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 postage
shipments in the fourth quarter of 2000.

32

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Software license fees for the Internet postage products were amounts paid
by end-users for a perpetual license to the Company's software. The Company's
software package allowed the end-user to apply for a USPS license. When the
Company was notified that the USPS had approved the license, the Company
shipped a secure Internet postage storage device, which was necessary for the
use of the Company's 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 the Company's 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 the Company 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.

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

Revenues recognized during 2000 from arrangements deemed to be nonmonetary
exchange of the Company's 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.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a remaining
maturity of three months or less when purchased to be cash equivalents. The
Company's cash equivalents were composed of money market mutual funds and
government securities as of December 31, 1999 and December 31, 2000. The
Company's cash and cash equivalents are carried at cost, which approximates
market. The Company had no material unrealized gains or losses on cash
equivalents as of December 31, 1999 and 2000. During 2000, the Company
purchased a certificate of deposit for $3.8 million as security for amounts
owed under its agreement for online advertising. The certificate of deposit
has been included in restricted cash. See Note 3.

Inventory

Inventory at December 31, 1999 consisted principally of compact disks
(CDs), user manuals and devices for the Company's Internet postage business.
Inventory was stated at the lower of standard cost (which approximated actual
cost) and market. As of December 31, 2000, all inventory had been written-off
in connection with the Company's phase-out of its Internet postage business in
November 2000. The write-off was included in restructuring costs.

Property and Equipment

Property and equipment are recorded at cost. Additions, improvements, and
renewals that significantly add to the asset value or extend the life of the
asset are capitalized. Expenditures for maintenance and repairs are expensed
as costs are incurred.

33

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Depreciation and amortization, for financial reporting purposes, are
provided on the straight-line method based upon the estimated useful lives as
follows:

Computer and other equipment............................. 3 years
Furniture and fixtures................................... 3 years
Leasehold improvements................................... Life of the lease

Property and equipment held at December 31, 1999 and 2000 were as follows:

December 31,
----------------
1999 2000
------- -------
(In thousands)

Property and equipment:
Computers................................................ $ 3,146 $ 4,763
Furniture and fixtures................................... 708 1,512
Leasehold improvements................................... 142 1,771
------- -------
3,996 8,046
Accumulated depreciation and amortization................ (1,256) (2,553)
------- -------
Net property and equipment................................. $ 2,740 $ 5,493
======= =======

Goodwill and Other Intangible Assets

Goodwill represents the excess purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair
value. Other intangible assets primarily represent customer base, core and
developed technology, workforce in place and trade name. Goodwill and other
intangible assets are being amortized on a straight-line basis over their
estimated useful lives, which range from two to five years. Under certain
conditions, the Company reviews goodwill and other intangible assets to assess
recoverability from future operations using undiscounted cash flows.
Conditions that will cause the Company to undertake an impairment review
include material adverse changes in operations or the Company's decision to
abandon acquired products, services or technologies. The Company measures the
fair value of an impaired asset based on discounted expected future cash flows
from the impaired assets. Management had not identified any indicators of
impairment that existed at December 31, 2000 for the Company's goodwill and
other intangible assets. Accumulated amortization of goodwill and other
intangible assets was $1.1 million at December 31, 2000.

Research and Development

Research and development costs are expensed as they are incurred. Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software To Be Sold, Leased, or Otherwise Marketed" ("FAS 86"),
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of all phases of the detailed product design necessary to establish that the
product can be manufactured to meet all design specifications. Costs incurred
by the Company between the completion of the detailed product design and the
point at which the product is ready for general release have been
insignificant. Therefore, through December 31, 2000, the Company has charged
all such costs to research and development expense in the period incurred.

Software Development Cost

Costs of software developed internally by the Company for use in its
operations are accounted for under AICPA SOP 98-1, "Internal Use Software,"
which the Company adopted on January 1, 1999. Under SOP 98-1,

34

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

the Company expenses costs of research, including pre-development efforts
prior to establishing technological feasibility, and costs incurred for
training and maintenance. Software development costs are capitalized when
technological feasibility has been established and it is probable that the
project will be completed and the software will be used as intended. No costs
related to internal use software have been capitalized through December 31,
2000.

Advertising Costs

Advertising production costs are recorded as expense the first time an
advertisement appears. The costs of communicating advertising are incurred and
expensed as the advertisement is broadcast. All other advertising costs are
expensed as incurred. The Company also pays royalties for the promotion of its
product. Such royalties are recorded as advertising expense as the royalties
are earned. Advertising expense was approximately $156,000, $6.8 million and
$10.5 million for the years ended December 31, 1998, 1999 and 2000,
respectively. The Company also had $6.2 million of prepaid marketing costs at
December 31, 1999. In connection with the Company's phase-out of its Internet
postage business, $4.4 million of prepaid advertising had been written-off as
of December 31, 2000. The write-off was included in restructuring costs. See
Note 3.

Income Taxes

The Company computes and records income tax in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, the liability method is used to calculate deferred
taxes.

