E STAMP CORP - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2000

or

[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to

Commission File Number: 0-27417

E-Stamp Corporation

(Exact name of Registrant as specified in its charter)

Delaware 76-0518568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2051 Stierlin Court, Mountain View, CA 94043
(Address of principal executive office) (zip code)

Registrant's telephone number, including area code: (650) 919-7500

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class On which registered
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None None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 28, 2001 as reported on the National Market of The Nasdaq Stock
Market, was approximately $3,926,000. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of February 28, 2001,
registrant had outstanding 38,150,637 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into Part III of this Form 10-
K portions of its Proxy Statement for Registrant's Annual Meeting of
Stockholders.

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The Business section and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Risk Factors" commencing on
page 18.

PART I

Item 1. BUSINESS

Overview

E-Stamp Corporation is a provider of transportation management solutions to
a wide range of customers, including retailers, manufacturers and
distributors. Our solutions automate the operation of shipping and
distribution centers by allowing customers to compare multiple shipping
carrier rates, print shipping manifests and shipping carrier labels, and track
shipment status. We sell our solutions primarily through a direct sales force.
Additionally, we have commenced relationships with value added resellers. We
also offer client evaluation, software products and professional consulting
services.

During 2000, we provided an Internet postage service that enabled users to
purchase, download and print Internet postage directly from their personal
computers without the need to maintain a persistent Internet connection.
During 2000, we undertook two corporate restructurings. In July 2000, we
restructured our organization to focus on the development, marketing and sales
of our transportation management solutions and reduce our emphasis on our
Internet postage business. In November 2000, we restructured the organization
to phase out our Internet postage business. We incurred charges of
approximately $20.3 million related to these restructurings.

Company History

Prior to September 1996, we conducted operations as Post N Mail, L.L.C., a
Texas limited liability company formed in April 1994. From April 1994 until
the September 1996 merger with E-Stamp, Post N Mail engaged in discussions
with the U.S. Postal Service regarding non-traditional postal services and, as
use of the Internet became more prevalent, focused on the development of our
Internet postage service. In September 1996, Post N Mail was merged into E-
Stamp Corporation, a Delaware corporation. Following the merger, we continued
to develop our Internet postage service. We entered the U.S. Postal Service's
three-phase beta test certification process in March 1998 and received final
U.S. Postal Service approval for our Internet postage service on August 9,
1999.

In May 2000, we acquired Infinity Logistics Corporation, a provider of a
Web-enabled warehouse management solutions, and Automated Logistics Corp., a
provider of transportation management solutions. The total purchase price was
$9.0 million and consisted of a combination of cash, stock and assumed
liabilities. The transaction was accounted for as a purchase and, accordingly,
Infinity Logistics Corporation and Automated Logistics Corp.'s results of
operations have been included in E-Stamp's results of operations from May 23,
2000, which was the date of acquisition.

In November 2000, we announced the phase-out of our Internet postage
product line to enable us to focus on our transportation management solutions.
As part of the transition, we reduced our workforce by approximately 30%,
deploying the remaining organization and resources toward the development,
marketing and sale of our transportation management solutions. We discontinued
our Internet postage service on December 31, 2000, and accepted eligible
product returns and requests for postage refunds that were postmarked by
February 28, 2001.

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Products and services

Software

DigitalShipper(TM) Enterprise, our transportation management solution, and
e-Receive(TM), our receiving solution, are based on software that we license
from Kewill Electronic Commerce and our proprietary user interface software.

DigitalShipper Enterprise is a multi-carrier, integrated transportation
management solution, targeted at large- and medium-sized companies. It allows
a customer to compare rates and services for all of the major small package
and freight carriers, review carrier rates and shipping options, select a
carrier, print shipping labels, track shipments and create shipping reports
from one system. This allows a customer to optimize its shipping process,
thereby saving time and reducing shipping and labor costs.

e-Receive is an internal receiving and delivery system for enterprises that
use a portable data collection device to track incoming packages and
documents. The handheld device scans the bar code on a package label,
providing both delivery verification and documentation. An organization's mail
center can use e-Receive to receive, record, sort and confirm delivery of
packages and documents.

Prior to March 2001, we also offered e-Warehouse(TM), a warehouse
distribution management system targeted at small- to medium-sized companies,
to enable the visualization and management of inventory throughout customer
warehouse operations. We have discontinued offering e-Warehouse to new
customers in order to further develop the operability and functionality of the
product. We continue to support existing customers using the product in its
current form.

Professional Services

Our professional services group provides our customers with expertise and
assistance in planning and implementing our solutions. To ensure a successful
product implementation, consultants evaluate customer needs, assist customers
with the initial installation of a system, as well as the conversion and
transfer of the customer's historical data onto our system, and provide
ongoing training education. We also provide system upgrades to those customers
who have purchased our maintenance and support services. This ensures the
customer's success with our solution, strengthens our relationship with the
customer, and adds to our industry-specific knowledge base for use in future
implementations and product development efforts.

Professional services are an integral part of system implementation. Our
professional services include product installation and system integration, and
a majority of our customers utilize our services for ongoing support of our
software products, as well as product upgrades. Professional services are
either included in annual maintenance and support contracts or billed on an
hourly basis.

Support and Software Upgrades

From time to time, we offer our customers software upgrades providing
increased functionality and technological advances incorporating emerging
supply chain execution, transportation management and other industry
initiatives. As of December 31, 2000, a majority of our customers were
participating in our support and upgrade program. With DigitalShipper
Enterprise, we have the ability to remotely access the customer's system in
order to perform diagnostics, on-line assistance and software upgrades. We
currently offer 24-hour support plus upgrades for a fee based on the current
software license fee.

Hardware

In conjunction with the licensing of our software, we resell a variety of
hardware products developed and manufactured by third parties in order to
provide our customers with integrated solutions. These products include
computer hardware, radio frequency terminal networks, bar code printers and
scanners and related hardware and

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peripherals. We resell all third party hardware products under agreements or
purchase orders with manufacturers or through distributor-authorized reseller
agreements. We generally purchase hardware from our vendors only after
receiving an order from a customer. As a result, we do not maintain
significant hardware inventory.

Consumable Supplies

We offer a range of supplies used in connection with the use of our
transportation management solutions. These supplies include shipping labels,
various other labels, warehouse audit tags and thermal transfer film.

Product Development

Our development efforts are focused on improving the functionality,
performance and quality of existing products. An additional focus is on ease
of installation and deployment. Our goal is to offer our customers a highly
configurable product with increased functionality that requires minimal
customization.

Our future success depends in part upon our ability to continue to enhance
existing products and respond to changing customer requirements. To that end,
our development efforts frequently focus on core system enhancements
incorporating new user requirements and features identified through customer
interaction and systems implementation experiences.

Our research and development expenses for the years ended December 31,
1998, 1999 and 2000 were $5.6 million, $14.0 million and $18.2 million,
respectively. We intend to continue to invest in product development,
principally to enhance the functionality and operability of our transportation
management and warehouse management solutions.

Competition

The supply chain execution market, which includes transportation management
systems, is highly competitive and characterized by rapid technological
change. The competitive market changes frequently and contains numerous
companies offering a wide range of solutions that differ in functionality and
scope. The principal competitive factors in the supply chain software markets
we serve are product features, functionality, architecture and quality,
product suite integration, ease and speed of implementation, customer service
and satisfaction, vendor and production reputation, product price and support,
product related services, and compliance with industry standards and
requirements.

Our existing competitors include iShip, Tan Data, Kewill, Federal Express,
UPS, Neopost, Manhattan Associates, Inc., Manugistics Group, Inc., EXE
Technologies, Inc., Optum Inc. and McHugh Software International, Inc., as
well as smaller independent companies that offer software solutions that
compete with our software solution. We license software technology for our
transportation management and receiving solutions from Kewill Electronic
Commerce, which also offers its transportation management and receiving
solutions directly to customers.

Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, greater name
recognition and a larger installed based of customers than we do. In order to
be successful, we must continue to respond promptly and effectively to
technological change and competitors' innovations. There can be no assurance
that our current or potential competitors will not develop products comparable
or superior in terms of price and performance features to those developed by
us. In addition, no assurance can be given that we will not be required to
make substantial additional investments in connection with our research,
development, marketing, sales and customer service efforts in order to meet
any competitive threat, or that we will be able to compete successfully in the
future. Increased competition may result in reductions in market share,
pressure for price reductions and related reductions in gross margins, any of
which could materially and adversely affect our ability to achieve our
financial and business goals.

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Sales and Marketing

To date, we have generated substantially all of our transportation
management and warehouse management product revenues through our direct sales
force. We have also commenced relationships with value added resellers,
although we have only one sale from these arrangements to date. We plan to
continue selling our solutions in this manner. Our marketing programs include
advertising, public relations, trade shows, joint programs with vendors and
ongoing customer communication programs. The sales cycle typically begins with
the generation of a sales lead or the receipt of a request for proposal from a
prospective customer. The sales lead or request for proposal is followed by
the qualification of the lead or prospect, an assessment of the customer's
requirements, a formal response to the request for proposal, presentations and
product demonstrations, and contract negotiation. The sales cycle can vary
substantially from customer to customer, but typically requires three to six
months.

Customers

We provide transportation management and warehouse management systems to
small and medium-sized companies, as well as retailers, manufacturers,
warehouses and distribution centers. Some of our customers include SanDisk
Corporation, iPrint and the California Department of Forestry, as well as
divisions of larger companies, such as Oracle and Sony Music.

