended March 31, 2000, the Company recorded revenues from TKK of
approximately $367,000. The Company recorded revenues from Hikari of $514,000,
$787,000 and $0 in 2000, 1999, and 1998, respectively.

    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 7). In June 1999, the Company entered into a license agreement and a
consulting agreement with this customer and recorded revenues of approximately
$567,000 and $374,000 in 2000 and 1999, respectively, and deferred revenues of
approximately $147,000 and $650,000 as of December 31, 2000 and 1999,
respectively. The total amount due from this customer was approximately $0 and
$650,000 and total amount due by the Company to this customer was approximately
$175,000 and $72,000 as of December 31, 2000 and 1999, respectively.

(6) DEBT

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Equipment loan facilities...................................   $  871     $1,335
Financing arrangement for directors' and officers insurance
  premium...................................................       --        302
Capital leases..............................................      213         85
Term facility...............................................       --        135
                                                               ------     ------
Total long-term debt........................................    1,084      1,857
Less current portion........................................      587        840
                                                               ------     ------
Total long-term portion.....................................   $  497     $1,017
                                                               ======     ======
</TABLE>

                                       56
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(6) DEBT (CONTINUED)
    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
December 31, 1999, there were no outstanding borrowings under the revolving
credit facility, which expired 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
December 31, 2000, total borrowings under both equipment loan facilities was
approximately $871,000 in the aggregate and $879,000 remained available under
the facilities. The weighted average interest rate for the equipment loans was
10.0%, 8.45%, and 8.5% for 2000, 1999, and 1998, respectively. The loan has
aggregate maturities of approximately $507,000 and $364,000 in 2000 and 2001,
respectively.

    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 expired 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 was collateralized
by the assets of the Company, contained certain financial covenants and
restricts the Company's ability to incur other indebtedness and pay dividends.
There were no outstanding balances under the line of credit agreement as of
December 31, 2000 and 1999. Borrowings under the term facility were $0 and
$135,000 as of December 31, 2000 and 1999, respectively.

    FINANCING ARRANGEMENT FOR DIRECTOR'S 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. As of December 31, 2000, there was no debt outstanding under this
financing arrangement. The weighted average interest rate for the financing
arrangement for directors' and officers' insurance was 7.5% for 1999 and 2000.

                                       57
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(7) INCOME TAXES

    The differences between the amount of income tax expense recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate of
35% for the year ended December 31, 2000 and 34% for the years ended
December 31, 1999 and 1998, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Statutory federal income tax benefit........................  $(24,320)  $(8,133)   $(3,984)
State income tax, net of federal tax benefit................    (3,567)       --          1
Valuation allowance.........................................    23,221     6,945      3,755
Foreign income tax expense..................................       375       301         --
Nondeductible stock compensation expense....................        --     1,188        229
Research & development credit...............................      (774)       --         --
Goodwill amortization and other permanent differences.......     5,440        --         --
                                                              --------   -------    -------
Income tax expense..........................................  $    375   $   301    $     1
                                                              ========   =======    =======
</TABLE>

    The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 2000 and
1999, are presented below (in thousands):

<TABLE>
<CAPTION>
                                                              2000       1999
                                                            --------   --------
<S>                                                         <C>        <C>
Net operating loss carryforwards..........................  $50,992    $16,516
Fixed assets..............................................      232         --
Deferred stock compensation...............................    2,287         --
Deferred research and development costs...................       --      2,022
Tax credit carryforwards..................................    3,784      2,260
Reserves and accruals not currently deductible............    3,880      2,373
                                                            -------    -------
Total deferred tax assets.................................   61,175     23,171
Less: Valuation allowance.................................   56,977     23,171
                                                            -------    -------
Net deferred tax assets...................................    4,198         --
Intangible assets.........................................   (1,683)        --
Book/tax basis differences arising from merger............   (2,515)        --
                                                            -------    -------
Net deferred tax liabilities..............................  $    --    $    --
                                                            =======    =======
</TABLE>

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

    As of December 31, 2000, the Company has federal and state net operating
loss carryforwards of approximately $132 million and $95 million, respectively.
The federal net operating loss carryforwards expire in the years 2007 through
2020 and the state net operating loss carryforwards expire in the years 2001
through 2020. To the extent of the current year net operating loss pertaining to
the stock option deduction of approximately $26 million, when realized, the
resulting tax benefit of $10.8 million will be credited to stockholders' equity.