Stock-Based Compensation

In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
which the Company adopted in 1996, the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), and related interpretations in accounting
for stock options. Under APB Opinion No. 25, if the exercise price of the
stock options equals or exceeds the fair value of the underlying stock on the
date of grant, no compensation expense is recognized. Options granted to
consultants are accounted for using the Black-Scholes method prescribed by FAS
123 in accordance with Emerging Issues Task Force consensus No. 96-18.
Deferred stock compensation is amortized over the vesting period of the
individual options, generally four years, using the graded vesting method. The
graded vesting method provides for the amortization of the deferred stock
compensation on an accelerated basis which results in higher amortization in
earlier years than the straight-line method.

Other Comprehensive Loss

Comprehensive loss includes all changes in stockholders' equity during a
period, except those resulting from investments by owners and distributions to
owners. Other comprehensive loss comprises unrealized gains and losses on cash
equivalents, which have been immaterial to date. As a result, comprehensive
loss approximates net loss for all periods presented.

Concentrations

One customer accounted for 21% of net product and services revenues for the
year ended December 31, 1999. For the year ended December 31, 2000, one
customer accounted for 18% of net product and services revenues. Three
customers accounted for 51%, 23% and 16% of net accounts receivable at
December 31, 2000. Credit is extended based on an evaluation of a customer's
financial condition. The Company generally does not require collateral. Bad
debt expense has not been significant in all periods presented.

35

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

The Company's transportation management and receiving solutions products
are based on software technologies that are licensed from a single source. The
Company does not have an alternative source available for this technology.

Reclassifications

Certain prior-year amounts have been reclassified to conform with the
current year's presentation.

Recent Accounting Pronouncements

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," 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. The Company adopted SAB
101 during the fourth quarter of 2000 and the adoption had no impact on the
Company's financial condition or results of operations.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). The Company is 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 the Company currently holds no derivative
financial instruments and does not currently engage in hedging activities,
adoption of FAS 133 will not have a material impact on the Company's 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 the Company's financial position or results
of operations.

36

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

2. Acquisitions

In May 2000, the Company acquired all of the issued and outstanding shares
of Infinity Logistics Corporation and Automated Logistics Corp. These
companies provide transportation management and warehouse management solutions
that allow customers to review carrier rates and shipping options, select a
carrier, print shipping labels, track shipments and create shipping reports.
The total purchase price was approximately $9.0 million and consisted of a
cash payment of $2.5 million, 1,164,000 shares of common stock with a fair
market value of $4.4 million, $0.9 million related to the value of assumed
options, $0.7 million of assumed liabilities and $0.5 million of acquisition
related costs. The total purchase price was allocated based on available
information, including an independent appraisal of the fair value of assets
acquired and liabilities assumed as follows (in thousands):

Acquired assets, net of assumed liabilities.......................... $ 320
Customer base........................................................ 1,293
Core technology...................................................... 696
Developed technology................................................. 158
Workforce in place................................................... 297
Trade name........................................................... 90
Acquired in-process research and development......................... 1,677
Deferred compensation................................................ 1,200
Goodwill............................................................. 3,267
------
Total purchase price................................................. $8,998
======

The purchase price allocation includes $1.2 million of deferred
compensation, of which $0.9 million is related to 232,620 shares issued which
vest subject to continued employment of the stockholder and $0.3 million is
associated with certain of the assumed options.

The purchase price allocation resulted in a $1.7 million charge related to
the value of acquired in-process research and development. The value of
acquired in-process research and development represents the appraised value of
technology in the development stage that had not yet reached economic and
technological feasibility. In reaching this determination, the Company used a
present value income approach and considered, among other factors, the stage
of development of each product, the time and resources needed to complete each
product, and expected income and associated risks. The stage of completion was
determined by estimating the costs and time incurred and the milestones
completed to date relative to the time and costs incurred to develop the in-
process technology into a commercially viable technology or product. The
estimated net present value of cash flows was based on incremental future cash
flows from revenue expected to be generated by the technology or product being
developed. The core technology, goodwill and other intangibles are being
amortized on a straight-line basis over periods from two to five years, the
estimated useful lives of these acquired assets.

The acquisitions were accounted for as purchases and accordingly, the
results of operations of Infinity and Automated Logistics subsequent to May
23, 2000 are included in the Company's statements of operations. The unaudited
pro forma information presented in the table below represents the combined
revenue, net loss and net loss per share as if the acquisition had taken place
on January 1, 1999 and includes the amortization of goodwill and other
intangible assets but excludes the charge for acquired in-process research and
development as it is non-recurring.

Year Ended
December 31,
-------------------
1999 2000
-------- ---------
(In thousands)

Net product and services revenues...................... $ 3,825 $ 6,381
Net loss............................................... $(57,244) $(111,800)
Net loss per share, basic and diluted.................. $ (3.14) $ (2.98)

37

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

The pro forma results are not necessarily indicative of results that would
have occurred if these acquisitions had taken place at the beginning of each
year presented and are not intended to be indicative of future results of
operations.

3. Restructuring Costs

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

The restructuring charge included $2.3 million related to severance and
other employee costs associated with the elimination of 52 positions. Costs
associated with employee termination included severance pay and medical and
other benefits. All of the affected employees had been notified as of December
31, 2000. Of the 52 terminated employees, 32 had left the Company by December
31, 2000 and the remaining 20 employees will leave at various dates through
April 30, 2001.

