Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2002

Commission File Number: 000-26223

TUMBLEWEED COMMUNICATIONS CORP.

(Exact name of registrant as specified in its charter)

700 Saginaw Drive

Redwood City, CA 94063

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code

(650) 216-2000

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

None

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

Common Stock, $0.001 Par Value per Share

Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes x    No ¨

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

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

The approximate aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market on June 28, 2002 was approximately $57,072,065 (based on the closing price for shares of the Registrant’s Common Stock as reported on the Nasdaq National Market of $1.85 on that date). Shares held by each officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of common stock outstanding as of February 14, 2003 was 30,484,301.

Table of Contents

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. The forward-looking statements are based on our current expectations and projections about future events, including, but not limited to, implementing our business strategy; attracting and retaining customers; obtaining and expanding market acceptance of the products and services we offer; forecasts of Internet usage and the size and growth of relevant markets; rapid technological changes in our industry and relevant markets; and competition in our market. Discussions containing such forward-looking statements may be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These forward-looking statements are based on current beliefs, expectations and assumptions and involve certain risks and uncertainties that could cause actual results, levels of activity, performance, achievements and events to differ materially from those implied by such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under the caption “Risks and Uncertainties” contained herein, as well as those discussed elsewhere herein. These forward-looking statements are made as of the date of this Annual Report on Form 10-K. We disclaim any obligation to update these forward-looking statements or to explain the reasons why actual results may differ. We reserve the right to update these statements for any reason, including the occurrence of material events.

Table of Contents

TUMBLEWEED COMMUNICATIONS CORP.

2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

TRADEMARKS

Our registered trademarks include Tumbleweed^®, Tumbleweed Communications^®, Secure Envelope^®, Secure Inbox^®, Tumbleweed IME Integrated Messaging Exchange^®, WorldSecure^® and Worldtalk^®. Additional trademarks belonging to us include Tumbleweed Secure Guardian^™, Tumbleweed Secure Policy Gateway^™, Tumbleweed Secure Staging Server^™, Tumbleweed Staging Server^™, Tumbleweed Secure Mail^™, Tumbleweed Secure Redirect^™, Tumbleweed Secure Public Network^™, Tumbleweed SPN^™, Tumbleweed Secure Archive^™, Tumbleweed Secure Web^™, Tumbleweed Secure CRM^™, Tumbleweed Secure Messenger^™, Tumbleweed Secure Statements^™, Tumbleweed My Copy^™, Tumbleweed L2i^™, Tumbleweed IME Developer^™, Tumbleweed IME Personalize^™, WorldSecure/Mail^™ and Tumbleweed IME Alert^™.

Table of Contents

PART I

Item 1—Business.

Overview

Tumbleweed is a leading provider of secure messaging applications for businesses and government organizations using the Internet. Tumbleweed enables businesses to share sensitive information via e-mail with customers, business partners, and suppliers, transforming e-mail into a tool for enhancing communication and increasing productivity. By deploying our secure messaging solutions, businesses improve their ability to enhance customer service, automate traditional paper and voice-based processes, enable secure collaboration with partners, comply with government and company policies to limit liability, enhance employee productivity, and prevent network disruption.

Tumbleweed’s suite of secure messaging products provide solutions to important productivity, customer service and online security needs. By deploying some or all of our solutions, our customers can:

Industry Background

The use of corporate e-mail systems, customer service applications and web services has grown as enterprises are increasingly relying on these applications to communicate with their customers, business partners and suppliers. Enterprises are looking for communications applications that can integrate and migrate business processes and associated data with e-mail and web applications and transform how they communicate and conduct business with their customers and partners. The volume of corporate e-mail communications has grown significantly over the past several years in both the business and consumer markets.

