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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2007

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: 000-26223



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TUMBLEWEED COMMUNICATIONS CORP.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3336053                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|700 Saginaw Drive Redwood City, CA       |  | 94063     
|(Address of principal executive offices) |  | (Zip Code)

(650) 216-2000

(Registrants telephone number, including area code)



---

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated
filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

The number of shares of common stock outstanding as of April 30, 2007 was 51,101,727.



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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, which are subject to the safe harbor created by those sections. The forward-looking statements are based on our current expectations and projections about future events.
Discussions containing such forward-looking statements may be found in Managements Discussion and Analysis of Financial Condition and Results of Operations. In some cases, forward-looking statements can be identified by terminology
such as may, will, should, could, predicts, projects, potential, continue, expects, anticipates, future,
intends, plans, believes, estimates, or the negative of these terms and other comparable terminology, including, but not limited to, the following:



| |  |  | any projections of revenues, earnings, cash balances or cash flow, synergies, or other financial items;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | any revenue expected to be realized from backlog;
| | - |  | -------------------------------------------------



| |  |  | any statements of the plans, strategies and objectives of management for future operations;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | any statements regarding future economic conditions or performance;
| | - |  | -------------------------------------------------------------------



| |  |  | any statements regarding implementing our business strategy;
| | - |  | ------------------------------------------------------------



| |  |  | any statements regarding attracting and retaining customers;
| | - |  | ------------------------------------------------------------



| |  |  | any statements regarding obtaining and expanding market acceptance of the products and services we offer;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | any statements regarding competition in, or size of, our market; and
| | - |  | --------------------------------------------------------------------



| |  |  | any statements of assumptions underlying any of the foregoing.
| | - |  | --------------------------------------------------------------

These forward-looking statements are only predictions, not historical facts. These forward-looking statements involve certain risks and uncertainties, as well as assumptions. Actual results, levels of activity,
performance, achievements and events could differ materially from those stated, anticipated or implied by such forward-looking statements. The factors that could contribute to such differences include those discussed under the caption Risks
Factors in Part II, Item 1A contained herein, as well as those discussed in our Form 10-K and other filings with the Securities and Exchange Commission. These risks should be considered carefully, among other things, in evaluating our
prospects and future financial performance. The occurrence of the events described in the risk factors could harm our business, results of operations and financial condition. These forward-looking statements are made as of the date of this Quarterly
Report on Form 10-Q. We disclaim any obligation to update or alter these forward-looking statements, whether as a result of new information, future events or otherwise, or any obligation to explain the reasons why actual results may differ.



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TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

I
NDEX



|               |  |                                                                                                              |  |     
|-------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|               |  |                                                                                                              |  | Page
|               |  | Part I                                                                                                       |  |     
|               |  |                                                                                                             
|Item 1         |  | Financial Statements (unaudited)                                                                             |  | 4   
|               |  | Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                             |  | 4   
|               |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and March 31, 2006 |  | 5   
|               |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and March 31, 2006 |  | 6   
|               |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 7   
|Item 2         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 12  
|Item 3         |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 20  
|Item 4         |  | Controls and Procedures                                                                                      |  | 20  
|               |  |                                                                                                             
|               |  | Part II                                                                                                      |  |     
|               |  |                                                                                                             
|Item 1         |  | Legal Proceedings                                                                                            |  | 21  
|Item 1A        |  | Risk Factors                                                                                                 |  | 23  
|Item 2         |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 29  
|Item 3         |  | Defaults Upon Senior Securities                                                                              |  | 29  
|Item 4         |  | Submission of Matters to a vote of Security Holders                                                          |  | 29  
|Item 5         |  | Other Information                                                                                            |  | 29  
|Item 6         |  | Exhibits                                                                                                     |  | 30  
|Signatures     |  | 31                                                                                                          
|Certifications |  |                                                                                                             

TRADEMARKS

The following are registered trademarks of Tumbleweed Communications Corp. or its subsidiaries in the United States and/or other countries: Tumbleweed®, Tumbleweed Communications®, the Arrows logo, MailGate®, Secure Envelope®, Secure Inbox®, Tumbleweed Email Firewall®, Tumbleweed IME Integrated Messaging Exchange®, Messaging Management System (MMS)®, Valicert®, and Corvigo®. The following are other trademarks and service marks of Tumbleweed Communications Corp. or its subsidiaries in the United States and/or other countries: MailGate Appliance, MailGate Desktop Messenger,
MailGate Edge, MailGate Email Firewall, MailGate Secure Messenger, Dark Traffic, Dynamic Anti-Spam Service (DAS), Edge Defense, Intent-Based Filtering (IBF), Spam Analysis Engine,
SecureTransport, SecureTransport Client, SecureTransport Edge, SecureTransport Server, Valicert Validation Authority, Tumbleweed Validation Authority, Validation Authority, Validation Authority Server,
Server Validator, Desktop Validator, Validator Toolkit, Tumbleweed FTP Analyzer, Tumbleweed Secure Guardian, Tumbleweed Secure Policy Gateway, Tumbleweed Secure Staging Server, Tumbleweed Staging
Server, Tumbleweed Secure Mail, Tumbleweed Secure Redirect, Tumbleweed Secure Public Network, Tumbleweed SPN, Tumbleweed Secure Archive, Tumbleweed Secure Web, Tumbleweed Secure CRM, Tumbleweed Secure
Messenger, Tumbleweed Secure Statements, Tumbleweed My Copy, Tumbleweed L2i, Tumbleweed IME Developer, Tumbleweed IME Personalize, Tumbleweed IME Alert, WorldSecure, and WorldSecure/Mail. All
other trademarks and service marks are the property of their respective owners.



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PART IFINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS

TUMBLEWEED COMMUNICATIONS CORP. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)



|                                                                                                                    |  |                |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                    |  | March 31, 2007 |          |   | December 31, 2006 |  
|Assets                                                                                                              |  |                |          |   |                   |   |          |  
|Current Assets:                                                                                                     |  |                |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                           |  | $              | 31,893   |   |                   | $ | 30,511   |  
|Accounts receivable, net of allowance for doubtful accounts of $375 at March 31, 2007 and $431 at December 31, 2006 |  |                | 8,817    |   |                   |   | 12,506   |  
|Other current assets                                                                                                |  |                | 1,939    |   |                   |   | 1,938    |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total current assets                                                                                                |  |                | 42,649   |   |                   |   | 44,955   |  
|Goodwill                                                                                                            |  |                | 48,074   |   |                   |   | 48,074   |  
|Intangible assets, net                                                                                              |  |                | 1,054    |   |                   |   | 1,470    |  
|Property and equipment, net                                                                                         |  |                | 2,112    |   |                   |   | 1,820    |  
|Other assets                                                                                                        |  |                | 584      |   |                   |   | 612      |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total assets                                                                                                        |  | $              | 94,473   |   |                   | $ | 96,931   |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Liabilities and Stockholders Equity                                                                                |  |                |          |   |                   |   |          |  
|Current liabilities:                                                                                                |  |                |          |   |                   |   |          |  
|Accounts payable                                                                                                    |  | $              | 1,231    |   |                   | $ | 1,808    |  
|Accrued liabilities                                                                                                 |  |                | 6,152    |   |                   |   | 7,522    |  
|Accrued merger-related and other costs                                                                              |  |                | 26       |   |                   |   | 97       |  
|Deferred revenue                                                                                                    |  |                | 19,548   |   |                   |   | 20,003   |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                           |  |                | 26,957   |   |                   |   | 29,430   |  
|Deferred revenue, excluding current portion                                                                         |  |                | 4,334    |   |                   |   | 4,728    |  
|Other long-term liabilities                                                                                         |  |                | 74       |   |                   |   | 63       |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total long-term liabilities                                                                                         |  |                | 4,408    |   |                   |   | 4,791    |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total liabilities                                                                                                   |  |                | 31,365   |   |                   |   | 34,221   |  
|Stockholders equity:                                                                                               |  |                |          |   |                   |   |          |  
|Common stock                                                                                                        |  |                | 52       |   |                   |   | 51       |  
|Additional paid-in capital                                                                                          |  |                | 361,630  |   |                   |   | 359,238  |  
|Treasury stock                                                                                                      |  |                | (796     | ) |                   |   | (796     | )
|Accumulated other comprehensive income                                                                              |  |                | 46       |   |                   |   | 29       |  
|Accumulated deficit                                                                                                 |  |                | (297,824 | ) |                   |   | (295,812 | )
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total stockholders equity                                                                                          |  |                | 63,108   |   |                   |   | 62,710   |  
|                                                                                                                    |  |                |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                          |  | $              | 94,473   |   |                   | $ | 96,931   |  
|                                                                                                                    |  |                |          |   |                   |   |          |  

See accompanying Notes to Condensed Consolidated Financial Statements



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Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



|                                          |  |                              |        |   |      |   |        |  
|----------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                          |  | Three Months Ended March 31, |       
|                                          |  | 2007                         |        |   | 2006 |  
|Revenue:                                  |  |                              |        |   |      |   |        |  
|Product revenue                           |  | $                            | 5,897  |   |      | $ | 7,425  |  
|Service revenue                           |  |                              | 9,022  |   |      |   | 7,255  |  
|Intellectual property revenue             |  |                              | 96     |   |      |   | 375    |  
|                                          |  |                              |        |   |      |   |        |  
|Total revenue                             |  |                              | 15,015 |   |      |   | 15,055 |  
|Cost of revenue:                          |  |                              |        |   |      |   |        |  
|Cost of product revenue                   |  |                              | 1,756  |   |      |   | 723    |  
|Provision for excess inventory            |  |                              | 164    |   |      |   |       |  
|Cost of service revenue                   |  |                              | 1,899  |   |      |   | 1,539  |  
|Amortization of intangible assets         |  |                              | 234    |   |      |   | 510    |  
|                                          |  |                              |        |   |      |   |        |  
|Total cost of revenue                     |  |                              | 4,053  |   |      |   | 2,772  |  
|Gross profit                              |  |                              | 10,962 |   |      |   | 12,283 |  
|Operating expenses:                       |  |                              |        |   |      |   |        |  
|Research and development                  |  |                              | 3,896  |   |      |   | 3,420  |  
|Sales and marketing                       |  |                              | 6,617  |   |      |   | 6,453  |  
|General and administrative                |  |                              | 2,487  |   |      |   | 3,356  |  
|Amortization of intangible assets         |  |                              | 183    |   |      |   | 321    |  
|                                          |  |                              |        |   |      |   |        |  
|Total operating expenses                  |  |                              | 13,183 |   |      |   | 13,550 |  
|                                          |  |                              |        |   |      |   |        |  
|Operating loss                            |  |                              | (2,221 | ) |      |   | (1,267 | )
|Other income, net                         |  |                              | 339    |   |      |   | 264    |  
|                                          |  |                              |        |   |      |   |        |  
|Net loss before income taxes              |  |                              | (1,882 | ) |      |   | (1,003 | )
|Income taxes                              |  |                              | 13     |   |      |   | 35     |  
|                                          |  |                              |        |   |      |   |        |  
|Net loss                                  |  | $                            | (1,895 | ) |      | $ | (1,038 | )
|                                          |  |                              |        |   |      |   |        |  
|Net loss per sharebasic and diluted      |  | $                            | (0.04  | ) |      | $ | (0.02  | )
|                                          |  |                              |        |   |      |   |        |  
|Weighted average sharesbasic and diluted |  |                              | 50,841 |   |      |   | 49,662 |  