Intellectual Property

We regard our technology as proprietary and attempt to protect it by
relying on patent, trademark, service mark, copyright and trade secret laws
and restrictions on disclosure and transferring title and other methods. We
generally enter into confidentiality or license agreements with our employees
and consultants, and control access to and distribution of our documentation
and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use our proprietary
information without authorization or to develop similar technology
independently. We are in the process of pursuing the registration in the U.S.
for a number of our trademarks and service marks, and we cannot assure that
any of these trademark registrations will be issued or that if they are issued
that we will be able to successfully enforce them. Despite efforts to protect
our intellectual property rights, we face substantial uncertainty regarding
the impact that other parties' intellectual property positions will have on
the markets that we serve.

We do not have any issued patents in connection with our transportation
management business. We have been issued patents pertaining to our Internet
postage business, which we discontinued during December 2000. Our issued
patents will expire between 2010 and 2016.

Employees

As of December 31, 2000, we employed 91 full-time employees. From time to
time, we employ independent contractors to support our research and
development, marketing, sales and support and administrative organizations.
None of our employees are represented by a collective bargaining agreement,
and we have never experienced a work stoppage. We believe our relations with
our employees are good.

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EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

Executive Officers and Directors

The following table sets forth our executive officers' and directors' ages
and positions as of December 31, 2000.

Robert H. Ewald...... 53 President, Chief Executive Officer and Director
Edward F. Malysz..... 41 Vice President, General Counsel, Secretary and Acting
Chief Financial Officer
Roderick M. Witmond.. 37 Vice President, Business Development
Paul A. Goldman...... 39 Vice President, Sales and Marketing
Laurie L. Lindsey.... 45 Vice President, Product Development
Daniel P. Walsh...... 32 Vice President, Operations
Marcelo A. Gumucio... 63 Chairman of the Board
John V. Balen(1)..... 40 Director
Thomas L. Rosch(2)... 38 Director
Peter G. Boit........ 41 Director
Adam Wagner(1)....... 42 Director
Rebecca Saeger(2).... 45 Director
Robert J. Cresci(1).. 57 Director

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(1) Member of Audit Committee

(2) Member of Compensation Committee

Robert H. Ewald has been our President and Chief Executive Officer since
February 1999 and has been a Director since January 1999. From July 1996 to
July 1998, Mr. Ewald held various executive positions at Silicon Graphics,
Inc., a manufacturer of computer workstations, servers and supercomputers,
most recently as Executive Vice President and Chief Operating Officer. From
August 1984 to June 1996, Mr. Ewald held various management and executive
positions with Cray Research, Inc., a manufacturer of high performance
computers, including President and Chief Operating Officer. Before joining
Cray Research, Inc., Mr. Ewald led the Computing and Communications Division
of the Los Alamos National Laboratory and was responsible for providing
computing and communications services to government customers nationwide
between 1980 and 1984. Mr. Ewald is currently a director of Ceridian, Inc., an
information technology services company, and a member of the President's
Information Technology Advisory Committee chartered by the White House. Mr.
Ewald received his B.S. in civil engineering from the University of Nevada and
his M.S. in civil engineering from the University of Colorado.

Edward F. Malysz has been our Vice President, General Counsel and Secretary
since June 1999. In April 2000, Mr. Malysz assumed the additional role of
Acting Chief Financial Officer. From July 1993 to June 1999, Mr. Malysz held
various legal positions with Silicon Graphics, Inc., a manufacturer of
computer workstations, servers and supercomputers, most recently serving as
Senior Corporate Counsel. From August 1988 to July 1993, Mr. Malysz was a
transactional lawyer with the law firm of Berliner Cohen. From August 1982 to
December 1984, Mr. Malysz was a certified public accountant with Arthur Young
& Company, an accounting firm. Mr. Malysz received his B.A. in economics from
the University of California, Santa Barbara and J.D. from Santa Clara
University.

Roderick M. Witmond joined E-Stamp in August 1999 and currently serves as
Vice President, Business Development. He has also served as Vice President,
Operations, Vice President, Strategic Development and Vice President,
Shipping, Mailing and Supplies Business Unit. From July 1995 to August 1999,
Mr. Witmond was a Principal Consultant with the Government Consulting Practice
of PricewaterhouseCoopers. Mr. Witmond received his B.S. from London
University in London, England and his M.B.A. from the University of Virginia.

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Paul A. Goldman joined E-Stamp in May 2000 with the acquisition of Infinity
Logistics, and currently serves as Vice President, Sales and Marketing. From
January 1990 to May 2000, Mr. Goldman was President of Automated Logistics. In
May 1998, Mr. Goldman founded Infinity Logistics and served as President and
CEO from May 1998 to May 2000. Prior to May 1998 Mr. Goldman was Area Sales
Manager of the Northwest Pacific Region at Pitney Bowes. Mr. Goldman received
his B.A. in Marketing from Boston College.

Laurie L. Lindsey has been our Vice President, Product Development since
April 2000. From August 1997 to February 2000, Ms. Lindsey was Director of the
EcoTOOLS Product Center for Compuware. From February 1992 to June 1997, Ms.
Lindsey was Director of Engineering at Novell, Inc. Ms. Lindsey received her
B.S. in Mathematics and Computer Science from University of California,
Riverside, and her M.S. in Computer Science from California State University,
Fullerton.

Daniel P. Walsh has been our Vice President, Operations since November
2000. Mr. Walsh joined E-Stamp in June 2000. From March 1995 to June 2000, Mr.
Walsh held various positions at Visa International, including Department Head
of Corporate Systems. From May 1991 to February 1995 Mr. Walsh held various
software development and management positions at Kraft Foods, in the areas of
corporate and operational software applications. Mr. Walsh also held various
software development positions from 1989 to 1991 at Harris Bank, Chicago, IL.
Mr. Walsh received his B.S. in Business from Indiana University.

Marcelo A. Gumucio has served as Chairman of the Board since November 1998.
Mr. Gumucio is Managing Partner of Gumucio, Burke and Associates, a private
investment firm that he co-founded in 1992. From April 1996 to July 1997, Mr.
Gumucio was Chief Executive Officer of Micro Focus PLC, an enterprise software
provider. He also served as a member of the Micro Focus' board of directors
from January 1996. Before joining Micro Focus, Mr. Gumucio was President and
Chief Executive Officer of Memorex Telex NV between 1992 and 1996. Mr. Gumucio
currently serves on the board of directors of BidCom, Inc., Digital Island and
Burr Brown Corporation and serves as Chairman of the boards of WebSentric and
NetFreight. Mr. Gumucio received his B.S. in mathematics from the University
of San Francisco and M.S. in applied mathematics and operations research from
the University of Idaho. Mr. Gumucio is also a graduate of the Harvard
Business School Advanced Management Program.

John V. Balen has served on the Board of Directors since July 1998. Mr.
Balen joined Canaan Partners, a national venture capital investment firm, in
September 1995 where he is currently a general partner. From June 1985 to June
1995, Mr. Balen served as Managing Director of Horsley Bridge Partners, a
private equity investment management firm. Mr. Balen currently serves on the
board of directors of Intraware and Commerce One. Mr. Balen received his B.S.
in electrical engineering and M.B.A. from Cornell University.

Thomas L. Rosch has served on the Board of Directors since September 1997.
Mr. Rosch joined InterWest Partners in January 2000 where he is currently
general partner and managing director. InterWest Partners is a Silicon Valley-
based venture capital firm that invests in information technology and health
care companies. Previously, Mr. Rosch was a partner at AT&T Ventures from
December 1996 to January 2000. AT&T Ventures is an independent venture capital
fund that invests in information technology companies. Prior to AT&T Ventures,
Mr. Rosch served as a senior member of The Boston Consulting Group from
November 1989 to November 1996. Mr. Rosch received his A.B. in government and
philosophy from Harvard University and J.D./M.B.A. from Stanford University.

Peter G. Boit has served on the Board of Directors since July 2000. Since
1994, Mr. Boit has been with Microsoft Corporation in various positions,
including Sales Manager, Director of Licensing, General Manager of Licensing,
and most recently as Vice President of e-Commerce. Since January 2000, he has
served as a director for Vertaport, a privately held company. Mr. Boit
received his B.A. in English from the University of Vermont and M.B.A from the
Kellogg Graduate School of Management at Northwestern University.

Adam Wagner has served on the Board of Directors since November 1996. Mr.
Wagner is the founder and principal of Neo Ventures, LLC, a privately held
investment firm, since its formation in September 1999. From

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June 1992 until September 1999, Mr. Wagner served as Vice President,
Investments at Wagner & Brown, Ltd., a closely-held oil and gas investment
company. Mr. Wagner currently serves on the board of directors of Advanced
Data Analysis and Preservation Technology, Inc., Innotek Powder Coatings,
L.L.C. and SeaSound, LLC Mr. Wagner received his B.S. in geology from the
University of Oklahoma and M.B.A. from the University of Southern California.

Rebecca Saeger has served on the Board of Directors since September 1999.
Since June 1997, Ms. Saeger has served as Executive Vice President of Brand
Marketing for VISA U.S.A., a provider of payment products and services. From
June 1991 to May 1997, Ms. Saeger served in various positions at Foote, Cone &
Belding San Francisco, an advertising agency, including Senior Vice President,
Group Management Supervisor and Director of Account Management. From June 1980
to April 1991, Ms. Saeger worked at Ogilvy and Mather New York, an advertising
agency, where she held a variety of positions, including most recently, Senior
Vice President, Group Director. Ms. Saeger received her B.A. from Muhlenberg
College and M.B.A. from the Wharton School of Business, University of
Pennsylvania.