To fully leverage the power of communicating using the Internet and email, businesses must first address the issues of security, centralized management, automation, legacy integration and end-user behavior, as well as potential adoption issues. The use of policies and management protocols that were traditionally applied to paper or voice-based processes within a company in many cases are appropriately applied to communications conducted over e-mail. The adoption of these policies and protocols is critical to establish adherence to regulatory requirements that face each industry and to provide enterprises with the same protection of audit trail and confidentiality that paper processes supply. In addition, recent studies from Gartner Group indicate that consumers are hesitant about doing business online unless they can have confidence that the security and the privacy of their information is protected. End-users are also interested in easily accessible online services and communications from the companies with which they do business.

With comprehensive security solutions, businesses can deploy policies enterprise-wide, provide critical management of communications, and leverage the investment they have made in their existing systems in order to fully maximize business conducted on the Internet.

3

Table of Contents

Tumbleweed’s Secure Messaging Applications and Services

Tumbleweed offers a comprehensive family of secure messaging applications that enable enterprises to safely leverage the cost-efficiencies and productivity of Internet communications. In addition, all Tumbleweed solutions are designed to integrate with existing business and e-mail systems, requiring no significant change in existing firewall or system infrastructures. Our applications can be purchased independently or together to create a powerful and complete communications solution for businesses. All of our solutions offer multi-level security using industry standards, universal access, and proven scalability for high volume message traffic.

Tumbleweed Solutions to Protect Enterprises

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

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

Businesses need to monitor and manage their communications so that groupware applications can continue to be a tool for fast, cost-effective communications. They need to centrally manage and globally enforce communications policies. They need a solution that complements, rather than replaces, their groupware infrastructure. They also need a solution that enforces communication controls automatically, without relying on the initiative or costly re-training of individual users within their organization.

By integrating Tumbleweed’s protection solutions with existing groupware networks, a business can significantly enhance control of its online communications and set policies to apply content control, spam protection, filtering, encryption, access control, attachment management, virus scanning and digital signatures to groupware traffic. Because our solutions allow policies to be administered centrally and enforced universally across an enterprise, our server-based protection solutions offer several advantages over desktop solutions, including:

4

Table of Contents

Our protection solutions include Tumbleweed Secure Mail and Tumbleweed Secure Archive:

Tumbleweed Solutions to Extend Enterprise Networks

Tumbleweed’s extension solutions allow businesses and organizations to establish secure Internet communications channels with partners, suppliers and customers. All of Tumbleweed’s extension solutions are server-based and integrate with existing groupware networks, enterprise systems, or legacy applications in order to secure communications automatically before it crosses the corporate firewall. Without retraining users or changing desktop software, our extension solutions enable businesses to take advantage of moving their business communications online and ensure that those communications are encrypted, auditable and controlled so that access is granted only to appropriate recipients.

Tumbleweed’s extension solutions include Tumbleweed Secure Public Network, or SPN, Tumbleweed Secure Redirect, Tumbleweed Secure Messenger, and Tumbleweed Secure Statements.

Using groupware applications and e-mail is fast and convenient, but typically not secure and can be difficult to manage and track. Using e-mail as a main communications vehicle can also open a company to risks involved with exposing important confidential information to competitors and hackers. Businesses need a way to secure these communications—quickly, easily, and automatically. The solution should:

5

Table of Contents

By deploying our Tumbleweed SPN solution, a business can create secure networks among its offices, partners, suppliers, and customers. Meanwhile, end users within and outside the company can continue using their own client software. Tumbleweed SPN is a server-based solution that can automatically encrypt outgoing messages and sign them with an organization’s digital certificate. The solution also monitors, authenticates, and decrypts incoming messages, and delivers them unencrypted to the recipient’s desktop within the corporate network environment. Security applied is automatic and transparent to employees within the organizations.

6

Table of Contents

The advantages of using Tumbleweed Secure Statements versus traditional paper-based delivery and other electronic delivery methods include:

Tumbleweed Professional Services

Tumbleweed’s professional services organization provides support, integration engineering, consulting, custom application development, training and educational services and used to build online communication systems based on our products.