See accompanying Notes to Condensed Consolidated Financial Statements



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Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                |  | Three months ended March 31, |       
|                                                                                |  | 2007                         |        |   | 2006 |  
|Cash flows from operating activities:                                           |  |                              |        |   |      |   |        |  
|Net loss                                                                        |  | $                            | (1,895 | ) |      | $ | (1,038 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Stock-based compensation expense                                                |  |                              | 1,110  |   |      |   | 1,698  |  
|Depreciation and amortization expenses                                          |  |                              | 754    |   |      |   | 1,105  |  
|Bad debt expense (credit)                                                       |  |                              | (47    | ) |      |   | 80     |  
|Loss on disposal of property and equipment                                      |  |                              | 40     |   |      |   | 14     |  
|Changes in operating assets and liabilities:                                    |  |                              |        |   |      |   |        |  
|Accounts receivable                                                             |  |                              | 3,736  |   |      |   | (3,406 | )
|Other current assets and other assets                                           |  |                              | 27     |   |      |   | (248   | )
|Accounts payable, accrued liabilities, and other long-term liabilities          |  |                              | (2,053 | ) |      |   | 2,162  |  
|Accrued merger-related and other costs                                          |  |                              | (71    | ) |      |   | (33    | )
|Deferred revenue                                                                |  |                              | (849   | ) |      |   | 198    |  
|                                                                                |  |                              |        |   |      |   |        |  
|Net cash provided by operating activities                                       |  |                              | 752    |   |      |   | 532    |  
|                                                                                |  |                              |        |   |      |   |        |  
|Cash flows from investing activitiespurchase of property and equipment         |  |                              | (670   | ) |      |   | (440   | )
|                                                                                |  |                              |        |   |      |   |        |  
|Cash flows from financing activitiesproceeds from issuance of common stock     |  |                              | 1,283  |   |      |   | 372    |  
|                                                                                |  |                              |        |   |      |   |        |  
|Effect of exchange rate on cash and cash equivalents                            |  |                              | 17     |   |      |   | 9      |  
|                                                                                |  |                              |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                       |  |                              | 1,382  |   |      |   | 473    |  
|Cash and cash equivalents, beginning of period                                  |  |                              | 30,511 |   |      |   | 26,952 |  
|                                                                                |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                        |  | $                            | 31,893 |   |      | $ | 27,425 |  
|                                                                                |  |                              |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                               |  |                              |        |   |      |   |        |  
|Cash paid during the period for taxes                                           |  | $                            | 2      |   |      | $ | 5      |  
|                                                                                |  |                              |        |   |      |   |        |  

See accompanying Notes to Condensed Consolidated Financial Statements



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Notes to Condensed Consolidated Financial Statements

(1) Organization

The condensed consolidated financial statements included herein have been prepared by Tumbleweed Communications Corp. (Tumbleweed) without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with Tumbleweeds audited financial statements and notes thereto included in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the SEC on March 14, 2007.

The unaudited
condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to state fairly the financial position of Tumbleweed and its subsidiaries as of March 31, 2007 and
December 31, 2006, respectively, the results of operations for the three months ended March 31, 2007 and 2006, respectively, and cash flows for the three months ended March 31, 2007 and 2006, respectively. The results for the three
months ended March 31, 2007 are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2007.

The accompanying condensed consolidated financial statements include the accounts of Tumbleweed and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

(2) Stock-Based Compensation

Tumbleweeds
stock-based compensation program is a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. The stock-based compensation program includes awards of stock options and
restricted stock.

On June 30, 2006, Tumbleweed exchanged 959,531 vested stock options held by 18 employees with exercise prices
ranging from $3.86 to $118.44 for 422,472 vested stock options to those same employees at an exercise price of $2.85, which was Tumbleweeds common stock price on the date of the exchange. Neither Tumbleweeds officers nor members of its
Board of Directors participated in this exchange program. Tumbleweed did not recognize any stock-based compensation expense as a result of the exchange since the fair values of the new awards were less than the fair values of the original awards
immediately prior to the exchange.

Tumbleweed estimates the fair value of stock options granted using the Black-Scholes-Merton
option-pricing model that uses the assumptions noted in the following table. The expected life of the options is based on the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting
schedules and Tumbleweeds historical exercise patterns. Tumbleweeds expected volatility is based on the daily historical volatility of Tumbleweeds common stock, over the expected life of the option. The risk-free rate is based on
the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term to the expected life of the option. Where the expected term of Tumbleweeds stock-based awards does not correspond with the terms for
which interest rates are quoted, Tumbleweed performs a straight-line interpolation to determine the rate from the available term maturities. Tumbleweed has not historically paid dividends, thus the expected dividends are zero. Tumbleweed issues new
shares of common stock upon the exercise of stock options. The assumptions for the three months ended March 31, 2007 and March 31, 2006 are as follows:



|                                      |  |                              |      |   |      |   |      |  
|------------------------------------- |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                      |  | Three Months Ended March 31, |     
|                                      |  | 2007                         |      |   | 2006 |  
|Stock options:                        |  |                              |      |   |      |   |      |  
|Weighted average fair value of grants |  | $                            | 2.03 |   |      | $ | 1.80 |  
|Expected life (in years)              |  |                              | 4.5  |   |      |   | 4.5  |  
|Volatility                            |  |                              | 78   | % |      |   | 88   | %
|Risk-free interest rate               |  |                              | 4.66 | % |      |   | 4.55 | %
|Dividend yield                        |  |                              | 0    | % |      |   | 0    | %
|                                      |  |                              |      |   |      |   |      |  



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The cost of restricted stock awards is determined using the fair value of Tumbleweeds common stock
on the date of the grant, and compensation expense is recognized over the vesting period. Generally, restricted stock awards are subject to the employees continuing service to Tumbleweed. The weighted average grant date fair value of
restricted stock granted during the three months ended March 31, 2007 was $3.28.

Stock-based compensation expense is included in
Tumbleweeds condensed consolidated statement of operations as follows (in thousands):



|                                       |  |                             |       |      |   |      
|-------------------------------------- |  | --------------------------- | ----- | ---- | - | -----
|                                       |  | Three MonthsEnded March 31,
|                                       |  | 2007                        |       | 2006
|Cost of product revenue                |  | $                           |      |      | $ | 2    
|Cost of service revenue                |  |                             | 26    |      |   | 39   
|Research and development               |  |                             | 303   |      |   | 259  
|Sales and marketing                    |  |                             | 220   |      |   | 189  
|General and administrative             |  |                             | 561   |      |   | 1,209
|                                       |  |                             |       |      |   |      
|Total stock-based compensation expense |  | $                           | 1,110 |      | $ | 1,698
|                                       |  |                             |       |      |   |      

(3) Net Loss Per Share

Tumbleweed excludes potentially dilutive securities from its diluted net loss per share computation when their effect would be antidilutive to net loss per share amounts. The following potential common shares were
excluded from the net loss per share computation (in thousands):



|                                                                                                                                                                                                              |  |                              |  |      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | -----
|                                                                                                                                                                                                              |  | Three Months Ended March 31,
|                                                                                                                                                                                                              |  | 2007                         |  | 2006 
|Warrants and options for which the exercise price was less than the average fair market value of Tumbleweeds common stock during the
period but were excluded as inclusion would decrease net loss per share |  |                             |  |     
|Warrants and options excluded due to the exercise price exceeding the average fair market value of common stock during the
period                                                                             |  | 5,339                        |  | 7,585
|                                                                                                                                                                                                              |  |                              |  |      
|Total potential shares of common stock excluded from diluted net loss per share                                                                                                                               |  | 5,339                        |  | 7,585
|                                                                                                                                                                                                              |  |                              |  |      

(4) Concentrations of Credit Risk

Financial instruments, which potentially subject Tumbleweed to concentrations of credit risk, consist primarily of cash equivalents and accounts
receivable. Tumbleweeds cash equivalents generally consist of money market mutual funds with qualified financial institutions. To reduce credit risk with accounts receivable, Tumbleweed performs periodic evaluations of its customers
financial condition and, when necessary, records bad debt expense. No single customer comprised 10% or more of Tumbleweeds accounts receivable balance, net of allowance for doubtful accounts, at March 31, 2007. One customer comprised 27%
of Tumbleweeds accounts receivable balance, net of allowance for doubtful accounts, at December 31, 2006. One customer comprised 25% of Tumbleweeds revenue during the three months ended March 31, 2006.

(5) Intangible Assets and Goodwill

Intangible assets
consist of the fair value of core/developed technology, customer base and reseller agreements, maintenance agreements, and trademarks and trade names, all net of accumulated amortization, acquired during the acquisitions of Valicert, Inc.,
Tumbleweed Communications Limited (formerly Incubator, Limited), and Corvigo, Inc.

A summary of intangible assets as of March 31,
2007 follows (in thousands):



|                                      |  |                                |  |                       |       |                          |   |        |     |  |   |      
|------------------------------------- |  | ------------------------------ |  | --------------------- | ----- | ------------------------ | - | ------ | --- |  | - | -----
|                                      |  | Amortization period (in years) |  | Gross carrying amount |       | Accumulated amortization |   |        | Net
|Core/developed technology             |  | 3 to 4                         |  | $                     | 3,250 |                          | $ | (2,466 | )   |  | $ | 784  
|Customer base and reseller agreements |  | 3                              |  |                       | 2,300 |                          |   | (2,192 | )   |  |   | 108  
|Maintenance agreements                |  | 3 to 4                         |  |                       | 500   |                          |   | (380   | )   |  |   | 120  
|Trademarks and trade names            |  | 4                              |  |                       | 350   |                          |   | (308   | )   |  |   | 42   
|                                      |  |                                |  |                       |       |                          |   |        |     |  |   |      
|                                      |  |                                |  | $                     | 6,400 |                          | $ | (5,346 | )   |  | $ | 1,054
|                                      |  |                                |  |                       |       |                          |   |        |     |  |   |      

A summary of intangible assets as of December 31, 2006 is as follows (in thousands):



|                                      |  |                                |  |                       |       |                          |   |        |     |  |   |      
|------------------------------------- |  | ------------------------------ |  | --------------------- | ----- | ------------------------ | - | ------ | --- |  | - | -----
|                                      |  | Amortization period (in years) |  | Gross carrying amount |       | Accumulated amortization |   |        | Net
|Core/developed technology             |  | 3 to 4                         |  | $                     | 3,250 |                          | $ | (2,263 | )   |  | $ | 987  
|Customer base and reseller agreements |  | 3                              |  |                       | 2,300 |                          |   | (2,032 | )   |  |   | 268  
|Maintenance agreements                |  | 3 to 4                         |  |                       | 500   |                          |   | (349   | )   |  |   | 151  
|Trademarks and trade names            |  | 4                              |  |                       | 350   |                          |   | (286   | )   |  |   | 64   
|                                      |  |                                |  |                       |       |                          |   |        |     |  |   |      
|                                      |  |                                |  | $                     | 6,400 |                          | $ | (4,930 | )   |  | $ | 1,470
|                                      |  |                                |  |                       |       |                          |   |        |     |  |   |      



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##### Table of Contents

The estimated amortization of intangible assets for each of the fiscal years subsequent to March 31, 2007, is as
follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Year Ending December 31,     |  |  
|2007 (remaining nine months) |  |   | 822  
|2008                         |  |   | 232  
|                             |  |   |      
|                             |  | $ | 1,054
|                             |  |   |      

Goodwill represents the excess of the purchase price over the fair value of acquired net tangible
and identified intangible assets. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but instead, is tested for impairment
at least annually and more frequently if certain impairment conditions exist. Tumbleweed completed its annual assessment of goodwill in the three months ended June 30, 2006 and no impairment of goodwill was determined as a result of this
assessment. Any future impairment loss related to the goodwill recorded in connection with acquisitions will not be deductible by Tumbleweed for federal income tax purposes.