Robert J. Cresci has served on the Board of Directors since October 1999.
Since 1990, Mr. Cresci has served as a Managing Director of Pecks Management
Partners Ltd., which specializes in managing portfolios of public and private
convertible securities for institutional clients. Mr. Cresci currently serves
on the board of directors of Sepracor, Inc., Aviva Petrolium Ltd., Film Roman,
Inc., Castle Dental Centers, Inc., j2 Global Communications, Inc., Candlewood
Hotel Co. and SeraCara, Inc. Mr. Cresci is a graduate of the United States
Military Academy at West Point and received an MBA from Columbia University.

Classified Board

Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. Marcelo A. Gumucio and Adam Wagner have been designated
Class II directors whose terms expire at the 2001 annual meeting of
stockholders. Peter Boit, John V. Balen and Rebecca Saeger have been
designated as Class III directors whose terms expire at the 2002 annual
meeting of stockholders. Robert H. Ewald, Thomas L. Rosch and Robert J. Cresci
have been designated Class I directors whose terms will expire at the 2003
annual meeting of stockholders. This classification of the board of directors
may delay or prevent a change in control of our company or in our management.

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

Board Committees

We established an audit committee and a compensation committee in July
1998.

Our audit committee currently consists of Messrs. Balen, Wagner and Cresci.
Among other duties, the audit committee reviews our internal accounting
procedures and consults with and reviews the services provided by our
independent auditors.

Our compensation committee currently consists of Mr. Rosch and Ms. Saeger.
The compensation committee reviews and recommends to the board of directors
the compensation and benefits of our employees.

Director Compensation

Except for our Chairman of the Board, we do not currently compensate our
directors in cash for their service as members of the board of directors,
although we reimburse our directors for expenses in connection with attendance
at board of director and compensation committee meetings. We currently pay Mr.
Gumucio $9,537

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per month for his service as Chairman of the Board. In addition, we provide
Mr. Gumucio with health coverage and other employee benefits, and have agreed
to provide Mr. Gumucio and his dependents with continued health coverage until
the age of 65. Under our stock option plan, directors are eligible to receive
stock option grants at the discretion of the board of directors or other
administrator of the plan.

ITEM 2. PROPERTIES

Our headquarters are currently located in a leased facility in Mountain
View, California, consisting of approximately 92,300 square feet. The lease
expires in April 2007. We currently utilize less than one-half of the leased
facility and do not anticipate a need for additional space for the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

On June 10, 1999, Pitney Bowes filed suit against us in the U.S. District
Court for the District of Delaware alleging infringement of Pitney Bowes'
patents. The suit alleges that we are infringing seven patents held by Pitney
Bowes related to postage application systems and seeks treble damages, a
preliminary and permanent injunction from further alleged infringement,
attorneys fees and other unspecified damages. On July 30, 1999, we filed our
answer to Pitney Bowes complaint in which we deny all allegations of patent
infringement and assert affirmative and other defenses based on statutory and
common law grounds, including inequitable conduct on the part of Pitney Bowes
in its procurement of patents in proceedings before the U.S. Patent and
Trademark Office. As part of the answer, we also brought various counterclaims
against Pitney Bowes claiming Pitney Bowes violation of Section 2 of the
Sherman Act and intentional and tortious interference with our business
relations based, in part, upon our allegations that Pitney Bowes has
unlawfully maintained its monopoly power in the postage metering market
through a scheme to defraud the U.S. Patent and Trademark Office and its
efforts to discourage potential investors and businesses from investing and
entering into agreements with us. Our suit seeks compensatory and treble
damages, injunctive relief and recovery of attorneys fees. On September 21,
1999, Pitney Bowes filed a motion to strike or dismiss certain of our
affirmative defenses and counterclaims or, in the alternative, to bifurcate
discovery and trial of those counterclaims. On July 28, 2000 the U.S. District
Court for the District of Delaware granted Pitney Bowes' motion to bifurcate
discovery and trial of certain of our defenses and counterclaims. On April 14,
2000, Pitney Bowes filed a motion to amend their original complaint seeking to
assert one additional patent held by Pitney Bowes and to remove one of the
seven originally asserted patents held by Pitney Bowes. On July 28, 2000, the
U.S. District Court for the District of Delaware granted Pitney Bowes' motion
to amend. We are continuing to investigate the claims against us as well as
infringement by Pitney Bowes of our patents, and may assert additional
defenses or pursue additional counterclaims or independent claims against
Pitney Bowes in the future.

On March 16, 2001, a plaintiff filed a purported consumer class action suit
against us in the Supreme Court of the State of New York, County of Kings. The
suit alleges that we breached our contracts with plaintiff and other
customers. The plaintiff seeks compensatory damages and disgorgement of monies
received in connection with the sale of Internet postage products. We are
currently investigating the claims against us and intend to vigorously defend
this action.

Pendency of the these legal proceedings can be expected to result in
significant expenses to us and the diversion of management time and other
resources.

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

No matters were submitted to a vote of the security holders during the
fourth quarter of the year ended December 31, 2000.

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PART II

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

Our common stock is traded on The Nasdaq Stock Market's National Market
under the symbol "ESTM." The following table sets forth, for the periods
indicated, the range of the high and low sale prices for our common stock as
reported on The Nasdaq Stock Market's National Market.

Quarter High Low
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Fiscal Year Ended December 31, 1999:
Fourth Quarter (from October 8, 1999)................... $39.250 $18.000

Fiscal Year Ended December 31, 2000:
First Quarter........................................... $23.063 $ 7.313
Second Quarter.......................................... $ 6.464 $ 1.688
Third Quarter........................................... $ 2.000 $ 0.875
Fourth Quarter.......................................... $ 0.969 $ 0.125

The last reported sale price of our common stock on The Nasdaq Stock
Market's National Market on February 28, 2001 was $0.125. As of February 28,
2001, there were 38,150,637 shares of common stock outstanding that were held
of record by approximately 584 stockholders.

On November 9, 2000, we received a notice from The Nasdaq Stock Market that
our common stock had failed to maintain a minimum bid price of $1.00 over the
previous 30 consecutive trading days as required for continued listing on The
Nasdaq National Market. On March 23, 2001, we attended a hearing before the
Nasdaq Qualifications Hearing Panel to determine if our common stock should
continue to be listed on The Nasdaq National Market, and we are awaiting a
determination by The Nasdaq Stock Market of our listing status on The Nasdaq
National Market . If our common stock is delisted from The Nasdaq National
Market, its liquidity and trading price could be negatively impacted.

Dividend Policy

We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in connection with the
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Year Ended December 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- ---------
(In thousands, except per share data)

Statement of Operations Data
Net product and services
revenues.................... $ -- $ -- $ -- $ 1,318 $ 5,337
Cost of sales................ -- -- -- 2,396 6,396
------- ------- -------- -------- ---------
Gross loss................... -- -- -- (1,078) (1,059)
Operating expenses:
Research and development.... 2,387 3,916 5,603 14,024 18,170
Sales and marketing......... 1,761 1,743 2,722 22,292 54,179
General and administrative.. 1,739 1,748 1,897 8,419 9,304
In-process research and
development................ -- -- -- -- 1,677
Goodwill and intangible
asset amortization......... -- -- -- -- 1,060
Restructuring charges....... -- -- -- -- 20,291
Amortization of deferred
stock compensation......... 688 414 858 10,589 8,040
Amortization of deferred
distribution costs......... -- -- -- 950 2,850
------- ------- -------- -------- ---------
Total operating expenses..... 6,575 7,821 11,080 56,274 115,571
------- ------- -------- -------- ---------
Loss from operations......... (6,575) (7,821) (11,080) (57,352) (116,630)
Interest income, net......... 236 143 370 1,942 3,804
------- ------- -------- -------- ---------
Net loss..................... (6,339) (7,678) (10,710) (55,410) (112,826)
Accretion on redeemable
convertible preferred
stock....................... -- (196) (1,383) (2,086) --
------- ------- -------- -------- ---------
Net loss attributable to
common stockholders......... $(6,339) $(7,874) $(12,093) $(57,496) $(112,826)
======= ======= ======== ======== =========
Net loss per share, basic and
diluted(1).................. $ (0.51) $ (0.61) $ (0.92) $ (3.32) $ (3.04)
======= ======= ======== ======== =========
Shares used in computing net
loss per share, basic and
diluted..................... 12,543 12,966 13,075 17,313 37,144
======= ======= ======== ======== =========

As of December 31,
------------------------------------------
1996 1997 1998 1999 2000
------ ------- -------- -------- -------
(In thousands)

Balance Sheet Data:
Cash and cash equivalents.......... $3,910 $ 4,111 $ 10,217 $118,689 $25,233
Working capital.................... 3,394 2,398 8,805 124,590 19,543
Total assets....................... 4,873 4,763 10,811 136,417 42,907
Capital lease, net of current
portion........................... 88 38 11 -- --
Redeemable convertible preferred
stock............................. -- 6,126 23,469 -- --
Total stockholders' equity
(deficit)......................... 4,070 (3,390) (15,196) 127,330 30,977

- --------
(1) See Note 11 of Notes to Financial Statements for an explanation of the
method used to determine the number of shares used in computing per share
amounts.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This section and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in forward-looking statements for
many reasons, including the risks described in the section titled "Risk
Factors" beginning on page 18. You should read the following discussion with
the "Selected Financial Data" and our financial statements and related notes
included elsewhere in this report.

Overview

Our original business model was to provide an Internet postage service that
enabled users to conveniently purchase, download and print Internet postage
directly from their personal computers without the need to maintain a
persistent Internet connection. In 2000, we substantially changed our focus to
business users. In May 2000, we acquired two logistics companies, Infinity
Logistics Corporation and Automated Logistics Corp. These companies offered
transportation management and warehouse management solutions to allow
enterprise customers to review carrier rates and shipping options, select a
carrier, print shipping labels, track shipments and create shipping reports.