Asset write-offs as a result of the abandonment of the Internet postage
business totaled $13.3 million. This amount included $6.9 million related to
property and equipment, $4.6 million related to prepaid marketing and warranty
agreements, $1.4 million for inventory and $.4 million for accounts
receivable.

The Company also recorded charges totaling $2.9 million related to costs to
terminate various agreements with suppliers, partners and lessors arising from
the decision to phase our the Internet postage business.

The Company expects the windup of the Internet postage line of business to
continue through approximately April 30, 2001. The restructuring charge
includes $1.8 million related to the costs to complete the shut down of this
business.

The following table sets forth the restructuring activity during 2000.

Balance,
Charges Cash Write- December 31,
in 2000 Paid offs 2000
------- ------ ------- ------------
(in thousands)

Charged to restructuring expense:
Employee termination costs............... $ 2,337 $1,513 $ -- $ 824
Asset write-offs......................... 13,251 -- 13,251 --
Contract terminations.................... 2,898 211 -- 2,687
Operations shut-down..................... 1,805 -- -- 1,805
------- ------ ------- ------
Subtotal................................. $20,291 $1,724 $13,251 5,316
======= ====== =======
Reserve for sales returns of Internet
postage sales after
September 1, 2000....................... 617
------
Total.................................. $5,933
======

38

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

4. Accrued Liabilities

At December 31, 1999 and 2000, accrued liabilities are comprised of the
following:

December 31,
-------------
1999 2000
------ ------
(In
thousands)

Accrued payroll and other compensation expenses............... $2,810 $ 843
Accrued legal expenses........................................ 1,302 186
Accrued inventory costs....................................... 961 --
Accrued marketing expenses.................................... 342 151
Other accrued liabilities..................................... 221 960
------ ------
$5,636 $2,140
====== ======

5. Borrowings

On July 12, 1999, the Company entered into a bridge loan financing
arrangement with a financial institution under which the Company borrowed $5.0
million under the facility. Amounts borrowed under the arrangement bore
interest at a rate of 13% per annum. The outstanding balance was fully repaid
in August 1999.

In connection with this financing, the Company granted the lender warrants
to purchase 48,496 shares of common stock with an exercise price of $8.25 per
share. These warrants expire in July 2004 and remain outstanding at December
31, 2000. The Company recorded the fair value of these warrants upon issuance
of approximately $85,000 as interest expense over the period the loan was
outstanding.

The Company had letters of credit outstanding amounting to $5.0 million as
of December 31, 2000.

6. Redeemable Convertible Preferred Stock

In August 1999, the Company issued 2,928,521 shares of Series C redeemable
convertible preferred stock at $10.31 per share.

The redemption price for each share of preferred stock was equal to the
respective original issuance price plus a 10% compound annual rate of return.
During the period that the preferred stock was outstanding, the carrying
amount of all three series of redeemable convertible preferred stock was
increased by periodic accretions so that the carrying amount equaled the
redemption amount at the redemption date.

Each share of preferred stock was convertible at the option of the holder
into shares of common stock at the then effective conversion ratio. Upon the
Company's initial public offering, each outstanding share of preferred stock
automatically converted into 1.25 shares of common stock.

7. Stockholders' Equity

Sales of Common Stock

On September 10, 1999, the Company issued 726,745 shares of its common
stock and warrants to purchase an additional 83,855 shares of common stock at
an exercise price of $0.01 per share to investors for cash proceeds of $5.0
million. The fair value of the common stock and warrants was deemed by
management to be $7.8 million and $1.0 million, respectively. The fair value
of the warrants was computed using the Black-Scholes method using the
following assumptions: expected volatility of 100%, expected life of 3 years,
risk free interest rate of 6.0% and expected dividend yield of 0.0%. The
warrants were exercised in 1999.

39

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

In connection with the issuance of common stock and warrants, the Company
and the investors signed non-binding letters of intent to negotiate for a
period of up to one year to enter into definitive joint venture, joint
marketing, cooperation, or technology development agreements. The Company
recorded the $3.8 million excess of the fair value of the common stock and
warrants over the consideration received as deferred distribution costs (as a
contra equity account). The balance was amortized to expense over the one year
period covered by the letter of intent. Amortization of deferred distribution
costs amounted to $0.9 million in 1999 and $2.9 million in 2000. At December
31, 2000, the balance had been fully amortized.

1999 Employee Stock Purchase Plan

In September 1999, the board of directors and stockholders adopted the 1999
Employee Stock Purchase Plan. A total of 850,000 shares of common stock has
been reserved for issuance under the 1999 Purchase Plan. The 1999 Purchase
Plan permits eligible employees to acquire shares of the Company's common
stock through periodic payroll deductions of up to 15% of total compensation.
No more than 5,000 shares may be purchased on any purchase date per employee.
Each offering period will have a maximum duration of 24 months. The price at
which the common stock may be purchased is 85% of the lesser of the fair
market value of the Company's common stock on the first day of the applicable
offering period or on the last day of the respective purchase period. In 2000,
151,627 shares were purchased at a weighted average price of $3.01. No shares
were purchased in fiscal 1999. At December 31, 2000, 698,373 shares remain
available for future issuance.