The following are examples of the professional services Tumbleweed offers:

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

7

Table of Contents

Strategy

Tumbleweed’s objective is to provide a comprehensive family of solutions to leverage the Internet for business communication. Key elements of our strategy are:

Establish Tumbleweed as the leading provider of secure messaging applications that offer customers increased productivity, lowered costs and reduced liability.

Tumbleweed intends to establish Tumbleweed’s suite of secure messaging applications as the leading foundation upon which to build mission-critical business communications. Our focus is on offering solutions that allow our customers to rapidly recoup their original investment and earn a significant return on that investment. Our customers use our solutions to increase their productivity, efficiency and reduce costs. By moving business processes online and extending online communications to include a number of different applications, our software solutions can eliminate costs associated with traditional paper, fax or voice-based business processes. By filtering spam our solutions limit liability, protect network resources, and enhance employee productivity. Our solutions enable our customers to define and implement multi-layer security policies, ensuring the safe and efficient use of corporate email systems and the privacy of confidential information.

Focus on providing solutions in markets where Tumbleweed has solid market traction and which represent the largest opportunities for us.

Tumbleweed is focusing its efforts on large customers in the financial services and healthcare industries and federal government agencies. These sectors are especially sensitive to maintaining the confidentiality of information, including financial account or transaction data, patient health information, or issues of national security. In addition, these customers are subject to governmental and industry regulations, such as the Health Insurance Portability and Accountability Act, or HIPAA, and the Gramm-Leach-Bliley Act, or GLBA, concerning online communication.

Provide comprehensive professional and/or outsourcing services through systems integrators or through Tumbleweed’s in-house team.

Tumbleweed offers a full suite of professional and consulting services that are designed to help customers implement our solutions as rapidly as possible. The services include business-specific applications consulting, software development, training and complete technical support. In addition, services and outsourcing can also be provided through our best-of-breed systems integrators.

8

Table of Contents

Customers

Tumbleweed provides secure messaging applications and services for a variety of businesses and government agencies. The following is a list of each of Tumbleweed’s business customers that in 2002 entered into a contract to pay Tumbleweed over $50,000.

Sales

Tumbleweed maintains a direct sales force that focuses on signing key enterprise customers as well as further penetrating existing accounts by selling them new applications. Our sales force consists of a total of 34 employees as of December 31, 2002. Sales offices in the U.S. currently include Redwood City, California; Chicago, Illinois; New York, New York; Reston, Virginia; and San Ramon, California. Our sales force includes field sales engineers and inside sales personnel who support the account executives. Field sales engineers assist our account executives with technical presentations, customer requirements analysis and initial solution designs. Our inside sales personnel assist the account executives in managing their customer relationships and qualifying

9

Table of Contents

new accounts. Our sales effort is augmented by the sales forces of our channel partners. The typical sales cycle can range from one to nine months, but may be significantly longer for large sales.

Marketing

Tumbleweed’s marketing efforts are organized around three primary areas: product marketing, product management and corporate marketing. Product marketing identifies target markets and customer opportunities, then develops the positioning, programs and materials to reach customers and support sales activities. Product management translates customer and market requirements into product plans and works with engineering to ensure completion. Product management also trains salespeople on product information. Corporate marketing drives overall market awareness of Tumbleweed as a company and our products through analyst and investor relations, media, events, and speaking engagements. Corporate marketing is also responsible for branding, corporate identity, and the Tumbleweed website. Both product marketing and corporate marketing work closely with direct sales and channel sales partners to focus programs more effectively and guide product research and development.