(6) Comprehensive Loss

Comprehensive loss includes Tumbleweeds net loss as well as foreign
currency translation adjustments. Comprehensive loss for the three months ending March 31, 2007 and 2006, respectively, is as follows (in thousands):



|                                                   |  |                              |        |   |      |   |        |  
|-------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                   |  | Three Months Ended March 31, |       
|                                                   |  | 2007                         |        |   | 2006 |  
|Net loss                                           |  | $                            | (1,895 | ) |      | $ | (1,038 | )
|Other comprehensive incometranslation adjustments |  |                              | 17     |   |      |   | 9      |  
|                                                   |  |                              |        |   |      |   |        |  
|Comprehensive loss                                 |  | $                            | (1,878 | ) |      | $ | (1,029 | )
|                                                   |  |                              |        |   |      |   |        |  

(7) Segment Information

As defined by SFAS 131, Disclosure About Segments of an Enterprise and Related Information, Tumbleweeds chief operating decision-maker is its Chief Executive Officer. This officer reviews financial
information presented on a consolidated basis accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. The consolidated financial information reviewed
is the information presented in the accompanying condensed consolidated statement of operations. Tumbleweed operates in a single reporting segment providing messaging security solutions that are developed and sold in similar ways to enterprise and
government customers of all sizes.

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



|                                |  |                              |        |      |   |       
|------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                |  | Three Months Ended March 31,
|                                |  | 2007                         |        | 2006
|North America                   |  | $                            | 13,075 |      | $ | 13,889
|Europe, Middle East, and Africa |  |                              | 1,426  |      |   | 780   
|Asia Pacific                    |  |                              | 478    |      |   | 288   
|Other                           |  |                              | 36     |      |   | 98    
|                                |  |                              |        |      |   |       
|Total                           |  | $                            | 15,015 |      | $ | 15,055
|                                |  |                              |        |      |   |       



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Tumbleweeds property and equipment located in the different geographic regions as of March 31,
2007 and December 31, 2006 are as follows (in thousands):



|                        |  |               |       |                  |   |      
|----------------------- |  | ------------- | ----- | ---------------- | - | -----
|                        |  | March 31,2007 |       | December 31,2006
|North America           |  | $             | 1,626 |                  | $ | 1,403
|Europe                  |  |               | 482   |                  |   | 410  
|Other                   |  |               | 4     |                  |   | 7    
|                        |  |               |       |                  |   |      
|Total long-lived assets |  | $             | 2,112 |                  | $ | 1,820
|                        |  |               |       |                  |   |      

(8) Contingencies

In December 2001, certain plaintiffs filed a class action lawsuit in the United States District Court for the Southern District of New York (the District Court) on behalf of purchasers of the common stock
of Valicert, alleging violations of federal securities laws. In re Valicert, Inc. Initial Public Offering Securities Litigation, No. 01-CV-10889 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation,
No. 21 MC 92 (SAS). The operative amended complaint is brought on purported behalf of all persons who purchased Valicert common stock from the date of its July 27, 2000 initial public offering (IPO) through December 6,
2000. It names as defendants Valicert, its former Chief Executive Officer, and its Chief Financial Officer (the Valicert Defendants), as well as an investment banking firm that served as an underwriter for the IPO. The complaint alleges
liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the IPO did not disclose that: (1) the underwriter agreed
to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriter; and (2) the underwriter arranged for certain customers to purchase additional shares in the aftermarket at predetermined
prices. The complaint also appears to allege that false or misleading analyst reports were issued. The complaint does not claim any specific amount of damages. Similar allegations have been made in lawsuits relating to more than 300 other initial
public offerings conducted in 1999 and 2000, all of which have been consolidated for pretrial purposes. In February 2003, the Court issued a ruling on all defendants motions to dismiss, denying Valicerts motion to dismiss the claims
under the Securities Act of 1933, but granting Valicerts motion to dismiss the claims under the Securities Exchange Act of 1934.

In
June 2003, Valicert accepted a settlement proposal presented to all issuer defendants in this case. Under the proposed settlement, the plaintiffs will dismiss and release all claims against the Valicert Defendants in exchange for a contingent
payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the consolidated cases, and the assignment or surrender of control to the plaintiffs of certain claims the issuer defendants may have against the
underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all of the cases. If the plaintiffs
fail to recover $1 billion and payment is required under the guaranty, Valicert would be responsible to pay its pro rata portion of the shortfall, up to the amount of the deductible retention under its insurance policy, which is $500,000. The timing
and amount of payments that Valicert could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment required by the insurers pursuant to the $1 billion guaranty. The proposed
settlement is subject to approval of the Court, which cannot be assured.

In April 2006, the District Court held a hearing on the proposed
settlement but has not yet issued a ruling on the issue.Subsequently, the Court of Appeals for the Second Circuit (the Court of Appeals) vacated the class certification of plaintiffs claims against the underwriters in
six cases designated as focus or test cases. Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006). Thereafter, the District Court ordered a stay of all proceedings in all of
the lawsuits pending the outcome of plaintiffs petition to the Court of Appeals for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Court of Appeals denied plaintiffs petition for rehearing,
but clarified that the plaintiffs may seek to certify a more limited class in the District Court.

Accordingly, the stay remains in place
and the plaintiffs and issuers have stated that they are prepared to discuss how the settlement might be amended or renegotiated to comply with the ruling of the Court of Appeals. Failure of the District Court to approve the settlement (or
an amended or renegotiated settlement) followed by an adverse outcome could harm our business and operating results. Moreover, the costs in defending this lawsuit could harm future operating results. The accompanying consolidated financial
statements do not include a reserve for any potential loss, as Tumbleweed does not consider a loss to be probable at this time.

In June
2003, Tumbleweed was served with a summons and first amended complaint, captioned Liu v. Credit Suisse First Boston, et alia, alleging the violation of federal and state securities laws, purportedly on behalf of persons who acquired our
common stock of (other than purchasers of our IPO) from August 6, 1999 to October 18, 2000. The case was transferred to the United States District Court for the Southern District of New York, where, in March 2005, the Court dismissed the
case with prejudice. In June 2005 plaintiffs filed an appeal of the dismissal with the United States Court of Appeals for the Second Circuit, which in May of 2006 affirmed the dismissal by the District Court. In September 2006 plaintiffs petitioned
the Supreme Court of the United States for a writ of certiorari, which was denied in December 2006.



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All costs incurred as a result of these legal proceedings and claims are charged to expense as incurred.
Tumbleweed indemnifies its customers from third party claims of intellectual property infringement relating to the use of its products. Historically, costs related to these guarantees have not been significant. Tumbleweed is unable to estimate the
potential impact of these guarantees on its future results of operations.

Tumbleweed is engaged in other legal actions arising in the
ordinary course of business. Although there can be no assurance as to the outcome of such litigation, Tumbleweed believes it has adequate legal defenses and it believes that the ultimate outcome of any of these actions will not have a material
effect on its consolidated financial positions or results of operations.

(9) Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement 109 (FIN 48).

FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in accordance with SFAS 109, Accounting for Income Taxes and requires a two-step approach to evaluate tax positions and determine if they should be recognized in the financial statements.
The two-step approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine if they are recognizable in the financial statements. The interpretation is effective for
fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007. The impact of FIN 48, did not have a material effect on our consolidated financial position, results of operations, or cash flows.

As of January 1, 2007, Tumbleweed did not have any federal, state, and foreign unrecognized tax benefits. Upon adoption of FIN 48, Tumbleweed
adopted an accounting policy to classify interest and penalties on unrecognized tax benefits as income tax expense. For the years prior to adoption of FIN 48, Tumbleweed did not have interest or penalties on unrecognized tax benefits and therefor,
had no established accounting policy. As of January 1, 2007, Tumbleweed had no interest or penalties accrued on unrecognized tax benefits. Tumbleweed files income tax returns in the U.S. federal jurisdiction, various states, and foreign
jurisdictions. Tumbleweed is subject to U.S. federal and state income tax examinations by tax Authorities for all periods since inception due to net operating losses. As of March 31, 2007, Tumbleweed did not have nor does not expect any material
changes to unrecognized tax benefits within the next twelve months.

In June 2006, the FASB ratified the Emerging Issues Task Force
(EITF) consensus on Issue 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (EITF 06-2). EITF 06-2 requires that
the costs associated with unrestricted sabbaticals and other similar benefit arrangements are recognized over the service period during which the employee earns the benefit. The provisions of EITF 06-2 are effective for fiscal years beginning after
December 15, 2006. The provisions of EITF 06-2 were applied by Tumbleweed through a cumulative effect adjustment to its accumulated deficit that resulted in increases of $117,000 each to its accumulated deficit and accrued liabilities balances,
respectively. The changes in accumulated deficit for the three months ended March 31, 2007 were as follows:



|                                |  |                |          |  
|------------------------------- |  | -------------- | -------- | -
|                                |  | (In thousands) |         
|Balance as of December 31, 2006 |  | $              | (295,812 | )
|Net loss                        |  |                | (1,895   | )
|Adoption effect of EITF 06-2    |  |                | (117     | )
|                                |  |                |          |  
|Balance as of March 31, 2007    |  | $              | (297,824 | )
|                                |  |                |          |  



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to this
Quarterly Report on Form 10-Q and Tumbleweeds Annual Report on Form 10-K for 2006 filed with the Securities and Exchange Commission (SEC), as well as Managements Discussion and Analysis of Financial Condition and Results of
Operations included therein. The following discussion contains forward-looking statements that reflect Tumbleweeds plans, estimates and beliefs. Tumbleweeds actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and at Part II, Item 1A, Risk Factors to this Quarterly Report.