Stock Option Plans

Pursuant to the Company's 1996 Stock Option and Restricted Stock Plan, the
1999 Stock Plan, the 1996 Non-Employee Stock Option Plan and the 1999 Director
Option Plan (together, the "Plans"), the board of directors or one of its
designated committees are authorized to grant incentive stock options or
nonstatutory stock options to employees, officers and directors of the
Company. During the year ended December 31, 1999, the board of directors
terminated the 1996 Stock Option and Restricted Stock Plan and the 1996 Non-
Employee Director Stock Option Plan with respect to future grants. As of
December 31, 2000, a total of 3,823,093 shares remain available for future
grants under the Plans.

Stock options are limited to ten-year terms, and options generally vest at
the rate of 25% upon the first anniversary of the grant and 6.25% each quarter
thereafter. The exercise price for stock options may not be less than the fair
value of the shares on the date of grant for incentive stock options and is
subject to the discretion of the committee for nonstatutory stock options.
Restricted stock may be granted at no cost to recipients. Compensation
expense, if any, equal to the fair value of the restricted stock or stock
options granted in excess of the purchase or exercise price, is recognized
over the related vesting period using the graded vesting method.

In May 2000, in connection with the acquisitions of Infinity Logistics
Corporation and Automated Logistics Corp., the Company assumed the option
plans of these companies and converted all outstanding options to purchase the
common stock of these companies to options to purchase E-Stamp common stock.
The assumed options have a maximum term of ten years and generally vest
ratably over two to four years on a monthly basis. No further options can be
granted under the Infinity and Automated Logistics plans.

40

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

A summary of activity under the Company's Plans is as follows:

Options
Outstanding
-----------------
Weighted-
Shares Number Average
Available of Exercise
for Grant Shares Price
--------- ------ ---------
(in thousands, except per
share amounts)

Options outstanding at December 31, 1997............ 361 2,089 $0.50
Authorized........................................ 938 -- --
Granted........................................... (1,360) 1,360 0.55
Exercised......................................... -- (1,916) 0.42
Repurchases of restricted stock................... 10 -- --
Canceled.......................................... 255 (255) 0.41
------ ------
Options outstanding at December 31, 1998............ 204 1,278 0.60
Authorized........................................ 5,381 -- --
Granted........................................... (5,425) 5,425 4.18
Exercised......................................... -- (3,771) 0.96
Repurchases of restricted stock................... 472 -- --
Canceled.......................................... 672 (672) 2.03
------ ------
Options outstanding at December 31, 1999............ 1,304 2,260 7.37
Authorized........................................ 1,120 -- --
Granted........................................... (4,061) 4,061 4.30
Assumption of option plans in acquisitions........ -- 245 0.82
Exercised......................................... -- (76) 0.64
Repurchases of restricted stock................... 2,180 -- --
Canceled.......................................... 3,280 (3,280) 6.97
Expired........................................... -- (1) 0.82
------ ------
Options outstanding at December 31, 2000............ 3,823 3,209 3.67
====== ======
Exercisable at December 31, 2000.................... 745 2.85
======

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

Options Outstanding Options Exercisable
---------------------------------------------- ------------------------------
Options Weighted- Options
Outstanding at Average Weighted- Outstanding at Weighted-
December 31, Remaining Average December 31, Average
Range of Exercise Prices 2000 Contractual Life Exercise Price 2000 Exercise Price
- ------------------------ -------------- ---------------- -------------- -------------- --------------
(In thousands) (In years) (In thousands)

$0.40-$0.72............. 266 8.61 $ 0.57 109 $ 0.51
$0.75................... 1,035 8.16 $ 0.75 88 $ 0.75
$0.82-1.47.............. 713 9.27 $ 1.21 337 $ 0.96
$1.75-6.88.............. 639 9.23 $ 4.05 149 $ 4.54
$10.19-$21.88........... 525 9.02 $12.20 52 $12.70
$32.19.................. 31 8.93 $32.19 10 $32.19
----- ---
3,209 8.80 $ 3.67 745 $ 2.85
===== ===

41

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Stock-Based Compensation

During 1995, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which became effective for the Company's 1996
fiscal year. FAS 123 requires the Company to disclose the pro forma effect of
the method of accounting prescribed in FAS 123, which would generally require
the Company to record compensation expense equal to the fair value of a stock
option or employee stock purchase plan right on the grant date.

The fair value of the Company's stock-based awards to employees prior to
the Company's initial public offering in October 1999 was estimated using the
minimum value method. Options and employee stock purchase plan rights granted
subsequent to the initial public offering have been valued using the Black-
Scholes pricing model using the following weighted average assumptions.

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

Expected volatility.......................... 0% 200%* 160%
Expected life of options..................... 4.0 years 3.5 years 3.5 years
Expected life of employee stock purchase plan
rights...................................... NA NA 1.2 years
Risk-free interest rate--options............. 5.0% 6.0% 6.4%
Risk-free interest rate--employee stock
purchase plan rights........................ NA NA 6.0%
Expected dividend yield...................... 0% 0% 0%

* Prior to the Company's initial public offering in October 1999, expected
volatility was 0%.