During 2000, we undertook two corporate restructurings. In July 2000, we
restructured our organization to focus on the development, marketing and sales
of our transportation management solutions and reduce our emphasis on our
Internet postage business. In November 2000, we restructured the organization
to phase out our Internet postage business. We incurred charges of
approximately $20.3 million related to these restructurings. In connection
with the phase-out of the Internet postage business, we allowed customers to
return certain items purchased since September 1, 2000 for full refund. As a
result, we did not recognize revenue on any Internet postage shipments in the
fourth quarter of 2000.

We have incurred net losses in each quarterly and annual period since our
inception and as of December 31, 2000 we had accumulated aggregate losses of
$188.7 million. The quarter ended September 30, 1999 was the first quarter in
which we generated revenues. Until the acquisition of Infinity Logistics
Corporation and Automated Logistics Corp. in May 2000, all of our revenues
were generated by the Internet postage business. In November 2000, we
announced that we were phasing-out of the Internet postage business and ceased
recognizing revenue on Internet postage shipments as of October 1, 2000.

We currently generate revenues from the sale of our transportation
management and warehouse management solutions and associated hardware and
software and from maintenance and service contracts. Revenues from
transportation management and warehouse management solutions are generally
recognized upon shipment of the associated hardware and software. Revenues
from software license fees are recognized in accordance with AICPA Statement
of Position ("SOP") 97-2 and SOP 98-9 when the software has been delivered,
persuasive evidence of an arrangement exists, collection is probable, the fee
is fixed or determinable and no significant obligations remain. When
significant obligations remain after the products are delivered, revenues are
recognized only after these obligations are fulfilled. Service and maintenance
revenues are recognized ratably over the contractual period or as the services
are provided.

Prior to phasing out our Internet postage business, we generated revenues
for our Internet postage products from software license fees, ongoing
convenience fees for the purchase of postage over the Internet, and the sale
of ancillary postage supplies and technology license fees. In connection with
phasing out the Internet postage business, we allowed customers to return
certain items purchased since September 1, 2000 for full refund. Consequently
we did not recognize revenues on any Internet postage shipments in the fourth
quarter of 2000.

Software license fees for our Internet postage products were amounts paid
by end-users for a perpetual license to our software. Our software package
allowed the end-user to apply for a USPS license. When we were notified that
the USPS had approved the license, we shipped a secure Internet postage
storage device, which was

12

necessary for the use of our software, to the end-user. Revenues from software
license fees were recognized in accordance with SOP 97-2 and SOP 98-9.
Revenues from software license fees were recognized when delivery of the
secure Internet postage storage device and the software were complete, when
persuasive evidence of an arrangement existed, collection was probable, the
fee was fixed or determinable and no significant obligations remained.

Technology license fees represented revenues earned from original equipment
manufacturers, which incorporated our Internet postage technology into their
product. Technology license fee revenues were recognized in accordance with
SOP 97-2 and SOP 98-9 when the technology had been delivered, persuasive
evidence of an arrangement existed, collection was probable, the fee was fixed
or determinable and no significant obligations remained.

Postage convenience fees were amounts paid by end-users for the delivery of
postage by us to the end-user. The convenience fees were based on the amount
of postage ordered by the end-user. Revenues from postage convenience fees
were recognized when the postage was downloaded into the secure postage
storage device.

We recognized revenues related to Internet postage supplies when the
supplies were delivered.

Revenues recognized during 2000 from arrangements deemed to be nonmonetary
exchange of our products and services totaled approximately $976,000. Revenues
from these exchanges were recorded at the fair value of the products and
services provided or received, whichever was more clearly evident. There was
no corresponding cost of revenues related to these transactions.

Our costs of revenues for our transportation management and warehouse
management solutions include the costs of manuals, packaging, license fees,
hardware costs and support costs. The cost of revenues for our Internet
postage products, services and supplies included the costs of manuals,
packaging, the postage device, credit card and electronic funds transfer fees,
the address management system, support costs, fulfillment costs and direct
costs from the sale of postage supplies.

The revenue and income potential of our new business and market is
unproven, and our limited operating history makes it difficult to evaluate our
prospects. We expect to continue to incur net losses for the foreseeable
future and may never achieve profitable operations.

Results of Operations

Year Ended December 31, 1999 Compared to Year Ended December 31, 2000

Revenues. Until our acquisition of Infinity Logistics Corporation and
Automated Logistics Corp. in May 2000, all of our revenues were generated by
our Internet postage products and related technologies. Revenues for the year
ended December 31, 2000 totaled $5.3 million as compared to $1.3 million for
the year ended December 31, 1999. Revenues generated by our transportation
management and warehouse management products were $1.2 million, or 22% of net
product and services revenues for the year ended December 31, 2000. Revenues
from our Internet postage products were $4.1 million, or 78% of total net
product and services revenues for 2000. As discussed above, we did not
recognize any revenue from our Internet postage products in the fourth quarter
of 2000.

Cost of Sales. Cost of sales includes costs related to product shipments,
including materials, labor and other direct or allocated costs involved in
their manufacture or delivery. It also includes cost of customer support
services and technical support. Cost of sales for the year ended December 31,
2000 totaled $6.4 million as compared to $2.4 million for the year ended
December 31, 1999. The gross loss was primarily attributable to our Internet
postage product line because we were not able to achieve sufficient revenue
levels in this product line to cover our costs. As discussed above, we decided
to phase out our Internet postage business in November 2000 and did not
recognize any revenue from our Internet postage products in the fourth quarter
of 2000.

13

Research and Development. Research and development expenses include
expenses for the research, design and development of our two product lines,
including expenses such as salaries and benefits, consulting expenses, and the
related facilities, equipment and information technology costs. Research and
development expenses increased 30% to $18.2 million for the year ended
December 31, 2000 from $14.0 million for the year ended December 31, 1999. The
increase of $4.2 million in 2000 was primarily attributable to increases in
employee and consulting costs and related facilities and equipment expenses.

Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenses, strategic partner marketing and other
marketing program costs. It also includes expenses such as salaries and
benefits, consulting expenses and related facilities, equipment and
information technology costs. Sales and marketing expenses increased 143% to
$54.2 million for the year ended December 31, 2000 from $22.3 million for the
year ended December 31, 1999. The increase of $31.9 million in 2000 was
primarily attributable to increased spending on marketing programs,
advertising and promotion as well as to increases in employee and consulting
costs and related facilities and equipment expenses.

General and Administrative. General and administrative expenses consist
primarily of compensation for administrative and executive staff, fees for
professional services, facilities and office expenses, and depreciation and
other equipment costs. General and administrative expenses increased 11% to
$9.3 million for the year ended December 31, 2000 from $8.4 million for the
year ended December 31, 1999. The increase of $0.9 million in 2000 was
primarily attributable to increases in employee costs and related facilities,
equipment and information technology costs. The increase in spending was
partially offset by a reduction in non-cash stock compensation charges. The
non-cash stock compensation charge in 1999 was $1.9 million compared to $0.1
million in 2000.

In-process Research and Development. In May 2000, we acquired Infinity
Logistics Corporation and Automated Logistics Corp. These companies provide
transportation management solutions that allow enterprise customers to review
carrier rates and shipping options, select a carrier, print shipping labels,
track shipments and create shipping reports. Based on an independent
appraisal, approximately $1.7 million of the purchase price has been allocated
to in-process research and development related to Infinity Logistics
Corporation products that had not yet reached technological feasibility and
had no alternative future use. This amount was expensed immediately.

As of the acquisition date, in-process research and development of Infinity
Logistics Corporation and Automated Logistics Corp. consisted of the
development of two products, e-Warehouse, which was 80 percent complete, and
DigitalShipper Enterprise, which was 75 percent complete. The e-Warehouse
product was completed and introduced in July 2000 and the DigitalShipper
Enterprise product was completed and introduced in late June 2000. In March
2001, we discontinued offering the e-Warehouse product to new customers in
order to further develop the operability and functionality of the product.

In valuing the in-process technologies of Infinity Logistics Corporation
and Automated Logistics Corp. at the acquisition date, we used a discounted
cash flow analysis based on projected net product and services revenues, cost
of revenues, operating expenses and income taxes resulting from these
technologies over a 4-year period. The projected financial results, which were
discounted using a 25 percent rate, were based on expectations for Infinity
Logistics Corporation and Automated Logistics Corp. on a stand alone basis and
excluded any special synergistic benefits that we expected to achieve after
the acquisition.

The revenue projections for the developed technologies, which considered
the release dates of new products, assumed a gradual decline. The revenue
projections for the in-process research and development were based on expected
trends in technology and our timing of new product introductions.

Amortization of Goodwill and Intangible Assets. In May 2000, in connection
with our acquisition of Infinity Logistics Corporation and Automated Logistics
Corp., we recorded goodwill and intangible assets totaling approximately $5.8
million. This amount will be amortized over two to five years.

14

Restructuring Costs. During 2000, we undertook two corporate
restructurings. In July 2000, we restructured our organization to focus on the
development, marketing and sales of our transportation management solutions
and reduce our emphasis on our Internet postage business. In November 2000, we
restructured the organization to phase out our Internet postage business. We
incurred charges of approximately $20.3 million related to these
restructurings. These charges included $2.3 million for severance payments and
benefits continuation for terminated employees, $13.3 million for asset write-
offs, $2.9 million for contract terminations, and $1.8 for operations shut-
down costs.

Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $8.0 million for the year ended December 31, 2000, compared
to $10.6 million for the year ended December 31, 1999. Deferred stock
compensation is being amortized using the graded vesting method. In 2000, we
recorded deferred stock compensation of $1.2 million related to a business
combination. During 2000, we reversed approximately $3.9 million of deferred
stock compensation related to unvested stock options that were forfeited upon
the employees' termination of employment.

Amortization of Deferred Distribution Costs. Amortization of deferred
distribution costs was $2.9 million for the year ended December 31, 2000,
compared to $0.9 million for the year ended December 31, 1999. Deferred
distribution costs arose from the issuance of common stock and warrants in
1999 to investors who signed agreements to enter into joint venture, joint
marketing, cooperation or other technology agreements for a one year period.
These costs were fully amortized as of December 31, 2000.

Interest Income, Net. Interest income, net, consists primarily of interest
on our cash and cash equivalents, net of interest expenses attributable to
equipment leases. Interest income, net, increased 96% to $3.8 million for the
year ended December 31, 2000 from $1.9 million for the year ended December 31,
1999. The increase in interest income, net, was due to increased interest
earned as a result of increased cash balances resulting from our public
offering in November 1999.

Income Taxes

As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $133.6 million and $80.5 million, respectively.
The net operating loss carryforwards will expire at various dates beginning in
2005 and through 2020, if not utilized.

Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. The annual
limitation may result in the expiration of net operating loss carryforwards
before utilization.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1999

Revenues. Revenues for the year ended December 31, 1999 totaled $1.3
million. There were no revenues for the year ended December 31, 1998. Revenues
were generated from software license fees, postage convenience fees and sales
of postage supplies.

Cost of Sales. Cost of sales includes costs related to product shipments,
including materials, labor and other direct or allocated costs involved in
their manufacture or delivery. It also includes cost of customer support
services and technical support. Cost of sales for the year ended December 31,
1999 totaled $2.4 million. There were no costs of sales for the year ended
December 31, 1998.

Research and Development. Research and development expenses include
expenses for research, design and development of our Internet postage product
line, expenses related to obtaining patents from the U.S. Patent and Trademark
Office, and server and network operations. Research and development expenses
increased 150% to $14.0 million for the year ended December 31, 1999 from $5.6
million for the year ended December 31, 1998. The increase of $8.4 million in
1999 was primarily attributable to increases in research and development
employee headcount, and consulting and contractor expenses.

15

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related benefits for sales and marketing personnel, strategic
partner marketing, Web site development, package design, advertising and
promotional expenses, and tradeshow expenses. Sales and marketing expenses
increased more than eight times to $22.3 million for the year ended December
31, 1999 from $2.7 million for the year ended December 31, 1998. The increase
of $19.6 million in 1999 reflected costs associated with continued development
of our marketing campaigns related to the August 1999 launch of our Internet
postage product line, advertising and strategic partners expenses. The
increase also reflected increases in our sales and marketing personnel.

General and Administrative. General and administrative expenses consist
primarily of compensation for administrative and executive staff, fees for
professional services, depreciation expense and general office expenses.
General and administrative expenses increased more than four times to $8.4
million for the year ended December 31, 1999 from $1.9 million for the year
ended December 31, 1998. The increase of $6.5 million in 1999 was primarily
related to a one-time non-cash stock compensation charge, increased legal
expenses and increases in administrative staff and other professional
services.

Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation was $10.6 million for the year ended December 31, 1999, compared
to $0.9 million for the year ended December 31, 1998. We recorded aggregate
deferred stock compensation of $26.8 million in the period from July 1, 1998
through December 31, 1999 for options awarded to employees with exercise
prices below the deemed fair value for financial reporting purposes of our
common stock on their respective grant dates.

Amortization of Deferred Distribution Costs. Amortization of deferred
distribution costs was $0.9 million for the year ended December 31, 1999. In
connection with the issuance of common stock and warrants, we and our
investors signed nonbinding letters of intent to negotiate for a period of up
to one year to enter into joint venture, joint marketing, cooperation or
technology development agreements. The excess of the fair value of the common
stock and warrants over the consideration received was $3.8 million and was
recorded as deferred distribution costs, a contra equity account.

Interest Income, Net. Interest income, net, consists primarily of interest
on our cash and cash equivalents, net of interest expenses attributable to
equipment leases. Interest income, net, increased more than four times to $1.9
million for the year ended December 31, 1999 from $0.4 million for the year
ended December 31, 1998. The increase in interest income, net, was due to
increased interest earned as a result of increased cash balances resulting
from our initial public offering in November 1999.

Liquidity and Capital Resources

We have financed our operations primarily through private and public sales
of equity securities. During 1999, we received approximately $28.9 million in
private financings and net proceeds of $125.4 million from our initial public
offering. During 1998, we received approximately $16.0 million in private
financings. As of December 31, 2000, we had cash, cash equivalents and
restricted cash of approximately $29.0 million.

Net cash used in operating activities totaled $75.4 million, $48.8 million
and $9.6 million for the years ended December 31, 2000, 1999 and 1998. Cash
used in operating activities for each period resulted primarily from net
operating losses in those periods partially offset by non-cash charges.

Net cash used in investing activities totaled $18.7 million, $2.8 million
and $0.3 million for the years ended December 31, 2000, 1999 and 1998. Cash
used in investing activities for each period resulted primarily from the
acquisition of capital assets, primarily computer and office equipment. In
2000, we also used $3.0 million of cash for the acquisition of Infinity
Logistics Corporation and Automated Logistics Corp. and $3.8 million for a
certificate of deposit, which is included in restricted cash, to secure
payment of advertising costs with a vendor.

Net cash provided by financing activities totaled $0.6 million, $160.0
million and $16.0 million for the years ended December 31, 2000, 1999 and
1998. Cash provided by financing activities for 2000 resulted primarily from
issuance of common stock and collections on notes receivable from
stockholders. Cash provided by

16

financing activities in 1999 resulted primarily from issuance of common stock
in our initial public offering and issuance of redeemable convertible
preferred stock. Cash provided by financing activities in 1998 resulted
primarily from the issuance of redeemable preferred stock.

Aggregate noncancelable commitments under facilities operating leases total
$23.8 million, which run through April 2007. In addition, aggregate
noncancelable online advertising commitments for our Internet postage products
related to our agreement with eBay, Inc. were approximately $2.5 million as of
December 31, 2000 and have been accrued and included in our restructuring
charges for the fiscal year ending December 31, 2000. We have an outstanding
certificate of deposit of $3.8 million securing our payment obligations to
eBay, Inc. We also have outstanding $5.0 million in letters of credit related
to these commitments.

We expect to make cash payments in 2001 totaling $5.9 million related to
our corporate restructurings.

We believe that our current cash balances and cash flows from operations,
if any, will be sufficient to meet our present growth strategies and related
working capital and capital expenditure requirements through December 31,
2001. Our forecast of the period of time through which our financial resources
will be adequate to support operations is a forward-looking statement that
involves risks and uncertainties. Our actual funding requirements may differ
materially from this as a result of a number of factors, including the risks
disclosed under the caption "Risk Factors -- We may need additional capital
and failure to obtain such capital could harm our ability to market our
services and develop future services." We may require substantial working
capital to fund our business and we may need to raise additional capital prior
to this time or thereafter. We cannot be certain that additional funds will be
available on satisfactory terms when needed, if at all. If we are unable to
raise additional necessary capital in the future, we may be required to
curtail our operations significantly. Raising additional equity capital would
have a dilutive effect on existing stockholders.

Recent Accounting Pronouncements

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting No. 101, "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. We adopted SAB 101 during
the fourth quarter of 2000 and the adoption had no impact on our financial
condition or results of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). We are required to adopt FAS 133 for the
quarter ending March 31, 2001. FAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because we currently hold no
derivative financial instruments and do not currently engage in hedging
activities, the adoption of FAS 133 will not have a material impact on our
financial condition or results of operations.

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB No. 25" ("FIN 44"). FIN 44 clarifies
the application of APB 25 and, among other issues clarifies the following: the
definition of an employee for purposes of applying APB 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the
accounting consequence of various modifications to the terms of the previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The application of FIN 44
has not had a material impact on our financial position or results of
operations.

17

RISK FACTORS

We have a limited operating history with a history of losses, only began
offering our transportation management solutions from May 2000, expect to
incur losses in the future, and may never achieve profitability.

We have a very limited operating history. You should consider our prospects
in light of the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. We cannot be certain that we
will achieve profitability or, if achieved, that we will be able to sustain or
increase profitability on a quarterly or annual basis. As of December 31,
2000, we had an accumulated deficit of $188.7 million. We have incurred
increasing losses and had a net loss for the year ended December 31, 2000 of
$112.8 million. We have generated nominal revenues of $1.2 million from our
transportation management and warehouse management solutions during the year
ending December 31, 2000. We have not achieved profitability and expect to
continue to incur net losses for the foreseeable future. We will need to
generate significant revenues to achieve and maintain profitability.

We may not be able to successfully implement our plans to restructure our
business by focusing on transportation management solutions.

In November 2000, we announced a plan to restructure our business by
focusing on our transportation management solutions and phasing-out our
Internet postage service. In connection with this restructuring, we intend to
reduce our current level of operating expenses by reducing our marketing
efforts, terminating or restructuring existing marketing arrangements and
reducing our current employee and contractor staffing levels. We can provide
no assurance that we will be successful in implementing these plans or
reducing our operating expenses in the future. Our inability to successfully
implement the restructuring and cost reduction measures could have a material
adverse effect upon our business, financial condition and results of
operations.