Overview

Tumbleweed Communications Corp.
(Tumbleweed or we) is a recognized expert in providing messaging security solutions for enterprise and government customers of all sizes. We provide one of the most comprehensive solutions for inbound and outbound email, file
transfer, and identity validation needs. With our products, organizations can block security threats, protect information, confidently conduct business online, and reduce their cost of doing business. We provide comprehensive solutions for
inbound and outbound email protection, secure file transfer and routing, and identity validation that allow organizations to safely and confidently conduct business over the Internet. We offer these solutions in three comprehensive product
suites: MailGate®, SecureTransport, and
Validation Authority. MailGate® provides
protection against spam, viruses, and attacks, and enables policy-based message filtering, encryption, and routing. SecureTransport enables customers to safely exchange large files and transactions without having to change their internal
infrastructure. Validation Authority is a world-leading solution for determining the validity of digital certificates.

We are
trusted by approximately 2,700 enterprise and government customers who use our products to connect with over ten thousand corporations and millions of end-users. While our solutions apply to all industry sectors, our traditional market focus
has been in the financial services, healthcare, and government markets. Security-conscious organizations use our products to block security threats, protect information assets, and enable the safe exchange of messages, files, and transactions.

Revenue the three months ended March 31, 2007 was $15.0 million as compared to $15.1 million for the same three months in 2006, and
our net loss was $1.9 million as compared to $1.0 million during the same periods. The reduction in revenue and increase in net loss were both due to a single large transaction during the three months ended March 31, 2006 that accounted for 25%
of our total revenue during that period, with no comparable transaction recorded during the three months ended March 31, 2007. Despite the impact of this single transaction, total revenue was nearly as high during the three months ended
March 31, 2007 as compared to the same three months in 2006 due to a $1.8 million increase in service revenue. The increase in service revenue was due to an increase in our consulting revenue and an increase in our support and maintenance
revenue, largely due to expansion of our customer base. Cash flow from operations increased to $752,000 during the three months ended March 31, 2007 from $532,000 for the same three months in 2006 due to an increase in cash receipts from our
customers.

Backlog

Our backlog
consists of deferred revenue as well as contractual commitments that are not due and payable as of the balance sheet date, or for which the product or service has not yet been delivered, and/or for which collectibility is not considered probable.
Our backlog excludes all items relating to consulting and training services. Backlog was $23.2 million and $26.0 million at March 31, 2007 and December 31, 2006, respectively. We believe that $18.4 million of the backlog at March 31,
2007 will be recognized as revenue in the next 12 months in accordance with our revenue recognition policy, with the balance to be recognized thereafter.



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Outlook

We believe that our success in the remainder of 2007 will depend on our ability to build on our core competency in enterprise security and:



| |  |  | foster a culture of innovation, where every employee is customer-focused and creativity is encouraged;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | differentiate our products on ease of use and security effectiveness;
| | - |  | ---------------------------------------------------------------------



| |  |  | expand our customer base in email and file transfer by solving a larger number of our customers problems in messaging security;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase our brand awareness including building greater mindshare among buyers of email, file transfer, and validation technologies; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expand our reseller channel by having our sales organization and channel partners work co-operatively to expand our revenue base.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

We believe that key risks include overall economic conditions and the overall level of information technology spending; economic and business conditions
within our target customer sectors in the financial services, health care, and government markets; timing of the closure of customer contracts; the integration of our new Executive Vice President of Field Operations; and competitive factors in our
rapidly changing industry. Our prospects must be considered in light of the risks, expenses and difficulties encountered by companies at an early stage of development, particularly given that we operate in rapidly evolving markets, and face an
uncertain economic environment. We may not be successful in addressing such risks and difficulties. Please refer to the Risk Factors section at Part II, Item 1A for additional information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our
discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and judgments in determining the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We regularly
evaluate our estimates, including those related to revenue recognition, customer arrangements, collectibility of accounts receivable, valuation of assets, and contingencies and litigation. When making estimates, we consider our historical
experience, our knowledge of economic and market factors and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies represent areas where significant judgments and estimates have been used in the preparation of
our condensed consolidated financial statements.

Revenue Recognition

We derive our revenue from three sources: (i) product revenue, which includes license fees for products sold as software or on appliances, subscription-based license fees, and transaction-based license fees;
(ii) service revenue, which consists of support and maintenance fees, consulting fees, and training fees; and (iii) intellectual property revenue which includes patent license agreement fees. As described below, significant management
judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period based on the judgments and estimates made by our
management.

We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition
(SOP 97-2), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions (SOP 98-9). We make significant judgments related to revenue
recognition. Specifically, as set forth in paragraph 8 of SOP 97-2 in connection with each transaction involving our products, we must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the fee is fixed or determinable, and (iv) collectibility is probable. We apply these criteria as discussed below.



| |  |  | Persuasive evidence of an arrangement exists.We require a written contract, signed by both the customer and us, or a purchase order from those customers
that have previously negotiated a standard license arrangement or volume purchase agreement with us prior to recognizing revenue on an arrangement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Delivery has occurred.We deliver software to our customers physically or electronically. For physical deliveries, our standard transfer terms are typically
free on board, or FOB, shipping point. For electronic deliveries, delivery occurs when we provide the customer access codes or keys that allow the customer to take immediate possession of the software.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The fee is fixed or determinable.Our determination that an arrangement fee is fixed or determinable depends principally on the arrangements payment
terms. Our standard payment terms require the arrangement fee to be due within a maximum of 90 days. Where these terms apply, we regard the fee as fixed or determinable, and we recognize revenue upon delivery (assuming all other revenue recognition
criteria are met). If the payment terms do not meet this standard, which we refer to as extended payment terms, we do not consider the fee to be fixed or determinable and generally recognize revenue when customer installments are due and
payable.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Collectibility is probable. To recognize revenue, we must judge collectibility of the arrangement fees, which we do on a customer-by-customer basis pursuant
to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For new customers, we evaluate the customers financial position and ability to pay. If we determined that collectibility is not
probable based upon our credit review process or the customers payment history, we recognize revenue when payment is received.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We allocate revenue on software transactions, (referred to as arrangements in the accounting literature), involving multiple elements to each undelivered element based on their respective fair values.
Specifically, in a multi-element arrangement we allocate revenue first to undelivered elements such as support and maintenance, consulting services, and training based on each elements fair value and the residual is allocated to the product
license as product revenue. The fair value of support and maintenance fees is recognized ratably over the contractual term of the maintenance, which is typically one year. The fair value of services not considered essential to the functionality
of the product or technology delivered is initially deferred and recognized into revenue as the services are performed. Our determination of the fair value of each element in multiple element arrangements is based on vendor-specific objective
evidence (VSOE). We limit our assessment of the VSOE of fair value for each element to the price charged when that element is sold separately.

Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of the other elements of the arrangement. When services are not considered essential,
the revenue allocable to the services is recognized separately from the software, provided VSOE of the fair value of these services exists. If we provide consulting services that are considered essential to the functionality of the software
products, both the product revenue and service revenue are recognized under contract accounting in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue from
these arrangements is recognized under the percentage of completion method based on the ratio of direct labor hours incurred to date to total projected labor hours except in limited circumstances where completion status cannot be reasonably
estimated, in which case the completed contract method is used.

Our software products are typically fully functional upon delivery and do
not require significant modification or alteration. For arrangements where services are not essential to the functionality of the software, customers typically purchase consulting services to facilitate the adoption of our technology, but they may
also decide to use their own resources or appoint other professional service organizations to perform these services. Software products and related support and maintenance services may be billed separately and independently from professional
services, which are typically billed on either a time-and-materials basis or a fixed fee basis. For time-and-materials contracts, we recognize revenue as the services are performed. For fixed fee engagements with milestones or acceptance provisions,
revenue is recognized upon completion of a milestone or acceptance, if applicable.

We recognize revenue from patent license agreements
when (i) the patent license agreement is executed, (ii) the amounts due are fixed, determinable, and billable, and (iii) collection of the resulting receivable is probable.

We recognize revenue from indirect channels such as resellers using the same criteria as is used for arrangements obtained through our direct sales team.

We typically grant our customers a warranty which guarantees that our products will substantially conform to our current specifications
for 90 days from the delivery date. We account for the estimated cost of product and service warranties in accordance with Statement of Financial Accounting Standards (SFAS) 5, Accounting for Contingencies, based on specific
warranty claims received, provided that it is probable that a liability exists, and provided the cost to repair or otherwise satisfy the claim can be reasonably estimated. The amount of the reserve recorded is equal to the costs to repair or
otherwise satisfy the claim. Costs related to warranty claims were $115,000 and $0 for the three months ended March 31, 2007 and 2006, respectively.

Stock-based Compensation Expense

Effective January 1, 2006, we adopted the fair value recognition provisions of
SFAS 123 revised (2004), Share-Based Payment (SFAS 123R), using the modified prospective transition method. Under this transition method, stock-based compensation expense includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of



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SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). We recognize stock-based compensation expense for the unvested
portion of stock-based compensation awards granted prior to, but not yet vested, as of January 1, 2006 on an accelerated basis over the vesting period of the individual award consistent with our methodology prior to the adoption of SFAS 123R
and consistent with the method described in Financial Accounting Standards Board Interpretation 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Stock-based compensation expense for all stock-based
compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R and compensation cost for these awards is recognized on a straight-line basis over the
requisite service period of the award, which is generally the option vesting term. In accordance with the provisions of SFAS 123R, we recognize stock-based compensation expense net of an estimated forfeiture rate and recognize the compensation
expense for only those shares expected to vest over the requisite service period of the award, which is generally the option vesting term. We estimate the forfeiture rate based on our historical experience during the preceding term that equals the
expected life of the options. The expected life of the options is based on the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Our
expected volatility is based on the daily historical volatility of our common stock, over the expected life of the option. The risk-free rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent
remaining term to the expected life of the option. Where the expected term of our stock-based awards does not correspond with the terms for which interest rates are quoted, we perform a straight-line interpolation to determine the rate from the
available term maturities. Determining the fair value of stock based awards at the grant date requires judgment, including estimating the expected life of stock options, the expected volatility of our stock and the amount of stock options expected
to be forfeited. To the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Actual results, and future changes in estimates, may
differ substantially from our current estimates and our results of operations could be materially impacted.

On June 30, 2006, we
exchanged 959,531 vested stock options held by 18 employees with exercise prices ranging from $3.86 to $118.44 for 422,472 vested stock options to those same employees at an exercise price of $2.85, which was our common stock price on the date of
the exchange. Neither our officers nor members of our Board of Directors participated in this exchange program. We did not recognize any stock-based compensation expense as a result of the exchange since the fair values of the new awards were less
than the fair values of the original awards immediately prior to the exchange.