For pro forma purposes, the estimated fair value of the Company's stock-
based awards to employees is amortized ratably over the award's vesting
period. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by FAS 123, net
loss and net loss per share would have increased to the pro forma amounts
indicated in the table below (in thousands except per share amounts):

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

Net loss attributable to common
stockholders:
As reported.............................. $(12,093) $(57,496) $(112,826)
======== ======== =========
Pro forma................................ $(12,667) $(69,940) $(115,728)
======== ======== =========
Net loss per share (basic and diluted):
As reported.............................. $ (0.92) $ (3.32) $ (3.04)
======== ======== =========
Pro forma................................ $ (0.97) $ (4.04) $ (3.12)
======== ======== =========

The weighted-average fair value of options granted during 1998, 1999 and
2000 was $4.42, $7.89 and $3.79, respectively. The weighted average fair value
of employee stock purchase plan rights granted in 2000 was $.56.

Deferred Stock Compensation

The Company recorded deferred stock compensation of approximately $3.6
million and $23.2 million in 1998 and 1999, respectively, representing the
difference between the exercise price and the deemed fair value, for financial
reporting purposes, of the Company's common stock on the grant date for
certain of the Company's

42

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

stock options granted to officers and employees. In the absence of a public
market for the Company's common stock, the deemed fair value was determined by
the Company's board of directors and was based on the price per share of sales
of equity securities to third parties. In 2000, the Company recorded deferred
stock compensation of $1.2 million related to the acquisition of Infinity
Logistics Corporation and Automated Logistics Corp. Approximately $0.9 million
of this amount related to an agreement with a stockholder of Infinity
Logistics Corporation and Automated Logistics Corp. to remain an employee of
the Company for a two-year period. The remainder related to stock options that
were assumed by the Company. The amounts related to stock options are being
amortized by charges to operations over the vesting periods of the individual
stock options using the graded vesting method. The amount related to the
agreement with the stockholder of Infinity Logistics Corporation and Automated
Logistics Corp. is being amortized on a straight-line basis over the two-year
vesting period. Amortization expense amounted to approximately $0.9 million,
$10.6 million and $8.0 million in 1998, 1999 and 2000, respectively.

In August 1999, the Company granted 187,500 shares of common stock to two
Company executives. On the date of grant, the Company recorded approximately
$1.8 million of compensation expense.

During 2000, the Company reversed approximately $3.9 million of deferred
stock compensation related to unvested stock options that were forfeited upon
the employee's termination of employment.

In September 2000, the Company repurchased unvested shares as part of the
severance arrangement from two terminated employees at a price exceeding the
fair value of the stock at the date of repurchase. The Company recorded
expense of $0.6 million in connection with the repurchase, which is included
in restructuring costs.

In October 2000, the Company allowed four officers to rescind their
exercise of stock options with respect to the unvested portion of the shares
exercised. A total of 1,304,687 shares were returned to the Company in
exchange for the cancellation of promissory notes totaling $1.1 million. The
Company granted to two of the officers replacement options for a total of
1,035,156 shares at an exercise price of $0.75 per share, the fair market
value on the date of the grant. The exercise price of $0.75 was in excess of
the exercise price for the options that were rescinded. In connection with the
rescission, the Company recognized compensation expense of $121,000.

Stock Subject to Rescission

Shares issued under the Company's 1996 Employee Plan, 1996 Director Plan
and 1999 Stock Plan (the "Plans") prior to October 14, 1999 may not have
qualified for exemption from registration or qualification under federal and
state securities laws and therefore may be subject to rescission.

On February 2, 2000, the Company filed a rescission offer for 5,682,341
shares of common stock pursuant to a registration statement filed under the
Securities Act of 1933, as amended, covering shares of common stock issued
under the Plans. The Company currently intends to file a request to withdraw
the registration statement. Because the Act does not provide that a rescission
offer will terminate a purchaser's right to rescind a sale of stock and a
significant portion of the shares have been resold for a price in excess of
the original purchase price paid by the optionees, the Company does not intend
to extend the rescission offer to the optionees. Management believes that the
Company does not have a contingent liability resulting from the issuance of
stock to these optionees that would materially and adversely impact the
results of operations or financial position of the Company.

Shares subject to rescission have been included in stockholders' equity in
the accompanying balance sheets.

43

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

Stock Subject to Repurchase

As of December 31, 1999 and 2000, the Company had 3,358,570 and 425,882
shares of common stock outstanding, respectively, that were subject to
repurchase. All of the shares subject to repurchase at December 31, 1999 and
193,262 shares at December 31, 2000 are the result of the exercise of unvested
stock options by employees in exchange for notes and cash. These shares vest
over the four-year vesting period of the underlying exercised stock options.
At December 31, 2000, the remaining 232,620 shares subject to repurchase
relate to the earn-out agreement entered into in connection with the
acquisition of Infinity Logistics Corporation and Automated Logistics Corp.
The right to repurchase these shares is at the sole discretion of the Company.

Notes Receivable from Stockholders

In 1998 and 1999, the Company received $0.7 million and $3.1 million,
respectively, of full recourse notes receivable from employees that bear
interest at 6% per annum in consideration for the exercise of stock options.
Interest on the notes is payable annually on the anniversary date of the note
and principle is due on the earlier of the fifth anniversary of the note or 90
days after termination of employment. In 1999 and 2000, the Company received
payments on the notes of $168,000 and $247,000, respectively. In 1999 and
2000, the Company canceled notes totaling $27,000 and $2.7 million,
respectively, in connection with the repurchase of shares or rescission of
option exercises upon termination of certain note holders.