The success of our business will depend upon acceptance by customers of our
transportation management solutions.

Our acquisition of Infinity Logistics Corporation and Automated Logistics
Corp. in May 2000 represents our entry into the market for transportation
management solutions. We expect that our transportation management solutions
will generate all of our near-term future revenues. As a result, we depend on
the commercial acceptance of our transportation management solutions. If we
fail to successfully gain commercial acceptance of our transportation
management solutions, we will be unable to generate significant revenues.

The success of our business will depend upon our ability to develop, market
and distribute new Web-based transportation management and warehouse
management solutions.

Our success will depend on our ability to develop and rapidly bring to
market technologically complex and innovative transportation management and
warehouse management products and services. Our financial and operating
results could be adversely affected by such factors as development delays,
quality problems and variations in product costs. There can be no assurance
that we will timely introduce these new products to market, successfully
market these products to customers or otherwise manage our transition into the
transportation management and supply chain execution markets. We are currently
negotiating a license arrangement with Kewill Electronic Commerce for purposes
of allowing us to market and distribute a Web-based transportation management
solution. There can be no assurance that we will enter into a license
arrangement with Kewill Electronic Commerce. We have also discontinued
offering our warehouse management solution to new customers, and there can be
no assurance that we will be able to further develop or commercially release a
new warehouse management solution in the future.

18

Our quarterly results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations.

Since August 1999, we have generated only nominal revenues from our
operations. Accordingly, we have little basis upon which to predict future
operating results. We expect that our revenues, margins and operating results
will fluctuate significantly due to a variety of factors. Factors affecting
our quarterly results include:

. the costs of our marketing programs to generate market demand for our
products and services;

. the timing of the commercial release of products and services developed
by us;

. the ability to secure license arrangements from Kewill Electronic
Commerce to enable us to market and distribute our transportation
management solutions.

. the number, timing and significance of new products or services
introduced by our competitors, which are outside our control;

. the level of service and price competition;

. changes in our operating expenses as we restructure our operations; and

. general economic factors, which are outside our control.

Timing of commercial release of new products or services by us and our
competitors and general economic factors will also affect our long-term
financial results. Substantially all of our operating expenses are related to
personnel costs, marketing programs and overhead, which cannot be adjusted
quickly and are therefore relatively fixed in the short term. Our operating
expense levels are based, in significant part, on our expectations of future
revenues. If our expenses exceed our revenues, both gross margins and results
of operations could be harmed because of increased costs and expenses in the
short term. Due to the foregoing factors and the other risks discussed in this
document, you should not rely on period-to-period comparisons of our results
of operations as an indication of future performance. Our results of
operations have fallen below public expectations in past periods, and it is
possible that in some future periods our results of operations will be below
public expectations. In this event, the market price of our common stock is
likely to fall.

Our transportation management and receiving solutions are based on software
technologies that we license from Kewill Electronic Commerce, and if we are
unable to continue this license or successfully manage our relationship with
Kewill Electronic Commerce in the future, our ability to distribute our
solutions would be adversely affected.

Our transportation management and receiving solutions are based upon
software technologies that we license from Kewill Electronic Commerce. We do
not have an alternative source for the supply of this software technology. If
we are unable to extend the term of this license or to successfully manage our
relationship with Kewill Electronic Commerce, we would be unable to distribute
our transportation management and receiving solutions and our business would
fail. We are also negotiating a license arrangement with Kewill Electronic
Commerce to distribute a Web-enabled transportation management solution. If we
are unable to enter into such a licensing arrangement with Kewill Electronic
Commerce, our business could be adversely affected. Kewill Electronic Commerce
offers its transportation management and receiving solutions directly to
customers, and competes with us in these markets. There can be no assurance
that Kewill Electronic Commerce will continue to license to us its
transportation management and receiving software technologies in the future,
or that we will be able to identify, license and integrate replacement
technologies.

The transportation management market is highly competitive and we may be
unable to compete successfully.

The market for transportation management systems is rapidly evolving and
intensely competitive. Potential competitors with greater resources than us
may develop more successful solutions. In addition, we compete with other
solutions providers, including iShip, Tan Data, Kewill, Federal Express, UPS,
Neopost, Manhattan

19

Associates, Inc., Manugistics Group, Inc., EXE Technologies, Inc., Optum Inc.
and McHugh Software International, Inc., as well as smaller independent
companies that have developed or are attempting to develop software that
competes with our software solution. We also compete directly with our
software technology provider, Kewill Electronic Commerce, which is offering
its transportation management and receiving solutions directly to customers.
Many of our competitors may be able to devote greater resources to marketing
and promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to Web site and systems development than us. This
competition may result in loss of market share and reduced revenues and
operating margins.

If our software products contain product defects, our ability to sell our
software products could be adversely affected.

Software products developed by us or licensed from third parties and
incorporated into our products may contain undetected errors or failures when
first introduced or when new versions are released. There can be no assurance
that errors will not be found in new products or product enhancements after
commercial release, resulting in loss or delay in market acceptance, which
could have a material adverse effect upon our business, operating results,
financial condition and cash flows.

If we are unable to successfully protect our intellectual property, our
competitive position will be harmed.

We rely on a combination of patent, trademark, service mark, copyright and
trade secret laws, contractual restrictions on disclosure and transferring
title and other methods in an effort to establish and protect proprietary
rights in our products, services, know-how and information. If our
intellectual property rights fail to protect our technology, our competitive
position could be harmed. In addition, third parties may develop alternative
technologies or products that do not infringe on any of our patents or other
intellectual property. Steps taken to protect our intellectual property may
not be sufficient to prevent misappropriation of technology or deter
independent third party development of similar technologies. Additionally, the
laws of foreign countries may not protect our services or intellectual
property rights to the same extent as do the laws of the United States.

We depend on key personnel and attracting qualified employees for our future
success.

Our success depends to a significant degree upon the continued
contributions of our executive management team and other senior level
financial, technical, marketing and sales personnel. The loss of the services
of any of these key employees or members of our senior management team could
have a material adverse effect on our business and results of operations. The
loss of key personnel or our inability to attract additional qualified
personnel to supplement or, if necessary, to replace existing personnel, could
have a material adverse effect on our business and results of operations. We
have recently lost certain members of our management team, which could impair
our ability to respond to dynamic market pressures.

Rapid technological change may make our products obsolete or cause us to incur
substantial costs to adapt to these changes.

The market for our products is characterized by rapidly changing
technology, evolving industry standards and frequent new product
announcements. To be successful, we must adapt to these rapid changes by
continually improving the performance, features and reliability of our
products and services, and by developing new products and services, or else
our products and services may become noncompetitive or obsolete. We also could
incur substantial costs to modify our service or infrastructure and to develop
new products and services, in order to adapt to these changes. Our business,
operating results and financial condition could be harmed if we incur
significant costs without adequate results, or find ourselves unable to adapt
rapidly to these changes.

20

We may be unable to effectively manage any future acquisitions of new or
complementary businesses, products or technology.

We may pursue the acquisition of new or complementary businesses, including
individual products or technologies, in an effort to enter into new markets,
diversify our sources of revenue and expand our services. To the extent we
pursue new or complementary businesses, we may not be able to expand our
services and related operations in a cost-effective or timely manner. We may
experience increased costs, delays and diversions of management's attention
when integrating any new businesses. We may lose key personnel from our
operations or those of any acquired business. Furthermore, any new business or
service we launch that is not favorably received by users could damage our
reputation and brand name. We also cannot be certain that we will generate
satisfactory revenues from any expanded services to offset related costs. Any
expansion of our operations would also require significant additional
expenses, and these efforts may strain our management, financial and
operational resources. Additionally, future acquisitions may also result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt, the assumption of known and unknown liabilities, and the
amortization of expenses related to goodwill and other intangible assets, all
of which could harm our business, financial condition and operating results.

We may need additional capital and failure to obtain such capital could harm
our ability to market our service and to develop future services.

We require substantial working capital to fund our business. We cannot be
certain that additional financing will be available to us on favorable terms
when required, or at all. Since our inception, we have experienced negative
cash flow from operations and expect to experience significant negative cash
flow from operations in the future. We currently anticipate that our available
funds will be sufficient to meet our anticipated needs for working capital and
capital expenditures through the next twelve months. The estimate of the time
period during which these funds will be sufficient is a forward-looking
statement that is subject to risks and uncertainties. Our actual funding
requirements may differ materially from this as a result of the number of
factors, including the development of new products and services. As a result,
we may need to raise additional funds within the next twelve months. If we are
unable to raise additional capital in the future, we may be required to
curtail our operations significantly or discontinue or sell all or a portion
of our business. If we are able to raise additional equity capital in the
future, the additional equity capital would have a dilutive effect on our
existing stockholders.

Our common stock may be delisted from The Nasdaq National Market, which could
adversely affect the trading price of our stock or eliminate the trading
market for our common stock.

On November 9, 2000, we received a notice from The Nasdaq Stock Market that
our common stock had failed to maintain a minimum bid price of $1.00 over the
previous 30 consecutive trading days as required for continued listing on The
Nasdaq National Market. On March 23, 2001, we attended a hearing before The
Nasdaq Qualifications Hearing Panel to determine if our common stock should
continue to be listed on the The Nasdaq National Market, and we are awaiting a
determination by The Nasdaq Stock Market of our listing status on the Nasdaq
National Market. If our common stock is delisted from The Nasdaq National
Market, its liquidity and trading price could be negatively impacted. In
addition, our common stock could be deemed to be a penny stock. If our common
stock were deemed a penny stock, it would be subject to rules that impose
additional sales practices on broker-dealers who sell our securities. Because
of these additional obligations, some brokers could be unwilling to effect
transactions in our stock, which could have an adverse effect on the liquidity
of our common stock and your ability to sell the common stock.