Valuation of Allowance for Doubtful Accounts

We must make estimates of the collectibility of our accounts receivable. We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. A considerable amount of judgment is required when we assess the realization of receivables, including assessing the probability of collection and the current credit-worthiness of each
customer. We specifically analyze accounts receivable, including review of historical bad debts, customer credit-worthiness, current economic trends, aging of the balance and estimated collectibility percentages for different aging ranges, and
changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of certain of our customers were to deteriorate, resulting in an impairment of their ability to make payments, we
may record a specific allowance against amounts owed to us by those customers, and thereby reduce the value of the receivable to the amount we reasonably believe will be collected. If all collection efforts have been exhausted, we would write off
the receivable against the allowance.

Valuation of Long-Lived Assets and Goodwill

We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following:



| |  |  | significant underperformance relative to historical or projected future operating results;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | significant changes in the manner or our use of the acquired assets or the strategy for our overall business;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | significant negative industry or economic trends;
| | - |  | -------------------------------------------------



| |  |  | significant decline in our stock price for a sustained period; and
| | - |  | ------------------------------------------------------------------



| |  |  | our market capitalization relative to our net book value.
| | - |  | ---------------------------------------------------------

We evaluate whether goodwill is impaired on at least on an annual basis in accordance with SFAS 142, Goodwill and Other Intangible Assets(SFAS 142) or more frequently if certain indicators are
present. If this evaluation indicates that the value of the goodwill may be impaired, we make an assessment of the impairment of the goodwill using the two-step method prescribed by SFAS 142. Any such impairment charge could be significant and have
a material adverse effect on our reported financial statements. We did not record any impairment charges on our goodwill during the three months ended March 31, 2007 or 2006, respectively.



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Any future impairment loss related to the goodwill recorded in connection with acquisitions will not be
deductible by us for federal income tax purposes. As of March 31, 2007 we had goodwill of $48.1 million.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2007 and 2006

Revenue. Revenue, which consists of product revenue, service revenue and intellectual property revenue, results from new contracts and backlog. We define backlog as deferred revenue, contractual commitments that are not due and
payable as of the balance sheet date, or for which collectibility is not considered probable, and/or for which the product or service has not yet been delivered. Product revenue consists of license fees, subscription-based license fees, and
transaction-based license fees. Service revenue includes support and maintenance fees, consulting fees, and training fees. Intellectual property revenue consists of patent license agreement fees. Total revenue for the three months ended
March 31, 2007 was $15.0 million as compared to $15.1 million for the same three months in 2006. The decrease in total revenue was due to a $1.5 million decrease in product revenue and a $279,000 decrease in intellectual property revenue,
partially offset by a $1.8 million increase in service revenue.

Product revenue decreased to $5.9 million for the three months ended
March 31, 2007 from $7.4 million for the same three months in 2006. The decrease was due to a single large transaction during the three months ended March 31, 2006 that accounted for 25% of our total revenue during that period, with no
comparable transaction recorded during the three months ended March 31, 2007. This was partially offset by increases in product revenue from our Mailgate and Validation Authority product lines, reflecting an expansion of our customer base.

Service revenue increased to $9.0 million for the three months ended March 31, 2007 from $7.3 million for the same three months in
2006. The increase in service revenue was primarily due to an increase in support and maintenance revenue of $1.1 million and an increase in consulting revenue of $608,000. The increase in support and maintenance revenue was due to the increased
number of customers covered by support agreements. The increase in consulting revenue was due to increased customer demand for consulting services related to our Secure Transport product line.

Intellectual property revenue decreased to $96,000 for the three months ended March 31, 2007 from $375,000 for the same three months in 2006. The
decrease in intellectual property revenue was due to a decrease in patent license revenue.

Cost of revenue. Cost of revenue is
comprised of product costs, provision for excess inventory, service costs, and the amortization of intangible assets for core/developed technology and maintenance agreements relating to the acquisitions of Valicert, Inc. (Valicert),
Incubator Limited (now named Tumbleweed Communications Limited), and Corvigo, Inc. (Corvigo). Product costs are primarily comprised of royalties paid to third parties for software licensed by us for inclusion in our products, the cost of
our products sold on appliances including related shipping and warranty costs, and employee and employee-related costs, including stock-based compensation expense in accordance with our adoption of SFAS 123R during 2006. Provision for excess
inventory is comprised of costs associated with excess inventory resulting from our transition to a new appliance manufacturer. Service costs are comprised primarily of employee and employee-related costs, including stock-based compensation expense,
for customer support, consulting and training, and contract development projects with third parties. Total cost of revenue increased to $4.1 million, or 27% of total revenue, for the three months ended March 31, 2007 from $2.8 million, or 18%
of total revenue, for the same three months in 2006. The increase in total cost of revenue was due to a $1.0 million increase in product costs, a $360,000 increase in service costs, a $164,000 increase in provision for excess inventory, partially
offset by a $276,000 decrease in the amortization of intangible assets.

Cost of product revenue increased to $1.8 million, or 12% of total
revenue, for the three months ended March 31, 2007 from $723,000, or 5% of total revenue, for the same three months in 2006. The increase in product costs was primarily due to an increase in appliance costs, including product warranty costs, of
$818,000 due to an increase in the number of appliances shipped to our customers as customer adoption of our appliance products increased. In addition, royalty costs increased by $205,000 due to an increases in revenues from our anti-virus and
appliance products, both of which utilize third-party licenses for which we pay royalties. We expect cost of product revenue to increase on a year-over-year basis during the remainder of 2007 due to an expected increase in the number of appliance
products to be shipped.

Provision for excess inventory of $164,000, or 1% of total revenue, for the three months ended March 31, 2007
is the estimated loss for excess inventory associated with transitioning our hardware products to a new appliance manufacturer and from a proprietary design to a standard product offering. There was no comparable expense during the three months
ended March 31, 2006.

Service costs increased to $1.9 million, or 13% of total revenue, for the three months ended March 31,
2007 from $1.5 million, or 10% of total revenue, for the same three months in 2006. The increase in service costs was primarily due to an



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increase in employee and employee-related costs, including stock-based compensation expense, of $287,000. The increase in employee and employee-related costs
was due to an increase in average services headcount to 79 employees for the three months ended March 31, 2007 from 53 employees for the same three months in 2006 primarily due to transitioning from a partial utilization of third parties in our
support function towards a full employee-based support model and due to the need for greater personnel resources to fulfill our customer service requirements due to our increased service revenues. We expect cost of service revenue to increase on a
year-over-year basis during the remainder of 2007 due to an anticipated increase in employee and employee-related costs driven by increased headcount required to meet our customer requirements.

Amortization of intangible assets included in cost of revenue decreased to $234,000, or 2% of total revenue, for the three months ended March 31,
2007 from $510,000 or 3% of total revenue, for the same three months in 2006 due to completing the amortization of the intangible assets for core/developed technology and maintenance agreements acquired during the Valicert acquisition during the
three months ended June 30, 2006.

Research and development expenses. Research and development expenses are primarily comprised
of employee and employee-related costs, including stock-based compensation expense, and other costs required for the development and quality assurance of our products. Research and development expenses for the three months ended March 31, 2007
increased to $3.9 million, or 26% of total revenue, from $3.4 million, or 23% of total revenue, for the same three months in 2006. The increase in research and development expenses was primarily due to an increase in employee and employee-related
costs, including stock-based compensation expense, of $369,000. The increase in employee and employee-related costs was due to salary increases that occurred after the three months ended March 31, 2006 and an increase in average research and
development headcount to 157 employees for the three months ended March 31, 2007 from 151 employees for the same three months in 2006. We expect research and development expenses to increase on a year-over-year basis during the remainder of
2007 due to our continuous efforts to broaden and upgrade our products.

Sales and marketing expenses. Sales and marketing expenses
are primarily comprised of employee and employee-related costs, including stock-based compensation expense, travel expenses, and costs associated with marketing programs. Sales and marketing expenses increased to $6.6 million, or 44% of total
revenue, for the three months ended March 31, 2007 from $6.5 million, or 43% of total revenue, for the same three months in 2006. The increase in sales and marketing expenses was primarily due to increases in travel and marketing program
expenses. Travel expenses increased by $80,000 due to an increased volume of travel associated with selling out products to greater number of customers. Marketing program expenses increased due to strategic initiatives to increase awareness of our
company and our products. We expect sales and marketing expenses to increase on a year-over-year basis during the remainder of 2007 due to an anticipated increase in headcount to further expand our sales presence and an anticipated increase in
marketing programs.

General and administrative expenses. General and administrative expenses consist primarily of employee and
employee-related costs, including stock-based compensation expense, for our administrative, finance, legal, and human resources departments as well as public reporting costs, and professional fees including intellectual property enforcement and
protection costs. General and administrative expenses for the three months ended March 31, 2007 decreased to $2.5 million, or 17% of total revenue, from $3.4 million, or 22% of total revenue, for the same three months in 2006. The decrease in
general and administrative expenses was primarily due to a decrease of $648,000 in stock-based compensation expense due to the acceleration of vesting, during the three months ended March 31, 2006, of certain stock options granted to our Chief
Executive Officer with no comparable activity during the three months ended March 31, 2007. In addition, legal expenses decreased by $159,000 due to a number of legal matters that drove expenses during the three months ended March 31, 2006
with fewer such matters during the three months ended March 31, 2007.

Amortization of intangible assets. Amortization of
intangible assets included in operating expenses consists of the amortization of intangible assets for customer base and reseller agreements and trademarks and tradenames recorded as a result of the Valicert, Incubator Limited, and Corvigo
acquisitions. Amortization of intangible assets included in operating decreased to $183,000, or 2% of total revenue, for the three months ended March 31, 2007 from $321,000 or 2% of total revenue, for the same three months in 2006. The decrease
in the amortization of intangible assets included in operating expenses was due to completing the amortization of the customer base and reseller agreements acquired during the Valicert acquisition during the three months ended June 30, 2006.

Other income, net. Other income, net, is generally comprised of interest income earned on investment securities. Other income, net,
increased to $339,000 for the three months ended March 31, 2007 from $264,000 for the same three months in 2006. The increase in other income, net was primarily due to an increase in interest income due to a larger cash balance.



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LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the issuance of equity securities. As of March 31, 2007, we had approximately $31.9 million in cash and cash equivalents.

Net cash provided by operating activities for the three months ended March 31, 2007 was $752,000, which was primarily the result of a $3.7 million
decrease in our accounts receivable balance, partially offset by our $1.9 million net loss, a $2.1 million decrease in our accounts payable, accrued liabilities, and other long-term liabilities balances and a $849,000 decrease in our deferred
revenue balance. Our accounts receivable balance decreased due to an increase in cash collections from our customers. Our accounts payable, accrued liabilities, and other long-term liabilities balances decreased due to a reduction in our accounts
payable balance and payments to employees, during the three months ended March 31, 2007, for bonuses and commissions earned during the three and twelve month periods ended December 31, 2006. Our deferred revenue balance decreased due to
seasonality in our business whereby the first three months of our fiscal year generally have lower sales than the last three months of our fiscal year.