Shares Reserved

As of December 31, 2000, the common shares reserved for future issuance
were as follows (in thousands):

Stock options........................................................ 7,032
Employee stock purchase plan......................................... 698
Warrants............................................................. 48
-----
Total shares reserved.............................................. 7,778
=====

8. Employee Benefit Plan

Effective April 1, 1996, the Company established a 401(k) plan, the E-Stamp
Corporation Benefit Plan (the "Plan"). The Plan provides for a Company match
of employee contributions equal to 50% of employee contributions up to 4% of
their compensation. Employees are eligible to participate in the Plan at the
beginning of the month following the first day of employment. The terms of the
Plan are subject to change as determined by management. The Company made
contributions in 1998, 1999 and 2000 of approximately $59,000, $101,000 and
$218,000, respectively.

9. Income Taxes

Due to operating losses, no income tax provision has been recorded for
1998, 1999 and 2000.

44

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

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

December 31,
------------------
1999 2000
-------- --------
(in thousands)

Net operating loss carryforwards............................ $ 15,100 $ 51,400
Research and development credit carryforwards............... 1,500 2,100
Capitalized research and development........................ 9,300 15,200
Capitalized start-up costs.................................. 1,500 2,200
Other....................................................... 6,500 4,100
-------- --------
Total deferred tax assets................................... 33,900 75,000
Valuation allowance......................................... (33,900) (75,000)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========

FAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes the Company's historical operating performance and
the reported cumulative net losses in prior years, the Company has provided a
full valuation allowance against its net deferred tax assets.

The valuation allowance increased by $23.7 million during the year ended
December 31, 1999.

As of December 31, 2000, the Company 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 through 2020, if not utilized. The Company also had
federal and state research and development tax credit carryforwards of
approximately $1.5 million and $0.9 million, respectively. The federal and
state tax credit carryforwards will expire at various dates beginning in 2011
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.

10. Commitments

The Company entered into an operating lease agreement on February 25, 2000
for office space in Mountain View, California. The term of the lease is seven
years and there are no renewal terms. The rental commitments relating to this
lease for the years 2001, 2002, 2003, 2004, 2005 and thereafter are $3.6
million, $3.7 million, $3.8 million, $3.9 million, $4.0 million and $4.8
million, respectively. Prior to entering into this lease agreement, the
Company had various leases and subleases for facilities in California and
Texas, all of which had expired or had been terminated as of December 31,
2000. Rental expenses under all operating leases were $554,000, $853,000 and
$4,247,000 for 1998, 1999 and 2000, respectively.

Assets capitalized under capital leases totaled approximately $94,000 and
$80,000 at December 31, 1999 and 2000, respectively and are included in
computers and furniture and fixtures. Accumulated amortization related to
assets under capital leases totaled $74,000 and $72,000 at December 31, 1999
and 2000, respectively.

At December 31, 2000, aggregate noncancelable advertising commitments
related to the Internet postage business total approximately $2.5 million.
This amount has been accrued and included in restructuring costs.

45

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

11. Net Loss Per Share

Net loss per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which requires disclosure of basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options, shares subject to
repurchase, warrants and convertible securities. The Company's potentially
dilutive securities were antidilutive and therefore were not included in the
computation of weighted-average shares used in computing diluted net loss per
share. Therefore, the Company's basic and diluted net loss are the same.

The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):

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

Basic and diluted:
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)
======== ======== =========
Weighted-average shares of common stock
outstanding.................................. 14,044 20,240 39,251
Less: weighted-average shares subject to
repurchase................................... (969) (2,927) (2,107)
-------- -------- ---------
Shares used in computing basic and diluted net
loss per share............................... 13,075 17,313 37,144
======== ======== =========
Net loss per share, basic and diluted......... $ (0.92) $ (3.32) $ (3.04)
======== ======== =========

The Company has excluded all redeemable convertible preferred stock,
outstanding stock options, warrants and shares subject to repurchase from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of shares excluded
from the calculations of diluted net loss per share were 7,711,000, 5,667,000
and 3,683,000 for the years ended December 31, 1998, 1999 and 2000,
respectively. Such securities, had they been dilutive, would have been
included in the computations of diluted net loss per share using the treasury
stock method.

12. Contingencies

Pitney Bowes Litigation

On June 10, 1999, Pitney Bowes filed suit against the Company in the U.S.
District Court for the District of Delaware alleging infringement of Pitney
Bowes patents. The suit alleges that the Company is 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,
the Company filed its answer to Pitney Bowes' complaint in which the Company
denies all allegations of patent infringement and asserts 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, the Company also brought various counterclaims against Pitney Bowes
claiming Pitney Bowes' violation of Section 2 of the Sherman Act and
intentional and tortious interference with E-Stamp's business relations based,
in part, upon the Company's 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 E-Stamp. The Company's suit seeks

46

E-STAMP CORPORATION

NOTES TO FINANCIAL STATEMENTS--(Continued)

compensatory and treble damages, injunctive relief and recovery of attorney's
fees. On September 21, 1999, Pitney Bowes filed a motion to strike or dismiss
certain of E-Stamp's 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
Bowers' 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
qBowes. On July 28, 2000, the U.S. District Court for the District of Delaware
granted Pitney Bowes' motion to amend. The Company is continuing to
investigate the claims against it as well as infringement by Pitney Bowes of
its patents, and may assert additional defenses or pursue additional
counterclaims or independent claims against Pitney Bowes in the future.