21

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Disclosures About Market Risk

The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially as a result of a number
of factors, including those set forth under the caption "Risk Factors--We have
a limited operating history with a history of losses, only began offering our
transportation management solutions from May 2000, expect to incur losses in
the future, and may never achieve profitability," and "--We may need
additional capital and failure to obtain such capital could harm our ability
to market our service and to develop future services."

Interest Rate Risk

As of December 31, 2000, we had cash, cash equivalents and restricted cash
of approximately $29.0 million invested in short term investments. Due to the
short-term nature of these investments and our investment policies and
procedures, we have determined that the risk associated with interest rate
fluctuations related to these financial instruments does not pose a material
risk to us.

As of December 31, 2000, we did not have any outstanding short or long-term
debt. Increases in interest rates could, however, increase the interest
expense associated with our future borrowings, if any. We do not hedge against
interest rate increases.

Equity Price Risk

As of December 31, 2000, we did not hold any equity investments.

Foreign Currency Exchange Rate Risk

We realize all of our revenues in U.S. dollars, and through December 31,
2000, all of our revenues were derived from customers in the United States.
Therefore, we do not believe we have any significant direct foreign currency
exchange rate risk. We do not hedge against foreign currency exchange rate
changes.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Supplementary Data

The following tables set forth unaudited quarterly supplementary data for
each of the eight quarters in the two-year period ended December 31, 2000.

1999
--------------------------------------------------------
Quarter Ended
-------------------------------------------- Year Ended
March 31 June 30 September 30 December 31 December 31
-------- -------- ------------ ----------- -----------
(In thousands, except per share data)

Net product and services
revenues............... $ -- $ -- $ 358 $ 960 $ 1,318
Gross loss.............. -- -- (374) (704) (1,078)
Loss from operations.... (4,615) (7,928) (15,392) (29,417) (57,352)
Net loss................ (4,511) (7,856) (15,219) (27,824) (55,410)
Accretion on redeemable
convertible preferred
stock.................. (440) (736) (723) (187) (2,086)
Net loss attributable to
common stockholders.... (4,951) (8,592) (15,942) (28,011) (57,496)
Net loss per share,
basic and diluted...... $ (0.35) $ (0.37) $ (0.65) $ (0.81) $ ( 3.32)

2000
--------------------------------------------------------
Quarter Ended
-------------------------------------------- Year Ended
March 31 June 30 September 30 December 31 December 31
-------- -------- ------------ ----------- -----------
(In thousands, except per share data)

Net product and services
revenues............... $ 1,490 $ 1,632 $ 1,843 $ 372 $ 5,337
Gross loss.............. (389) (519) (19) (132) (1,059)
Loss from operations.... (31,093) (29,299) (24,414) (31,824) (116,630)
Net loss................ (29,688) (28,138) (23,687) (31,313) (112,826)
Net loss per share,
basic and diluted....... $ (0.82) $ (0.76) $ (0.63) $ (0.83) $ (3.04)

23

INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Ernst & Young LLP, Independent Auditors........................ 25

Balance Sheets........................................................... 26

Statements of Operations................................................. 27

Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit)........................................................ 28

Statements of Cash Flows................................................. 30

Notes to Financial Statements............................................ 32

24

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
E-Stamp Corporation

We have audited the accompanying balance sheets of E-Stamp Corporation as
of December 31, 1999 and 2000, and the related statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of E-Stamp Corporation at
December 31, 1999 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.

s/ ERNST & YOUNG LLP

Palo Alto, California
February 20, 2001

25

E-STAMP CORPORATION

BALANCE SHEETS
(In thousands, except par value amounts)

As of December 31,
-------------------
1999 2000
-------- ---------

ASSETS
Current assets:
Cash and cash equivalents................................ $118,689 $ 25,233
Restricted cash.......................................... -- 3,750
Accounts receivable--trade............................... 237 369
Other receivable......................................... 253 847
Inventory................................................ 2,120 --
Prepaid marketing expenses............................... 6,156 --
Prepaid expenses and other current assets................ 6,222 1,274
-------- ---------
Total current assets...................................... 133,677 31,473
Property and equipment, net............................... 2,740 5,493
Goodwill and other intangible assets, net................. -- 4,741
Other assets.............................................. -- 1,200
-------- ---------
Total assets.............................................. $136,417 $ 42,907
======== =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 3,235 $ 3,529
Accrued liabilities...................................... 5,636 2,140
Accrued restructuring costs.............................. -- 5,933
Deferred revenue......................................... 193 328
Current portion of obligations under capital lease....... 23 --
-------- ---------
Total current liabilities................................. 9,087 11,930

Commitments and contingencies

Stockholders' equity:
Common stock, $0.001 par value per share: 100,000 shares
authorized, 39,110 and 38,014 shares issued and
outstanding at December 31, 1999 and 2000,
respectively............................................ 39 38
Additional paid-in capital............................... 224,835 224,878
Notes receivable from employees and officers............. (3,540) (664)
Deferred stock compensation.............................. (15,327) (4,622)
Deferred distribution costs.............................. (2,850) --
Accumulated deficit...................................... (75,827) (188,653)
-------- ---------
Total stockholders' equity................................ 127,330 30,977
-------- ---------
Total liabilities and stockholders' equity................ $136,417 $ 42,907
======== =========

See accompanying notes.

26

E-STAMP CORPORATION

STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

Year ended December 31,
-----------------------------
1998 1999 2000
-------- -------- ---------

Net product and services revenues.............. $ -- $ 1,318 $ 5,337
Cost of sales.................................. -- 2,396 6,396
-------- -------- ---------
Gross loss..................................... -- (1,078) (1,059)

Operating expenses:
Research and development...................... 5,603 14,024 18,170
Sales and marketing........................... 2,722 22,292 54,179
General and administrative.................... 1,897 8,419 9,304
In-process research and development........... -- -- 1,677
Goodwill and intangible asset amortization.... -- -- 1,060
Restructuring costs........................... -- -- 20,291
Amortization of deferred stock compensation... 858 10,589 8,040
Amortization of deferred distribution costs... -- 950 2,850
-------- -------- ---------
Total operating expenses....................... 11,080 56,274 115,571
-------- -------- ---------
Loss from operations........................... (11,080) (57,352) (116,630)
Interest income................................ 380 1,979 3,982
Interest expense............................... (10) (37) (178)
-------- -------- ---------
Net loss....................................... (10,710) (55,410) (112,826)
Accretion on redeemable convertible preferred
stock......................................... (1,383) (2,086) --
-------- -------- ---------
Net loss attributable to common stockholders... $(12,093) $(57,496) $(112,826)
======== ======== =========
Net loss per share, basic and diluted.......... $ (0.92) $ (3.32) $ (3.04)
======== ======== =========
Shares used in computing net loss per share,
basic and diluted............................. 13,075 17,313 37,144
======== ======== =========

See accompanying notes.

27

E-STAMP CORPORATION

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)

Redeemable
Convertible Notes
Preferred Receivable Total
Stock Common Stock Additional From Deferred Deferred Stockholders'
-------------- -------------- Paid-In Employees Stock Distribution Accumulated Equity
Shares Amount Shares Amount Capital and Officers Compensation Costs Deficit (Deficit)
------ ------- ------ ------ ---------- ------------ ------------ ------------ ----------- -------------

Balance at
December 31,
1997............ 2,500 $ 6,126 13,008 $13 $6,556 $ -- $ -- $ -- $ (9,707) $ (3,138)
Issuance of
Series B
redeemable
convertible
preferred
stock........... 4,188 15,960 -- -- -- -- -- -- -- --
Issuance of
notes receivable
from employees
for exercise of
stock options... -- -- 1,738 2 651 (653) -- -- -- --
Issuance of
common stock to
consultants for
services........ -- -- 10 -- 82 -- -- -- -- 82
Exercise of
stock options... -- -- 178 -- 70 -- -- -- -- 70
Shares
repurchased from
employees....... -- -- (10) -- (4) -- -- -- -- (4)
Deferred stock
compensation.... -- -- -- -- 3,624 -- (3,624) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 858 -- -- 858
Accretion on
redeemable
convertible
preferred
stock........... -- 1,383 -- -- (1,383) -- -- -- -- (1,383)
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- (10,710) (10,710)
----- ------- ------ --- ------ ----- ------- ---- -------- --------
Balance at
December 31,
1998
carried forward.. 6,688 $23,469 14,924 $15 $9,596 $(653) $(2,766) $ -- $(20,417) $(14,225)

See accompanying notes.