    As of December 31, 2000, the Company has federal and California research and
development tax credit of approximately $2.6 million and $1.7 million,
respectively. The research and development tax

                                       58
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(7) INCOME TAXES (CONTINUED)
credit for federal income tax purposes will expire in years 2006 through 2020.
And the research and development credit for California income tax purposes can
be carried forward indefinitely.

    The Company's future ability to utilize the net operating loss and tax
credit carryforwards may be subject to certain limitations in the event of
ownership changes as defined in Section 382 of the Internal Revenue Code.

(8) STOCKHOLDERS' EQUITY

    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.

    In August 2000, Tumbleweed completed a primary and secondary public offering
of 3,000,000 shares of its common stock at a price of $56.00 per share. Of the
3,000,000 shares of common stock, 1,500,000 primary shares were sold by
Tumbleweed and 1,500,000 secondary shares were sold by stockholders of
Tumbleweed. The Company did not receive any of the proceeds from shares sold by
its stockholders. Net proceeds of approximately $77.6 million from the offering
of primary shares will be used for working capital and other general corporate
purposes. In addition, Tumbleweed may use a portion of the net proceeds to
acquire complementary products, technologies, or businesses.

    1993 STOCK OPTION PLAN

    On September 30, 1993, the Company adopted the 1993 Stock Option Plan. In
1999, the board of directors approved an amendment to the plan to increase the
number of shares authorized for issuance by 650,000 shares to a total of
3,768,500 authorized shares. In August 1999, the company ceased granting further
options under the plan.

    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 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.

                                       59
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(8) STOCKHOLDERS' EQUITY (CONTINUED)
    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, which will terminate
in 2009.

    2000 NSO INCENTIVE STOCK PLAN

    The 2000 NSO Incentive Stock Plan was adopted by the Board of Directors on
July 10, 2000. This plan qualifies as a "broadly based" plan and is for the
benefit of our officers, directors, employees, advisors, and consultants. It
provides for the issuance of stock-based incentive awards, including stock
options, stock appreciation rights, restricted stock, deferred stock, and
performance shares or any combination of such. The options granted under this
plan are not intended to qualify as "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986. An aggregate of 1,181,500
shares of common stock are reserved for issuance under this plan, which will
terminate on July 10, 2010.

    Under the terms of the plan, the exercise price for stock options is
determined by the Board of Directors, Compensation Committee, or Administrator
("Administrator"), generally 100% of the fair market value on the date of grant.
The option term is determined by the Administrator, generally no longer than
10 years. Vesting periods are determined by the Administrator 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.

    INTERFACE STOCK OPTION PLANS

    On September 1, 2000, the Company assumed the Interface 1992 Stock Option
Plan ("1992 Plan") and 1993 Stock Option Plan for Non-Employee Directors
("Directors Plan"). The 1992 Plan provided for the grant of both incentive stock
options and non-qualified options to officers and key employees at not less than
market price on the date of grant as determined by the Board of Directors. Under
the 1992 Plan, options generally vest at the rate of 33% per year after one year
from the date of grant and have a term of ten years. The Directors Plan provided
for the grant to non-employee directors of non-qualified options at market price
on the date of grant. The Directors Plan provides for discretionary grants with
vesting determined at the time of grant with a term of ten years. A total of
236,000 shares of the Company's common stock were reserved for issuance upon the
exercise of stock options assumed in connection with the acquisition of
Interface. The Company registered an additional 304,000 shares for issuance from
the 1992 Plan, which will be used to grant options to Interface employees at the
time of the merger and who remain employed by Tumbleweed. The Directors Plan was
terminated upon its assumption by Tumbleweed, and no further options will be
granted under it.