Pendency of the litigation can be expected to result in significant
expenses to E-Stamp and the diversion of management time and other resources.
Management believes that the Company will not suffer a material adverse impact
on its results of operations or its financial position as a result of this
litigation.

13. Segment Reporting

The Company operates in a single reportable segment. For the year 2000, the
Company's product lines included its transportation management and warehouse
management products and its Internet postage products. Prior to 2000, the
Company had only the Internet postage product line. For the year ended
December 31, 2000, the transportation management and warehouse management
product lines generated revenues of $1.2 million and the Internet postage
product line generated revenues of $4.1 million. The Company's chief operating
decision maker does not review any information other than revenues on a
product line or segment basis.

All of the Company's assets are located in the United States. The Company
had no significant revenues from outside the United States in any period
presented.

14. Subsequent Events (unaudited)

On February 22, 2001, the Company announced that it would implement a
reduction in force and eliminate 45 employees and contractors from its
workforce. The Company expects to record a corporate restructuring charge for
the quarter ending March 31, 2001 in connection with this reduction in force.

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 vigoriously defend
this action.

On November 9, 2000, the Company received a notice from The Nasdaq Stock
Market that its 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, the Company attended
a hearing before The Nasdaq Qualifications Hearing Panel to determine if its
common stock should continue to be listed on the The Nasdaq National Market,
and the Company is awaiting a determination by The Nasdaq Stock Market of its
listing status on the Nasdaq National Market. If the Company's common stock is
delisted from The Nasdaq National Market, the liquidity and trading price of
the Company's common stock could be negatively impacted.

47

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

Certain information required by Part III is omitted from this report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end
of the fiscal year covered by this report, and certain information included
therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY

Certain information regarding the directors and officers of the Company is
contained herein under Item 1, "Executive Officers and Directors of the
Company."

Information regarding directors appearing under the caption "Election of
Directors -- Directors and Nominees for Director" in the Proxy Statement is
hereby incorporated by reference.

Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is hereby incorporated herein by reference
from the section entitled "Election of Directors -- Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is set forth under the caption,
"Executive Compensation" in our Proxy Statement, which information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is set forth under the caption
"Security Ownership" in our Proxy Statement, which information is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Related
Party Transactions" in our Proxy Statement, which information is incorporated
herein by reference.

48

PART IV

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

(a) 1. Financial Statements

Reference is made to page 24 for a list of all financial statements
and schedules filed as a part of this report.

2. Financial Statement Schedules

None.

3. Exhibits

The exhibits listed under Item 14(c) hereof are filed as part of this
Annual Report on Form 10-K.

(b) Reports on Form 8-K.

On December 6, 2000, the Company filed a current report on Form 8-K
regarding the phase out of its Internet postage business.

(c) Exhibits

The following exhibits are filed with this report:

Exhibit
Number Exhibit Title
------- -------------

3.1* Certificate of Incorporation of Registrant.

3.2* Bylaws of Registrant.

3.3* Form of Amended and Restated Certificate of Incorporation of
Registrant.

3.4* Form of Amended and Restated Bylaws of Registrant.

3.5* Certificates of Designation of Registrant relating to Series A
Preferred Stock.

3.6* Certificates of Designation of Registrant relating to Series B
Preferred Stock.

3.7* Certificates of Designation of Registrant relating to Series C
Preferred Stock.

3.8* Amendment to Certificate of Incorporation of the Registrant.

4.1* Specimen Common Stock Certificate.

10.1* Form of Indemnification Agreement between the Registrant and each of
its directors and officers.

10.2* 1999 Stock Plan and form of agreements thereunder.

10.3* 1999 Employee Stock Purchase Plan and form of agreements thereunder.

10.4* 1999 Director Option Plan and form of agreements thereunder.

10.5* 1996 Stock Option and Restricted Stock Plan.

10.6* 1996 Non-Employee Director Stock Option Plan.

10.7* Second Amended and Restated Investors Rights Agreement.

10.8* Employment Agreement, dated March 29, 1996, between Registrant and
Nicole Ward (Eagan).

10.9* Employment Agreement, dated May 13, 1996, between Registrant and
Martin Pagel.

10.10* Employment Agreement, dated July 27, 1996, between Registrant and
Thomas Reinemer.

10.11* Promissory Note, dated May 30, 1999, between Registrant and Robert H.
Ewald.

10.12* Crypto iButton Service Provider Agreement dated August 21, 1998,
between Registrant and Dallas Semiconductor Corporation.

49

Exhibit
Number Exhibit Title
------- -------------

10.13+* Premium Partner Website Marketing Agreement dated July 1, 1999,
between Registrant and Microsoft Corporation.