Governmental Regulation

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

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

In addition, Tumbleweed’s products rely on encryption and authentication technology from third parties to provide the security and authentication necessary to achieve secure transmission of confidential information. Exports of software products utilizing encryption technology are generally restricted by the U.S. and various foreign governments. We have obtained approval to export products using up to 255-bit symmetric encryption and 2048-bit public key encryption, including the products formerly known as IME Server, IME Desktop, IME Receive Applet, IME Remote API using OmniORB with SSL, and MMS Worldwide/255. We are not exporting other hardware, software or technology that is subject to export control under U.S. law. However, the list of countries and products for which exports are restricted and the related regulatory policies could be revised in the future, and we may not be able to obtain required government approvals.

10

Table of Contents

Intellectual Property

To date, the U.S. Patent and Trademark Office has issued Tumbleweed 12 U.S. patents—11 utility patents and one design patent related to the user interface of Tumbleweed’s products. We have filed an additional 22 utility patent applications that are now pending in the U.S. Patent and Trademark Office. We also have 23 patent applications now pending in foreign jurisdictions, including three pending applications filed under the Patent Cooperation Treaty. In addition, we currently have nine registered trademarks worldwide, including the mark Tumbleweed, and are pursuing other key trademarks and service marks in the U.S. and internationally.

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

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

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

Competition

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

Tumbleweed’s principal competition for Tumbleweed’s protection solutions are companies that offer various e-mail content filtering products. Companies that sell products that compete with some of the features within our products include Clearswift Technologies, CipherTrust, Inc., and Trend Micro Incorporated.

Tumbleweed’s principal competition in the secure messaging and statement delivery market area comes from providers with offerings that are intended to compete directly with our products or that could be used as

11

Table of Contents

alternatives to our products. Examples of some of these providers are PostX Corporation, Sigaba, and Zix Corporation. Our solutions can be an alternative to traditional mail and courier delivery services such as those offered by Federal Express Corporation, UPS, or the U.S. Postal Service, and to general purpose e-mail applications and services. In addition, companies with which we do not presently directly compete may become competitors in the future, either through the expansion of our products or through their product development in the area of secure online communication services. These companies include International Business Machines Corporation/Lotus Development Corporation, and Microsoft Corporation.

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

Employees

As of December 31, 2002, Tumbleweed employed 133 people worldwide, including 47 in engineering, 34 in sales, 25 in professional services, five in marketing, and 22 combined in corporate management, finance, human resources, information technology, legal, and other administration. Our employees are not represented by any collective bargaining organization. We have never experienced a work stoppage and consider our relations with our employees to be good.

Our Executive Officers

Listed below are Tumbleweed’s executive officers as of March 12, 2003. There are no family relationships between any of the executive officers and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected. At the annual meeting of Tumbleweed’s board of directors, which follows the annual meeting of stockholders, executive officers are appointed by the board to hold office until their earlier resignation or removal.

Jeffrey C. Smith, Chairman of the Board of Directors and Chief Executive Officer, is responsible for strategic planning and business development. Before founding Tumbleweed in June 1993, Mr. Smith held various senior positions in research and development with the following firms: Frame Technology from January 1991 to June 1993; Aeon Corp. from January 1990 to January 1991; Hewlett-Packard from June 1988 to

12

Table of Contents

June 1989; and IBM Scientific Research Center in Palo Alto from June 1987 to June 1988. Mr. Smith served as a lecturer in Software Engineering at Stanford University in 1988 and 1989. Mr. Smith holds a B.S. in Computer Science from Stanford University.

Douglas A. Sabella, President and Chief Operating Officer, is responsible for worldwide operations, including research and development, sales, professional services, and marketing. Prior to joining Tumbleweed in March 2001, Mr. Sabella was the president and chief executive officer of Bidcom, Inc. Prior to joining Bidcom, Mr. Sabella held various senior management positions at Lucent Technology from February 1985 to February 2000. Mr. Sabella holds a B.B.A. in Business Administration from Hofstra University.