                                       60
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(8) STOCKHOLDERS' EQUITY (CONTINUED)
    A summary of all stock option activity follows:

<TABLE>
<CAPTION>
                                               OPTIONS AVAILABLE                         WEIGHTED AVERAGE
                                                   FOR GRANT       OPTIONS OUTSTANDING    EXERCISE PRICE
                                               -----------------   -------------------   ----------------
<S>                                            <C>                 <C>                   <C>
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
Authorized...................................       1,721,235                   --                --
Granted......................................      (5,469,939)           5,469,939             35.48
Exercised....................................              --           (1,234,033)             5.07
Canceled.....................................       1,467,530           (1,467,530)            32.79
Expired......................................      (4,169,694)                  --                --
                                                   ----------           ----------            ------
Balances, December 31, 2000..................         626,595            7,242,963            $25.01
                                                   ==========           ==========            ======
</TABLE>

    The following table summarizes information about stock options outstanding
as of December 31, 2000:

<TABLE>
<CAPTION>
                                            AVERAGE REMAINING
                                            CONTRACTUAL LIFE
  EXERCISE PRICES      NUMBER OUTSTANDING        (YEARS)        NUMBER EXERCISABLE
--------------------   ------------------   -----------------   ------------------
<S>                    <C>                  <C>                 <C>
$               0.50         808,413               7.2                324,853
          0.77--0.80         561,745               8.3                162,697
         7.69--11.05         182,773               7.4                 89,366
        11.36--17.13         889,692               8.4                341,124
        17.69--27.23       1,455,655               9.5                149,169
        30.50--45.37       2,657,296               9.4                171,686
        47.94--71.50         359,389               9.3                 13,507
        73.00--85.13         278,000               9.1                     --
              118.44          50,000               9.3                     --
--------------------       ---------               ---              ---------
$       0.50--118.44       7,242,963               8.9              1,252,402
====================       =========               ===              =========
</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

                                       61
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(8) STOCKHOLDERS' EQUITY (CONTINUED)
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 approximately $4.0 million, $7.3 million, $1.7 million, 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,
2000, 1999, and 1998, 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 $5.4 million, $3.5 million, and $715,000 was
recognized in the years ended December 31, 2000, 1999, and 1998, respectively.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
the Company's net losses for the years ended December 31, 2000, 1999, and 1998,
would have been as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                  2000        1999       1998
                                                ---------   --------   --------
<S>                                             <C>         <C>        <C>
Net loss as reported..........................  $ (69,829)  $(24,222)  $(11,720)
APB No. 25 compensation expense recorded......      5,695      3,536        715
Stock-based compensation under SFAS No. 123...    (20,466)    (3,052)    (1,171)
                                                ---------   --------   --------
Net loss pro forma............................  $ (84,600)  $(23,738)  $(12,176)
                                                =========   ========   ========
Basic and diluted net loss per share as
  reported....................................  $   (2.51)  $  (1.65)  $  (1.79)
                                                =========   ========   ========
Basic and diluted net loss per share pro
  forma.......................................  $   (3.04)  $  (1.62)  $  (1.86)
                                                =========   ========   ========
</TABLE>

    For purposes of computing pro forma net income, the fair value of each
option grant and stock purchases under the Purchase Plan is estimated on the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach for the years ended December 31, 2000 and 1999. For the year ended
December 31, 1998, the fair value of options was estimated on the date of grant
using the minimum value method. The assumptions used to value the option grants
and purchase rights are stated as follows:

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                2000        1999        1998
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
Stock options:
  Expected life of options granted before IPO...............  3.0 years   2.0 years   4.0 years
  Expected life of options granted after IPO................  3.0 years    1.0 year          --
  Volatility................................................        100%         78%         --
  Risk-free interest rate...................................       6.17%       5.42%       5.02%
  Dividend yield............................................          0%          0%          0%
Purchase plan options:
  Expected life.............................................   0.5 year    1.0 year          --
  Volatility................................................        100%         78%         --
  Risk-free interest rate...................................       6.39%       5.42%         --
  Dividend yield............................................          0%          0%         --
</TABLE>

                                       62
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(8) STOCKHOLDERS' EQUITY (CONTINUED)
    WARRANTS

    In connection with the November 1998 Bridge Loan Facility, the Company
issued a warrant to acquire 20,973 shares of Series C preferred stock at an
exercise price of $3.58. In December 1999, an option for a cashless 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. 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 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. 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 approximately $355,000 in aggregate. The first tranch of 50,000 shares for
$20 per share was exercised on a net issuance basis in July 2000.