10.14+* America Online Strategic Marketing Agreement dated November 13,
1998, between Registrant and America Online.

10.15+* Turnkey/Inventory Agreement dated June 1, 1999, between Registrant
and Modus Media International.

10.16+* Agreement for Services dated June 27, 1997 between Registrant and
Pilot Network Services, Inc.

10.17* Sublease Agreement dated February 2, 1999 between the Registrant and
Electronics for Imaging, Inc.

10.18+* Advertising and Promotion Agreement dated May 14, 1999 between
Registrant and Yahoo!, Inc.

10.19+* Letter Agreement dated August 2, 1999 between Registrant and At Home
Corporation.

10.20+* Platinum Premier Partner Package Agreement dated June 25, 1999
between Registrant, EarthLink Network, Inc. and EarthLink
Operations, Inc.

10.21+* Services Agreement dated September 24, 1999 between Registrant and
Intuit Inc.

10.22++** Cobranding and Promotion Agreement dated December 10, 1999 between
Registrant and eBay Inc.

10.23** Promissory Note dated December 23, 1999, between Registrant and
Marcelo Gumucio.

10.24** Promissory Note dated January 14, 2000, between Registrant and
Robert H. Ewald.

10.25** Stock Pledge Agreement dated December 22, 1999 between Registrant
and Marcelo Gumucio.

10.26** Stock Pledge dated January 14, 2000 between Registrant and Robert H.
Ewald.

10.27*** Office lease between EOP-Shoreline Technology Park, LLC and E-Stamp
Corporation.

10.28**** Promissory Note dated June 7, 2000 between the Company and Roderick
Witmond.

10.29**** Letter dated October 23, 2000 between the Company and Robert Ewald.

10.30**** Letter dated October 23, 2000 between the Company and Bruce White.

10.31**** Letter dated October 23, 2000 between the Company and Ed Malysz.

10.32 Change of Control Severance Agreement between the Company and Robert
H. Ewald

10.33 Change of Control Severance Agreement between the Company and Paul
Goldman

10.34 Change of Control Severance Agreement between the Company and Laurie
Lindsey

10.35 Change of Control Severance Agreement between the Company and Edward
Malysz

10.36 Change of Control Severance Agreement between the Company and Daniel
Walsh

10.37 Change of Control Severance Agreement between the Company and
Roderick Witmond

10.38 Value Added Reseller Agreement between the Company (through
Automated Logistics Corp, a.k.a. Evcor) and Aristo Computers, Inc.
(now Kewill Electronic Commerce).

10.39 Tracer VAR Agreement between Tracer Research Inc. (now Kewill
Electronic Commerce) and the Company (a.k.a. Evcor Automated
Logistics Corp.)

10.40 Master Systems and Program Development Agreement amount Infonet
Services Corporation, the Company (through Infinity Logistics
Corporation) and Questco, Incorporated

23.1 Consent of Ernst & Young LLP, Independent Auditors.

24.1 Power of Attorney (Included on Page 52).

- --------

50

* Incorporated by reference from Registration Statement No. 333-85359, as
amended, originally filed with the Securities and Exchange Commission on
August 17, 1999.

** Incorporated by reference from Registration Statement No. 333-96013,
originally filed with the Securities and Exchange Commission on February
2, 2000.

*** Incorporated by reference from Form 10-Q, filed August 14, 2000.

**** Incorporated by reference from Form 10-Q, filed November 14, 2000.

+ The registrant obtained confidential treatment of certain portions of this
exhibit from the Commission. The omitted portions have been filed
separately with the Commission.

++ The registrant is seeking confidential treatment of certain portions of
this exhibit from the Commission. The omitted portions have been filed
separately with the Commission.

(d) Financial Statement Schedules.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.

51

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, in
San Mateo, California, on the 28th day of March, 2001.
E-STAMP CORPORATION

By: /s/ Robert H. Ewald
-----------------------------------
Robert H. Ewald
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert H. Ewald and Edward Malysz and
each of them singly, as true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign this Annual Report on Form 10-K filed
herewith and any or all amendments to said report, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents the full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this report has been signed by the following persons in the capacities and on
the dates indicated below.

Signature Title Date
--------- ----- ----

/s/ Robert H. Ewald President, Chief Executive March 28, 2001
____________________________________ Officer and Director
Robert H. Ewald (Principal Executive
Officer)

/s/ Edward F. Malysz Vice President and Acting March 28, 2001
____________________________________ Chief Financial Officer
Edward F. Malysz (Principal Financial and
Accounting Officer),
General Counsel and
Secretary

/s/ Marcelo A. Gumucio Chairman of the Board March 28, 2001
____________________________________
Marcelo A. Gumucio

/s/ John V. Balen Director March 28, 2001
____________________________________
John V. Balen

52

Signature Title Date
--------- ----- ----

/s/ Thomas L. Rosch Director March 28, 2001
____________________________________
Thomas L. Rosch

Director March 28, 2001
____________________________________
Peter Boit

/s/ Adam Wagner Director March 28, 2001
____________________________________
Adam Wagner

Director March 28, 2001
____________________________________
Rebecca Saeger

/s/ Robert J. Cresci Director March 28, 2001
____________________________________
Robert J. Cresci

53