Gregory M. Capitolo, Senior Vice President—Finance and Chief Financial Officer, is responsible for finance and administration. Prior to joining Tumbleweed in June 2002, Mr. Capitolo served as Chief Financial Officer and member of the Office of the President at Certicom from May 2001 through April 2002, and as Vice President—Finance at Clustra Systems from October 2000 to April 2001. Prior to joining Clustra Systems, Mr. Capitolo was Director of Finance at Wind River Systems from March 1998 through October 2000. Mr. Capitolo holds a B.S. in Accounting from Santa Clara University and received an MBA from the Amos Tuck School of Business Administration at Dartmouth College.

Available Information

Our Internet address is www.tumbleweed.com. Information contained on our website is not part of this annual report on Form 10-K. We make available free of charge on www.tumbleweed.com our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Statements of changes in beneficial ownership of our securities on Form 4 by our executive officers and directors are made available on our web site by the end of the business day following the submission of such filings to the SEC.

In addition, you may request a copy of these filings, excluding exhibits, at no cost by writing or telephoning us at the following address or telephone number:

Tumbleweed Communications Corp.

700 Saginaw Drive

Redwood City, CA 94063

Attention: Investor Relations

Telephone: (650) 216-2134

Item 2—Properties.

Tumbleweed leases approximately 40,000 square feet for our corporate headquarters located in Redwood City, California under a lease with a term of five years commencing June 8, 1999. We also maintain domestic sales offices in Chicago, Illinois; New York, New York; Reston, Virginia; and San Ramon, California. Other offices we maintain include Ann Arbor, Michigan, Hong Kong, the Netherlands, Switzerland, and the United Kingdom.

Item 3—Legal Proceedings.

On July 7, 2000, three complaints were filed by David H. Zimmer, Congressional Securities, Inc. and other plaintiffs against Interface Systems, Inc. (a company Tumbleweed acquired in 2000) and various additional defendants, including Interface’s prior president and chief executive officer, Robert A. Nero, and Fiserv Correspondent Services, Inc., in the United States District Court for the Southern District of New York. The three complaints contained substantially similar allegations of false and misleading representations by various

13

Table of Contents

defendants allegedly designed to inflate Interface’s stock price. The complaints sought relief under the federal securities laws on behalf of purported classes of persons who purchased, held, or sold shares of Interface stock, and under various other causes of action. On July 27, 2001, the Court granted our motion to transfer the lawsuits to the United States District Court for the Eastern District of Michigan, which, on April 19, 2002, dismissed with prejudice plaintiffs’ class allegations and federal securities law claims that purportedly arose under Section 10(b) of the Securities Exchange Act of 1934. Also on April 19, 2002, plaintiffs filed a Second Amended Consolidated Complaint that (i) consolidated the separate actions into one action, (ii) added certain new plaintiffs, (iii) withdrew Congressional Securities, Inc. as a plaintiff, and (iv) added claims for breach of fiduciary duty and negligent misrepresentation, which are the sole remaining claims in the case. On May 20, 2002, we filed a motion to dismiss these claims, which motion has remained pending before the Court while the case has continued to proceed through the discovery phase. The accompanying financial statements do not include a reserve for any costs for damages, if any, that might result from this uncertainty. We believe this consolidated action is without merit and intend to vigorously defend against it and seek its dismissal.

An attorney issued a press release on March 7, 2003 stating that he had filed a purported securities class action lawsuit, alleging the violation of federal and state securities laws, on behalf of persons who acquired the common stock of Tumbleweed (other than purchasers of Tumbleweed’s initial public offering) during the time period from August 6, 1999 to October 18, 2000, inclusive. According to the press release, the lead plaintiff in this purported class action lawsuit is a person whose deceased husband purchased approximately 2,700 shares of securities of Commerce One, Inc. In addition, the press release states that this purported class action lawsuit names Tumbleweed Communications Corp. as a defendant, along with Jeffrey C. Smith and Joseph C. Consul (who served as Tumbleweed’s CEO and CFO, respectively, during that time period). We have not been served with a summons or a complaint with respect to this purported securities class action lawsuit.