    In conjunction with various financing arrangements in 1994, 1995, 1998 and
1999, the Company issued warrants to purchase an aggregate of approximately
440,000 shares of common stock at prices ranging from $23.08 per share to $69.62
per share and expiration dates ranging from July 2003 to July 2006. In addition
to those warrants, the Company also issued two shares of Series B redeemable
preferred stock now exercisable for common stock in lieu of the preferred stock
at $8.62 per share. In July 2000, 6,500 shares at $23.08 was exercised on a net
issuance basis. As of December 31, 2000 and 1999, 433,900 and 440,400 warrants
to purchase common stock remained outstanding, respectively. Of the warrants
that remain outstanding at December 31, 2000, 600 expire in July 2003, and the
remaining 433,300 expire in July 2006.

(9) EMPLOYEE BENEFIT PLAN

    The Company has a 401(k) plan that allows eligible employees to contribute a
percentage of their compensation, limited to $10,500 in 2000 and $10,000 in 1999
and 1998. The Company made no contributions in 1999 and 1998. On April 1, 2000,
the Company began matching each eligible employee's contribution 100% up to 4%
of the employee's salary. The Company matching contributions and earnings
thereon vest immediately. For the year ended December 31, 2000, the Company's
matching contributions to employees' 401(k) plans totaled approximately
$603,000.

                                       63
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(10) COMMITMENTS AND CONTINGENCIES

    LEASE COMMITMENTS

    The Company leases its facilities and certain equipment under operating
lease agreements. The facilities leases expire at various dates through 2005.
The Company also leases certain equipment under capital lease agreements. These
leases expire at various dates through 2004. Future minimum lease payments as of
December 31, 1999, are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                          OPERATING LEASES   CAPITAL LEASES
------------------------                          ----------------   --------------
<S>                                               <C>                <C>
2001............................................      $ 2,871             $ 87
2002............................................        5,754               87
2003............................................        6,311               41
2004............................................        6,491                8
2005............................................          731               --
Thereafter......................................           --               --
                                                      -------             ----
Future minimum lease payments...................      $22,158              223
                                                      =======
Less amount representing interest...............                            10
                                                                          ----
                                                                           213
Less current portion............................                            80
                                                                          ----
Long-term portion...............................                          $133
                                                                          ====
</TABLE>

    Total rent expense under operating leases for the years ended December 31,
2000, 1999, and 1998, was approximately $2.9 million, $1.9 million, and
$942,000, respectively.

    CONTINGENCIES

    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 September 27, 2000
the Company filed (i) a motion to strike or dismiss for failure to meet
certification requirements of the Private Securities Litigation Reform Act,
(ii) a motion to dismiss for failure to state a claim, and (iii) a motion to
dismiss because of improper venue, or in the alternative, motion to transfer the
lawsuits to the Eastern District of Michigan. These motions remain pending
through March 2001. The accompanying financial statements do not include any
costs for damages, if any, that might result from this uncertainty.

(11) SEGMENT INFORMATION

    SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, 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

                                       64
<PAGE>
                TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999
                              AND 1998 (CONTINUED)

(11) SEGMENT INFORMATION (CONTINUED)
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 its Chief
Executive Officer ("CEO"). The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenue by
geographic region for purposes of making operating 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>
                                                      YEARS ENDED DECEMBER 31,
                                                   ------------------------------
                                                     2000       1999       1998
                                                   --------   --------   --------
<S>                                                <C>        <C>        <C>
North America....................................  $25,267    $ 9,084    $ 6,919
Europe...........................................    7,133      4,273      2,989
Asia and Australia...............................    4,938      1,927        667
                                                   -------    -------    -------
Total revenue from continuing product lines......  $37,338    $15,284    $10,575
                                                   =======    =======    =======
</TABLE>

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

(12) SUBSEQUENT EVENTS (UNAUDITED)

    RESTRUCTURING

    In January 2001, the Board of Directors approved a restructuring program.
This restructuring program focuses the Company's efforts towards concentrating
on its strongest opportunities, reducing operating expenses, and improving the
Company's allocation of resources. This involved closing international locations
in Paris, France; Chatsworth, Australia; and Stockholm Sweden. The restructuring
program also realigned the professional services organization, and included a
targeted staff reduction of approximately 20%. Total charges incurred as a
result of the restructuring are anticipated to be approximately $9-10 million in
the first quarter of 2001, which includes severance and related charges
associated with the reduction in force and charges related to vacating leased
facilities domestically and abroad.