28

E-STAMP CORPORATION

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(In thousands)

Notes
Redeemable Receivable
Convertible From Total
Preferred Stock Common Stock Additional Employees Deferred Deferred Stockholders'
---------------- -------------- Paid-In and Stock Distribution Accumulated Equity
Shares Amount Shares Amount Capital Officers Compensation Costs Deficit (Deficit)
------ -------- ------ ------ ---------- ---------- ------------ ------------ ----------- -------------

Balance at
December 31,
1998, brought
forward......... 6,688 $ 23,469 14,924 $15 $ 9,596 $ (653) $ (2,766) $ -- $ (20,417) $ (14,225)
Issuance of
warrants for
bridge loan..... -- -- -- -- 85 -- -- -- -- 85
Issuance of
Series C
redeemable
convertible
preferred stock,
net of issuance
costs........... 2,929 28,879 -- -- -- -- -- -- -- --
Common stock
grants to
executives...... -- -- 188 -- 1,800 -- -- -- -- 1,800
Issuance of
common stock to
strategic
investors....... -- -- 726 1 8,799 -- -- (3,800) -- 5,000
Accretion on
redeemable
convertible
preferred
stock........... -- 2,086 -- -- (2,086) -- -- -- -- (2,086)
Conversion of
redeemable
convertible
preferred stock
upon IPO........ (9,617) (54,434) 12,021 12 54,422 -- -- -- -- 54,434
Issuance of
common stock
upon IPO, net of
issuance costs.. -- -- 8,050 8 125,398 -- -- -- -- 125,406
Exercise of
stock options... -- -- 697 -- 526 -- -- -- -- 526
Issuance of
notes receivable
for exercise of
stock options... -- -- 2,886 3 3,079 (3,082) -- -- -- --
Repayments of
notes receivable
from employees.. -- -- -- -- -- 168 -- -- -- 168
Shares
repurchased from
employee........ -- -- (472) -- (191) 27 -- -- -- (164)
Deferred stock
compensation.... -- -- -- -- 23,150 -- (23,150) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 10,589 -- -- 10,589
Issuance of
common stock to
consultants for
services........ -- -- 6 -- 37 -- -- -- -- 37
Exercise of
warrants........ -- -- 84 -- 220 -- -- -- -- 220
Amortization of
deferred
distribution
costs........... -- -- -- -- -- -- -- 950 -- 950
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- (55,410) (55,410)
------ -------- ------ --- -------- ------- -------- ------- --------- ---------
Balance at
December 31,
1999............ -- -- 39,110 39 224,835 (3,540) (15,327) (2,850) (75,827) 127,330
Exercise of
stock options... -- -- 76 -- 45 -- -- -- -- 45
Issuance of
common stock
under employee
stock purchase
plan............ -- -- 152 -- 457 -- -- -- -- 457
Issuance of
common stock in
connection with
acquisition..... -- -- 1,164 1 5,309 -- (1,200) -- -- 4,110
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 8,040 -- -- 8,040
Amortization of
deferred
distribution
costs........... -- -- -- -- -- -- -- 2,850 -- 2,850
Reversal of
deferred stock
compensation for
terminated
employees....... -- -- -- -- (3,865) -- 3,865 -- -- --
Compensation
related to share
repurchase...... -- -- -- -- 724 -- -- -- -- 724
Shares
repurchased..... -- -- (2,488) (2) (2,627) 2,629 -- -- -- --
Payments on
notes
receivable...... -- -- -- -- -- 247 -- -- -- 247
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- (112,826) (112,826)
------ -------- ------ --- -------- ------- -------- ------- --------- ---------
Balance at
December 31,
2000............ -- $ -- 38,014 $38 $224,878 $ (664) $ (4,622) $ -- $(188,653) $ 30,977
====== ======== ====== === ======== ======= ======== ======= ========= =========

See accompanying notes.

29

E-STAMP CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)

Year ended December 31,
-----------------------------
1998 1999 2000
-------- -------- ---------

Operating activities
Net loss....................................... $(10,710) $(55,410) $(112,826)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 405 502 3,458
Loss on disposal of assets................... 65 -- --
Amortization of deferred stock compensation.. 858 10,589 8,040
Amortization of deferred distribution costs.. -- 950 2,850
Stock based compensation..................... 82 1,837 724
Restructuring costs.......................... -- -- 13,251
Warrants issued in connection with short term
loan........................................ -- 85 --
Write-off of in-process research and
development................................. -- -- 1,677
Changes in assets and liabilities:
Accounts receivable........................ -- (237) (239)
Other receivable........................... -- (253) (594)
Notes receivable from employees and
officers.................................. -- 4 --
Prepaid marketing expenses................. -- (6,156) 1,797
Other prepaid expenses and other current
assets.................................... -- (6,078) 3,550
Inventory.................................. (88) (2,120) 244
Accounts payable and accrued expenses...... (172) 7,342 (2,990)
Accrued restructuring costs................ -- -- 5,933
Deferred revenue........................... -- 193 (277)
-------- -------- ---------
Net cash used in operating activities.......... (9,560) (48,752) (75,402)

Investing activities
Purchase of property and equipment............. (324) (2,778) (11,961)
Cash used for business combinations............ -- -- (2,973)
Increase in restricted cash.................... -- -- (3,750)
-------- -------- ---------
Net cash used in investing activities.......... (324) (2,778) (18,684)

Financing activities
Repayments of lease obligations................ (36) (29) (23)
Proceeds from issuance of notes payable........ 700 -- --
Repayments of notes payable.................... (700) -- (96)
Net proceeds from issuance of redeemable
convertible preferred stock................... 15,960 28,879 --
Net proceeds from issuance of common stock..... -- 5,000 --
Net proceeds from issuance of common stock in
Initial Public Offering....................... -- 125,406 --
Collections on notes receivable from
stockholders.................................. -- -- 247
Net proceeds from exercise of stock options and
employee stock purchase plan.................. 66 526 502
Net proceeds from exercise of warrants......... -- 220 --
-------- -------- ---------
Net cash provided by financing activities...... 15,990 160,002 630
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 6,106 108,472 (93,456)
Cash and cash equivalents at beginning of
year.......................................... 4,111 10,217 118,689
-------- -------- ---------
Cash and cash equivalents at end of year....... $ 10,217 $118,689 $ 25,233
======== ======== =========

See accompanying notes.

30

E-STAMP CORPORATION

STATEMENTS OF CASH FLOWS
(In thousands)

Year ended December
31,
------------------------
1998 1999 2000
------ ------- -------

Supplemental cash flow information
Cash paid for interest............................... $ 10 $ 37 $ 2
====== ======= =======

Schedule of non-cash financing and investing
transactions
Issuance of notes receivable from employees and
officers for exercise of stock options.............. $ (653) $(3,082) $ --
====== ======= =======
Issuance of common stock for deferred distribution
costs............................................... $ -- $ 3,800 $ --
====== ======= =======
Conversion of preferred stock to common stock........ $ -- $54,434 $ --
====== ======= =======
Deferred stock compensation related to grants of
stock options....................................... $3,624 $23,150 $ --
====== ======= =======
Assets acquired under capital lease obligations...... $ -- $ 14 $ --
====== ======= =======
Repurchase of common stock in exchange for
cancellation of notes receivable.................... $ -- $ -- $(2,629)
====== ======= =======
Issuance of common stock for business combination.... $ -- $ -- $ 5,310
====== ======= =======
Deferred stock compensation related to business
combination......................................... $ -- $ -- $(1,200)
====== ======= =======
Reversal of deferred stock compensation related to
unvested stock options forfeited by terminated
employees........................................... $ -- $ -- $(3,865)
====== ======= =======

See accompanying notes.

31

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. Background and Summary of Significant Policies

E-Stamp Corporation, a Delaware corporation, was formed on August 23, 1996.
The Company's original business model provided an Internet postage service
that enabled users to conveniently purchase, download and print Internet
postage directly from their personal computers without the need to maintain a
persistent Internet connection. In May 2000, the Company acquired two
logistics companies, Infinity Logistics Corporation ("Infinity Logistics") and
Automated Logistics Corp. ("Automated Logistics"), providers of transportation
management and warehouse management solutions that allow enterprise customers
to review carrier rates and shipping options, select a carrier, print shipping
labels, track shipments and create shipping reports.

In July 2000, the Company restructured its organization to focus on the
development, marketing and sales of its transportation management solutions
and reduce its emphasis on the Internet postage business. In November 2000,
the Company announced that it would phase-out its Internet postage service by
the end of 2000 and restructured its organization. For the fiscal year ended
December 31, 2000, the Company recorded charges of $20.3 million in connection
with these restructurings.

The Company has incurred significant net losses and negative cash flows
form operations since its inception. At December 31, 2000, the Company had an
accumulated deficit of $188.7 million. Ultimately, the Company's ability to
meet obligations in the ordinary course of business is dependent on its
ability to establish profitable operations and raise additional funds through
public or private equity financings, collaborative or other arrangements with
corporate sources, or other sources of financing. As a result of the Company's
phase-out of its Internet postage business at the end of 2000, management has
the intent and believes it has the ability to reduce expenditures in 2001.
There can be no assurance that the Company will be successful in raising
additional capital resources with terms that are favorable to the Company, if
at all. If the Company fails to obtain any additional financing, management
believes its current available cash resources will enable the Company to meet
its obligation through at least December 31, 2001.

Use of Estimates

The Company's management makes estimates and assumptions in the preparation
of its financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions may affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements, and the reported amounts of expenses
during the respective reporting periods. Actual results could differ from
those estimates.

Revenue Recognition

The Company currently generates revenues from the sale of its
transportation management and warehouse management solutions and associated
hardware and software and from maintenance and service contracts. Revenues
from transportation management and warehouse management solutions are
generally recognized upon shipment of the associated hardware and software.
Revenues from software license fees are recognized in accordance with AICPA
Statement of Position ("SOP") 97-2 and SOP 98-9 when the software has been
delivered, persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable and no significant obligations
remain. When significant obligations remain after the products are delivered,
revenues are recognized only after these obligations are fulfilled. Service
and maintenance revenues are recognized ratably over the contractual period or
as the services are provided.

Prior to phasing out its Internet postage business, the Company generated
revenues for its Internet postage products from software license fees, ongoing
convenience fees for the purchase of postage over the Internet, and the sale
of ancillary postage supplies and technology license fees. In connection with
phasing out the Internet postage business, the Company allowed customers to
return certain items purchased since September 1, 2000 for a full refund.
Consequently, the Company did not recognize revenues on any Internet pos