The net cash provided by operating activities for the three months ended March 31, 2007 increased to $752,000 compared to net cash provided by operating activities for the three months ended March 31, 2006
of $532,000. Net cash provided by operating activities for the three months ended March 31, 2006 was $532,000, which was primarily the result of our net loss of $1.0 million and an adjustment to reconcile net loss to net cash provided by
operating activities due to a non-cash charge for stock-based compensation expense of $1.7 million.

Net cash used in investing activities
for the three months ended March 31, 2007 increased to $670,000 from $440,000 for the same three months in 2006. Net cash used in investing activities for both the three months ended March 31, 2007 and March 31, 2006 was comprised of
purchases of property and equipment. Purchases of property and equipment for the three months ended March 31, 2007 increased as compared to the three months ended March 31, 2006 due to investments made to strengthen our information
technology infrastructure as well as growing demand for computer equipment driven by an increased number of employees.

Net cash provided
by financing activities for the three months ended March 31, 2007 increased to $1.3 million from $372,000 for the same three months in 2006. Net cash provided by financing activities for both the three months ended March 31, 2007 and
March 31, 2006 was due to the proceeds from the issuance of common stock as a result of the exercises of stock options. 604,000 shares were exercised during the three months ended March 31, 2007 as compared to 293,000 shares exercised
during the same three months in 2006.

As of March 31, 2007, our principal commitments consisted of obligations related to outstanding
operating leases and unconditional purchase obligations. We do not anticipate a substantial increase in operating lease obligations in the immediate future.

In June 1999, we entered into an operating lease covering approximately 40,000 square feet of office space in Redwood City, California and renewed that lease in 2003. The renewed lease expires in July 2008 with
current monthly rent payments of approximately $77,000.

Our capital requirements depend on numerous factors, including revenue generated
from operations and market acceptance of our products and services, and the resources devoted to the development of our products and services and to sales and marketing and other operating activities. We believe that our existing capital resources
should enable us to maintain our current and planned operations for at least the next twelve months. Our current cash reserves, however, may be insufficient if we experience either lower than expected revenues or extraordinary or unexpected cash
expenses, or for other reasons. Funding, if pursued, may not be available on acceptable terms or at all. If adequate funds are not available, we may be required to curtail significantly or defer one or more of our operating goals or programs, or
take other steps that could harm our business or future operating results. We may consider future financing alternatives, which may include the incurrence of debt, additional public or private equity offerings or an equity investment by a strategic
partner; however, we have no present commitments or arrangements assuring us of any future equity or debt financing.

OFF-BALANCE SHEET ARRANGEMENTS

At March 31, 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities
often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.



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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

Future cash payments for contractual obligations and commercial commitments as of March 31, 2007, are as follows (in thousands):



|                                   |  |       |       |                  |   |             |  |                   |     |  |   |  
|---------------------------------- |  | ----- | ----- | ---------------- | - | ----------- |  | ----------------- | --- |  | - | -
|                                   |  | Total |       | Less Than 1 Year |   | 1  2 Years |  | More Than 2 Years
|Operating leases                   |  | $     | 1,763 |                  | $ | 1,159       |  | $                 | 604 |  | $ | 
|Unconditional purchase obligations |  |       | 806   |                  |   | 545         |  |                   | 261 |  |   | 
|                                   |  |       |       |                  |   |             |  |                   |     |  |   |  
|Total                              |  | $     | 2,569 |                  | $ | 1,704       |  | $                 | 865 |  | $ | 
|                                   |  |       |       |                  |   |             |  |                   |     |  |   |  



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We currently do not use financial instruments to hedge operating expenses in Australia, Bulgaria, Japan, the Netherlands, Singapore, Switzerland, or the United Kingdom denominated in the respective local currency. We assess the need to
utilize financial instruments to hedge currency exposures on an ongoing basis.

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

Interest Rate Sensitivity

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities
that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed rate equal to the
then-prevailing interest rate and the prevailing interest rate later rises, the fair value of our investment will decline. To minimize this risk, we maintain our portfolio of cash equivalents in commercial paper and money market funds. In general,
our investments are not subject to market risk because the interest paid on these funds fluctuates with the prevailing interest rate. As of March 31, 2007, none of our cash equivalents were subject to market risk.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Evaluation of disclosure controls and
procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2007. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that, as of March 31, 2007, our disclosure controls and procedures are effective.

(b) Changes in internal controls.

No changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the three months ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

In December 2001, certain
plaintiffs filed a class action lawsuit in the United States District Court for the Southern District of New York (the District Court) on behalf of purchasers of the common stock of Valicert, alleging violations of federal securities
laws. In re Valicert, Inc. Initial Public Offering Securities Litigation, No. 01-CV-10889 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No. 21 MC 92 (SAS). The operative amended complaint
is brought on purported behalf of all persons who purchased Valicert common stock from the date of its July 27, 2000 initial public offering (IPO) through December 6, 2000. It names as defendants Valicert, its former Chief
Executive Officer, and its Chief Financial Officer (the Valicert Defendants), as well as an investment banking firm that served as an underwriter for the IPO. The complaint alleges liability under Sections 11 and 15 of the Securities Act
of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the IPO did not disclose that: (1) the underwriter agreed to allow certain customers to purchase shares in the IPO
in exchange for excess commissions to be paid to the underwriter; and (2) the underwriter arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The complaint also appears to allege that false
or misleading analyst reports were issued. The complaint does not claim any specific amount of damages. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, all of which
have been consolidated for pretrial purposes. In February 2003, the Court issued a ruling on all defendants motions to dismiss, denying Valicerts motion to dismiss the claims under the Securities Act of 1933, but granting Valicerts
motion to dismiss the claims under the Securities Exchange Act of 1934.

In June 2003, Valicert accepted a settlement proposal presented to
all issuer defendants in this case. Under the proposed settlement, the plaintiffs will dismiss and release all claims against the Valicert Defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible
for insuring the issuers in all the consolidated cases, and the assignment or surrender of control to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay
the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all of the cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty,
Valicert would be responsible to pay its pro rata portion of the shortfall, up to the amount of the deductible retention under its insurance policy, which is $500,000. The timing and amount of payments that Valicert could be required to make under
the proposed settlement will depend on several factors, principally the timing and amount of any payment required by the insurers pursuant to the $1 billion guaranty. The proposed settlement is subject to approval of the Court, which cannot be
assured.

In April 2006, the District Court held a hearing on the proposed settlement but has not yet issued a ruling on the
issue.Subsequently, the Court of Appeals for the Second Circuit (the Court of Appeals) vacated the class certification of plaintiffs claims against the underwriters in six cases designated as focus or test cases.
Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006). Thereafter, the District Court ordered a stay of all proceedings in all of the lawsuits pending the outcome of
plaintiffs petition to the Court of Appeals for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Court of Appeals Circuit denied plaintiffs petition for rehearing, but clarified that the
plaintiffs may seek to certify a more limited class in the District Court.

Accordingly, the stay remains in place and the plaintiffs and
issuers have stated that they are prepared to discuss how the settlement might be amended or renegotiated to comply with the ruling of the Court of Appeals. Failure of the District Court to approve the settlement (or an amended or
renegotiated settlement) followed by an adverse outcome could harm our business and operating results. Moreover, the costs in defending this lawsuit could harm future operating results. The accompanying consolidated financial statements do
not include a reserve for any potential loss, as we do not consider a loss to be probable at this time.

In June 2003, we were served with
a summons and first amended complaint, captioned Liu v. Credit Suisse First Boston, et alia, alleging the violation of federal and state securities laws, purportedly on behalf of persons who acquired our common stock of (other than purchasers
of our IPO) from August 6, 1999 to October 18, 2000. The case was transferred to the United States District Court for the Southern District of New York, where, in March 2005, the Court dismissed the case with prejudice. In June 2005
plaintiffs filed an appeal of the dismissal with the United States Court of Appeals for the Second Circuit, which in May of 2006 affirmed the dismissal by the District Court. In September 2006 plaintiffs petitioned the Supreme Court of the United
States for a writ of certiorari, which was denied in December 2006.

All costs incurred as a result of these legal proceedings and claims
are charged to expense as incurred. We indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to these guarantees have not been significant and we are
unable to estimate the potential impact of these guarantees on our future results of operations.



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We are engaged in other legal actions arising in the ordinary course of business. Although there can be
no assurance as to the outcome of such litigation, we believe we have adequate legal defenses and we believe that the ultimate outcome of any of these actions will not have a material effect on our consolidated financial positions or results of
operations.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

Although we have attained positive cash flow from operations, we have a history of losses and
may experience losses in the future.

Although we have attained positive cash flow from our operations, we may not be able to do so in
the future, which could harm our business. Our prospects must be considered in light of the risks, expenses, delays and difficulties frequently encountered by companies engaged in rapidly evolving technology markets like ours. We incurred net losses
of $4.9 million, $3.9 million, and $7.5 million in 2006, 2005, and 2004, respectively. As of March 31, 2007, we had incurred cumulative net losses of $297.7 million.

Our success may depend in large part upon the adoption and use of our products and technology, as well as our ability to effectively maintain existing relationships and develop new relationships with customers, both
in new vertical markets and new segments, and via direct sales, channel sales partners, and strategic partners. If we do not succeed in doing so, we may not continue to generate cash from our operations. In particular, we intend to expend
significant financial and management resources on product development, sales and marketing, strategic relationships, technology, and operating infrastructure. As a result, we may incur additional losses for the foreseeable future and may not
continue to have positive cash flow from operations.

If we lose the services of executive officers or other key employees, our ability to develop our
business and secure customer relationships will suffer.

We are substantially dependent on the continued services and performance of our
executive officers and other key personnel and do not have long-term employment agreements with any of our key personnel. In this regard, during 2006 we appointed a new Chief Executive Officer, Chief Technology Officer, Chief Marketing Officer, and
during the three months ended March 31, 2007 we appointed a new Executive Vice President, Worldwide Field Operations. These new appointments subject us to heightened risks as these executive officers assume their roles, work together as a team,
and make changes to our business and operations. The loss of the services of any of our executive officers or other key employees, including members of our sales force, could significantly delay or prevent the achievement of our development and
strategic objectives.

If we have elected an ineffective strategy, or do not execute our strategy well, our business could be harmed.

If the company strategy we have elected to pursue turns out to be ineffective, it could significantly limit our ability to compete successfully against
current and future competitors.

If on the other hand we have elected to pursue an effective strategy, but we do not execute our strategy
well by optimizing our methods of producing, marketing, and selling our products, it could significantly limit our ability to compete successfully against current and future competitors. In particular we must effectively and efficiently execute four
key initiatives of our strategic and operating plan: channel expansion, international expansion, increased brand awareness, and the delivery of a broader product portfolio.