    In addition to the restructuring, the Company announced its intent to revise
its pricing model to include upgrades as part of the license and transaction
bundles, resulting in ratable revenue recognition over the term of the license
agreement.

    On March 4, 2001, the Board of Directors unanimously approved an amendment
to the 2000 NSO Incentive Stock Plan to increase the number of shares of common
stock reserved for issuance under the plan from 1,181,000 to 4,181,000.

                                       65
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.

    Not applicable.

                                       66
<PAGE>
PART III

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS.

    The information required by this item, insofar as it relates to our
directors, will be contained under the captions "Election of Directors" and
"Section 16 Beneficial Ownership Reporting Compliance" in the Proxy Statement
and is incorporated herein by reference. The information relating to our
executive officers is contained in Part I.

ITEM 11--EXECUTIVE COMPENSATION.

    The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by reference.

ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.

ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required by this item will be contained in the Proxy
Statement under the caption "Certain Transactions" and is incorporated herein by
reference.

                                       67
<PAGE>
PART IV

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

(a) Documents filed as a part of this Form 10-K:

    (1) Financial Statements

       Report of Independent Auditors
       Consolidated Balance Sheets
       Consolidated Statements of Operations
       Consolidated Statements of Stockholders' Equity
       Consolidated Statements of Cash Flows
       Notes to Consolidated Financial Statements

    (2) Financial Statement Schedules:

        Financial statement schedules are omitted because they are not
    applicable or are not required or the information required to be set forth
    therein is included in the Financial Statements or Notes thereto.

(b) Reports on Form 8-K.

        No reports on Form 8-K were filed by the registrant during the fiscal
    quarter ended December 31, 2000.

(c) Exhibits. The following exhibits are filed as part of, or incorporated by
    reference into, this Form 10-K.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                            EXHIBIT DESCRIPTION
------                        ------------------------------------------------------------
<C>                           <S>
         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 Certificate of Incorporation of
                              Registrant

         3.2 (1)              Amended and Restated Bylaws of Registrant

         4.1 (1)              Specimen common stock certificate

         4.2 (6)              Amended and Restated Investor's Rights Agreement, dated as
                              of January 31, 2000, among the Registrant, Jeffrey C. Smith,
                              Jean-Christophe D. Bandini, the holders of the Registrant's
                              preferred stock, and certain other persons.

         4.3 (1)              Warrant to Purchase Stock, dated November 30, 1998, issued
                              to Silicon Valley Bank

        10.1 (5)              1993 Stock Option Plan

        10.2 (8)              1999 Omnibus Stock Incentive Plan, as amended

        10.3 (5)              1999 Employee Stock Purchase Plan

        10.4                  2000 NSO Incentive Stock Plan, as amended

        10.5 (1)(2)           Software License, Development and Services Agreement, dated
                              December 17, 1997, between the Registrant and United Parcel
                              Service General Services, Co.

        10.6 (1)(2)           Posta License and Distribution Agreement, dated as of March
                              31, 1999, between Tumbleweed Software, K.K. and K.K. Hikari
                              Tsushin
</TABLE>

                                       68
<PAGE>
<TABLE>
<C>                           <S>
        10.7 (1)(2)           OEM Object Code License Agreement, dated as of March 30,
                              1998, between the Registrant and RSA Data Security, Inc.

        10.8 (5)              Form of Indemnity Agreement

        10.9                  Employment Agreement, dated February 21, 2001, between
                              Douglas A. Sabella and Tumbleweed Communications Corp.

        21.1                  Subsidiaries of the Registrant

        23.1                  Consent of KPMG LLP
</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 (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.