If we do not develop our products, marketing and distribution channels more successfully than our competitors, our business could be harmed.

Larger companies, such as Microsoft, Cisco, and Secure Computing, are concentrating an increasing amount of their substantially greater financial and
other resources on the markets in which we participate, which represents a serious competitive threat to Tumbleweed.

The markets in which
we compete are intensely competitive and rapidly changing, through consolidation and otherwise. Vendors in our markets use different methods of marketing and distribution in order to meet expected customer demand. For example, our competitors
include multiple software-only vendors, appliance-only vendors, and service providers, as well as vendors that offer a combination of some or all of the foregoing. Moreover, our competitors offerings range from single-function point products
and services to more sophisticated and scalable multi-functional offerings. In addition, pricing and other terms and conditions of sales contracts also vary considerably among our competition. Because it is difficult to predict demand in our rapidly
changing markets, we may not be able to manage our product development, marketing, and sales efforts in an optimal way, which may disadvantage our business in comparison to competitors.

Additional competitive factors in our industry include customer-driven requirements such as high quality, additional functionality, improved product
performance, ease of use, integration capacity, platform coverage, and the quality of each vendors global technical support. Some of our competitors, particularly Microsoft, Cisco, and Secure Computing, have greater financial, technical,
sales, marketing and other resources than we do, as well as greater name recognition and a larger installed customer base. Additionally, some of these competitors have research and development capabilities that may allow them to develop new or
improved products that may compete with product lines we market and distribute.



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We expect that the market for messaging security products will become more consolidated with larger
companies being better positioned to compete in such an environment in the long term. As this market continues to develop, a number of companies with greater resources than ours have increased their presence in this market and others could attempt
to increase their presence in this market by acquiring or forming strategic alliances with our competitors or business partners.

Our
success will depend on our ability to adapt our strategy to these competing forces, to develop and successfully launch more effective products more rapidly and less expensively than our competitors, and to educate potential customers as to the
benefits of licensing our products rather than developing their own products or licensing our competitors products. Competitors could introduce products with superior features, scalability and functionality at lower prices than our products
and could also bundle existing or new products with other more established products in order to compete with us. In addition, because there are relatively low barriers to entry for the software market, we expect additional competition from other
established and emerging companies. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could harm our business.

In particular, our success depends on our ability to grow and develop our indirect distribution channels, both in the United States and internationally,
and the inability to do so could adversely affect future operating results. Our failure to increase revenue through our indirect distribution channels could have a material adverse effect on our business, operating results, and financial condition.
We must continue to increase the number of strategic and other third-party relationships with vendors of Internet-related systems and application software, resellers and systems integrators. Our existing or future channel partners may choose to
devote greater resources to marketing and supporting the products of other companies, which could have a negative impact on our company. In addition, our success depends in part on our ability to sell our appliance-based products through both direct
and indirect distribution channels. In comparison to several of our leading competitors, we have less experience in managing the product development, marketing, and sales of appliance-based products. Historically most of our revenue has been derived
from software-based products, not appliance-based products, and our business could be harmed if we do not successfully execute our plans with respect to our appliance-based products.

We must continue to expand our operations, which strains our resources, but either the failure to expand or the failure to manage our expansion properly could cause our business to suffer.

We must expand our operations in order to compete effectively in new markets and new segments of the markets we seek to address. Our management may not be
able to hire, train, retain, motivate and manage required personnel. In particular we need to maintain a sufficient number of properly trained sales personnel and sales partners, as well as product development personnel, to execute our company
strategy, and accordingly we must recruit, train, motivate and manage an increased number of suitably talented personnel for such roles. As we expand our operations, it may be difficult for us to keep expense growth in line with revenue growth. In
this regard we face notable recruiting and retention risks in Sofia, Bulgaria, where we foresee increased competition for talented personnel as well as escalating costs.

Our headcount increased from 362 as of December 31, 2006 to 378 as of March 31, 2007, and we plan further increases. This expansion has placed, and further expansion is expected to continue to place, a
strain on our managerial and operational resources. To manage our growth, we will need to continue to improve our operational, human resources, and training capabilities, as well as the systems, procedures and controls used to manage such
capabilities. Any failure to properly manage these functional areas, as well as the corresponding systems, procedures and controls associated with them, could impair our ability to execute our strategy, and could cause us to incur higher operating
costs and delays in the execution of our strategic and operating plan. If we cannot manage growth effectively, our business and operating results could suffer.

Economic conditions that result in a decrease in information technology spending could adversely affect our ability to maintain and increase revenue.

Our revenue and profitability or loss depends on the overall demand for our products and our services, particularly within the industries in which we offer specific versions of our products. Because our sales are
primarily to customers in the financial services, health care, and government markets, our business depends on the overall economic conditions and the economic and business conditions within these industries. Any weakening of the global economy, the
information technology industry in particular, or the weakening of the business conditions within the above industries could cause a decrease in our revenues. A softening of demand for information technology spending caused by a continued weakening
of the economy, domestically or internationally, may result in a decrease in revenues and continued losses.



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Fluctuations in our quarterly operating results may not be predictable and may result in significant volatility in our
stock price.

Our revenue and our operating results have fluctuated and may continue to fluctuate based on, among other things, the
timing of the execution and termination of customer agreements in a given quarter. We have experienced, and expect to continue to experience, fluctuations in revenue and operating results from quarter to quarter for other reasons, including the
timing of our target customers election to adopt and implement our products and services, election of our customers to delay their purchase commitments or purchase in smaller amounts, and the timing of and our ability to continue to license
our patents. Further, we have experienced and may continue to experience difficulty in managing the amount and timing of operating costs and capital expenditures relating to our business, operations and infrastructure as well as collecting fees owed
by customers. Finally, any acquisitions or divestitures we complete as well as the announcement or introduction of new or enhanced products and services may create additional volatility in our results.

As a result of these factors, we believe that quarter-to-quarter comparisons of our revenue and operating results are not necessarily meaningful, and
that these comparisons may not be accurate indicators of future performance. Because our staffing and operating expenses are based on anticipated revenue levels, and because a high percentage of our costs are fixed, small variations in the timing of
the recognition of specific revenue could cause significant variations in operating results from quarter to quarter. In addition, many of our customers delay purchases of our products until the end of each quarter. If we are unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall, any significant revenue shortfall would likely have an immediate negative effect on our operating results. Moreover, we believe the challenges and difficulties that we
face, as outlined above with respect to financial forecasts, also apply to securities analysts that may publish estimates of our financial results. Our operating results in the past have, and in future quarters may, fail to meet our expectations or
those of securities analysts or our investors due to any of a wide variety of factors, including fluctuations in financial ratios or other metrics used to measure our performance. If this occurs, we would expect to experience an immediate and
significant decline in the trading price of our stock.

Contractual issues may arise during the negotiation of license agreements that may delay the
anticipated closure of a transaction and our ability to recognize revenue as anticipated.

Because we focus on selling enterprise-wide
software products to enterprises and government entities, the process of contractual negotiation is critical and may be lengthy. Additionally, many factors may require us to defer recognition of license revenue for a significant period of time after
entering into a license agreement.

Many customers negotiate software licenses near the end of each quarter. In part, this is because
customers are able, or believe that they are able, to negotiate lower prices and more favorable terms at that time. Our reliance on a large portion of software license revenue occurring at the end of the quarter and the increase in the dollar value
of transactions that occur at the end of a quarter can result in increased uncertainty relating to quarterly revenues. Due to end of period variances, forecasts may not be achieved, either because expected sales do not occur or because they occur at
lower prices or on terms that are less favorable to us.

A limited number of customers account for a high percentage of our revenue, and the failure to
maintain or expand these relationships could adversely affect our future revenue.

The loss of one or more of our major customers, the
failure to attract new customers on a timely basis, or a reduction in revenue associated with existing or proposed customers would harm our future revenue and prospects. No single customer comprised 10% or more of our revenue or its accounts
receivable balance, net of allowance for doubtful accounts, at March 31, 2007. For the three months ended March 31, 2006, one customer comprised approximately 25% of our revenue. For the three months ended March 31, 2007 and 2006,
five customers comprised approximately 12% and 37% of our revenue, respectively.

Our appliance products may not be adopted in the market and expose us
to hardware costs and supply chain issues.

Over time, we have expanded our portfolio of products sold on appliances, which are
manufactured by a third party. The inclusion of these hardware appliances in our product portfolio subjects us to additional risks, including, but not limited to:



| |  |  | the inability of the manufacturer to perform in accordance with our expectations, in particular our expectations regarding the hardware appliances compliance
with any applicable regulations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to deliver appliance products to customers in a timely manner, harming our ability to win time-sensitive customer contracts and/or recognize revenue;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | product shortages that could result in increased product costs;
| | - |  | ---------------------------------------------------------------



| |  |  | price increases from suppliers that may not be able to be passed on to customers;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | increased marginal costs relative to software-only transactions which may reduce our gross profits;
| | - |  | ---------------------------------------------------------------------------------------------------



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| |  |  | oversupply or obsolescence of inventory, which may result in the need to reduce our prices and/or write down inventory; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | product quality issues.
| | - |  | -----------------------

The
occurrence of any of these events could adversely affect our business and operating results.

We may be unable to adequately protect our intellectual
property rights or may be subject to claims of patent infringement, either of which could result in substantial costs to us.

We
currently rely on a combination of patents, trade secrets, copyrights, trademarks and licenses, together with non-disclosure and confidentiality agreements, to establish and protect our proprietary rights in our products. We hold certain patent
rights with respect to some of our products. Our existing patents or trademarks, as well as any future patents or trademarks obtained by us, may be challenged, invalidated or circumvented, or our competitors may independently develop or patent
technologies that are substantially equivalent or superior to our technology. We also rely on unpatented trade secrets and other unpatented proprietary information. Although we take precautionary measures to maintain our unpatented proprietary
information, others may acquire equivalent information or otherwise gain access to or disclose our proprietary information, and we may be unable to meaningfully protect our rights to our proprietary information. As a result, our operating results
could suffer.

Third parties could assert patent or other intellectual property infringement claims against us and the cost of responding
to such assertions, regardless of their validity, could be significant. We may increasingly be subject to claims of intellectual property infringement as the number of our competitors grows and the functionality of their products and services
increasingly overlap with ours. In addition, we may infringe upon patents that may be issued to third parties in the future. It may be time consuming and costly to defend ourselves against any of these claims and we may not prevail. Furthermore,
parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our products in the United States and abroad. In the event of a claim of
infringement, we may be required to obtain one or more licenses from or pay royalties to third parties. We may be unable to obtain any such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain such license could harm
our business.

The enforcement of our intellectual property rights, especially through patent infringement lawsuits we may initiate, could result in
substantial litigation costs and ultimately may not result in additional revenue to us or a favorable judicial determination.

Since
1999 we have aggressively pursued cases of potential infringement by third parties of our patents and other intellectual property rights. The enforcement process is costly and requires significant management attention. These costs are expensed
during the period incurred, and the costs of pursuing the litigation may not be directly matched with the related patent license agreement revenue, if any. In addition, our enforcement of our rights may increase the risk of adverse claims, with or
without merit, which could be time consuming to defend, result in costly litigation, divert managements attention and our resources, limit the use of our services, or require us to enter into royalty or license agreements. In addition, such
counter-claims asserted by these third parties may be found to be valid and could result in an injunction or damages against us. Our ability to prevail in this litigation is inherently uncertain, and if we were subject to an adverse judicial
determination, our ability to protect our products and to secure related licensing or settlement revenue could be lost.

Failure to license necessary
third party software incorporated in our products could cause delays or reductions in our sales.

We license third party software that
we incorporate into our products. These licenses may not continue to be available on commercially reasonable terms, or at all. Some of this technology would be difficult to replace. The loss of any such license could result in delays or reductions
of our applications until we identify, license and integrate or develop equivalent software. If we are required to enter into license agreements with third parties for replacement technology, we could face higher royalty payments and our products
may lose certain attributes or features. In the future, we might need to license other software to enhance our products and meet evolving customer needs. If we are unable to do this, we could experience reduced demand for our products.

Our international business exposes us to additional risks that may result in future additional costs or limit the market for product sales.

Products and services provided to our international customers accounted for 13% and 7% of our revenues for the three months ended March 31, 2007 and
for the three months ended March 31, 2006, respectively. Conducting business outside of the United States subjects us to additional risks, including:



| |  |  | changes in regulatory requirements and any resulting costs of compliance, for example, the introduction by the European Union of its Restrictions on Hazardous
Substances;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | reduced protection of intellectual property rights; evolving privacy laws; tariffs and other trade barriers;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | increased income tax expenses;
| | - |  | ------------------------------



| |  |  | problems in collecting accounts receivable; and
| | - |  | -----------------------------------------------



| |  |  | difficulties in authenticating customer information.
| | - |  | ----------------------------------------------------

Managing these risks may subject us to additional costs that may not be justified in light of the market opportunity, and the inability to comply with or manage foreign laws and related risks may preclude or limit
sales in foreign jurisdictions.

We rely on public key cryptography and other security techniques that could be breached, resulting in reduced demand
for our products and services.

A requirement for the continued growth of electronic commerce is the secure transmission of confidential
information over public networks. We rely on public key cryptography, an encryption method that utilizes two keys, a public and a private key, for encoding and decoding data, and on digital certificate technology, to provide the security and
authentication necessary for secure transmission of confidential information. Regulatory and export restrictions may prohibit us from using the strongest and most secure cryptographic protection available, and thereby may expose us or our customers
to a risk of data interception. A party who is able to circumvent our security measures could misappropriate proprietary information or interrupt our or our customers operations. Any compromise or elimination of our security could result in
risk of loss or litigation and possible liability and reduce demand for our products and services.

Our stock price could be adversely affected if we
are unable to continue to favorably assess the effectiveness of our internal control over financial reporting or if our independent registered public accounting firm is unable to provide an unqualified report on our assessment.

In the future, we may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our
internal controls over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter future problems or delays in completing the implementation of any requested
improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal controls over financial reporting, investor confidence and our stock price could be adversely affected.

The terms of any financing we may obtain could result in substantial dilution of existing stockholders.

In the future, we may be required or elect to seek additional financing to fund our operations. Factors such as the commercial success of our existing
products and services, the timing and success of any new products and services, the progress of our research and development efforts, our results of operations, the status of competitive products and services, and the timing and success of potential
strategic alliances or potential opportunities to acquire or sell technologies or assets may require us to seek additional funding sooner than we expect. In the event that we require additional cash, we may not be able to secure additional financing
on terms that are acceptable to us, especially in light of uncertainty in the current market environment, and we may not be successful in implementing or negotiating such other arrangements to improve our cash position. If we raise additional funds
through the issuance of equity or debt securities, the percentage ownership of our stockholders would be reduced and the securities we issue might have rights, preferences and privileges senior to those of our current stockholders. If adequate funds
were not available on acceptable terms or at all, our ability to sustain positive cash flows, maintain current operations, fund any potential expansion, take advantage of new opportunities, develop or enhance products or services, or otherwise
respond to competitive pressures could be significantly limited.

Our certificate of incorporation and bylaws contain provisions that could discourage
or prevent an acquisition of us, which could depress our stock price.

Certain provisions of our certificate of incorporation and
bylaws, as well as provisions of Delaware law, may discourage or prevent an acquisition or disposition of our business. Our certificate of incorporation and bylaws may inhibit changes of control that are not approved by our Board of Directors. These
provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In particular, our certificate of incorporation includes provisions for a classified Board of Directors and prohibits stockholder
action by written consent. Further, our bylaws contain provisions requiring advance notice for nomination of directors and stockholders proposals. In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law. In general, this law prevents a person



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who becomes the owner of 15% or more of the corporations outstanding voting stock from engaging in specified business combinations for three years
unless specified conditions are satisfied. In addition, our certificate of incorporation allows our Board of Directors to issue preferred stock without further stockholder approval. The issuance of preferred stock also could effectively limit the
voting power of the holders of our common stock. This could have the effect of delaying, deferring or preventing a change in control.

We are a
defendant in a purported securities class action lawsuit that could divert management attention and resources or eventually expose us to liability.

In December 2001, certain plaintiffs filed a class action lawsuit in the United States District Court for the Southern District of New York (the District Court) on behalf of purchasers of the common stock
of Valicert, alleging violations of federal securities laws. In re Valicert, Inc. Initial Public Offering Securities Litigation, No. 01-CV-10889 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation,
No. 21 MC 92 (SAS). The operative amended complaint is brought on purported behalf of all persons who purchased Valicert common stock from the date of its July 27, 2000 initial public offering (IPO) through December 6,
2000. It names as defendants Valicert, its former Chief Executive Officer, and its Chief Financial Officer (the Valicert Defendants), as well as an investment banking firm that served as an underwriter for the IPO. The complaint alleges
liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the IPO did not disclose that: (1) the underwriter agreed
to allow certain customers to purchase shares in the IPO in exchange for excess commissions to be paid to the underwriter; and (2) the underwriter arranged for certain customers to purchase additional shares in the aftermarket at predetermined
prices. The complaint also appears to allege that false or misleading analyst reports were issued. The complaint does not claim any specific amount of damages. Similar allegations have been made in lawsuits relating to more than 300 other initial
public offerings conducted in 1999 and 2000, all of which have been consolidated for pretrial purposes. In February 2003, the Court issued a ruling on all defendants motions to dismiss, denying Valicerts motion to dismiss the claims
under the Securities Act of 1933, but granting Valicerts motion to dismiss the claims under the Securities Exchange Act of 1934.

In
June 2003, Valicert accepted a settlement proposal presented to all issuer defendants in this case. Under the proposed settlement, the plaintiffs will dismiss and release all claims against the Valicert Defendants in exchange for a contingent
payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the consolidated cases, and the assignment or surrender of control to the plaintiffs of certain claims the issuer defendants may have against the
underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all of the cases. If the plaintiffs
fail to recover $1 billion and payment is required under the guaranty, Valicert would be responsible to pay its pro rata portion of the shortfall, up to the amount of the deductible retention under its insurance policy, which is $500,000. The timing
and amount of payments that Valicert could be required to make under the proposed settlement will depend on several factors, principally the timing and amount of any payment required by the insurers pursuant to the $1 billion guaranty. The proposed
settlement is subject to approval of the Court, which cannot be assured.

In April 2006, the District Court held a hearing on the proposed
settlement but has not yet issued a ruling on the issue.Subsequently, the Court of Appeals for the Second Circuit (the Court of Appeals) vacated the class certification of plaintiffs claims against the underwriters in
six cases designated as focus or test cases. Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation, 471 F.3d 24 (2d Cir. 2006). Thereafter, the District Court ordered a stay of all proceedings in all of
the lawsuits pending the outcome of plaintiffs petition to the Court of Appeals for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Court of Appeals denied plaintiffs petition for rehearing,
but clarified that the plaintiffs may seek to certify a more limited class in the District Court.

Accordingly, the stay remains in place
and the plaintiffs and issuers have stated that they are prepared to discuss how the settlement might be amended or renegotiated to comply with the ruling of the Court of Appeals. Failure of the District Court to approve the settlement (or
an amended or renegotiated settlement) followed by an adverse outcome could harm our business and operating results. Moreover, the costs in defending this lawsuit could harm future operating results. The accompanying consolidated financial
statements do not include a reserve for any potential loss, as we do not consider a loss to be probable at this time.



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##### Table of Contents

|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

Not
applicable.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not applicable.



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

Not
applicable.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

Not applicable.



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##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------

a. Exhibits are incorporated herein by reference or are
filed with this report as indicated below (numbered in accordance with Item 601 of Regulation S-K):



|              |  |                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                          
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of Registrant                                                                                                      
|              | 
|3.2(1)        |  | Amended and Restated Bylaws of Registrant                                                                                                                            
|              | 
|10.1(2)       |  | Employment agreement between Nicholas W. Hulse and Tumbleweed, dated March 5, 2007                                                                                   
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|32.1          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    
|              | 
|32.2          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    

---

|(1) | Incorporated by reference to our Registration Statement on Form S-4 (File No. 333-92589), filed December 10, 1999.
|--- | ------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to our Current Report on Form 8-K, filed March 6, 2007.
|--- | ---------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, hereunto duly authorized:



|                   |  |                                 |  |                                                                                                                                               |  | 
|------------------ |  | ------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|                   |  | TUMBLEWEED COMMUNICATIONS CORP. |  |                                                                                                                                              
|                   |  |                                 | 
|Date: May 10, 2007 |  | By:                             |  | /S/ JAMES P. SCULLION                                                                                                                         |  | 
|                   |  |                                 |  | James P. Scullion Chairman and Chief Executive Officer (Principal Executive
Officer)                                                          |  | 
|                   |  |                                 | 
|Date: May 10, 2007 |  | By:                             |  | /S/ TIMOTHY G. CONLEY                                                                                                                         |  | 
|                   |  |                                 |  | Timothy G. Conley Senior Vice President of Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | 



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##### Table of Contents

INDEX TO EXHIBITS



|               |  |                                                                                                                                                                      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                          
|3.1(1)         |  | Amended and Restated Certificate of Incorporation of Registrant                                                                                                      
|               | 
|3.2(1)         |  | Amended and Restated Bylaws of Registrant                                                                                                                            
|               | 
|10.1(2)        |  | Employment agreement between Nicholas W. Hulse and Tumbleweed, dated March 5, 2007                                                                                   
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    
|               | 
|32.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    

---

|(1) | Incorporated by reference to our Registration Statement on Form S-4 (File No. 333-92589), filed December 10, 1999.
|--- | ------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to our Current Report on Form 8-K, filed March 6, 2007.
|--- | ---------------------------------------------------------------------------------



32