(8) Previously filed in Tumbleweed's Registration Statement on Form S-1 (File
    No. 333-41188).

                                       69
<PAGE>
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 29th day of March,
2001.

<TABLE>
<S>                                          <C>  <C>
                                             TUMBLEWEED COMMUNICATIONS CORP.

                                             By:             /s/ JEFFREY C. SMITH
                                                  ------------------------------------------
                                                               Jeffrey C. Smith
                                                           CHAIRMAN OF THE BOARD AND
                                                            CHIEF EXECUTIVE OFFICER
                                                         (PRINCIPAL EXECUTIVE OFFICER)
</TABLE>

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE                                                     TITLE                       DATE
---------                                                     -----                       ----
<C>                                            <S>                                  <C>
            /s/ JEFFREY C. SMITH
    ------------------------------------       Chairman of the Board and Chief        March 29, 2001
              Jeffrey C. Smith                   Executive Officer

                                               Vice President--Finance and Chief
            /s/ JOSEPH C. CONSUL                 Financial Officer (Principal
    ------------------------------------         Financial Officer and Principal      March 29, 2001
              Joseph C. Consul                   Accounting Officer)

               /s/ PEHONG CHEN
    ------------------------------------       Director                               March 29, 2001
                 Pehong Chen

            /s/ TIMOTHY C. DRAPER
    ------------------------------------       Director                               March 29, 2001
              Timothy C. Draper

            /s/ ERIC J. HAUTEMONT
    ------------------------------------       Director                               March 29, 2001
              Eric J. Hautemont

            /s/ KENNETH R. KLEIN
    ------------------------------------       Director                               March 29, 2001
              Kenneth R. Klein

           /s/ DAVID F. MARQUARDT
    ------------------------------------       Director                               March 29, 2001
             David F. Marquardt

           /s/ STANDISH H. O'GRADY
    ------------------------------------       Director                               March 29, 2001
             Standish H. O'Grady

            /s/ DEBORAH D. RIEMAN
    ------------------------------------       Director                               March 29, 2001
              Deborah D. Rieman

           /s/ DOUGLAS A. SABELLA
    ------------------------------------       Director                               March 29, 2001
             Douglas A. Sabella
</TABLE>

                                       70
<PAGE>
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                     EXHIBIT DESCRIPTION
---------------------         ------------------------------------------------------------
<C>                           <S>
         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 Certificate of Incorporation of
                              Registrant

         3.2 (1)              Amended and Restated Bylaws of Registrant

         4.1 (1)              Specimen common stock certificate

         4.2 (6)              Amended and Restated Investor's Rights Agreement, dated as
                              of January 31, 2000, among the Registrant, Jeffrey C. Smith,
                              Jean-Christophe D. Bandini, the holders of the Registrant's
                              preferred stock, and certain other persons.

         4.3 (1)              Warrant to Purchase Stock, dated November 30, 1998, issued
                              to Silicon Valley Bank

        10.1 (5)              1993 Stock Option Plan

        10.2 (8)              1999 Omnibus Stock Incentive Plan, as amended

        10.3 (5)              1999 Employee Stock Purchase Plan

        10.4                  2000 NSO Incentive Stock Plan, as amended

        10.5 (1)(2)           Software License, Development and Services Agreement, dated
                              December 17, 1997, between the Registrant and United Parcel
                              Service General Services, Co.

        10.6 (1)(2)           Posta License and Distribution Agreement, dated as of March
                              31, 1999, between Tumbleweed Software, K.K. and K.K. Hikari
                              Tsushin

        10.7 (1)(2)           OEM Object Code License Agreement, dated as of March 30,
                              1998, between the Registrant and RSA Data Security, Inc.

        10.8 (5)              Form of Indemnity Agreement

        10.9                  Employment Agreement, dated February 21, 2001, between
                              Douglas A. Sabella and Tumbleweed Communications Corp.

        21.1                  Subsidiaries of the Registrant

        23.1                  Consent of KPMG LLP
</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 (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.

(8) Previously filed in Tumbleweed's Registration Statement on Form S-1 (File
    No. 333-41188).